Chemical and ingredient distribution itself is a fragmented market in which only a small number of competitors have substantial international operations. Our principal large international competitor is Brenntag, which has a particularly strong position in Europe.Europe due to its strong market position in Germany.
Many other chemical distributors operate on a regional, national or local basis and may have a strong relationship with local producers and customers that may give them a competitive advantage in their local market. Some of our competitors are either local or regional distributors with a broad product portfolio,market, while others are niche players which focus on a specific end market, either industry or product-based. In addition to Brenntag, some of our regional competitors in North America include Helm America, Hydrite Chemical, Azelis, IMCD and Maroon Group and some of our regional competitors in Europe include Azelis, Helm and IMCD.
Chemical and ingredient producers may also sell their products through a direct sales force or through multiple chemical distributors, limit their use of third party distributors, particularly with respect to higher margin products, or to partner with other chemical and ingredient producers for distribution. Each of which could increase our competition.
We compete on the basis of service, on-time delivery, product breadth and availability, product and market knowledge and insights, safety and environmental compliance, global reach, product price, as well as our ability to provide certain additional value-added services.
We are affected by general economic conditions, particularly fluctuations in industrial production and consumption, and an economic downturn could adversely affect our operations and financial results.
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. For example, 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. Producers of commodity and specialty chemicals are likely to reduce their output in periods of significant contraction in industrial and consumer demand, while demand for the products we distribute depends largely on trends in demand in the end markets our customers serve. A majority of our sales are in North America and Europe and our business is therefore susceptible to downturns in those economies as well as, to a lesser extent, the economies in the rest of the world. Our profit margins, as well as overall demand for our products and services, could decline as a result of a large number of factors outside our control, including economic recessions, reduced customer demand (whether due to changes in production processes, consumer preferences, the industries in which the customer operates, laws and regulations affecting the chemicals industry and the manner in which they are enforced, or other factors), inflation, fluctuations in interest and currency exchange rates, and changes in the fiscal or monetary policies of governments in the regions in which we operate.
General economic conditions and macroeconomic trends, as well as the creditworthiness of our customers, could affect overall demand for chemicals. Any overall decline in the demand for chemicals could significantly reduce our sales and profitability. If the creditworthiness of our customers declines, we would face increased credit risk. In addition, volatility and
disruption in financial markets could adversely affect our sales and results of operations by limiting our customers’ ability to obtain financing necessary to maintain or expand their own operations.
A historical feature of past economic weakness has been significant destocking of inventories, including inventories of chemicals used in industrial and manufacturing processes. It is possible that an improvement in our net sales in a particular period may be attributable in part to restocking of inventories by our customers and represent a level of sales or sales growth that will not be sustainable over the longer term. Further economic weakness could lead to insolvencies among our customers or producers, as well as among financial institutions that are counterparties on financial instruments or accounts that we hold. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.
The chemical distribution market is highly competitive. Chemicals can be purchased from a variety of sources, including traders, brokers, wholesalers and other distributors, as well as directly from producers. Many of the products we distribute or finish are essentially fungible with products offered by our competition, including emerging competitors. The competitive pressure we face is particularly strong in sectors and markets where local competitors have strong positions or where new competitors can easily enter. Increased competition from distributors of products similar to or competitive with ours could result in price reductions, reduced margins and a loss of market share.
We expect to continue to experience significant and increasing levels of competition in the future. We must also compete with smaller companies that have been able to develop strong local or regional customer bases. In certain countries, some of our competitors are more established, benefit from greater name recognition and have greater resources within those countries than we do.
Consolidation of our competitors in the markets in which we operate could place us at a competitive disadvantage and reduce our profitability.
We operate in an industry, which is highly fragmented on a global scale, but in which there has been a trend toward consolidation in recent years. ConsolidationsConsolidation of our competitors may also further enhance their financial position, provide them with the ability to offer more competitive prices to customers for whom we compete, and allow them to achieve increased efficiencies in their consolidated operations that enable them to more effectively compete for customers. This may jeopardize the strength of our positions in one or more of the markets in which we operate and any advantages we currently enjoy due to the comparative scale of our operations. Losing some of those advantages could adversely affect our business, financial condition and results of operations, as well as our growth potential.
We require significant working capital, and we expect our working capital needs to increase in the future, which could result in having lower cash available for, among other things, capital expenditures and acquisition financing.
We require significant working capital to purchase chemicals from chemical producers and distributors and sell those chemicals efficiently and profitably to our customers. Our working capital needs may increase if the price of products we purchase and inventory increase. Our working capital needs also increase at certain times of the year, as our customers’ requirements for chemicals increase. For example, our customers in the agricultural sector require significant deliveries of chemicals within a growing season that can be very short and depend on weather patterns in a given year. We need inventory on hand to have product available to ensure timely delivery to our customers. If our working capital requirements increase and we are unable to finance our working capital on terms and conditions acceptable to us, we may not be able to obtain chemicals to respond to customer demand, which could result in a loss of sales.
In addition, the amount of working capital we require to run our business is expected to increase in the future due to expansions in our business activities. If our working capital needs increase, the amount of free cash we have at our disposal to devote to other uses will decrease. A decrease in free cash could, among other things, limit our flexibility, including our ability to make capital expenditures and to acquire suitable acquisition targets that we have identified. If increases in our working capital occur and have the effect of decreasing our free cash, it could have a material adverse effect on our business, financial condition and results of operations.
Although we maintain a significant portfolio of owned and leased transportation assets, including trucks, trailers and railcars,rail cars, we also rely on transportation and warehousing provided by third parties (including common carriers and rail companies) to deliver products to our customers. Our access to third party transportation is not guaranteed, and we may be unable to transport chemicals at economically attractive rates in certain circumstances, particularly in cases of adverse market conditions or disruptions to transportation infrastructure. We are also subject to increased costs that we may not always be able to recover from our customers, including fuel prices, as well as charges imposed by common carriers, leasing companies and other third parties involved in transportation. In particular, our US operations rely to a significant extent on rail shipments, and we are therefore required to pay rail companies’ network access fees. We can also experience the availability of trucks and drivers tighten. We are also subject to the risks normally associated with product delivery, including inclement weather, disruptions in the transportation infrastructure, disruptions in our lease arrangements and the availability of fuel, as well as liabilities arising from accidents to the extent we are not adequately covered by insurance or misdelivery of products. Our failure to deliver products in a timely and accurate manner could harm our reputation and brand, which could adversely affect our business, financial condition and results of operations.
Accidents, safety failures, environmental damage, product quality issues, major or systemic delivery failures involving our distribution network or the products we carry, or adverse health effects or other harm related to hazardous materials we blend, manage, handle, store, sell, transport or dispose of could damage our reputation and result in substantial damages or remedial obligations.
Our business depends to a significant extent on our customers’ and producers’ trust in our reputation for reliability, quality, safety and environmental responsibility. Actual or alleged instances of safety deficiencies, mistaken or incorrect deliveries, inferior product quality, exposure to hazardous materials resulting in illness, injury or other harm to persons, property or natural resources, or of damage caused by us or our products, could damage our reputation and lead to customers and producers curtailing the volume of business they do with us. Also, there may be safety, personal injury or other environmental risks related to our products which are not known today. Any of these events, outcomes or allegations could also subject us to substantial legal claims, and we could incur substantial expenses, including legal fees and other costs, in defending such legal claims, which could materially impact our financial position and results of operations.
Actual or alleged accidents or other incidents at our facilities or that otherwise involve our personnel or operations could also subject us to claims for damages by third parties. Because many of the chemicals that we handle are dangerous, we are subject to the ongoing risk of hazards, including leaks, spills, releases, explosions and fires, which may cause property damage, illness, physical injury or death. We sell products used in hydraulic fracturing, a process that involves injecting water, sand and chemicals
into subsurface rock formations to release and capture oil and natural gas. The use of such hydraulic fracturing fluids by our customers may result in releases that could impact the environment and third parties. Several of our distribution facilities including our Los Angeles facility, one of our largest, are located near high-density population centers. If any such events occur, whether through our own fault, through preexisting conditions at our facilities, through the fault of a third party or through a natural disaster, terrorist incident or other event outside our control, our reputation could be damaged significantly. We could also become responsible, as a result of environmental or other laws or by court order, for substantial monetary damages or expensive investigative or remedial obligations related to such events, including but not limited to those resulting from third party lawsuits or environmental investigation and cleanup obligations on and off-site. The amount of any costs, including fines, damages and/or investigative and remedial obligations, that we may become obligated to pay under such circumstances could substantially exceed any insurance we have to cover such losses.
Our business exposes us to potential product liability claims and recalls, which could adversely affect our financial condition and performance.
The repackaging, blending, mixing, manufacture, sale and distribution of chemical products by us, including products used in hydraulic fracturing operations and products produced with food ingredients or with pharmaceutical and nutritional supplement applications, involve an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity, including, without limitation, claims for exposure to our products, spills or escape of our products, personal injuries, food related claims and property damage or environmental claims. A product liability claim, judgment or recall against our customers could also result in substantial and unexpected expenditures for us, affect consumer confidence in our products and divert management’s attention from other responsibilities. Although we maintain product liability insurance, there can be no assurance that the type or level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on our business, financial condition and results of operation.
Our business is subject to many operational risks for which we might not be adequately insured or prevail in any claim dispute.
We are exposed to risks including, but not limited to, accidents, contamination and environmental damage, safety claims, natural disasters, terrorism, acts of war and civil unrest and other events that could potentially interrupt our business operations and/or result in significant costs. Although we attempt to cover these risks with insurance to the extent that we consider appropriate, we may incur losses that are not covered by insurance or exceed the maximum amounts covered by our insurance policies. Even if our insurance coverage is appropriate, our insurers may contest, and prevail in litigation regarding, and claims. We have incurred environmental risks and losses, often from our historic activities, for which we have no available or remaining insurance.
Damage to a major facility, whether or not insured, could impair our ability to operate our business in a geographic region and cause loss of business and related expenses. From time to time, insurance for chemical risks have not been available on commercially acceptable terms or, in some cases, not available at all. In the future we may not be able to maintain our current coverages. Due to the variable condition of the insurance market, we have experienced and may experience in the future, increased deductible retention levels and increased premiums. As we assume more risk through higher retention levels, we may experience more variability in our insurance reserves and expense. Increased insurance premiums or our incurrence of significant uncovered losses could have a material adverse effect on our business, financial condition and results of operations.
We are exposed to ongoing litigation and other legal and regulatory actions and risks in the ordinary course of our business, and we could incur significant liabilities and substantial legal fees.
We are subject to the risk of litigation, other legal claims and proceedings, and regulatory enforcement actions in the ordinary course of our business. Also, there may be safety or personal injury risks related to our products which are not known today. The results of legal proceedings cannot be predicted with certainty. We cannot guarantee that the results of current or future legal proceedings against McKesson and a few claims asserted directly against Univar USA Inc. will not materially harm our business, reputation or brand, nor can we guarantee that we will not incur losses in connection with current or future legal proceedings that exceed any provisions we may have set aside in respect of such proceedings or that exceed any applicable insurance coverage. We also cannot guarantee that any tax assessment previously made against us by the Canada Revenue Agency will not result in a material tax liability or that the issues raised by Customs and Border Patrol will not result in a material liability. The occurrence of any of these events could have a material adverse effect on our business, financial condition or results of operations. See “Business—Legal Proceedings” in Item 1 of this Annual Report on Form 10-K.
Many of the products we sell have “long-tail” exposures, giving rise to liabilities many years after their sale and use. Insurance purchased at the time of sale may not be available when costs arise in the future and producers may no longer be available to provide indemnification.
EmployeeThere is uncertainty surrounding the effect of Brexit and Benefitother global conditions, which may cause increased economic volatility and have a material adverse effect on our business, financial condition and results of operations.
In June 2016 the U.K. electorate voted in a referendum to voluntarily depart from the E.U., known as Brexit and in December 2019, the U.K. approved the Withdrawal Agreement and left the European Union (“Brexit”) on January 31, 2020.
The potential impact on our results of operations and liquidity resulting from Brexit remains unclear. The actual effects of Brexit will depend upon many factors and significant uncertainty remains with respect to the terms of the ultimate resolution of the Brexit negotiations. The final terms of the withdrawal may impact certain of our commercial and general business operations in the U.K. and the E.U. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations, including tax and free trade agreements, supply chain logistics, environmental, health and safety laws and regulations and employment laws, as the U.K. determines which E.U. laws to replace or replicate. We cannot predict the direction Brexit-related developments will take nor the impact of those developments on our European operations and the economies of the markets where we operate. This may cause us to adjust our strategy in order to compete effectively in global markets and could adversely affect our business, financial condition, operating results and cash flows.
Our results of operations could suffer if we are unable to expand into new geographic markets or manage the various risks related to our international activities.
Our profitability and longer-term success may be adversely affected if we fail to continue to expand our penetration in certain foreign markets and to enter new and emerging foreign markets. The profitability of our international operations will largely depend on our continued success in the following areas:
•securing key producer relationships to help establish our presence in international markets;
•hiring and training personnel capable of supporting producers and our customers and managing operations in foreign countries;
•localizing our business processes to meet the specific needs and preferences of foreign producers and customers;
•building our reputation and awareness of our services among foreign producers and customers; and
•implementing new financial, management information and operational systems, procedures and controls to monitor our operations in new markets effectively, without causing undue disruptions to our operations and customer and producer relationships.
In addition, we are subject to risks associated with operating in foreign countries, including:
•varying and often unclear legal and regulatory requirements that may be subject to inconsistent or disparate enforcement, particularly regarding environmental, health and safety issues and security or other certification requirements, as well as other laws and business practices that favor local competitors, such as exposure to possible expropriation, nationalization, restrictions on investments by foreign companies or other governmental actions;
•less stable supply sources;
•competition from existing market participants that may have a longer history in and greater familiarity with the foreign markets where we operate;
•tariffs, export duties, quotas and other barriers to trade; as well as possible limitations on the conversion of foreign currencies into US dollars or remittance of dividends and other payments by our foreign subsidiaries;
•divergent labor regulations and cultural expectations regarding employment and agency;
•different cultural expectations regarding industrialization, international business and business relationships;
•foreign taxes and related regulations, including foreign taxes that we may not be able to offset against taxes imposed upon us in the United States, and foreign tax and other laws limiting our ability to repatriate earnings to the United States;
•extended payment terms and challenges in our ability to collect accounts receivable;
•changes in a specific country’s or region’s political or economic conditions;
•compliance with anti-bribery laws such as the US Foreign Corrupt Practices Act, the UK Bribery Act and similar anti-bribery laws in other jurisdictions, the violation of which could expose us to severe criminal or civil sanctions; and
•compliance with anti-boycott, privacy, economic sanctions, anti-dumping, antitrust, import and export laws and regulations by our employees or intermediaries acting on our behalf, the violation of which could expose us to significant fines, penalties or other sanctions.
Increases in interest rates would increase the cost of servicing our debt and could reduce our profitability.
Certain of our outstanding debt bears interest at variable rates. As a result, increases in interest rates would increase the cost of servicing our debt and could materially reduce our profitability and cash flows. Approximately $1.8 billion, or 67 percent of our debt is indexed to LIBOR as a benchmark for establishing the rate and we may hold other operational contracts, including leases, that are also indexed to LIBOR. The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it intends to phase out LIBOR by the end of 2021. If LIBOR ceases to exist, we may need to amend our debt and other certain agreements that use LIBOR as a benchmark and we cannot predict what alternative index or other amendments may be negotiated with our counterparties. As a result, our interest or operating expense could increase and our available cash flow for general corporate requirements may be adversely affected. For additional information on our indebtedness, debt service obligations and sensitivity to interest rate fluctuations, see “Qualitative and Quantitative Disclosures About Market Risk” in Item 7A of this Annual Report on Form 10-K.
We may have future capital needs and may not be able to obtain additional financing on acceptable terms, or at all.
We have historically relied on debt financing to fund our operations, capital expenditures and expansion. The macroeconomic conditions that affect the markets in which we operate and our credit ratings could have a material adverse effect on our ability to secure financing on acceptable terms, if at all. The terms of additional financing may limit our financial and operating flexibility, and if financing is not available when needed, or is not available on acceptable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.
Fluctuations in currency exchange rates may adversely affect our results of operations.
We have sizable sales and operations in Canada, Europe, Middle East, Africa, Asia, and Latin America. We report our consolidated results in US dollars and the results of operations and the financial position of our local operations are generally reported in the relevant local currencies and then translated into US dollars at the applicable exchange rates. As a result, our financial performance is impacted by currency fluctuations. For additional details on our currency exposure and risk management practices, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of this Annual Report on Form 10-K.
The integration of our business systems may negatively impact our operations.
We are currently in the process of integrating our legacy business systems into the legacy Nexeo business systems (the “Systems Integration”). The Systems Integration is anticipated to be completed at the end of 2021. Since we will process and reconcile our information from multiple systems until the Systems Integration is complete, the chance of errors is greater. Inconsistencies in the information from multiple systems could adversely impact our ability to manage our business efficiently and may result in heightened risk to our ability to maintain our books and records and comply with regulatory requirements. Any disruptions, delays or deficiencies in the Systems Integration could adversely affect our ability to process orders, track inventory, ship products in a timely manner, prepare invoices to our customers, maintain regulatory compliance and otherwise carry on our business in the ordinary course. The Systems Integration involves numerous risks, including:
•diversion of management’s attention away from normal daily business operations;
•loss of, or delays in accessing, data;
•increased demand on our operations support personnel;
•initial dependence on unfamiliar systems while training personnel to use new systems; and
•increased operating expenses resulting from training, conversion and transition support activities.
Any of the foregoing or if we are unable to implement the Systems Integration successfully, could result in a material increase in information technology compliance or other related costs, and could have a negative impact on our business, financial condition and results of operations.
Our balance sheet includes significant goodwill and intangible assets, the impairment of which could affect our future operating results.
We carry significant goodwill and intangible assets on our balance sheet. As of December 31, 2019, our goodwill and intangible assets totaled approximately $2.3 billion and $0.3 billion, respectively. At least annually, the Company assesses goodwill for impairment. If testing indicates that goodwill is impaired, the carrying value is written down based on fair value with a charge against earnings. Where the Company utilizes a discounted cash flow methodology in determining fair value, weakened demand for a specific product line or business could result in an impairment. Intangible assets are amortized for book purposes over their respective useful lives and are tested for impairment if any event occurs or circumstances change that indicates that carrying value may not be recoverable. Accordingly, any determination requiring the write-off of a significant portion of goodwill or intangible assets could negatively impact the Company's financial condition and results of operations. See “Note 15: Goodwill and intangible assets” in Item 8 of this Annual Report on Form 10-K for a discussion of our 2019 impairment review.
We have in the past and may in the future make acquisitions, ventures and strategic investments, some of which may be significant in size and scope, which have involved in the past and will likely involve in the future numerous risks. We may not be able to address these risks without substantial expense, delay or other operational or financial problems.
Acquisitions or investments have involved in the past and will likely involve in the future various risks, such as:
•integrating the technologies, operations and personnel of any acquired business;
•the potential disruption of our ongoing business, including the diversion of management attention;
•the possible inability to obtain the desired financial and strategic benefits from the acquisition or investment;
•customer attrition arising from preferences to maintain redundant sources of supply;
•producer attrition arising from overlapping or competitive products;
•assumption of contingent or unanticipated liabilities or regulatory liabilities;
•dependence on the retention and performance of existing management and work force of acquired businesses for the future performance of these businesses;
•regulatory risks associated with acquired businesses (including the risk that we may be required for regulatory reasons to dispose of a portion of our existing or acquired businesses); and
•the risks inherent in entering geographic or product markets in which we have limited prior experience.
Future acquisitions and investments may need to be financed in part through additional financing from banks, through public offerings or private placements of debt or equity securities or through other arrangements, and could result in substantial cash expenditures. The necessary acquisition financing may not be available to us on acceptable terms if and when required, particularly if our debt leverage levels make it difficult or impossible for us to secure additional financing for acquisitions.
Negative developments affecting our pension and multi-employer pension plans in which we participate may occur.
We operate a number of pension and post-retirement plans for our employees and have obligations with respect to several multi-employer pension plans sponsored by labor unions in the United States. The terms of these plans vary from country to country. The recognition of costs and liabilities associated with the pension and postretirement plans is affected by assumptions made by management and used by actuaries engaged by us to calculate the benefit obligations and the expenses recognized for these plans. The inputs used in developing the required estimates are calculated using a number of assumptions, which represent management’s best estimate of the future. The assumptions that have the most significant impact on costs and liabilities are the discount rate, the estimated long-term return on plan assets for the funded plans, retirement rates, and mortality rates. Changes to the funded status of our pension plans as a result of updates to actuarial assumptions and actual experience that differs from our estimates are recognized as gains or losses in the period incurred under our “mark to market” accounting policy, and could result in a requirement for additional funding.
As of December 31, 2019, our pension plans were underfunded by $234.4 million and our unfunded postretirement plan liabilities were approximately $1.4 million. In recent years, declining interest rates have negatively impacted the funded status of our pension and postretirement plans. If the interest rates continue to decline, funding requirements for our pension plans may become more significant. If our cash flows and capital resources are insufficient to fund our obligations under these pension and postretirement plans, we could be forced to reduce or delay investments and capital expenditures, seek additional capital, or incur indebtedness.
The union sponsored multi-employer pension plans in which we participate are also underfunded, including the substantially underfunded New England Teamsters and Trucking Industry Pension Fund and Central States, Southeast and Southwest Areas Pension Plan, Riskwhich have liabilities that exceed its assets. Often, this requires us to make substantial withdrawal liability payments when we close a facility covered by one of these plans, which could hinder our ability to make otherwise appropriate management decisions to operate as efficiently as possible.
A portion of our workforce is unionized and labor disruptions could decrease our profitability.
As of December 31, 2019, approximately 22% of our labor force is covered by a collective bargaining agreement, including approximately 11%, 20%, and 46% of our labor force in the USA, Canada and Europe, respectively. Approximately 3% of our labor force is covered by a collective bargaining agreement that will expire within one year. These arrangements grant certain protections to employees and subject us to employment terms that are similar to collective bargaining agreements. We cannot guarantee that we will be able to negotiate these or other collective bargaining agreements or arrangements with works councils on the same or more favorable terms as the current agreements or arrangements, or at all, and without interruptions, including labor stoppages at the facility or facilities subject to any particular agreement or arrangement. A prolonged labor dispute, which could include a work stoppage, could have a material adverse effect on our business, financial condition and results of operations.
We depend on a limited number of key personnel who would be difficult to replace. If we lose the services of these individuals, or are unable to attract new talent, our business will be adversely affected.
We depend upon the ability and experience of a number of our executive management and other key personnel who have substantial experience with our operations, the chemicals and chemical distribution industries and the selected markets in which we operate. The loss of the services of one or a combination of our senior executives or key employees could have a material adverse effect on our results of operations. We also might suffer an additional impact on our business if one of our senior executives or key employees is hired by a competitor. Our success also depends on our ability to continue to attract, manage and retain other qualified management and technical and clerical personnel as we grow. We may not be able to continue to attract or retain such personnel in the future.
Negative developments affecting our pension plans and multi-employer pension plans in which we participate may occur.
We operate a number of pension plans for our employees and have obligations with respect to several multi-employer pension plans sponsored by labor unions in the United States. The terms of these plans vary from country to country. Generally, our defined benefit pension plans are funded with trust assets invested in a diversified portfolio of debt and equity securities and other investments. Among other factors, changes in interest rates, investment returns, the market value of plan assets and actuarial assumptions can (1) affect the level of plan funding; (2) cause volatility in the net periodic benefit cost; and (3) increase our future contribution requirements. In or following an economic environment characterized by declining investment returns and interest rates, we may be required to make additional cash contributions to our pension plans to satisfy our funding requirements and recognize further increases in our net periodic benefit cost. A significant decrease in investment returns or the market value of plan assets or a significant decrease in interest rates could increase our net periodic benefit costs and adversely affect our results of operations.
Our pension plans in the United States and certain other countries are not fully funded. The funded status of our pension plans is equal to the difference between the value of plan assets and projected benefit obligations. At December 31, 2018, our pension plans had an underfunded status of $212.4 million. This amount could increase or decrease depending on factors such as those mentioned above. Changes to the funded status of our pension plans as a result of updates to actuarial assumptions and actual experience that differs from our estimates will be recognized as gains or losses in the period incurred under our “mark to market” accounting policy, and could result in a requirement for additional funding which would have a direct effect on our cash position. Based on current projections of minimum funding requirements, we expect to make cash contributions of $28.3 million to our defined benefit pension plans in 2019. The timing for any such requirement in future years is uncertain given the implicit uncertainty regarding the future developments of factors mentioned above. The union sponsored multi-employer pension plans in which we participate are also underfunded, including the substantially underfunded New England Teamsters and Trucking Industry Pension Fund and Central States, Southeast and Southwest Areas Pension Plan, which have liabilities at a level twice that of its assets. This requires us to make often substantial withdrawal liability payments when we close a facility covered by one of these plans, which could hinder our ability to make otherwise appropriate management decisions to operate as efficiently as possible. As of December 31, 2018, we had approximately 250 employees in multi-employer pension plans.
A portion of our workforce is unionized and labor disruptions could decrease our profitability.
As of December 31, 2018, we had approximately 590 employees in the United States subject to various collective bargaining agreements, most of which have a three-year term. In addition, in several of our international facilities, particularly those in Europe, employees are represented by works councils appointed pursuant to local law consisting of employee representatives who have certain rights to negotiate working terms and to receive notice of significant actions. As of December 31, 2018, approximately 26% of our labor force is covered by a collective bargaining agreement, including approximately 14% of our labor force in the United States, approximately 20% of our labor force in Canada and approximately 45% of our labor force in Europe, and approximately 2% of our labor force is covered by a collective bargaining agreement that will expire within one year. These arrangements grant certain protections to employees and subject us to employment terms that are similar to collective bargaining agreements. We cannot guarantee that we will be able to negotiate these or other collective bargaining agreements or arrangements with works councils on the same or more favorable terms as the current agreements or arrangements, or at all, and without interruptions, including labor stoppages at the facility or facilities subject to any particular agreement or arrangement. A prolonged labor dispute, which could include a work stoppage, could have a material adverse effect on our business, financial condition and results of operations.
Changes in legislation, regulation and government policy may have a material adverse effect on our business in the future.
Elections in the United States and other democracies in which we conduct business could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy directly affecting our business or indirectly affecting us because of impacts on our customers and producers. Legislative and regulatory proposals that could have a material direct or indirect impact on us include, but are not limited to, disallowances of income tax deductions, taxes or other restrictions repatriating foreign earnings, restrictions on imports and exports, modifications to international trade policy, including withdrawal from trade agreements, environmental regulation, changes to immigration policy, changes to health insurance legislation and the imposition of tariffs and other taxes on imports. We are currently unable to predict whether such changes will occur and, if so, the ultimate impact on our business. To the extent that such changes have a negative impact on us, our producers or our customers, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition, results of operations and cash flows.
Risks Related to Our Indebtedness
We and our subsidiaries may incur additional debt in the future, which could substantially reduce our profitability, limit our ability to pursue certain business opportunities and reduce the value of your investment.
As of December 31, 2018, we had $1,747.8 million of debt outstanding under our $2,283.5 million US dollar term loan facility (the “New Senior Term Loan Facility”), $134.7 million of debt outstanding under our $1,300.0 million Senior ABL credit facility, $58.5 million of debt outstanding under our €200.0 million senior European ABL facility (the “Euro ABL Facility”) with approximately $620.3 million available for additional borrowing under these facilities and $399.5 million outstanding under Univar USA Inc.’s 6.75% senior notes due 2023 (the “Unsecured Notes”). Subject to certain limitations set forth in the agreements that govern these facilities and notes, we or our subsidiaries may incur additional debt in the future, or other obligations that do not constitute indebtedness, which could increase the risks described below and lead to other risks. The amount of our debt or such other obligations could have important consequences for holders of our common stock, including, but not limited to:
our ability to satisfy obligations to lenders or noteholders may be impaired, resulting in possible defaults on and acceleration of our indebtedness;
our ability to obtain additional financing for refinancing of existing indebtedness, working capital, capital expenditures, including costs associated with our international expansion, product and service development, acquisitions, general corporate purposes and other purposes may be impaired;
our assets that currently serve as collateral for our debt may be insufficient, or may not be available, to support future financings;
a substantial portion of our cash flow from operations could be used to repay the principal and interest on our debt;
we may be increasingly vulnerable to economic downturns and increases in interest rates;
our flexibility in planning for and reacting to changes in our business and the markets in which we operate may be limited; and
we may be placed at a competitive disadvantage relative to other companies in our industry with less debt or comparable debt at more favorable interest rates.
The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them.
The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior ABL Facility and European ABL Facility include certain financial covenants.
The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility.
Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, the pricing of our products, our success at implementing cost reduction initiatives, our ability to successfully implement our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries, 65% of the capital stock of our foreign subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders.
Increases in interest rates would increase the cost of servicing our debt and could reduce our profitability.
Our debt outstanding under the Senior Term Loan Facility, Senior ABL Facility and European ABL Facility bears interest at variable rates. As a result, increases in interest rates would increase the cost of servicing our debt and could materially reduce our profitability and cash flows. Some or all of the combined company’s variable-rate indebtedness may use the LIBOR as a benchmark for establishing the rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequence of these developments cannot be entirely predicted, but could include an increase in the cost of our variable rate indebtedness. For additional information on our indebtedness, debt service obligations and sensitivity to interest rate fluctuations, see “Qualitative and Quantitative Disclosures About Market Risk” in Item 7A of this Annual Report on Form 10-K.
We may have future capital needs and may not be able to obtain additional financing on acceptable terms, or at all.
We have historically relied on debt financing to fund our operations, capital expenditures and expansion. The market conditions and the macroeconomic conditions that affect the markets in which we operate could have a material adverse effect on our ability to secure financing on acceptable terms, if at all. We may be unable to secure additional financing on favorable terms or at all and our operating cash flow may be insufficient to satisfy our financial obligations under the indebtedness outstanding from time to time. The terms of additional financing may limit our financial and operating flexibility. Our ability to satisfy our financial obligations will depend upon our future operating performance, the availability of credit generally, economic conditions and financial, business and other factors, many of which are beyond our control. Furthermore, if financing is not available when needed, or is not available on acceptable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.
Risks Related to Our Common Stock
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock may depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of these analysts downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock may decrease, which could cause our stock price or trading volume to decline.
Future sales of shares by existing stockholders could cause our stock price to decline.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. All of the 40,250,000 shares sold pursuant to our IPO in June 2015, the 4,500,000 shares we registered on July 29, 2016, the 20,943,741 shares we registered on August 15, 2016, the 12,500,000 shares we registered on December 12, 2016, the 15,000,000 shares we registered on January 31, 2017 and the 10,000,000 shares we registered on December 14, 2017 are immediately tradable without restriction under the Securities Act of 1933, as amended (the “Securities Act”), unless held by “affiliates”, as that term is defined in Rule 144 under the Securities Act. The remaining shares of outstanding common stock are restricted securities within the meaning of Rule 144 under the Securities Act, but will be eligible for resale subject, in certain cases, to applicable volume, means of sale, holding period and other limitations of Rule 144 or pursuant to an exception from registration under Rule 701 under the Securities Act, subject to the terms of the lock-up agreements entered into by the Significant Stockholders, our directors and certain of our key executive officers. The underwriter may, at any time, release all or any portion of the shares subject to lock-up agreements entered into in connection with this offering.
We have also filed a registration statement under the Securities Act to register the shares of common stock to be issued under our equity compensation plans and, as a result, all shares of common stock acquired upon exercise of stock options granted under our plans are also freely tradable under the Securities Act, unless purchased by our affiliates. In addition, certain of our significant stockholders may distribute the shares that they hold to their investors who themselves may then sell into the public market. Such sales may not be subject to the volume, manner of sale, holding period and other limitations of Rule 144. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. In the future, we may also issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement or employee arrangement or otherwise. Any of these issuances could result in substantial dilution to our existing stockholders and could cause the trading price of our common stock to decline.
Significant stockholders have the right to nominate members of our Board of Directors and may exercise significant control over the direction of our business. To the extent ownership of our common stock continues to be held by stockholders with these rights, it could prevent you and other stockholders from influencing significant corporate decisions.
Investment funds associated with Clayton, Dubilier & Rice, LLC (“CD&R”) beneficially own approximately 8.2% of the outstanding shares of our common stock. CD&R continues to exercise significant influence over all matters requiring stockholder approval for the foreseeable future, including approval of significant corporate transactions, which may reduce the market price of our common stock.
Under the Fourth Amended and Restated Stockholders' Agreement of Univar Inc. (the “Amended and Restated Stockholders’ Agreement”), CD&R is entitled to nominate up to three sponsor directors and three independent directors under certain circumstances related to continued ownership of the shares they hold. CD&R continues to hold 11,561,039 shares, which allows them to continue to nominate members to our board of directors.
These provisions allow CD&R to continue to exercise significant control over our corporate decisions, including over matters which our other stockholders have a right to vote. Our Certificate of Incorporation and our Bylaws also include a number of provisions that may discourage, delay or prevent a change in our management or control for so long as CD&R owns specified percentages of our common stock. See “— Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.” These provisions not only could have a negative impact on the trading price of our common stock, but could also allow the Significant Stockholders to delay or prevent a corporate transaction that the public stockholders might approve.
Our Certificate of Incorporation provides that we will waive any interest or expectancy in corporate opportunities presented to CD&R.
Our Certificate of Incorporation provides that we, on our behalf and on behalf of our subsidiaries, renounce and waive any interest or expectancy in, or in being offered an opportunity to participate in, corporate opportunities that are from time to time presented to CD&R, or their respective officers, directors, agents, stockholders, members, partners, affiliates or subsidiaries, even if the opportunity is one that we or our subsidiaries might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so. None of CD&R or its respective agents, stockholders, members, partners, affiliates or subsidiaries will generally be liable to us or any of our subsidiaries for breach of any fiduciary or other duty, as a director or otherwise, by reason of the fact that such person pursues, acquires or participates in such corporate opportunity, directs such corporate opportunity to another person or fails to present such corporate opportunity, or information regarding such corporate opportunity, to us or our subsidiaries unless, in the case of any such person who is a director or officer, such corporate opportunity is expressly offered to such director or officer in writing solely in his or her capacity as a director or officer. Stockholders will be deemed to have notice of and consented to this provision of our Certificate of Incorporation. This will allow CD&R to compete with us. Strong competition for investment opportunities could result in fewer such opportunities for us. We likely will not always be able to compete successfully with our competitors and competitive pressures or other factors may also result in significant price competition, particularly during industry downturns, which could have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.
Fulfilling our obligations incident to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act of 2002, is expensive and time-consuming, and any delays or difficulties in satisfying these obligations could have a material adverse effect on our future results of operations and our stock price.
We are subject to the reporting and corporate governance requirements, the listing standards of the NYSE and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which apply to issuers of listed equity, which impose certain compliance costs and obligations upon us. Meeting these standards requires a significant commitment of additional resources and management oversight, which increases our operating costs. These requirements also place additional demands on our finance and accounting staff and on our financial accounting and information systems. Other expenses associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses. As a public company, we are required, among other things, to:
prepare and file periodic reports, and distribute other stockholder communications, in compliance with the federal securities laws and the NYSE rules;
define and expand the roles and the duties of our Board of Directors and its committees; and
institute more comprehensive compliance, investor relations and internal audit functions.
The Sarbanes-Oxley Act requires us to document and test the effectiveness of our internal control over financial reporting in accordance with an established internal control framework, and to report on our conclusions as to the effectiveness of our internal controls. Likewise, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. In addition, we are required under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), to maintain disclosure controls and procedures and internal control over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent auditors are unable to conclude that we have effective internal control over financial reporting, investors could lose confidence in the reliability of our financial statements. This could result in a decrease in the value of our common stock. Failure to comply with the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC, the NYSE or other regulatory authorities, which would require additional financial and management resources.
Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude, and our auditors were to concur, that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. This, in turn, could have an adverse impact on trading prices for our shares of common stock, and could adversely affect our ability to access the capital markets.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.
Our Certificate of Incorporation and By-laws include a number of provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. For example, our Certificate of Incorporation and By-laws currently:
•authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to thwart a takeover attempt;
•limit the ability of stockholders to remove directors; and
•establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt or before our Board becomes fully declassified, the existence of these provisions may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts in the future. See “Description of Capital Stock—Anti-Takeover Effects of our Certificate of Incorporation and By-laws.” Our Certificate of Incorporation and By-laws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.
Our Certificate of Incorporation includes provisions limiting the personal liability of our directors for breaches of fiduciary duty under the General Corporation Law of the State of Delaware and we have entered into Indemnification Agreements, which provide further protections to our directors.
Our Certificate of Incorporation contains provisions permitted under the General Corporation Law of the State of Delaware (the “DGCL”) relating to the liability of directors. These provisions eliminate a director’s personal liability to the fullest extent permitted by the DGCL for monetary damages resulting from a breach of fiduciary duty, except in circumstances involving:
any breach of the director’s duty of loyalty;
acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law;
under Section 174 of the DGCL (unlawful dividends); or
any transaction from which the director derives an improper personal benefit.
The principal effect of the limitation on liability provision is that a stockholder will be unable to prosecute an action for monetary damages against a director unless the stockholder can demonstrate a basis for liability for which indemnification is not available under the DGCL. These provisions, however, should not limit or eliminate our rights or any stockholder’s rights to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of a director’s fiduciary duty. These provisions will not alter a director’s liability under federal securities laws. The inclusion of this provision in our Certificate of Incorporation may discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise have benefited us and our stockholders.
We have entered into indemnification agreements with each of our directors and certain of our executive officers. The indemnification agreements provide our directors and certain of our executive officers with contractual rights to the indemnification and expense advancement rights provided under our By-laws, as well as contractual rights to additional indemnification as provided in the indemnification agreements.
Our Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our Certificate of Incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers, employees or agents, (iii) any action asserting a claim against us arising under the DGCL, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. By becoming a stockholder in our company, you will be deemed to have notice of and have consented to the provisions of our Certificate of Incorporation related to choice of forum. The choice of forum provision in our Certificate of Incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
We do not currently intend to pay cash dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We do not currently intend to declare and pay cash dividends on our common stock. We currently intend to invest our future earnings, if any, to fund our growth and repay outstanding indebtedness. Therefore, you are unlikely to receive any dividends on your common stock in 2019 and we have no current plans to pay dividends in future periods. The success of an investment in shares of our common stock will therefore depend entirely upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. See “Dividend Policy.”
Risks Related to the Nexeo Acquisition
The Nexeo Acquisition is subject to the approval of our shareholders as to our share issuance. Failure to obtain this approval would prevent completion of the Nexeo Acquisition.
Before the Nexeo Acquisition can be completed, our shareholders must approve our share issuance. There can be no assurance that this approval will be obtained. Failure to obtain the required approval may result in a material delay in, or the abandonment of, the acquisition. Any delay in completing the acquisition may materially adversely affect the timing and amount of cost savings and other benefits that are expected to be achieved from the acquisition.
Uncertainties associated with the Nexeo Acquisition may cause a loss of management personnel and other key employees which could adversely affect our future business and operations following the Nexeo Acquisition.
We are dependent on the experience and industry knowledge of our officers and other key employees to execute our business plans. Our success after the acquisition will depend in part upon our ability to retain key management personnel and other key employees. Current and prospective employees may experience uncertainty about their roles following the acquisition or other concerns regarding the timing and completion of the acquisition or our operations following the acquisition, any of which may have an adverse effect on our ability to attract or retain key management and other key personnel. Accordingly, no assurance can be given that following the Nexeo Acquisition we will be able to attract or retain key management personnel and other key employees to the same extent that we have previously been able to attract or retain our employees.
The business relationships of Univar and Nexeo may be subject to disruption due to uncertainty associated with the Nexeo Acquisition, which could have a material adverse effect on our results of operations, cash flows and financial position following the acquisition.
Parties with which Univar or Nexeo do business may experience uncertainty associated with the Nexeo Acquisition, including with respect to current or future business relationships with Univar or Nexeo following the acquisition. Univar’s and Nexeo’s business relationships may be subject to disruption as customers, distributors, suppliers, vendors and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than Univar or Nexeo following the acquisition. These disruptions could have an adverse effect on our results of operations, cash flows and financial position, including an adverse effect on our ability to realize the expected cost savings and other benefits of the acquisition. The risk, and adverse effect, of any disruption could be exacerbated by a delay in completion of the acquisition or termination of the Business Combination Agreement.
Failure to complete the Nexeo Acquisition could negatively impact our stock price and have a material adverse effect on our results of operations, cash flows and financial position.
If the Nexeo Acquisition is not completed for any reason, including as a result of Univar or Nexeo stockholders failing to approve the applicable proposals, our ongoing business may be materially adversely affected and, without realizing any of the benefits of having completed the acquisition, we would be subject to a number of risks, including the following:
we may experience negative reactions from the financial markets, including negative impacts on our stock price;
we may experience negative reactions from customers, distributors, regulators and employees;
we will still be required to pay certain significant costs relating to the Nexeo Acquisition, such as legal, accounting, financial advisor and printing fees;
we may be required to pay one or more cash termination fees as required by the Business Combination Agreement;
matters relating to the Nexeo Acquisition (including integration planning) require substantial commitments of our time and resources, which could have resulted in the distraction of our management from ongoing business operations and pursuing other opportunities that could have been beneficial to us; and
litigation related to any failure to complete the Nexeo Acquisition or related to any enforcement proceeding commenced against us to perform our obligations under the Business Combination Agreement.
If the Nexeo Acquisition is not completed, the risks described above may materialize and they may have a material adverse effect on our results of operations, cash flows, financial position and stock prices.
Our current stockholders will generally have a reduced ownership and voting interest after the Nexeo Acquisition.
We expect to issue to Nexeo stockholders (or reserve for issuance) approximately 37 million shares of our common stock in the acquisition (including shares of our common stock issuable in connection with outstanding Nexeo stock options, restricted stock awards, performance share unit awards and restricted share unit awards and assuming the conversion of all the outstanding Nexeo warrants into shares of Nexeo common stock entitled to receive the consideration). As a result of these issuances, our stockholders will generally have less voting power after the acquisition than they now have.
The exchange ratio is fixed and will not be adjusted in the event of any change in our stock price. Because the market price of our common stock may fluctuate, the value of the consideration we will pay is uncertain.
As consideration for the Nexeo Acquisition, each share of Nexeo common stock (other than dissenters’ shares or treasury shares held by Nexeo and any shares of Nexeo common stock owned by any Nexeo subsidiary, Univar or Univar subsidiary) will be converted into the right to receive and exchanged for (1) 0.305 of a fully paid and non-assessable share of Univar common stock plus (2) $3.29 in cash. The cash consideration is subject to reduction by up to $0.41 per share based on the closing price of Univar common stock on the day prior to the completion of the acquisition. The cash consideration will be reduced on a linear basis from $3.29 to $2.88 per share of Nexeo common stock to the extent that the closing price of Univar common stock is between $25.34 and $22.18. If the closing price of Univar common stock is $22.18 per share or lower, the cash consideration will be $2.88 per share of Nexeo common stock. If the closing price of Univar common stock is $25.34 per share or higher, the cash consideration will be $3.29 per share of Nexeo common stock. Nexeo stockholders will receive cash in lieu of any fractional shares.
The exchange ratio will not be adjusted for changes in the market price of our common stock. Because the exchange ratio is fixed, the value of the stock portion of the consideration will depend on the market price of our common stock at the completion of the acquisition. The value of the stock portion of the consideration has fluctuated since the date of the announcement of the Business Combination Agreement and will continue to fluctuate from the date of this 10-K to the completion of the acquisition and thereafter.
We may be unable to integrate the business of Nexeo successfully or realize the anticipated benefits of the acquisition.
The Nexeo Acquisition involves the combination of two companies that currently operate as independent public companies. We will be required to devote significant management attention and resources to integrating the business practices and operations of Nexeo and Univar. Potential difficulties that we may encounter as part of the integration process include the following:
the inability to successfully combine the business of Nexeo in a manner that permits us to achieve, on a timely basis, or at all, the enhanced revenue opportunities and cost savings and other benefits anticipated to result from the Nexeo Acquisition;
complexities associated with managing the combined businesses, including difficulty addressing possible differences in corporate cultures and management philosophies and the challenge of integrating complex systems, technology, networks and other assets of each of the companies in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies; and
potential unknown liabilities, including shareholder lawsuits and other potential legal actions, and unforeseen increased expenses or delays associated with the Nexeo Acquisition.
Any of these issues could adversely affect our ability to maintain relationships with customers, suppliers, employees and other constituencies or achieve the anticipated benefits of the acquisition, or could reduce our earnings or otherwise adversely affect our business and financial results following the acquisition.
Our future results following the Nexeo Acquisition will suffer if we do not effectively manage our expanded operations.
Following the acquisition, the size of our business will increase significantly beyond its current size. Our future success will depend, in part, upon our ability to manage this expanded business, which will pose substantial challenges for us, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings, revenue enhancements or other benefits currently anticipated from the acquisition.
In connection with the Nexeo Acquisition, we will incur additional indebtedness and may also assume certain of Nexeo’s outstanding indebtedness. Additional indebtedness would amplify the risks associated with our current indebtedness by increasing our interest expense and potentially reducing our flexibility to respond to changing business and economic conditions, which could have a material adverse effect on our results of operations, cash flows and financial position.
The increased indebtedness would increase our interest expense which could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions. We will also incur various costs and expenses associated with the financing of the Nexeo Acquisition. The amount of cash required to pay interest on our increased indebtedness levels following completion of the Nexeo Acquisition and thus the demands on our cash resources will be greater than the amount of cash flows required to service our indebtedness prior to the Nexeo Acquisition. The increased levels of indebtedness following completion of the Nexeo Acquisition could also reduce funds available for working capital, capital expenditures, acquisitions and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the Nexeo Acquisition, or if the financial performance of the combined company does not meet current expectations, then our ability to service our indebtedness may be adversely impacted. See “Risks Related to Our Indebtedness” above.
We may not successfully divest Nexeo’s plastics distribution business.
On February 8, 2019, Univar and Nexeo announced an agreement for Nexeo to divest its plastics distribution business to an affiliate of One Rock Capital Partners, LLC for an enterprise value of $640.0 million, subject to customary closing adjustments. The Company can provide no assurance this divestiture will occur timely or at all. If the divestiture of the plastics distribution business is delayed or unsuccessful, the Company could experience:
a loss of management personnel and other key employees of the plastics business;
disruption in the business relationships of the plastics business;
additional challenges and delays in successfully integrating the business of Nexeo, managing our newly-expanded operations or realizing the anticipated benefits of the Nexeo Acquisition; and
incurring larger amounts of indebtedness than anticipated.
Any of these risks, alone or in combination, could have a material adverse effect on our stock price and otherwise adversely affect our business and financial results following the acquisition.
ITEM 1B. UNRESOLVED STAFF COMMENTS.COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive office is located in Downers Grove, Illinois under a lease expiring in June 2024. As of December 31, 2018,2019, we had 278354 locations in the United States in 47 states. Of thesestates and 336 locations approximately 265 are warehouse facilities responsible for storing and shippingoutside of products and 13 are dedicated office space.the United States in 30 countries. Our warehouse facilities are nearly equally comprised of owned, leased and third party warehouses and our office space is generally leased. Our facilities focus on the storing, repackaging and blending of chemicals and ingredients for distribution. Such facilities do not require substantial investments in equipment, can be opened fairly quickly and replaced with little disruption. As such, we believe that none of our facilities on an individual basis is principalmaterial to the operation of our business. We select locations for our warehouses based on proximity to producers and our customers to maintain efficient distribution networks. We believe that our facilities are adequate and suitable for our current operations. We hold a relatively small number of surplus sites for potential disposition. In some instances, our larger owned sites have been mortgaged under our secured credit facilities.
We have 354 locations outside of the United States in 30 countries. These facilities are focused on storing and shipping of products. Approximately half are owned or leased and half are third party warehouses. The majority of the facilities outside of the United States are found in the following countries:
Canada (126 facilities)
China (13 facilities)
France (22 facilities)
Germany (7 facilities)
Italy (8 facilities)
Mexico (26 facilities)
Netherlands (19 facilities)
Spain (7 facilities)
Sweden (17 facilities)
Turkey ( 9 facilities)
United Kingdom (40 facilities)
ITEM 3. LEGAL PROCEEDINGS
“Legal Proceedings” in Item 1 of this Annual Report on Form 10-K and Note 20, entitled “CommitmentsSee “Note 21: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K arefor information regarding legal proceedings, the content of which is incorporated herein by reference.reference to this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our common stock is listed on the New York Stock Exchange under the symbol “UNVR”.UNVR.
Holders of Record
As of December 31, 2018,2019, there were 2 stockholders of record12 holders of our common stock,Common Stock, as determined by counting our record holders and the closing pricenumber of participants reflected in a security position listing provided to us by the Equiniti Trust Company (EQ). Because such EQ participants are brokers and other institutions holding shares of our common stock was $17.74 per share as reportedCommon Stock on behalf of their customers, we do not know the New York Stock Exchange.actual number of unique shareholders represented by these record holders.
Stock Performance
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the S&P 500 and the S&P 500 Chemical Index for the period beginning on June 17, 2015 through year ended December 31, 2018.2019. The graph assumes $100 was invested in each of the Company's common stock, the S&P 500 and S&P 500 Chemical Index as of the market close on June 17, 2015. Note that historic stock price performance is not necessarily indicative of future stock price performance.
Dividend Policy
We have never declared or paid any cash dividend on our common stock. We currently intend to retain any future earnings and we have no current plans to pay dividends in future periods.the near future. In addition, our credit facilities contain restrictionslimitations on our ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our summary consolidated financial data as of and for the periods indicated. The selected consolidated financial data as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 have been derived from our audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The selected consolidated financial data as of December 31, 2016, 2015 and 2014 and for the years ended December 31, 2015 and 2014 are derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K. Our historical consolidated financial data may not be indicative of our future performance.
This “Selected Financial Data” should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K and our audited consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | | | | | |
| 2019 (1) | | 2018 | | 2017 | | 2016 | | 2015 |
(in millions, except per share data) | | | | | | | | | |
Consolidated Statements of Operations | | | | | | | | | |
Net sales | $ | 9,286.9 | | | $ | 8,632.5 | | | $ | 8,253.7 | | | $ | 8,073.7 | | | $ | 8,981.8 | |
Operating income (2) | 187.3 | | | 387.4 | | | 338.0 | | | 138.4 | | | 259.3 | |
Net (loss) income from continuing operations | (105.6) | | | 172.3 | | | 119.8 | | | (68.4) | | | 16.5 | |
Net (loss) income | (100.2) | | | 172.3 | | | 119.8 | | | (68.4) | | | 16.5 | |
(Loss) income per common share from continuing operations– diluted | (0.64) | | | 1.21 | | | 0.85 | | | (0.50) | | | 0.14 | |
(Loss) income per common share – diluted | (0.61) | | | 1.21 | | | 0.85 | | | (0.50) | | | 0.14 | |
Consolidated Balance Sheet | | | | | | | | | |
Cash and cash equivalents | $ | 330.3 | | | $ | 121.6 | | | $ | 467.0 | | | $ | 336.4 | | | $ | 188.1 | |
Total assets | 6,494.8 | | | 5,272.4 | | | 5,732.7 | | | 5,389.9 | | | 5,612.4 | |
Long-term liabilities | 3,312.6 | | | 2,746.1 | | | 3,223.2 | | | 3,240.5 | | | 3,502.2 | |
Stockholders’ equity | 1,732.8 | | | 1,191.7 | | | 1,090.1 | | | 809.9 | | | 816.7 | |
Other Financial Data | | | | | | | | | |
Cash provided by operating activities (3) | $ | 363.9 | | | $ | 289.9 | | | $ | 282.6 | | | $ | 450.0 | | | $ | 356.0 | |
Cash used by investing activities | (433.1) | | | (99.0) | | | (79.1) | | | (136.0) | | | (294.4) | |
Cash provided (used) by financing activities (3) | 295.2 | | | (518.3) | | | (112.4) | | | (166.5) | | | (19.8) | |
Capital expenditures | 122.5 | | | 94.6 | | | 82.7 | | | 90.1 | | | 145.0 | |
Adjusted EBITDA (2)(4) | 704.2 | | | 640.4 | | | 593.8 | | | 547.4 | | | 573.3 | |
Adjusted EBITDA margin (2)(4) | 7.6 | % | | 7.4 | % | | 7.2 | % | | 6.8 | % | | 6.4 | % |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal year ended December 31, |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
(in millions, except per share data) | |
Consolidated Statements of Operations | | | | | | | | | |
Net sales | $ | 8,632.5 |
| | $ | 8,253.7 |
| | $ | 8,073.7 |
| | $ | 8,981.8 |
| | $ | 10,373.9 |
|
Operating income | 387.4 |
| | 338.0 |
| | 138.4 |
| | 259.3 |
| | 315.7 |
|
Net income (loss) | 172.3 |
| | 119.8 |
| | (68.4 | ) | | 16.5 |
| | (20.1 | ) |
Income (loss) per common share – diluted | 1.21 |
| | 0.85 |
| | (0.50 | ) | | 0.14 |
| | (0.20 | ) |
Consolidated Balance Sheet | | | | | | | | | |
Cash and cash equivalents | $ | 121.6 |
| | $ | 467.0 |
| | $ | 336.4 |
| | $ | 188.1 |
| | $ | 206.0 |
|
Total assets | 5,272.4 |
| | 5,732.7 |
| | 5,389.9 |
| | 5,612.4 |
| | 6,067.7 |
|
Long-term liabilities | 2,746.1 |
| | 3,223.2 |
| | 3,240.5 |
| | 3,502.2 |
| | 4,300.7 |
|
Stockholders’ equity | 1,191.7 |
| | 1,090.1 |
| | 809.9 |
| | 816.7 |
| | 248.1 |
|
Other Financial Data | | | | | | | | | |
Cash provided by operating activities | $ | 289.9 |
| | $ | 282.6 |
| | $ | 450.0 |
| | $ | 356.0 |
| | $ | 126.3 |
|
Cash used by investing activities | (99.0 | ) | | (79.1 | ) | | (136.0 | ) | | (294.4 | ) | | (148.2 | ) |
Cash (used) provided by financing activities | (518.3 | ) | | (112.4 | ) | | (166.5 | ) | | (19.8 | ) | | 84.1 |
|
Capital expenditures | 94.6 |
| | 82.7 |
| | 90.1 |
| | 145.0 |
| | 113.9 |
|
Adjusted EBITDA (1) | 640.4 |
| | 593.8 |
| | 547.4 |
| | 573.3 |
| | 624.8 |
|
Adjusted EBITDA margin (1) | 7.4 | % | | 7.2 | % | | 6.8 | % | | 6.4 | % | | 6.0 | % |
| |
(1) | For a complete discussion of the method of calculating Adjusted EBITDA and its usefulness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K. We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales. |
(1)Effective January 1, 2019, the Company adopted new guidance on lease accounting. Prior year amounts have not been adjusted. Refer to “Note 2: Significant accounting policies” for more information. On February 28, 2019, the Company completed the Nexeo acquisition. See “Note 3: Business combinations.”
The following is a quantitative reconciliation of(2)Operating income, Adjusted EBITDA and Adjusted EBITDA margin were restated for 2017 and prior to reflect the adoption of ASU 2017-07 “Compensation - Retirement Benefits” (Topic 715) - “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” which the Company adopted on January 1, 2018.
(3)Cash provided by operating activities and cash (used) provided by financing activities were restated for 2017 and prior to reflect the adoption of ASU 2016-15 “Statement of Cash Flows” (Topic 230) - “Classification of Certain Cash Receipts and Cash Payments” which the Company adopted on January 1, 2018.
(4)Non-GAAP financial measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K for further discussion and reconciliation to the most directly comparable GAAP financial performancemeasure. We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 whichto 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.
Our MD&A is net income (loss):
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal year ended December 31, |
(in millions) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Net income (loss) | $ | 172.3 |
| | $ | 119.8 |
| | $ | (68.4 | ) | | $ | 16.5 |
| | $ | (20.1 | ) |
Impairment charges (1) | — |
| | — |
| | 133.9 |
| | — |
| | 0.3 |
|
Pension mark to market loss | 34.2 |
| | 3.8 |
| | 68.6 |
| | 21.1 |
| | 117.8 |
|
Pension curtailment and settlement gains | — |
| | (9.7 | ) | | (1.3 | ) | | (4.0 | ) | | — |
|
Non-operating retirement benefits | (11.0 | ) | | (9.9 | ) | | (15.3 | ) | | (26.8 | ) | | (16.9 | ) |
Stock-based compensation expense | 20.7 |
| | 19.7 |
| | 10.4 |
| | 7.5 |
| | 12.1 |
|
Business transformation costs | — |
| | 23.4 |
| | 5.4 |
| | — |
| | — |
|
Restructuring charges | 4.8 |
| | 5.5 |
| | 6.5 |
| | 33.8 |
| | 46.2 |
|
Other employee termination costs | 16.4 |
| | 8.1 |
| | 1.5 |
| | — |
| | — |
|
Loss (gain) on sale of property, plant and equipment and other assets | 2.0 |
| | (11.3 | ) | | (0.7 | ) | | (2.8 | ) | | 3.4 |
|
Acquisition and integration related expenses | 22.0 |
| | 3.1 |
| | 5.5 |
| | 7.1 |
| | 3.7 |
|
Other operating expenses | 7.6 |
| | 6.9 |
| | 8.6 |
| | 14.4 |
| | 8.0 |
|
Other non-operating items | 3.1 |
| | 3.5 |
| | 0.1 |
| | 4.1 |
| | 2.9 |
|
Foreign currency transactions | 6.7 |
| | 4.6 |
| | 0.6 |
| | 0.8 |
| | 0.6 |
|
Foreign currency denominated loans revaluation | 0.8 |
| | 17.9 |
| | 13.7 |
| | (8.9 | ) | | (8.3 | ) |
Undesignated foreign currency derivative instruments | (1.1 | ) | | (0.3 | ) | | 1.8 |
| | 4.8 |
| | 3.9 |
|
Undesignated interest rate swap contracts | — |
| | 2.2 |
| | (10.1 | ) | | (2.0 | ) | | — |
|
Ineffective portion of cash flow hedges | — |
| | — |
| | — |
| | 0.4 |
| | (0.2 | ) |
Loss due to discontinuance of cash flow hedges | — |
| | — |
| | — |
| | 7.5 |
| | — |
|
Debt refinancing costs | — |
| | 5.3 |
| | — |
| | 16.5 |
| | — |
|
Loss on extinguishment of debt | 0.1 |
| | 3.8 |
| | — |
| | 12.1 |
| | 1.2 |
|
Advisory fees to CVC and CD&R | — |
| | — |
| | — |
| | 2.8 |
| | 5.9 |
|
Contract termination fee to CVC and CD&R | — |
| | — |
| | — |
| | 26.2 |
| | — |
|
Depreciation and amortization | 179.5 |
| | 200.4 |
| | 237.9 |
| | 225.0 |
| | 229.5 |
|
Interest expense, net | 132.4 |
| | 148.0 |
| | 159.9 |
| | 207.0 |
| | 250.6 |
|
Tax expense (benefit) | 49.9 |
| | 49.0 |
| | (11.2 | ) | | 10.2 |
| | (15.8 | ) |
Adjusted EBITDA | $ | 640.4 |
| | $ | 593.8 |
| | $ | 547.4 |
| | $ | 573.3 |
| | $ | 624.8 |
|
| | | | | | | | | |
| |
(1) | The 2016 impairment charges primarily related to impairment of intangible assets and property, plant and equipment. See “Note 14: Impairment charges” in Item 8 of this Annual Report on Form 10-K for further information regarding the fiscal year ended December 31, 2018. The 2014 impairment charges primarily related to impairments of idle properties and equipment. The 2013 impairment charges primarily related to the write-off of goodwill related to the Rest of World segment as well as the write-off of capitalized software costs related to a global ERP system. |
The defined benefit pensionprovided in addition to the accompanying consolidated financial statements and other postretirement benefit plan’s marknotes to market loss (gain) is measured and recognizedassist readers in its entirety within the statementunderstanding our results of operations, annuallyfinancial condition and cash flow. This section of this Annual Report on December 31. The adjustment primarily includes the differenceForm 10-K discusses year-to-year comparisons between the expected return2019 and 2018. Discussions of year-to-year comparisons between 2018 and 2017 that are not included in this Annual Report on plan assetsForm 10-K can be found in “Management's Discussion and the actual return on plan assets as well as differences resulting from assumption changes and changes in plan experience between the prior pension measurement date and the current pension measurement date. For detailsAnalysis of pension expense both within and excluded from Adjusted EBITDA, see the table below:
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal year ended December 31, |
(in millions) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Service cost included in Adjusted EBITDA | $ | 2.7 |
| | $ | 2.5 |
| | $ | 2.5 |
| | $ | 5.5 |
| | $ | 7.1 |
|
Pension expense included in Adjusted EBITDA | $ | 2.7 |
| | $ | 2.5 |
| | $ | 2.5 |
| | $ | 5.5 |
| | $ | 7.1 |
|
| | | | | | | | | |
Interest cost | $ | 42.7 |
| | $ | 47.2 |
| | $ | 50.4 |
| | $ | 51.1 |
| | $ | 55.2 |
|
Expected return on plan assets | (56.4 | ) | | (56.9 | ) | | (61.2 | ) | | (66 | ) | | (60.2 | ) |
Amortization of unrecognized prior service cost (credits) | 2.7 |
| | (0.2 | ) | | (4.5 | ) | | (11.9 | ) | | (11.9 | ) |
Net pension benefit | $ | (11.0 | ) | | $ | (9.9 | ) | | $ | (15.3 | ) | | $ | (26.8 | ) | | $ | (16.9 | ) |
| | | | | | | | | |
Mark to market loss (gain) due to difference in asset returns | $ | 116.0 |
| | $ | (60.5 | ) | | $ | (45.2 | ) | | $ | 67.3 |
| | $ | (76.3 | ) |
Mark to market (gain) loss due to assumption changes | (81.2 | ) | | 60.8 |
| | 103.9 |
| | (39.3 | ) | | 196.5 |
|
Mark to market (gain) loss due to plan experience | (0.6 | ) | | 3.5 |
| | 9.9 |
| | (6.9 | ) | | (2.4 | ) |
Mark to market loss | $ | 34.2 |
| | $ | 3.8 |
| | $ | 68.6 |
| | $ | 21.1 |
| | $ | 117.8 |
|
| | | | | | | | | |
Settlement | $ | — |
| | $ | (9.7 | ) | | $ | — |
| | $ | (1.4 | ) | | $ | — |
|
Curtailment | — |
| | — |
| | (1.3 | ) | | (2.6 | ) | | — |
|
Pension curtailment and settlement gains | $ | — |
| | $ | (9.7 | ) | | $ | (1.3 | ) | | $ | (4.0 | ) | | $ | — |
|
| | | | | | | | | |
Pension expense (income) excluded from Adjusted EBITDA | $ | 23.2 |
| | $ | (15.8 | ) | | $ | 52.0 |
| | $ | (9.7 | ) | | $ | 100.9 |
|
Total pension expense (income) | $ | 25.9 |
| | $ | (13.3 | ) | | $ | 54.5 |
| | $ | (4.2 | ) | | $ | 108.0 |
|
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, 2018, filed on February 21, 2019.
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We areUnivar Solutions Inc. is a leading global chemical and ingredientsingredient distributor and provider of specialty services.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 130 countries. Our specialized services include digital promotion or e-marketing of chemicals for our producers, chemical waste removal and ancillary services, on-site storage of chemicals for our customers, and support services for the agricultural end market. We derive competitive advantage from our scale, broad product offering, technical expertise, specialized services, long-standing relationships with leading chemical producers and our industry leading safety record.
Our operations are structured into four operatingreportable 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 Rest of World,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.”
We monitor the results of our operating segments separately for the purposes of making decisions about resource allocationRecent Developments and performance assessment. We evaluate performance on the basis of gross profit, whichItems Impacting Comparability
On February 28, 2019, we define as net sales less cost of goods sold (exclusive of depreciation), delivered gross profit, which we define as gross profit less outbound freight and handling expense, gross margin, which we define as gross profit divided by external net sales, delivered gross margin, which we define as delivered gross profit divided by external net sales as well as Adjusted EBITDA, which we define as our consolidated net income (loss), plus the sum of interest expense, net of interest income, income tax expense (benefit), depreciation, amortization, loss on
extinguishment of debt, other operating expenses, net (which primarily consists of acquisition and integration related expenses, employee stock-based compensation expense, restructuring charges, other employee termination costs, business optimization, and other unusual or non-recurring expenses), impairment charges, and other expense, net (which primarily consists of pension mark to market adjustments, gains and losses on foreign currency transactions and undesignated derivative instruments, ineffective portion of cash flow hedges, debt refinancing costs, non-operating retirement benefits, and other non-operating activity). We believe that Adjusted EBITDA is an important indicator of operating performance because:
we report Adjusted EBITDA to our lenders as required under the covenants of our credit agreements;
we consider gains (losses) oncompleted the acquisition disposal and impairment of assets as resulting from investing decisions rather than ongoing operations;
Adjusted EBITDA excludes the effects of income taxes, as well as the effects of financing and investing activities by eliminating the effects of interest, depreciation and amortization expenses and therefore more closely measures our operational performance;
we use Adjusted EBITDA in setting performance incentive targets in order to align performance measurement with operational performance; and
other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of our results.
We set transfer prices between operating segments on an arms-length basis in a similar manner to transactions with third parties. We allocate corporate operating expenses that directly benefit our operating segments on a basis that reasonably approximates our estimates100% of the useequity interest of these services.
Other/Eliminations representsNexeo, 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 elimination of inter-segment transactions as well as unallocated corporate costs consisting of costs specifically related to parent company operations that do not directly benefit segments, either individually or collectively. Inlargest North American sales force in chemical and ingredients distribution and the analysis of our results of operations, we discuss operating segment results forbroadest product offering. On March 29, 2019, the current reporting period following our consolidated results of operations period-to-period comparison.
The following is management’s discussion and analysisCompany completed the sale of the financial condition andNexeo plastics distribution business which is presented as a discontinued operation in the Company’s results of operations for the yearsyear ended December 31, 2018, 20172019.
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.
Market Conditions and 2016. Information includedOutlook
We sell chemicals that are used in this section for reported sales volumesmanufacturing processes and pricing utilize an average price at the consolidated level and respective reporting segment levels. In certain reporting segments we utilized country and revenue stream information to provide a more accurate representationas components of changes to the business. This discussion should be reador ingredients in conjunction with the consolidated financial statements, including the related notes, see Item 8 “Financial Statements” of this Annual Report on Form 10-K.
For reconciliations of Adjusted EBITDA to net income (loss), see “Selected Financial Data Selected” in Item 6 of this Annual Report on Form 10-K.
Key Factors Affecting Operating Results and Financial Condition
Key factors impacting our operating results and financial condition include the following:
Economic conditions, industry trends and relationships with customers and suppliers
Chemical availability and prices, including volume-based pricing
Acquisitions, dispositions and strategic investments
Operating efficiencies
Working capital requirements, interest rates and credit risk
Foreign currencies
For a description of our business and how the above factors impact us, refer to Item 1 “Business” and Item 1A “Risk Factors” of this Annual Report on Form 10-K.
In addition to the factors listed above, seasonal changes may affect our business and results of operations.other products. Our net 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. 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.
Executive Summary
Management is focused, in the near and long term, on the following priorities:
•growth through our sales force, utilizing our realigned sales territories;
•delivering technical and application development excellence through our global network of Solutions Centers;
•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;
•network optimization, as we progress with the integration of Nexeo, continuing to realize synergy cost savings;
•continuing to successfully achieve important ERP migration milestones;
•delivering on our commitment to focus on our core chemical and ingredient businesses through strategic divestitures and acquisitions globally; and
•strengthening our balance sheet and pursuing ways to deleverage.
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 provides valuable supplemental information regarding our results of operations, consistent with how we evaluate our performance.
Results of Operations
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | | | | | | | Favorable (unfavorable) | | % Change | | Impact of currency* |
(in millions) | December 31, 2019 | | | | December 31, 2018 | | | | | | | | |
Net sales | $ | 9,286.9 | | | 100.0 | % | | $ | 8,632.5 | | | 100.0 | % | | $ | 654.4 | | | 7.6 | % | | (1.7) | % |
Cost of goods sold (exclusive of depreciation) | 7,146.1 | | | 76.9 | % | | 6,732.4 | | | 78.0 | % | | (413.7) | | | 6.1 | % | | 1.7 | % |
Operating expenses: | | | | | | | | | | | | | |
Outbound freight and handling | 364.8 | | | 3.9 | % | | 328.3 | | | 3.8 | % | | (36.5) | | | 11.1 | % | | 1.4 | % |
Warehousing, selling and administrative | 1,068.8 | | | 11.5 | % | | 931.4 | | | 10.8 | % | | (137.4) | | | 14.8 | % | | 14.5 | % |
Other operating expenses, net | 298.2 | | | 3.2 | % | | 73.5 | | | 0.9 | % | | (224.7) | | | 305.7 | % | | 1.0 | % |
Depreciation | 155.0 | | | 1.7 | % | | 125.2 | | | 1.5 | % | | (29.8) | | | 23.8 | % | | 1.3 | % |
Amortization | 59.7 | | | 0.6 | % | | 54.3 | | | 0.6 | % | | (5.4) | | | 9.9 | % | | 1.3 | % |
Impairment charges | 7.0 | | | 0.1 | % | | — | | | — | % | | (7.0) | | | N/M | | | — | % |
Total operating expenses | $ | 1,953.5 | | | 21.0 | % | | $ | 1,512.7 | | | 17.5 | % | | $ | (440.8) | | | 29.1 | % | | 1.6 | % |
Operating income | $ | 187.3 | | | 2.0 | % | | $ | 387.4 | | | 4.5 | % | | $ | (200.1) | | | (51.7) | % | | (2.6) | % |
Other (expense) income: | | | | | | | | | | | | | |
Interest income | 7.7 | | | 0.1 | % | | 3.2 | | | — | % | | 4.5 | | | 140.6 | % | | (12.5) | % |
Interest expense | (147.2) | | | (1.6) | % | | (135.6) | | | (1.6) | % | | (11.6) | | | 8.6 | % | | 0.4 | % |
Gain on sale of business | 41.4 | | | 0.4 | % | | — | | | — | % | | 41.4 | | | N/M | | | — | % |
Loss on extinguishment of debt | (19.8) | | | (0.2) | % | | (0.1) | | | — | % | | (19.7) | | | N/M | | | — | % |
Other expense, net | | (70.5) | | | (0.8) | % | | (32.7) | | | (0.4) | % | | (37.8) | | | 115.6 | % | | 2.1 | % |
Total other expense | | $ | (188.4) | | | (2.0) | % | | $ | (165.2) | | | (1.9) | % | | $ | (23.2) | | | 14.0 | % | | 0.5 | % |
(Loss) income from continuing operations before income taxes | | (1.1) | | | — | % | | 222.2 | | | 2.6 | % | | (223.3) | | | (100.5) | % | | (4.1) | % |
Income tax expense from continuing operations | | 104.5 | | | 1.1 | % | | 49.9 | | | 0.6 | % | | (54.6) | | | 109.4 | % | | 4.4 | % |
Net (loss) income from continuing operations | | $ | (105.6) | | | (1.1) | % | | $ | 172.3 | | | 2.0 | % | | $ | (277.9) | | | (161.3) | % | | (4.0) | % |
Net income from discontinued operations | | 5.4 | | | 0.1 | % | | — | | | — | % | | 5.4 | | | N/M | | | — | % |
Net (loss) income | | $ | (100.2) | | | (1.1) | % | | $ | 172.3 | | | 2.0 | % | | $ | (272.5) | | | (158.2) | % | | (4.1) | % |
| | | | | | | | | | | | | |
* Foreign currency translation is included in the percentage change. Unfavorable impacts from foreign currency translation are designated with parentheses.
Net sales
Net sales were $9,286.9 million in the year ended December 31, 2019, an increase of $654.4 million, or 7.6%, from the year ended December 31, 2018. On a constant currency basis, net sales increased from the February 2019 Nexeo acquisition in USA, Canada and LATAM and the May 2018 Earthoil acquisition in EMEA. The increase was partially offset by lower sales volumes primarily due to lower global demand and by unfavorable changes in sales pricing due to chemical price deflation in USA, Canada and LATAM. Refer to the “Analysis of Segment Results” for additional information.
Gross profit (exclusive of depreciation)
Gross profit (exclusive of depreciation) increased $240.7 million, or 12.7%, to $2,140.8 million for the year ended December 31, 2019. The increase in gross profit (exclusive of depreciation) is attributable to changes in market and product mix and sales force execution. The increase in gross profit (exclusive of depreciation) from acquisitions was attributable to the February 2019 Nexeo acquisition in USA, Canada and LATAM segments and the May 2018 Earthoil acquisition in EMEA. Included in gross profit (exclusive of depreciation) is a $5.3 million charge in USA related to the inventory fair value step-up adjustment resulting from our February 2019 Nexeo acquisition and a $9.7 million benefit in LATAM related to the Brazil VAT recovery. Excluding these impacts, gross profit (exclusive of depreciation) increased $236.3 million, or 12.4%, to $2,136.4 million for the year ended December 31, 2019. Refer to the “Analysis of Segment Results” for additional information.
Outbound freight and handling
Outbound freight and handling expenses increased $36.5 million, or 11.1%, to $364.8 million for the year ended December 31, 2019. On a constant currency basis, outbound freight and handling expenses increased $40.9 million, or 12.5%, primarily due to the February 2019 Nexeo acquisition partially offset by lower sales volumes. Refer to the “Analysis of Segment Results” for additional information.
Warehousing, selling and administrative
Warehousing, selling and administrative expenses increased $137.4 million, or 14.8%, to $1,068.8 million for the year ended December 31, 2019. On a constant currency basis, the $153.9 million increase is primarily due to incremental expenses from the February 2019 Nexeo acquisition. These costs were partially offset by cost containment efforts across all of our segments. Refer to the “Analysis of Segment Results” for additional information.
Other operating expenses, net
Other operating expenses, net increased $224.7 million, or 305.7%, to $298.2 million for the year ended December 31, 2019. The increase was primarily due to higher acquisition and integration related expenses, expenses related to the saccharin legal settlement, higher other facility exit costs and higher other employee termination costs in connection with the February 2019 Nexeo acquisition. 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 $29.8 million, or 23.8%, to $155.0 million for the year ended December 31, 2019. On a constant currency basis, the increase of $31.4 million, or 25.1%, was primarily due to the February 2019 Nexeo acquisition and accelerated depreciation of legacy software.
Amortization expense increased $5.4 million, or 9.9%, to $59.7 million for the year ended December 31, 2019. On a constant currency basis, the increase of $6.1 million was primarily attributable to the February 2019 Nexeo acquisition.
Impairment charges
Impairment charges of $7.0 million were recorded in the year ended December 31, 2019 related to property, plant and equipment in connection with 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 increased $11.6 million, or 8.6%, to $147.2 million for the year ended December 31, 2019 primarily due to higher average outstanding borrowings in connection with the February 2019 Nexeo acquisition. Refer to “Note 18: Debt” in Item 8 of this Annual Report on Form 10-K for additional information.
Gain on sale of business
A gain of $41.4 million was recorded in the year ended December 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 $19.8 million for the year ended December 31, 2019 was due to the February and November 2019 debt refinancing and repayment activities.
Other expense, net
Other expense, net increased $37.8 million, or 115.6%, to $70.5 million for the year ended December 31, 2019. The change was primarily related to the increase in pension mark to market loss, losses on undesignated foreign currency derivative instruments, losses on interest rate swaps as well as the reduction in non-operating pension income. The change was partially offset by foreign currency denominated loan revaluation gains. 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 $104.5 million for the year ended December 31, 2019, resulting in an effective income tax rate of (9500.0)%, compared to the US federal statutory rate of 21.0%. The Company’s effective income tax rate for the year ended December 31, 2019 was primarily driven by 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, nondeductible expenses, including the Saccharin legal settlement, the Nexeo 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.
Income tax expense was $49.9 million for the year ended December 31, 2018, resulting in an effective income tax rate of 22.5%. The Company’s effective income tax rate for the year ended December 31, 2018 was higher than the US federal statutory rate of 21.0%, primarily due to international tax impacts, including those related to US tax reform and state income 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 was $5.4 million for the year ended December 31, 2019. Discontinued operations for 2019 represents one month of the Nexeo 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 (unfavorable) | | % Change |
(in millions) | 2019 | | 2018 | | | | |
Net sales: | | | | | | | |
External customers | $ | 5,828.5 | | | $ | 4,961.0 | | | $ | 867.5 | | | 17.5 | % |
Inter-segment | 100.2 | | | 126.6 | | | (26.4) | | | | (20.9) | % |
Total net sales | $ | 5,928.7 | | | $ | 5,087.6 | | | $ | 841.1 | | | | 16.5 | % |
Cost of goods sold (exclusive of depreciation) | 4,550.9 | | | 3,959.3 | | | (591.6) | | | | 14.9 | % |
Inventory step-up adjustment (1) | 5.3 | | | — | | | (5.3) | | | | N/M | |
Outbound freight and handling | 254.6 | | | 215.6 | | | (39.0) | | | | 18.1 | % |
Warehousing, selling and administrative | 673.8 | | | 536.3 | | | (137.5) | | | | 25.6 | % |
Adjusted EBITDA | $ | 454.7 | | | $ | 376.4 | | | $ | 78.3 | | | | 20.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Favorable (unfavorable) | | % Change |
(in millions) | 2019 | | 2018 | | | | |
Gross profit (exclusive of depreciation): | | | | | | | |
Net sales | $ | 5,928.7 | | | $ | 5,087.6 | | | $ | 841.1 | | | | 16.5 | % |
Cost of goods sold (exclusive of depreciation) | 4,550.9 | | | 3,959.3 | | | (591.6) | | | | 14.9 | % |
Gross profit (exclusive of depreciation) | $ | 1,377.8 | | | $ | 1,128.3 | | | $ | 249.5 | | | | 22.1 | % |
Inventory step-up adjustment (1) | 5.3 | | | — | | | (5.3) | | | | N/M | |
Adjusted gross profit (exclusive of depreciation) (1) | $ | 1,383.1 | | | $ | 1,128.3 | | | $ | 254.8 | | | | 22.6 | % |
| | | | | | | |
(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 our February 2019 Nexeo acquisition.
External sales in the USA segment were $5,828.5 million, an increase of $867.5 million, or 17.5%, in the year ended December 31, 2019. External sales increased primarily due to the February 2019 Nexeo acquisition, partially offset by lower sales volumes attributable to soft demand.
Gross profit (exclusive of depreciation) increased $249.5 million, or 22.1%, to $1,377.8 million in the year ended December 31, 2019. Gross profit (exclusive of depreciation) increased due to the February 2019 Nexeo acquisition and due to favorable changes in pricing and product mix, partially offset by lower sales volumes. Excluding the $5.3 million impact related to the inventory fair value step-up adjustment from the Nexeo acquisition, adjusted gross profit (exclusive of depreciation) increased $254.8 million, or 22.6%, to $1,383.1 million. Both gross margin and adjusted gross margin increased during the year ended December 31, 2019 due to the beneficial impact of product mix, sales force execution and margin management efforts.
Outbound freight and handling expenses increased $39.0 million, or 18.1%, to $254.6 million in the year ended December 31, 2019 primarily due to the February 2019 Nexeo acquisition partially offset by lower sales volumes.
Warehousing, selling and administrative expenses increased $137.5 million, or 25.6%, to $673.8 million in the year ended December 31, 2019 primarily due to incremental expenses from the February 2019 Nexeo acquisition. The increase was also attributable to higher environmental remediation expense partially offset by strong cost containment. Warehousing, selling and administrative expenses as a percentage of external sales increased from 10.8% in the year ended December 31, 2018 to 11.6% in the year ended December 31, 2019.
Adjusted EBITDA increased by $78.3 million, or 20.8%, to $454.7 million in the year ended December 31, 2019 primarily as a result of higher gross profit (exclusive of depreciation). Adjusted EBITDA margin increased from 7.6% in the year ended December 31, 2018 to 7.8% in the year ended December 31, 2019 primarily as a result of higher gross margin, partially offset by increased operating expenses as a percentage of sales.
Canada
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Favorable (unfavorable) | | % Change |
(in millions) | 2019 | | 2018 | | | | |
Net sales: | | | | | | | |
External customers | $ | 1,217.8 | | | $ | 1,302.3 | | | $ | (84.5) | | | | (6.5) | % |
Inter-segment | 6.2 | | | 9.3 | | | (3.1) | | | | (33.3) | % |
Total net sales | $ | 1,224.0 | | | $ | 1,311.6 | | | $ | (87.6) | | | | (6.7) | % |
Cost of goods sold (exclusive of depreciation) | 990.3 | | | 1,080.1 | | | 89.8 | | | | (8.3) | % |
Outbound freight and handling | 41.9 | | | 42.5 | | | 0.6 | | | | (1.4) | % |
Warehousing, selling and administrative | 91.6 | | | 84.3 | | | (7.3) | | | | 8.7 | % |
Adjusted EBITDA | $ | 100.2 | | | $ | 104.7 | | | $ | (4.5) | | | | (4.3) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Favorable (unfavorable) | | % Change |
(in millions) | 2019 | | 2018 | | | | |
Gross profit (exclusive of depreciation): | | | | | | | |
Net sales | $ | 1,224.0 | | | $ | 1,311.6 | | | $ | (87.6) | | | | (6.7) | % |
Cost of goods sold (exclusive of depreciation) | 990.3 | | | 1,080.1 | | | 89.8 | | | | (8.3) | % |
Gross profit (exclusive of depreciation) | $ | 233.7 | | | $ | 231.5 | | | $ | 2.2 | | | | 1.0 | % |
External sales in the Canada segment were $1,217.8 million, a decrease of $84.5 million, or 6.5%, in the year ended December 31, 2019. On a constant currency basis, external sales decreased $55.6 million, or 4.3%, primarily due to lower sales volumes attributable to the weather-impacted agriculture market as well as lower demand from Canada's energy sector. The decrease also resulted from lower average selling prices due to chemical price deflation and changes in market and product mix, partially offset by the increase due to the February 2019 Nexeo acquisition.
Gross profit (exclusive of depreciation) increased $2.2 million, or 1.0%, to $233.7 million in the year ended December 31, 2019. On a constant currency basis, gross profit (exclusive of depreciation) increased $7.7 million, or 3.3%, due to contributions from the February 2019 Nexeo acquisition, partially offset by lower sales volumes in agriculture. Gross margin increased from 17.8% in the year ended December 31, 2018 to 19.2% in the year ended December 31, 2019 as a result of higher margins on certain commodity chemicals.
Outbound freight and handling expenses decreased $0.6 million, or 1.4%, to $41.9 million in the year ended December 31, 2019 due to lower sales volumes.
Warehousing, selling and administrative expenses increased by $7.3 million, or 8.7%, to $91.6 million in the year ended December 31, 2019 primarily due to incremental expenses from the February 2019 Nexeo acquisition. Warehousing, selling and administrative expenses as a percentage of external sales increased from 6.5% in the year ended December 31, 2018 to 7.5% in the year ended December 31, 2019 due to higher bad debt charges and higher maintenance and repair expenses. On a constant currency basis, warehousing, selling and administrative expenses increased $9.4 million, or 11.2%.
Adjusted EBITDA decreased by $4.5 million, or 4.3%, to $100.2 million in the year ended December 31, 2019. On a constant currency basis, Adjusted EBITDA decreased $2.1 million, or 2.0%, primarily due to lower demand in the agriculture and energy sector. Adjusted EBITDA margin increased from 8.0% in the year ended December 31, 2018 to 8.2% in the year ended December 31, 2019, primarily as a result of higher margins on certain commodity chemicals.
EMEA
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Favorable (unfavorable) | | % Change |
(in millions) | 2019 | | 2018 | | | | |
Net sales: | | | | | | | |
External customers | $ | 1,785.5 | | | $ | 1,975.7 | | | $ | (190.2) | | | (9.6) | % |
Inter-segment | 3.3 | | | 4.0 | | | (0.7) | | | (17.5) | % |
Total net sales | $ | 1,788.8 | | | $ | 1,979.7 | | | $ | (190.9) | | | (9.6) | % |
Cost of goods sold (exclusive of depreciation) | 1,363.9 | | | 1,525.6 | | | 161.7 | | | (10.6) | % |
Outbound freight and handling | 59.1 | | | 62.4 | | | 3.3 | | | (5.3) | % |
Warehousing, selling and administrative | 222.5 | | | 240.5 | | | 18.0 | | | (7.5) | % |
Adjusted EBITDA | $ | 143.3 | | | $ | 151.2 | | | $ | (7.9) | | | (5.2) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Favorable (unfavorable) | | % Change |
(in millions) | 2019 | | 2018 | | | | |
Gross profit (exclusive of depreciation): | | | | | | | |
Net sales | $ | 1,788.8 | | | $ | 1,979.7 | | | $ | (190.9) | | | (9.6) | % |
Cost of goods sold (exclusive of depreciation) | 1,363.9 | | | 1,525.6 | | | 161.7 | | | (10.6) | % |
Gross profit (exclusive of depreciation) | $ | 424.9 | | | $ | 454.1 | | | $ | (29.2) | | | (6.4) | % |
External sales in the EMEA segment were $1,785.5 million, a decrease of $190.2 million, or 9.6%, in the year ended December 31, 2019. On a constant currency basis, external sales decreased $88.5 million, or 4.5%, primarily due to lower sales volumes attributable to soft demand, partially offset by incremental sales from the May 2018 Earthoil acquisition.
Gross profit (exclusive of depreciation) decreased $29.2 million, or 6.4%, to $424.9 million in the year ended December 31, 2019. On a constant currency basis, gross profit (exclusive of depreciation) decreased $5.5 million, or 1.2%, due to lower sales volumes and increased market pressure in the pharmaceutical finished goods product line. Gross margin increased from 23.0% in the year ended December 31, 2018 to 23.8% in the year ended December 31, 2019 primarily due to the favorable change in product mix and margin management initiatives.
Outbound freight and handling expenses decreased $3.3 million, or 5.3%, to $59.1 million. On a constant currency basis, outbound freight and handling expenses remained flat.
Warehousing, selling and administrative expenses decreased $18.0 million, or 7.5%, to $222.5 million in the year ended December 31, 2019, and increased as a percentage of external sales from 12.2% in the year ended December 31, 2018 to 12.5% in the year ended December 31, 2019. On a constant currency basis, operating expenses decreased $5.7 million, or 2.4%.
Adjusted EBITDA decreased by $7.9 million, or 5.2%, to $143.3 million in the year ended December 31, 2019. On a constant currency basis, Adjusted EBITDA increased $0.2 million, or 0.1%, primarily due effective cost containment partially offset by soft demand. In the year ended December 31, 2019, the pharmaceutical finished goods product line represented approximately 27% of Adjusted EBITDA in the EMEA segment, declining from approximately 30% in prior year due to increased market pressures. Adjusted EBITDA margin increased from 7.7% in the year ended December 31, 2018 to 8.0% in the year ended December 31, 2019.
LATAM
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Favorable (unfavorable) | | % Change |
(in millions) | 2019 | | 2018 | | | | |
Net sales: | | | | | | | |
External customers | $ | 455.1 | | | $ | 393.5 | | | $ | 61.6 | | | | 15.7 | % |
Inter-segment | — | | | 0.2 | | | (0.2) | | | | (100.0) | % |
Total net sales (1) | $ | 455.1 | | | $ | 393.7 | | | $ | 61.4 | | | | 15.6 | % |
Cost of goods sold (exclusive of depreciation) | 350.7 | | | 307.5 | | | (43.2) | | | | 14.0 | % |
Outbound freight and handling | 9.2 | | | 7.8 | | | (1.4) | | | | 17.9 | % |
Warehousing, selling and administrative | 50.8 | | | 45.1 | | | (5.7) | | | | 12.6 | % |
Brazil VAT recovery (1) | (8.3) | | | — | | | 8.3 | | | | N/M | |
Adjusted EBITDA (1) | $ | 36.1 | | | $ | 33.3 | | | $ | 2.8 | | | | 8.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Favorable (unfavorable) | | % Change |
(in millions) | 2019 | | 2018 | | | | |
Gross profit (exclusive of depreciation): | | | | | | | |
Net sales | $ | 455.1 | | | $ | 393.7 | | | $ | 61.4 | | | | 15.6 | % |
Cost of goods sold (exclusive of depreciation) | 350.7 | | | 307.5 | | | (43.2) | | | | 14.0 | % |
Gross profit (exclusive of depreciation) (1) | $ | 104.4 | | | $ | 86.2 | | | $ | 18.2 | | | | 21.1 | % |
Brazil VAT recovery (1) | (9.7) | | | | — | | | 9.7 | | | | N/M | |
Adjusted gross profit (exclusive of depreciation) | $ | 94.7 | | | $ | 86.2 | | | $ | 8.5 | | | | 9.9 | % |
| | | | | | | |
(1)Included in net sales and gross profit (exclusive of depreciation) is 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. 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, 2019.
External sales in the LATAM segment were $455.1 million, an increase of $61.6 million, or 15.7%, in the year ended December 31, 2019. On a constant currency basis, external sales increased $75.6 million, or 19.2%, which includes $9.7 million related to the Brazil VAT recovery. The increase was also due to the February 2019 Nexeo acquisition along with contributions from the Brazilian agriculture sector.
Gross profit (exclusive of depreciation) increased $18.2 million, or 21.1%, to $104.4 million in the year ended December 31, 2019. On a constant currency basis, gross profit (exclusive of depreciation) increased $22.5 million, or 26.1%, primarily due to the Brazil VAT recovery impact of $9.7 million and the February 2019 Nexeo acquisition. Excluding the $9.7 million impact related to the Brazil VAT recovery, adjusted gross profit (exclusive of depreciation) increased $8.5 million, or 9.9%, to $94.7 million. Gross margin inclusive of the Brazil VAT recovery increased from 21.9% to 22.9% and excluding the Brazil VAT recovery decreased from 21.9% to 21.3% in the year ended December 31, 2018 when compared to December 31, 2019.
Outbound freight and handling expenses increased $1.4 million, or 17.9%, to $9.2 million in the year ended December 31, 2019 primarily due to incremental expenses from the February 2019 Nexeo acquisition and higher sales volumes.
Warehousing, selling and administrative expenses increased $5.7 million, or 12.6%, to $50.8 million in the year ended December 31, 2019 and decreased as a percentage of external sales from 11.5% in the year ended December 31, 2018 to 11.2% in the year ended December 31, 2019. On constant currency basis, warehousing, selling and administrative expenses increased
$7.6 million, or 16.9%, primarily due to incremental expenses from the February 2019 Nexeo acquisition as well as from associated fees related to the Brazil VAT recovery, partially offset by strong cost control.
Adjusted EBITDA increased by $2.8 million, or 8.4%, to $36.1 million in the year ended December 31, 2019. On a constant currency basis, Adjusted EBITDA increased $5.0 million, or 15.0%, primarily as a result of higher gross profit (exclusive of depreciation). Adjusted EBITDA margin inclusive of the Brazil VAT recovery decreased from 8.5% to 7.9% and excluding the Brazil VAT recovery decreased from 8.5% to 8.1% in the year ended December 31, 2018 when compared to December 31, 2019.
Liquidity and Capital Resources
Our primary source of liquidity is cash generated from our operations as well as borrowings under our committed credit facilities. As of December 31, 2019, our total liquidity was approximately $931.2 million, comprised of $600.9 million available under our credit facilities and $330.3 million of cash and cash equivalents. Our primary liquidity and capital resource needs are to service our debt and to finance working capital, capital expenditures, other liabilities and general corporate purposes. We have significant working capital needs, although we have implemented several initiatives to improve our working capital and reduce the related financing requirements. The nature of our business, however, requires that we maintain inventories that enable us to deliver products to fill customer orders. As of December 31, 2019, we maintained inventories of $796.0 million, equivalent to approximately 43.6 days of sales.
Total debt as of December 31, 2019 was $2,714.5 million, consisting of senior term loans, asset backed loans, senior unsecured notes, finance lease obligations and short-term financing. We may from time to time repurchase our debt or take other steps to reduce our 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. Refer to “Note 18: Debt” in Item 8 of this Annual Report on Form 10-K for further information.
Our defined benefit pension plans had an underfunded status of $234.4 million and $212.4 million as of December 31, 2019 and 2018, respectively. Based on current projections of minimum funding requirements, we expect to make cash contributions of $22.9 million to our defined benefit pension plans in 2020. 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.
As a result of the 2017 US Tax Act, the Company recorded in 2017 a one-time Section 965 repatriation tax of $76.5 million. After offsetting allowable tax credits, we elected to pay the remaining balance of $14.9 million over eight years, of which $9.2 remains at December 31, 2019.
We expect our 2020 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 2020 are expected to be $115 million to $130 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 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) | 2019 | | 2018 | | 2017 |
Net cash provided by operating activities | | $ | 363.9 | | | $ | 289.9 | | | $ | 282.6 | |
Net cash used by investing activities | | (433.1) | | | (99.0) | | | (79.1) | |
Net cash provided (used) by financing activities | | 295.2 | | | (518.3) | | | (112.4) | |
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Cash Provided by Operating Activities
Cash provided by operating activities increased $74.0 million to $363.9 million for the year ended December 31, 2019 from $289.9 million for the year ended December 31, 2018. The increase is primarily due to changes in trade working capital and prepaid expenses and other current assets, partially offset by changes in net income, exclusive of non-cash items. The change in net income, exclusive of non-cash items, provided net cash outflows of $238.4 million related to reduced cash inflows when compared to the change in the prior year. Net income, exclusive of non-cash items, provided net cash inflows of $150.0 million and $388.4 million for the years ended December 31, 2019 and December 31, 2018, respectively.
The change in trade working capital, which includes trade accounts receivable, net, inventories, and trade accounts payable, provided net cash inflows of $233.5 million when compared to the change in the prior year. Trade working capital provided cash inflows of $195.1 million for the year end December 31, 2019 compared to cash outflows of $38.4 million for the year ended December 31, 2018. Cash inflows from trade accounts receivable, net is attributable to improvements in the timing of customer payments and reduced sales volumes, excluding acquisitions, during the current year. Inventory cash inflows on a year-over-year basis are primarily related to reductions in the USA segment inventories due to reduced sales volumes and favorable supplier partner pricing. The year-over-year cash outflows related to trade accounts payable are primarily attributable to decreased inventory purchases in the current year.
The change in prepaid expenses and other current assets is primarily due to payment timing differences and favorable changes in expected product returns from customers. The change in pension and other postretirement benefit liabilities is primarily due to unfavorable changes in actuarial valuations, partially offset by favorable changes in expected returns on plan assets.
Cash Used by Investing Activities
Cash used by investing activities increased $334.1 million to $433.1 million for the year ended December 31, 2019 from $99.0 million for the year ended December 31, 2018. The increase is primarily related to the acquisition of the Nexeo business in 2019, net of the proceeds received for the sale and dispositions of Nexeo Plastics and the Environmental Sciences business. In 2018, the Company acquired Earthoil and Kemetyl. 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 Provided (Used) by Financing Activities
Cash provided (used) by financing activities increased $813.5 million to cash provided of $295.2 million for the year ended December 31, 2019 from cash used of $518.3 million for the year ended December 31, 2018. The increase in financing cash flows is primarily due to raising additional debt to finance the February 2019 Nexeo acquisition and debt refinancing activities that occurred during the fourth quarter of 2019. The increase in financing activities were partially offset by increased debt repayments primarily due to the sale of Nexeo Plastics, where proceeds were used to pay down debt, and 2019 fourth quarter refinancing activities. 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 of December 31, 2019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payment Due by Period | | | | | | | | |
(in millions) | Total | | 2020 | | 2021 - 2022 | | 2023 - 2024 | | Thereafter |
Short-term financing (1) | $ | 0.7 | | | $ | 0.7 | | | $ | — | | | $ | — | | | $ | — | |
Finance leases | 74.6 | | | 22.6 | | | 34.6 | | | 11.1 | | | 6.3 | |
Long-term debt, including current maturities (1) | 2,668.9 | | | 4.0 | | | 138.9 | | | 1,646.0 | | | 880.0 | |
Interest (2) | 560.4 | | | 111.7 | | | 204.5 | | | 159.9 | | | 84.3 | |
Minimum operating lease payments | 185.2 | | | 53.6 | | | 73.1 | | | 33.8 | | | 24.7 | |
Estimated environmental liability payments (3) | 84.3 | | | 25.0 | | | 19.1 | | | 12.9 | | | 27.3 | |
2017 US repatriation tax | 9.2 | | | — | | | 2.5 | | | 6.7 | | | — | |
Other (4) | 112.6 | | | 54.6 | | | 28.0 | | | 30.0 | | | — | |
Total (5) | $ | 3,695.9 | | | $ | 272.2 | | | $ | 500.7 | | | $ | 1,900.4 | | | $ | 1,022.6 | |
| | | | | | | | | |
(1)See “Note 18: Debt” in Item 8 of this Annual Report on Form 10-K for additional information.
(2)Interest payments on debt are calculated for future periods using interest rates in effect as of December 31, 2019 and obligations on that date. Projected interest payments include the related effects of interest rate swap agreements. 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.
(3)Included in the less than one year category is $11.7 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.
(4)Commitments related to capital expenditures and other contractual obligations.
(5)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 $22.9 million to our defined benefit pension plans in the year ended December 31, 2020. 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 obligations and commitments with proceeds from available borrowing capacity under our New Senior ABL Facility or under future financings.
Off-Balance Sheet Arrangements
With the exception of letters of credit, we had no material off-balance sheet arrangements as of December 31, 2019.
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 of October 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 the Canada reporting unit, exceeded the carrying value by 11 percent. Key assumptions in our goodwill impairment test include an 11 percent estimated WACC for the Canada business and a residual growth rate of 2.5 percent. A 100 basis point change in the discount rate and a terminal growth assumption of zero would not have reduced the fair values of the Canada reporting unit below carrying value. The fair value for all other reporting units substantially exceeds their carrying value.
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.
Purchase Accounting for the Nexeo Solutions Acquisition
Our acquisition of Nexeo Solutions in 2019 was accounted for with ASC Topic 805, Business Combinations, as amended. As of December 31, 2019, the allocation of the purchase price to the acquired assets and assumed liabilities was considered preliminary. 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 at December 31, 2019 and 2018 was $78.7 million and $83.5 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 ended December 31, 2019 and 2018, we recorded a mark to market loss of $50.9 million and $34.9 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 asset rate would have the following effects:
| | | | | | | | | | | | | | | | | |
| | | Increase (decrease) in | | |
(in millions) | Percentage Change | | 2020 Net Benefit Cost | | 2019 Pension Benefit Obligation |
Discount rate | 25 bps decrease | | $ | (2.0) | | | $ | 51.4 | |
Discount rate | 25 bps increase | | 1.8 | | | (48.4) | |
Expected return on plan assets | 100 bps decrease | | 10.4 | | | N/A |
Expected return on plan assets | 100 bps increase | | (10.4) | | | 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 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.
Effective in 2018, the Company is subject to global intangible low tax income (“GILTI”), which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We elect to treat taxes due on future US inclusions in taxable income related to GILTI as a current-period expense when incurred and during the year ended December 31, 2019 and 2018, we recorded $22.8 million and $19.9 million, respectively, due to the impact of GILTI.
Recently Issued Accounting Pronouncements
See “Note 2: Significant accounting policies” in Item 8 of this Annual Report on Form 10-K.
Non-GAAP Financial MeasuresLiquidity and Capital Resources
Our primary source of liquidity is cash generated from our operations as well as borrowings under our committed credit facilities. As of December 31, 2019, our total liquidity was approximately $931.2 million, comprised of $600.9 million available under our credit facilities and $330.3 million of cash and cash equivalents. Our primary liquidity and capital resource needs are to service our debt and to finance working capital, capital expenditures, other liabilities and general corporate purposes. We believehave significant working capital needs, although we have implemented several initiatives to improve our working capital and reduce the related financing requirements. The nature of our business, however, requires that certain financial measureswe maintain inventories that do not comply with US GAAP provide relevantenable us to deliver products to fill customer orders. As of December 31, 2019, we maintained inventories of $796.0 million, equivalent to approximately 43.6 days of sales.
Total debt as of December 31, 2019 was $2,714.5 million, consisting of senior term loans, asset backed loans, senior unsecured notes, finance lease obligations and meaningful information concerning the ongoing operating results of the Company. These financial measures include gross profit, gross margin, delivered gross profit and delivered gross margin (all exclusive of depreciation) and Adjusted EBITDA. Such non-GAAP financial measures are usedshort-term financing. We may from time to time herein but should notrepurchase our debt or take other steps to reduce our 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 viewedrepurchased or refinanced will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Refer to “Note 18: Debt” in Item 8 of this Annual Report on Form 10-K for further information.
Our defined benefit pension plans had an underfunded status of $234.4 million and $212.4 million as a substitute for GAAP measures of performance.
We evaluate our resultsDecember 31, 2019 and 2018, respectively. Based on current projections of operations on both an as reported and a constant currency basis. The constant currency presentation is a non-GAAP financial measure, which excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our results of operations, consistent with howminimum funding requirements, we evaluate our performance. We calculate constant currency percentages by converting our financial results in local currency for a period using the average exchange rate for the prior period to which we are comparing. This calculation may differ from similarly-titled measures used by other companies.
Results of Operations
Executive Summary
During 2018, we strengthened our financial condition through the generation of strong operating cash flow which reduced our leverage. We continuedexpect to make progresscash contributions of $22.9 million to our defined benefit pension plans in 2020. The timing for any such requirement in future years is uncertain given the implementationimplicit uncertainty regarding the future developments of our key strategic initiativesfactors described in “Risk Factors” in Item 1A of Commercial Greatness, Operational Excellence, and One Univar, strengthened our management team and furthered the development of a performance-driven culture. From an operations standpoint, we advancedthis Annual Report on each of our priorities which form the framework for our strategy to grow the long-term value of Univar for our equity and debt holders. As a result, in 2018 we:Form 10-K.
expanded our consolidated Adjusted EBITDA margins;
grew Adjusted EBITDA and Adjusted EBITDA margin in all operating segments, with the exception of Canada, which was impacted by persistent weather challenges in agriculture;
improved USA sales force execution resulted in USA volume growth for the first time since 2014;
acquired Kemetyl and Earthoil, expanding our leading position in the pharmaceutical industry and strengthening our existing global natural beauty and personal care product line;
strengthened our balance sheet and lowered our leverage ratio; and
announced the acquisition of Nexeo Solutions, Inc.,accelerating transformation and growth.
Advances in our business were partially offset by:
lower volumes and revenue in the Canada segment asAs a result of the weather-impacted agriculture market2017 US Tax Act, the Company recorded in 2017 a one-time Section 965 repatriation tax of $76.5 million. After offsetting allowable tax credits, we elected to pay the remaining balance of $14.9 million over eight years, of which $9.2 remains at December 31, 2019.
We expect our 2020 capital expenditures for maintenance, safety and lower demandcost improvements and investments in our digital capabilities to be approximately $120 million to $130 million. Interest payments for 2020 are expected to be $115 million to $130 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 and capital resource needs for at least the Canadian energy sector.next 12 months under current operating conditions.
Cash Flows
The following tables set forth, for the periods indicated, certain statementstable presents a summary of operations data first on the basis of reported data and then as a percentage of total net sales for the relevant period. The financial data set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with our historical consolidated financial statements and accompanying notes included elsewhere herein.cash flow activity:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
(in millions) | 2019 | | 2018 | | 2017 |
Net cash provided by operating activities | | $ | 363.9 | | | $ | 289.9 | | | $ | 282.6 | |
Net cash used by investing activities | | (433.1) | | | (99.0) | | | (79.1) | |
Net cash provided (used) by financing activities | | 295.2 | | | (518.3) | | | (112.4) | |
Year Ended December 31, 20182019 Compared to Year Ended December 31, 20172018
Cash Provided by Operating Activities
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Favorable (unfavorable) | | % Change | | Impact of currency* |
(in millions) | December 31, 2018 | | December 31, 2017 | |
Net sales | $ | 8,632.5 |
| | 100.0 | % | | $ | 8,253.7 |
| | 100.0 | % | | $ | 378.8 |
| | 4.6 | % | | 0.5 | % |
Cost of goods sold (exclusive of depreciation) | 6,732.4 |
| | 78.0 | % | | 6,448.2 |
| | 78.1 | % | | (284.2 | ) | | 4.4 | % | | (0.4 | )% |
Operating expenses: | | | | | | | | | | | | | |
Outbound freight and handling | 328.3 |
| | 3.8 | % | | 292.0 |
| | 3.5 | % | | (36.3 | ) | | 12.4 | % | | (0.7 | )% |
Warehousing, selling and administrative | 931.4 |
| | 10.8 | % | | 919.7 |
| | 11.1 | % | | (11.7 | ) | | 1.3 | % | | (0.5 | )% |
Other operating expenses, net | 73.5 |
| | 0.9 | % | | 55.4 |
| | 0.7 | % | | (18.1 | ) | | 32.7 | % | | (0.2 | )% |
Depreciation | 125.2 |
| | 1.5 | % | | 135.0 |
| | 1.6 | % | | 9.8 |
| | (7.3 | )% | | (0.4 | )% |
Amortization | 54.3 |
| | 0.6 | % | | 65.4 |
| | 0.8 | % | | 11.1 |
| | (17.0 | )% | | 0.2 | % |
Total operating expenses | $ | 1,512.7 |
| | 17.5 | % | | $ | 1,467.5 |
| | 17.8 | % | | $ | (45.2 | ) | | 3.1 | % | | (0.5 | )% |
Operating income | $ | 387.4 |
| | 4.5 | % | | $ | 338.0 |
| | 4.1 | % | | $ | 49.4 |
| | 14.6 | % | | 0.3 | % |
Other (expense) income: | | | | | | | | | | | | | |
Interest income | 3.2 |
| | — | % | | 4.0 |
| | — | % | | (0.8 | ) | | (20.0 | )% | | (5.0 | )% |
Interest expense | (135.6 | ) | | (1.6 | )% | | (152.0 | ) | | (1.8 | )% | | 16.4 |
| | (10.8 | )% | | 0.1 | % |
Loss on extinguishment of debt | (0.1 | ) | | — | % | | (3.8 | ) | | — | % | | 3.7 |
| | (97.4 | )% | | — | % |
Other expense, net | (32.7 | ) | | (0.4 | )% | | (17.4 | ) | | (0.2 | )% | | (15.3 | ) | | 87.9 | % | | 2.9 | % |
Total other expense | $ | (165.2 | ) | | (1.9 | )% | | $ | (169.2 | ) | | (2.0 | )% | | $ | 4.0 |
| | (2.4 | )% | | 0.3 | % |
Income before income taxes | 222.2 |
| | 2.6 | % | | 168.8 |
| | 2.0 | % | | 53.4 |
| | 31.6 | % | | 0.9 | % |
Income tax expense | 49.9 |
| | 0.6 | % | | 49.0 |
| | 0.6 | % | | (0.9 | ) | | 1.8 | % | | 0.9 | % |
Net income | $ | 172.3 |
| | 2.0 | % | | $ | 119.8 |
| | 1.5 | % | | $ | 52.5 |
| | 43.8 | % | | 1.6 | % |
| | | | | | | | | | | | | |
| |
* | Foreign currency translation is included in the percentage change. Unfavorable impacts from foreign currency translation are designated with parentheses. |
Net sales
|
| | |
Net sales percentage change due to: |
Acquisitions | 0.6 | % |
Reported sales volumes | (2.3 | )% |
Sales pricing and product mix | 5.8 | % |
Foreign currency translation | 0.5 | % |
Total | 4.6 | % |
Net sales were $8,632.5Cash provided by operating activities increased $74.0 million in the year ended December 31, 2018, an increase of $378.8to $363.9 million or 4.6%, from the year ended December 31, 2017. On a constant currency basis, net sales increased due to sales pricing and product mix improvements in all segments, partially offset by lower reported sales volumes in all segments except the USA for the year ended December 31, 2018 compared to the year ended December 31, 2017. Net sales also increased2019 from the January 2018 Kemetyl and May 2018 Earthoil acquisitions in EMEA and the September 2017 Tagma acquisition in the Rest of World segment. Refer to the “Segment results”$289.9 million for the year ended December 31, 2018. The increase is primarily due to changes in trade working capital and prepaid expenses and other current assets, partially offset by changes in net income, exclusive of non-cash items. The change in net income, exclusive of non-cash items, provided net cash outflows of $238.4 million related to reduced cash inflows when compared to the change in the prior year. Net income, exclusive of non-cash items, provided net cash inflows of $150.0 million and $388.4 million for the years ended December 31, 2019 and December 31, 2018, discussionrespectively.
The change in trade working capital, which includes trade accounts receivable, net, inventories, and trade accounts payable, provided net cash inflows of $233.5 million when compared to the change in the prior year. Trade working capital provided cash inflows of $195.1 million for the year end December 31, 2019 compared to cash outflows of $38.4 million for the year ended December 31, 2018. Cash inflows from trade accounts receivable, net is attributable to improvements in the timing of customer payments and reduced sales volumes, excluding acquisitions, during the current year. Inventory cash inflows on a year-over-year basis are primarily related to reductions in the USA segment inventories due to reduced sales volumes and favorable supplier partner pricing. The year-over-year cash outflows related to trade accounts payable are primarily attributable to decreased inventory purchases in the current year.
The change in prepaid expenses and other current assets is primarily due to payment timing differences and favorable changes in expected product returns from customers. The change in pension and other postretirement benefit liabilities is primarily due to unfavorable changes in actuarial valuations, partially offset by favorable changes in expected returns on plan assets.
Cash Used by Investing Activities
Cash used by investing activities increased $334.1 million to $433.1 million for the year ended December 31, 2019 from $99.0 million for the year ended December 31, 2018. The increase is primarily related to the acquisition of the Nexeo business in 2019, net of the proceeds received for the sale and dispositions of Nexeo Plastics and the Environmental Sciences business. In 2018, the Company acquired Earthoil and Kemetyl. 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.information related to the Company's acquisitions and dispositions.
Cash Provided (Used) by Financing Activities
Gross profit (exclusiveCash provided (used) by financing activities increased $813.5 million to cash provided of depreciation)
|
| | |
Gross profit percentage change due to: |
Acquisitions | 0.7 | % |
Reported sales volumes | (2.3 | )% |
Sales pricing, product costs and other adjustments | 6.4 | % |
Foreign currency translation | 0.4 | % |
Total | 5.2 | % |
Gross profit increased $94.6$295.2 million or 5.2%, to $1,900.1for the year ended December 31, 2019 from cash used of $518.3 million for the year ended December 31, 2018. The increase in gross profitfinancing cash flows is attributableprimarily due to higher average selling prices resulting from changes in marketraising additional debt to finance the February 2019 Nexeo acquisition and product mix and sales force execution.debt refinancing activities that occurred during the fourth quarter of 2019. The increase in gross profit from acquisitions was drivenfinancing activities were partially offset by increased debt repayments primarily due to the January 2018 Kemetylsale of Nexeo Plastics, where proceeds were used to pay down debt, and May 2018 Earthoil acquisitions2019 fourth quarter refinancing activities. Refer to “Note 18: Debt” in EMEAItem 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 of December 31, 2019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payment Due by Period | | | | | | | | |
(in millions) | Total | | 2020 | | 2021 - 2022 | | 2023 - 2024 | | Thereafter |
Short-term financing (1) | $ | 0.7 | | | $ | 0.7 | | | $ | — | | | $ | — | | | $ | — | |
Finance leases | 74.6 | | | 22.6 | | | 34.6 | | | 11.1 | | | 6.3 | |
Long-term debt, including current maturities (1) | 2,668.9 | | | 4.0 | | | 138.9 | | | 1,646.0 | | | 880.0 | |
Interest (2) | 560.4 | | | 111.7 | | | 204.5 | | | 159.9 | | | 84.3 | |
Minimum operating lease payments | 185.2 | | | 53.6 | | | 73.1 | | | 33.8 | | | 24.7 | |
Estimated environmental liability payments (3) | 84.3 | | | 25.0 | | | 19.1 | | | 12.9 | | | 27.3 | |
2017 US repatriation tax | 9.2 | | | — | | | 2.5 | | | 6.7 | | | — | |
Other (4) | 112.6 | | | 54.6 | | | 28.0 | | | 30.0 | | | — | |
Total (5) | $ | 3,695.9 | | | $ | 272.2 | | | $ | 500.7 | | | $ | 1,900.4 | | | $ | 1,022.6 | |
| | | | | | | | | |
(1)See “Note 18: Debt” in Item 8 of this Annual Report on Form 10-K for additional information.
(2)Interest payments on debt are calculated for future periods using interest rates in effect as of December 31, 2019 and obligations on that date. Projected interest payments include the September 2017 Tagma acquisitionrelated effects of interest rate swap agreements. Certain of these projected interest payments may differ in the Restfuture based on changes in floating interest rates, foreign currency fluctuations or other factors or events.
(3)Included in the less than one year category is $11.7 million related to environmental liabilities for which the timing is uncertain. The timing of World segment. Gross margin, whichpayments 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.
(4)Commitments related to capital expenditures and other contractual obligations.
(5)This table excludes our pension and postretirement medical benefit obligations. Based on current projections of minimum funding requirements, we define as gross profit divided by external net sales, increasedexpect to 22.0%make cash contributions of $22.9 million to our defined benefit pension plans in the year ended December 31, 20182020. 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 21.9%operations. To the extent we are unable to fund these obligations and commitments with cash flow from operations; we intend to fund these obligations and commitments with proceeds from available borrowing capacity under our New Senior ABL Facility or under future financings.
Off-Balance Sheet Arrangements
With the exception of letters of credit, we had no material off-balance sheet arrangements as of December 31, 2019.
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 of October 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 the Canada reporting unit, exceeded the carrying value by 11 percent. Key assumptions in our goodwill impairment test include an 11 percent estimated WACC for the Canada business and a residual growth rate of 2.5 percent. A 100 basis point change in the year ended December 31, 2017, primarily duediscount rate and a terminal growth assumption of zero would not have reduced the fair values of the Canada reporting unit below carrying value. The fair value for all other reporting units substantially exceeds their carrying value.
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 favorable product mixcustomer relationships, and focused margin management efforts. Refer toour assumed market segment share, as well as the “Segment results” for the year ended December 31, 2018 discussion for additional information.estimated useful life of intangible assets;
Outbound freight•deferred tax assets and handlingliabilities, uncertain tax positions, and tax-related valuation allowances;
Outbound freight and handling expenses increased $36.3 million, or 12.4%, to $328.3 million for the year ended December 31, 2018. On a constant currency basis, outbound freight and handling expenses increased $34.2 million, or 11.7%, primarily due to higher delivery costs resulting from market capacity constraints and higher fuel costs, partially offset by lower reported sales volumes. Refer to the “Segment results” for the year ended December 31, 2018 discussion for additional information.
Warehousing, selling and administrative
Warehousing, selling and administrative expenses increased $11.7 million, or 1.3%, to $931.4 million for the year ended December 31, 2018. On a constant currency basis, the $7.2 million increase is primarily due to focused investments in resources and capabilities to meet our sales force and digital initiative objectives and higher salary expense. These costs were partially offset by cost containment efforts across all of our segments, lower variable compensation expense and lower employee health care costs in the current year. Refer to the “Segment results” for the year ended December 31, 2018 discussion for additional information.
Other operating expenses, net
Other operating expenses, net increased $18.1 million, or 32.7%, to $73.5 million for the year ended December 31, 2018. The increase was primarily attributable to higher acquisition and integration related expenses, the absence of gain on sale of•inventory; property, plant and equipmentequipment; pre-existing liabilities or legal claims; and higher other employee termination costs. The increase was partially offset by
•goodwill as measured as the reduction in costs incurred to supportexcess of consideration transferred over the transformationnet of the USacquisition 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.
Purchase Accounting for the Nexeo Solutions Acquisition
Our acquisition of Nexeo Solutions in 2019 was accounted for with ASC Topic 805, Business Combinations, as amended. As of December 31, 2019, the allocation of the purchase price to the acquired assets and lower restructuring charges. Refer toassumed liabilities was considered preliminary. See “Note 4: Other operating expenses, net”3: Business combinations” in Item 8 of this Annual Report on Form 10-K for additional information.
DepreciationDetermining the fair value of assets acquired and amortizationliabilities 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.
DepreciationEnvironmental 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 at December 31, 2019 and 2018 was $78.7 million and $83.5 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 decreased $9.8 million, or 7.3%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), to $125.2 million forunless an earlier remeasurement is required. For the year ended December 31, 2018. On2019 and 2018, we recorded a constant currency basis, the decrease of $10.4 million, or 7.7%, was primarily due to assets reaching the end of their useful lives.
Amortization expense decreased $11.1 million, or 17.0%, to $54.3 million for the year ended December 31, 2018. On a constant currency basis, the decrease of $11.0 million, or 16.8%, was primarily attributable to intangibles reaching the end of their useful lives.
Interest expense
Interest expense decreased $16.4 million, or 10.8%, to $135.6 million for the year ended December 31, 2018 primarily due to lower average outstanding borrowings. Refer to “Note 16: Debt” in Item 8 of our Annual Report on Form 10-K for additional information.
Loss on extinguishment of debt
Loss on extinguishment of debt decreased $3.7 million for the year ended December 31, 2018. The $0.1 million loss on extinguishment of debt for the year ended December 31, 2018 related to the amended Euro ABL Credit facility agreement. The $3.8 million loss on extinguishment of debt in the year ended December 31, 2017 related to the write off of unamortized debt
discount and debt issuance costs related to the January 2017 and November 2017 debt amendments of the Senior Term B loan agreement. Refer to “Note 16: Debt” in Item 8 of our Annual Report on Form 10-K for additional information.
Other expense, net
Other expense, net increased $15.3 million, or 87.9%, to $32.7 million for the year ended December 31, 2018. The increase was primarily related to the increase in pension mark to market loss of $50.9 million and the absence of pension curtailment and settlement gains. The increase was partially offset by the reduced exposure to exchange movements on foreign currency denominated loans due to the Euro Term B loan repayment in November 2017. Also contributing to the decrease was the absence of debt amendment fees for the January 2017 and November 2017 amendments of the Senior Term B loan agreement. Refer to$34.9 million, respectively. See “Note 6: Other expense, net”11: Employee benefit plans” in Item 8 of this Annual Report on Form 10-K for additional information.
Income tax expenseDue 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 asset rate would have the following effects:
| | | | | | | | | | | | | | | | | |
| | | Increase (decrease) in | | |
(in millions) | Percentage Change | | 2020 Net Benefit Cost | | 2019 Pension Benefit Obligation |
Discount rate | 25 bps decrease | | $ | (2.0) | | | $ | 51.4 | |
Discount rate | 25 bps increase | | 1.8 | | | (48.4) | |
Expected return on plan assets | 100 bps decrease | | 10.4 | | | N/A |
Expected return on plan assets | 100 bps increase | | (10.4) | | | N/A |
Income tax expense increased $0.9 million, or 1.8%,Taxes
The Company is subject to $49.9 millionincome taxes in the year ended December 31, 2018. The Company’s effectivejurisdictions in which it sells products and earn revenues. We record income taxes under the asset and liability method. Under this method, deferred tax rate forassets and liabilities are recognized based on the year ended December 31, 2018future tax consequences to temporary differences between the financial statement carrying values of 22.5% was higher than the recently reduced US federal statutory rate of 21.0%, primarily due to the addition of state taxesexisting assets and the higherliabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates incurredexpected 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 company’s earnings outsideavailable evidence, it is more likely than not that such assets will not be realized. In evaluating the US,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 expected net impactduration of the 2017 US Tax Cutsstatutory carryforward periods, our experience with operating loss and Jobs Act (the “Tax Act”) on foreign net earnings. These increases in the effective tax rate were partially offset by the release of valuation allowances on certaincredit carryforwards not expiring unused and feasible tax attributes. Included in the $49.9 million of tax expense for year ended December 31, 2018 wasstrategies. The Company has a $15.3 million benefit related to the release of valuation allowance on certain deferred tax assets, primarily related to foreign tax attributes,credits, net operating loss carry forwards and deferred interest.
Effective in 2018, the Company is subject to global intangible low tax income (“GILTI”), which is a $2.7 million benefittax on foreign income in recognitionexcess of previously unrecognized tax benefitsa deemed return on tangible assets of foreign corporations. We elect to treat taxes due to the statute of limitation expiration, $6.8 million of adjustments to provisional amounts for certain enactment-date effects of the Tax Act, and a $1.6 million net benefiton future US inclusions in taxable income related to prior year estimates of the impact from the 2017 US Tax CutsGILTI as a current-period expense when incurred and Jobs Act.
Segment results
Our Adjusted EBITDA and gross profit (exclusive of depreciation) by operating segment and in aggregate is summarized in the following tables:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | USA | | Canada | | EMEA | | Rest of World | | Other/ Elimin- ations(1) | | Consolidated |
| Year ended December 31, 2018 |
Net sales: | | | | | | | | | | | |
External customers | $ | 4,961.0 |
| | $ | 1,302.3 |
| | $ | 1,975.7 |
| | $ | 393.5 |
| | $ | — |
| | $ | 8,632.5 |
|
Inter-segment | 126.6 |
| | 9.3 |
| | 4.0 |
| | 0.2 |
| | (140.1 | ) | | — |
|
Total net sales | $ | 5,087.6 |
| | $ | 1,311.6 |
| | $ | 1,979.7 |
| | $ | 393.7 |
| | $ | (140.1 | ) | | $ | 8,632.5 |
|
Cost of goods sold (exclusive of depreciation) | 3,959.3 |
| | 1,080.1 |
| | 1,525.6 |
| | 307.5 |
| | (140.1 | ) | | 6,732.4 |
|
Outbound freight and handling | 215.6 |
| | 42.5 |
| | 62.4 |
| | 7.8 |
| | — |
| | 328.3 |
|
Warehousing, selling and administrative | 536.3 |
| | 84.3 |
| | 240.5 |
| | 45.1 |
| | 25.2 |
| | 931.4 |
|
Adjusted EBITDA | $ | 376.4 |
| | $ | 104.7 |
| | $ | 151.2 |
| | $ | 33.3 |
| | $ | (25.2 | ) | | $ | 640.4 |
|
Other operating expenses, net | | | | | | | | | | | 73.5 |
|
Depreciation | | | | | | | | | | | 125.2 |
|
Amortization | | | | | | | | | | | 54.3 |
|
Interest expense, net | | | | | | | | | | | 132.4 |
|
Loss on extinguishment of debt | | | | | | | | | | | 0.1 |
|
Other expense, net | | | | | | | | | | | 32.7 |
|
Income tax expense | | | | | | | | | | | 49.9 |
|
Net income | | | | | | | | | | | $ | 172.3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | USA | | Canada | | EMEA | | Rest of World | | Other/ Elimin-ations(1) | | Consolidated |
| Year ended December 31, 2018 |
Gross profit: | | | | | | | |
Net sales | $ | 5,087.6 |
| | $ | 1,311.6 |
| | $ | 1,979.7 |
| | $ | 393.7 |
| | $ | (140.1 | ) | | $ | 8,632.5 |
|
Cost of goods sold (exclusive of depreciation) | 3,959.3 |
| | 1,080.1 |
| | 1,525.6 |
| | 307.5 |
| | (140.1 | ) | | 6,732.4 |
|
Gross profit (exclusive of depreciation) | $ | 1,128.3 |
| | $ | 231.5 |
| | $ | 454.1 |
| | $ | 86.2 |
| | $ | — |
| | $ | 1,900.1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | USA | | Canada | | EMEA | | Rest of World | | Other/ Elimin- ations(1) | | Consolidated |
| Year ended December 31, 2017 |
Net sales: | | | | | | | |
External customers | $ | 4,657.1 |
| | $ | 1,371.5 |
| | $ | 1,821.2 |
| | $ | 403.9 |
| | $ | — |
| | $ | 8,253.7 |
|
Inter-segment | 121.9 |
| | 9.1 |
| | 4.5 |
| | 0.5 |
| | (136.0 | ) | | — |
|
Total net sales | $ | 4,779.0 |
| | $ | 1,380.6 |
| | $ | 1,825.7 |
| | $ | 404.4 |
| | $ | (136.0 | ) | | $ | 8,253.7 |
|
Cost of goods sold (exclusive of depreciation) | 3,706.8 |
| | 1,143.0 |
| | 1,411.7 |
| | 322.7 |
| | (136.0 | ) | | 6,448.2 |
|
Outbound freight and handling | 192.8 |
| | 37.3 |
| | 55.7 |
| | 6.2 |
| | — |
| | 292.0 |
|
Warehousing, selling and administrative | 529.4 |
| | 86.2 |
| | 229.1 |
| | 46.8 |
| | 28.2 |
| | 919.7 |
|
Adjusted EBITDA | $ | 350.0 |
| | $ | 114.1 |
| | $ | 129.2 |
| | $ | 28.7 |
| | $ | (28.2 | ) | | $ | 593.8 |
|
Other operating expenses, net | | | | | | | | | | | 55.4 |
|
Depreciation | | | | | | | | | | | 135.0 |
|
Amortization | | | | | | | | | | | 65.4 |
|
Interest expense, net | | | | | | | | | | | 148.0 |
|
Loss on extinguishment of debt | | | | | | | | | | | 3.8 |
|
Other expense, net | | | | | | | | | | | 17.4 |
|
Income tax expense | | | | | | | | | | | 49.0 |
|
Net income | | | | | | | | | | | $ | 119.8 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | USA | | Canada | | EMEA | | Rest of World | | Other/ Elimin-ations(1) | | Consolidated |
| Year ended December 31, 2017 |
Gross profit: | | | | | | | |
Net sales | $ | 4,779.0 |
| | $ | 1,380.6 |
| | $ | 1,825.7 |
| | $ | 404.4 |
| | $ | (136.0 | ) | | $ | 8,253.7 |
|
Cost of goods sold (exclusive of depreciation) | 3,706.8 |
| | 1,143.0 |
| | 1,411.7 |
| | 322.7 |
| | (136.0 | ) | | 6,448.2 |
|
Gross profit (exclusive of depreciation) | $ | 1,072.2 |
| | $ | 237.6 |
| | $ | 414.0 |
| | $ | 81.7 |
| | $ | — |
| | $ | 1,805.5 |
|
| |
(1) | Other/Eliminations represents the elimination of intersegment transactions as well as unallocated corporate costs consisting of costs specifically related to parent company operations that do not directly benefit segments, either individually or collectively. |
USA.
|
| | | | | | |
Net sales percentage change due to: | | Gross profit percentage change due to: |
Reported sales volumes | 0.9 | % | | Reported sales volumes | 0.9 | % |
Sales pricing and product mix | 5.6 | % | | Sales pricing, product costs and other adjustments | 4.3 | % |
Total | 6.5 | % | | Total | 5.2 | % |
External sales in the USA segment were $4,961.0 million, an increase of $303.9 million, or 6.5%, in the year ended December 31, 2018, primarily due to higher average selling prices resulting from chemical price inflation on certain products and the Company’s efforts to improve its sales force effectiveness as well as higher reported sales volumes, primarily in bulk commodity chemicals.
Gross profit increased $56.1 million, or 5.2%, to $1,128.3 million in the year ended December 31, 2018. Gross profit increased due to changes in product mix, higher sales volumes and a net benefit from miscellaneous operating items. Gross margin decreased from 23.0% in the year ended December 31, 2017 to 22.7% during the year ended December 31, 2019 and 2018, due to product mix.
Outbound freight and handling expenses increasedwe recorded $22.8 million or 11.8%, to $215.6and $19.9 million, in the year ended December 31, 2018 primarily due to higher delivery costs resulting from market capacity constraints and higher fuel costs.
Operating expenses increased $6.9 million, or 1.3%, to $536.3 million in the year ended December 31, 2018 primarily due to focused investments in resources and capabilities to meet our sales force and digital initiative objectives, higher environmental remediation expense and higher bad debt charges. These costs were partially offset by lower employee health care costs, lower variable compensation expense and strong cost containment. Operating expenses as a percentage of external sales decreased from 11.4% in the year ended December 31, 2017 to 10.8% in the year ended December 31, 2018.
Adjusted EBITDA increased by $26.4 million, or 7.5%, to $376.4 million in the year ended December 31, 2018. Adjusted EBITDA margin increased from 7.5% in the year ended December 31, 2017 to 7.6% in the year ended December 31, 2018 primarily as a result of lower operating expenses as a percentage of sales, partially offset by lower gross margin and higher outbound freight and handling expenses as a percentage of sales.
Canada.
|
| | | | | | |
Net sales percentage change due to: | | Gross profit percentage change due to: |
Reported sales volumes | (8.9 | )% | | Reported sales volumes | (6.4 | )% |
Sales pricing and product mix | 3.7 | % | | Sales pricing, product costs and other adjustments | 3.7 | % |
Foreign currency translation | 0.2 | % | | Foreign currency translation | 0.1 | % |
Total | (5.0 | )% | | Total | (2.6 | )% |
External sales in the Canada segment were $1,302.3 million, a decrease of $69.2 million, or 5.0%, in the year ended December 31, 2018. On a constant currency basis, external net sales decreased due to lower sales volumes attributable to the weather-impacted agriculture market as well as volume reductions in the industrial chemical business due to lower demand from Canada’s energy sector in the second half of the year. Average selling prices increased as a result of chemical price inflation in certain products, changes in market and product mix and sales force execution for the year ended December 31, 2018 to the year ended December 31, 2017.
Gross profit decreased $6.1 million, or 2.6%, to $231.5 million in the year ended December 31, 2018. On a constant currency basis, gross profit decreased due to lower sales volumes in agriculture and the industrial chemical business. Gross margin increased from 17.3% in the year ended December 31, 2017 to 17.8% in the year ended December 31, 2018respectively, due to the lower contribution from agriculture sales in 2018 and margin management efforts.impact of GILTI.
Outbound freight and handling expenses increased $5.2 million, or 13.9%, to $42.5 million primarily due to higher delivery costs per ton resulting from tight market conditions.Recently Issued Accounting Pronouncements
Operating expenses decreased by $1.9 million, or 2.2%, to $84.3 million in the year ended December 31, 2018 and increased as a percentage of external sales from 6.3% in the year ended December 31, 2017 to 6.5% in the year ended December 31, 2018. On a constant currency basis, operating expenses decreased $2.0 million, or 2.3%, primarily due to lower variable compensation expense and cost containment efforts.
Adjusted EBITDA decreased by $9.4 million, or 8.2%, to $104.7 million in the year ended December 31, 2018. On a constant currency basis, Adjusted EBITDA decreased $9.6 million, or 8.4%, attributable to reduced demand resulting from a weather-impacted agriculture market, partially offset by growth in the industrial chemical business. Adjusted EBITDA margin decreased from 8.3% in the year ended December 31, 2017 to 8.0% in the year ended December 31, 2018, reflecting the lower contribution from agriculture sales in 2018.
EMEA.
|
| | | | | | |
Net sales percentage change due to: | | Gross profit percentage change due to: |
Acquisitions | 2.3 | % | | Acquisitions | 2.0 | % |
Reported sales volumes | (7.1 | )% | | Reported sales volumes | (7.1 | )% |
Sales pricing and product mix | 10.2 | % | | Sales pricing, product costs and other adjustments | 11.4 | % |
Foreign currency translation | 3.1 | % | | Foreign currency translation | 3.4 | % |
Total | 8.5 | % | | Total | 9.7 | % |
External sales in the EMEA segment were $1,975.7 million, an increase of $154.5 million, or 8.5%, in the year ended December 31, 2018. On a constant currency basis, external net sales increased primarily due to higher average selling prices from chemical price inflation, mix improvement and sales force execution. Lower volumes are largely attributable to certain product shortages and a reduction of direct commodity sales. The increase in external net sales from acquisitions was due to the January 2018 Kemetyl and May 2018 Earthoil acquisitions.
Gross profit increased $40.1 million, or 9.7%, to $454.1 million in the year ended December 31, 2018. On a constant currency basis, gross profit increased from higher average selling prices attributable to favorable product mix and margin management initiatives. The increase in gross profit from acquisitions was due to the January 2018 Kemetyl and May 2018 Earthoil acquisitions. Gross margin increased from 22.7% in the year ended December 31, 2017 to 23.0% in the year ended December 31, 2018 primarily due to the change in product mix and price inflation.
Outbound freight and handling expenses increased $6.7 million, or 12.0%, to $62.4 million primarily due to incremental expenses related to our Kemetyl acquisition and overall higher costs to deliver.
Operating expenses increased $11.4 million, or 5.0%, to $240.5 million in the year ended December 31, 2018, and decreased as a percentage of external sales from 12.6% in the year ended December 31, 2017 to 12.2% in the year ended December 31, 2018. On a constant currency basis, operating expenses increased $3.9 million, or 1.7%, which was primarily due to incremental expenses related to our Kemetyl acquisition and higher salary expense, partially offset by lower environmental remediation expenses and lower bad debt charges.
Adjusted EBITDA increased by $22.0 million, or 17.0%, to $151.2 million in the year ended December 31, 2018. On a constant currency basis, Adjusted EBITDA increased $17.9 million, or 13.9%, primarily due to increased gross margin and lower operating expenses as a percentage of sales, partially offset by higher outbound freight and handling expenses as a percentage of sales. The pharmaceutical finished goods product line represented approximately 30% of Adjusted EBITDA in the EMEA segment for the year ended December 31, 2018. Adjusted EBITDA margin increased from 7.1% in the year ended December 31, 2017 to 7.7% in the year ended December 31, 2018.
Rest of World.
|
| | | | | | |
Net sales percentage change due to: | | Gross profit percentage change due to: |
Acquisitions | 2.6 | % | | Acquisitions | 6.0 | % |
Reported sales volumes | (18.5 | )% | | Reported sales volumes | (17.0 | )% |
Sales pricing and product mix | 18.6 | % | | Sales pricing, product costs and other adjustments | 24.0 | % |
Foreign currency translation | (5.3 | )% | | Foreign currency translation | (7.5 | )% |
Total | (2.6 | )% | | Total | 5.5 | % |
External sales in the Rest of World segment were $393.5 million, a decrease of $10.4 million, or 2.6%, in the year ended December 31, 2018. External sales increased from higher average selling prices attributable to market price inflation, shortages on certain products, changes in product mix and improved sales force effectiveness. Reported sales volumes were lower due to certain product shortages as well as the Company’s continued focus on margin management efforts. The increase in external net sales from acquisitions was due to the September 2017 Tagma acquisition.
Gross profit increased $4.5 million, or 5.5%, to $86.2 million in the year ended December 31, 2018 due to higher average selling prices resulting from higher chemical prices discussed above.The increase in gross profit from acquisitions was due to the September 2017 Tagma acquisition. Gross margin increased from 20.2% in the year ended December 31, 2017 to 21.9% in the
year ended December 31, 2018 primarily due to the factors discussed above and a shift towards higher margin products and services.
Outbound freight and handling expenses increased $1.6 million, or 25.8%, to $7.8 million in the year ended December 31, 2018.
Operating expenses decreased $1.7 million, or 3.6% to $45.1 million in the year ended December 31, 2018 and decreased as a percentage of external sales from 11.6% in the year ended December 31, 2017 to 11.5% in the year ended December 31, 2018. On constant currency basis, operating expenses increased $1.4 million, or 3.0%, primarily due to higher variable compensation expense.
Adjusted EBITDA increased by $4.6 million, or 16.0%, to $33.3 million in the year ended December 31, 2018. On a constant currency basis, Adjusted EBITDA increased $7.2 million, or 25.1%, primarily due to a shift towards higher margin products and services and market price inflation, partially offset by higher outbound freight and handling expenses as a percentage of sales. Adjusted EBITDA margin increased from 7.1% in the year ended December 31, 2017 to 8.5% in the year ended December 31, 2018.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended | | Favorable (unfavorable) | | % Change | | Impact of currency* |
(in millions) | December 31, 2017 | | December 31, 2016 | |
Net sales | $ | 8,253.7 |
| | 100.0 | % | | $ | 8,073.7 |
| | 100.0 | % | | $ | 180.0 |
| | 2.2 | % | | 0.5 | % |
Cost of goods sold (exclusive of depreciation) | 6,448.2 |
| | 78.1 | % | | 6,346.6 |
| | 78.6 | % | | (101.6 | ) | | 1.6 | % | | (0.5 | )% |
Operating expenses: | | | | | | | | | | | | | |
Outbound freight and handling | 292.0 |
| | 3.5 | % | | 286.6 |
| | 3.5 | % | | (5.4 | ) | | 1.9 | % | | (0.6 | )% |
Warehousing, selling and administrative | 919.7 |
| | 11.1 | % | | 893.1 |
| | 11.1 | % | | (26.6 | ) | | 3.0 | % | | (0.6 | )% |
Other operating expenses, net | 55.4 |
| | 0.7 | % | | 37.2 |
| | 0.5 | % | | (18.2 | ) | | 48.9 | % | | 0.8 | % |
Depreciation | 135.0 |
| | 1.6 | % | | 152.3 |
| | 1.9 | % | | 17.3 |
| | (11.4 | )% | | (0.4 | )% |
Amortization | 65.4 |
| | 0.8 | % | | 85.6 |
| | 1.1 | % | | 20.2 |
| | (23.6 | )% | | (0.3 | )% |
Impairment charges | — |
| | — | % | | 133.9 |
| | 1.7 | % | | 133.9 |
| | (100.0 | )% | | — | % |
Total operating expenses | $ | 1,467.5 |
| | 17.8 | % | | $ | 1,588.7 |
| | 19.7 | % | | $ | 121.2 |
| | (7.6 | )% | | (0.5 | )% |
Operating income | $ | 338.0 |
| | 4.1 | % | | $ | 138.4 |
| | 1.7 | % | | $ | 199.6 |
| | 144.2 | % | | 1.7 | % |
Other (expense) income: | | | | | | | | | | | | | |
Interest income | 4.0 |
| | — | % | | 3.9 |
| | — | % | | 0.1 |
| | 2.6 | % | | 2.6 | % |
Interest expense | (152.0 | ) | | (1.8 | )% | | (163.8 | ) | | (2.0 | )% | | 11.8 |
| | (7.2 | )% | | 0.1 | % |
Loss on extinguishment of debt | (3.8 | ) | | — | % | | — |
| | — | % | | (3.8 | ) | | 100.0 | % | | — | % |
Other expense, net | (17.4 | ) | | (0.2 | )% | | (58.1 | ) | | (0.7 | )% | | 40.7 |
| | (70.1 | )% | | 0.9 | % |
Total other expense | $ | (169.2 | ) | | (2.0 | )% | | $ | (218.0 | ) | | (2.7 | )% | | $ | 48.8 |
| | (22.4 | )% | | 0.4 | % |
Income (loss) before income taxes | 168.8 |
| | 2.0 | % | | (79.6 | ) | | (1.0 | )% | | 248.4 |
| | NM |
| | 3.9 | % |
Income tax expense (benefit) | 49.0 |
| | 0.6 | % | | (11.2 | ) | | (0.1 | )% | | (60.2 | ) | | NM |
| | 0.9 | % |
Net income (loss) | $ | 119.8 |
| | 1.5 | % | | $ | (68.4 | ) | | (0.8 | )% | | $ | 188.2 |
| | NM |
| | 4.7 | % |
| | | | | | | | | | | | | |
| |
* | Foreign currency translation is included in the percentage change. Unfavorable impacts from foreign currency translation are designated with parentheses. |
Net sales
|
| | |
Net sales percentage change due to: |
Acquisitions | 0.1 | % |
Reported sales volumes | (5.8 | )% |
Sales pricing and product mix | 7.4 | % |
Foreign currency translation | 0.5 | % |
Total | 2.2 | % |
Net sales were $8,253.7 million in the year ended December 31, 2017, an increase of $180.0 million, or 2.2%, from the year ended December 31, 2016. The increase in net sales from acquisitions was driven by the September 2017 Tagma acquisition in the Rest of World segment, the March 2016 Nexus Ag acquisition in Canada, and the March 2016 Bodine acquisition in the USA. The decrease in net sales from reported sales volumes was driven by the USA, EMEA, and Rest of World segments, partially offset by higher sales volumes in the Canada segment. The increase in net sales from changes in sales pricing and product mix was driven by all of our segments. Foreign currency translation increased net sales due to the US dollar weakening against the Canadian dollar, euro, and Brazilian real, partially offset by the strengthening of the US dollar against the British pound and the Mexican peso. Refer to the “Segment results” for the year ended December 31, 2017 discussion for additional information.
Gross profit (exclusive of depreciation)
|
| | |
Gross profit percentage change due to: |
Acquisitions | 0.2 | % |
Reported sales volumes | (5.8 | )% |
Sales pricing, product costs and other adjustments | 9.5 | % |
Foreign currency translation | 0.6 | % |
Total | 4.5 | % |
Gross profit increased $78.4 million, or 4.5%, to $1,805.5 million for the year ended December 31, 2017. The increase in gross profit from acquisitions was driven by the September 2017 Tagma acquisition in the Rest of World segment, the March 2016 Bodine acquisition in the USA, and the March 2016 Nexus Ag acquisition in Canada. The decrease in gross profit from reported sales volumes was driven by the USA, EMEA, and Rest of World segments, partially offset by higher sales volumes in the Canada segment. The increase in gross profit from changes in sales pricing, product costs and other adjustments was driven by the USA, EMEA, and Rest of World segments, partially offset by a decrease in the Canada segment. Foreign currency translation increased gross profit due to the weakening of the US dollar against the Canadian dollar, euro, and Brazilian real, partially offset by the strengthening of the US dollar against the British pound and the Mexican peso. Gross margin, which we define as gross profit divided by external net sales, increased to 21.9% in the year ended December 31, 2017 from 21.4% in the year ended December 31, 2016, primarily due to favorable product mix and focused margin management efforts. Refer to the “Segment results” for the year ended December 31, 2017 discussion for additional information.
Outbound freight and handling
Outbound freight and handling expenses increased $5.4 million, or 1.9%, to $292.0 million for the year ended December 31, 2017. Foreign currency translation increased outbound freight and handling expense by 0.6% or $1.7 million. On a constant currency basis, outbound freight and handling expenses increased 1.3% or $3.7 million, primarily due to higher delivery costs resulting from changes in product mix, market capacity constraints, and increasing fuel prices, partially offset by lower reported sales volumes. Refer to the “Segment results” for the year ended December 31, 2017 discussion for additional information.
Warehousing, selling and administrative
Warehousing, selling and administrative expenses increased $26.6 million, or 3.0%, to $919.7 million for the year ended December 31, 2017. Foreign currency translation decreased warehousing, selling and administrative expenses by 0.6% or $5.2 million. On a constant currency basis, the $21.4 million increase is primarily due to higher personnel costs of $28.8 million primarily driven by higher variable compensation expenseand higher environmental remediation expense of $4.6 million, partially offset by $3.8 million in lower lease expense, $2.4 million in lower bad debt charges, $1.0 million in lower legal expenses and $0.6 million in lower insurance expense. The remaining $4.2 million decrease related to several insignificant components. Refer to the “Segment results” for the year ended December 31, 2017 discussion for additional information.
Other operating expenses, net
Other operating expenses, net increased $18.2 million, or 48.9%, to $55.4 million for the year ended December 31, 2017. The increase in other operating expenses, net was related to $18.0 million of costs incurred to support the transformation of the US business, $9.3 million of higher stock-based compensation, and $6.6 million of higher other employee termination costs. The increase was partially offset by a higher gain on sale of property, plant and equipment of $10.6 million driven by the sale and subsequent leaseback of an operating facility in the Canada segment, $2.4 million in lower acquisition and integration related expenses and $1.0 million in lower restructuring charges. The remaining $1.7 million decrease related to several insignificant components. Foreign currency translation decreased other operating expenses, net by $0.3 million, or 0.8%. Refer toSee “Note 4: Other operating expenses, net”2: Significant accounting policies” in Item 8 of this Annual Report on Form 10-K for additional information.10-K.
Depreciation and amortization
Depreciation expense decreased $17.3 million, or 11.4%, to $135.0 million for the year ended December 31, 2017. Foreign currency translation increased depreciation expense by $0.6 million, or 0.4%. On a constant currency basis, the decrease of $17.9 million, or 11.8%, was primarily due to assets reaching the end of their useful lives and due to the second quarter 2016 reassessment of useful lives of certain internally developed software which were fully depreciated by May 2017.
Amortization expense decreased $20.2 million, or 23.6%, to $65.4 million for the year ended December 31, 2017. Amortization expense increased $0.3 million, or 0.3%, due to foreign currency translation. On a constant currency basis, the decrease of $20.5 million, or 23.9%, was primarily driven by the third quarter 2016 impairment charge which reduced the intangible asset base along with lower expense related to intangibles reaching the end of their useful life.
Impairment charges
There were no impairment charges in the year ended December 31, 2017. Impairment charges of $133.9 million were recorded in the year ended December 31, 2016 of which $133.6 million was due to the impairment of certain intangible assets and fixed assets related to the upstream oil and gas customers in the USA segment. The Company also recorded a non-cash, long-lived asset impairment charge of $0.3 million related to assets held-for-sale. Refer to “Note 14: Impairment charges” in Item 8 of this Annual Report on Form 10-K for additional information.
Interest expense
Interest expense decreased $11.8 million, or 7.2%, to $152.0 million for the year ended December 31, 2017 primarily due to lower average outstanding borrowings, as well as lower interest rates related to the January 2017 and November 2017 amendments of the Senior Term B loan agreement. Foreign currency translation decreased interest expense by 0.1% or $0.2 million. Refer to “Note 16: Debt” in Item 8 of this Annual Report on Form 10-K for additional information.
Loss on extinguishment of debt
Loss on extinguishment of debt increased $3.8 million for the year ended December 31, 2017. The $3.8 million loss on extinguishment of debt in the year ended December 31, 2017 related to the write off of unamortized debt discount and debt issuance costs related to the January 2017 and November 2017 debt amendments of the Senior Term B loan agreement. Refer to “Note 16: Debt” in Item 8 of this Annual Report on Form 10-K for additional information.
Other expense, net
Other expense, net decreased $40.7 million, or 70.1%, to $17.4 million for the year ended December 31, 2017. The decrease was primarily related to the $64.8 million decrease in pension mark to market loss, the $8.4 million increase in pension curtailment and settlement gains driven by a $9.7 million settlement gain in the year ended December 31, 2017 related to a lump sum offering in a US defined benefit plan, and offset by a $5.4 million decrease in other non-operating retirement benefits. The decrease was partially offset by an increase of $12.3 million change in mark to market for interest rate swaps resulting from a gain of $10.1 million during the year ended December 31, 2016 compared to a $2.2 million loss in the year ended December 31, 2017. Also offsetting the decrease was $5.3 million in fees related to the January 2017 and November 2017 amendments of the Senior Term B loan agreement, $4.2 million in higher foreign currency denominated loan revaluation losses and $4.0 million in higher foreign currency transactions. The remaining $1.3 million change is related to several insignificant components. Refer to “Note 16: Debt” and “Note 18: Derivatives” in Item 8 of this Annual Report on Form 10-K for additional information. Refer to “Note 6: Other expense, net” in Item 8 of this Annual Report on Form 10-K for additional information.
Income tax expense (benefit)
Income tax expense increased $60.2 million from an income tax benefit of $11.2 million in the year ended December 31, 2016 to an income tax expense of $49.0 million in the year ended December 31, 2017. The increase in income tax expense was
primarily the result of an increase in overall earnings before income taxes from a loss of $79.6 million incurred for the year ended December 31, 2016, as compared to an income of $168.8 million for the year ended December 31, 2017. The direct and indirect impacts from the Tax Cuts and Jobs Act (the “Tax Act”) also contributed to the total expense by $36.6 million. The increase in income tax expense was partially offset by a release of valuation allowances based on current estimated earnings and future profitability of $25.9 million for the year ended December 31, 2017.
Segment results
Our Adjusted EBITDA and gross profit (exclusive of depreciation) by operating segment and in aggregate is summarized in the following tables:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | USA | | Canada | | EMEA | | Rest of World | | Other/ Elimin- ations(1) | | Consolidated |
| Year ended December 31, 2017 |
Net sales: | | | | | | | | | | | |
External customers | $ | 4,657.1 |
| | $ | 1,371.5 |
| | $ | 1,821.2 |
| | $ | 403.9 |
| | $ | — |
| | $ | 8,253.7 |
|
Inter-segment | 121.9 |
| | 9.1 |
| | 4.5 |
| | 0.5 |
| | (136.0 | ) | | — |
|
Total net sales | $ | 4,779.0 |
| | $ | 1,380.6 |
| | $ | 1,825.7 |
| | $ | 404.4 |
| | $ | (136.0 | ) | | $ | 8,253.7 |
|
Cost of goods sold (exclusive of depreciation) | 3,706.8 |
| | 1,143.0 |
| | 1,411.7 |
| | 322.7 |
| | (136.0 | ) | | 6,448.2 |
|
Outbound freight and handling | 192.8 |
| | 37.3 |
| | 55.7 |
| | 6.2 |
| | — |
| | 292.0 |
|
Warehousing, selling and administrative | 529.4 |
| | 86.2 |
| | 229.1 |
| | 46.8 |
| | 28.2 |
| | 919.7 |
|
Adjusted EBITDA | $ | 350.0 |
| | $ | 114.1 |
| | $ | 129.2 |
| | $ | 28.7 |
| | $ | (28.2 | ) | | $ | 593.8 |
|
Other operating expenses, net | | | | | | | | | | | 55.4 |
|
Depreciation | | | | | | | | | | | 135.0 |
|
Amortization | | | | | | | | | | | 65.4 |
|
Interest expense, net | | | | | | | | | | | 148.0 |
|
Loss on extinguishment of debt | | | | | | | | | | | 3.8 |
|
Other expense, net | | | | | | | | | | | 17.4 |
|
Income tax expense | | | | | | | | | | | 49.0 |
|
Net income | | | | | | | | | | | $ | 119.8 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | USA | | Canada | | EMEA | | Rest of World | | Other/ Elimin-ations(1) | | Consolidated |
| Year ended December 31, 2017 |
Gross profit: | | | | | | | |
Net sales | $ | 4,779.0 |
| | $ | 1,380.6 |
| | $ | 1,825.7 |
| | $ | 404.4 |
| | $ | (136.0 | ) | | $ | 8,253.7 |
|
Cost of goods sold (exclusive of depreciation) | 3,706.8 |
| | 1,143.0 |
| | 1,411.7 |
| | 322.7 |
| | (136.0 | ) | | 6,448.2 |
|
Gross profit (exclusive of depreciation) | $ | 1,072.2 |
| | $ | 237.6 |
| | $ | 414.0 |
| | $ | 81.7 |
| | $ | — |
| | $ | 1,805.5 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | USA | | Canada | | EMEA | | Rest of World | | Other/ Elimin- ations(1) | | Consolidated |
| Year ended December 31, 2016 |
Net sales: | | | | | | | | | | | |
External customers | $ | 4,706.7 |
| | $ | 1,261.0 |
| | $ | 1,704.2 |
| | $ | 401.8 |
| | $ | — |
| | $ | 8,073.7 |
|
Inter-segment | 104.4 |
| | 8.3 |
| | 4.5 |
| | — |
| | (117.2 | ) | | — |
|
Total net sales | $ | 4,811.1 |
| | $ | 1,269.3 |
| | $ | 1,708.7 |
| | $ | 401.8 |
| | $ | (117.2 | ) | | $ | 8,073.7 |
|
Cost of goods sold (exclusive of depreciation) | 3,769.7 |
| | 1,047.4 |
| | 1,324.6 |
| | 322.1 |
| | (117.2 | ) | | 6,346.6 |
|
Outbound freight and handling | 191.5 |
| | 34.1 |
| | 54.9 |
| | 6.1 |
| | — |
| | 286.6 |
|
Warehousing, selling and administrative | 523.5 |
| | 85.4 |
| | 219.3 |
| | 46.8 |
| | 18.1 |
| | 893.1 |
|
Adjusted EBITDA | $ | 326.4 |
| | $ | 102.4 |
| | $ | 109.9 |
| | $ | 26.8 |
| | $ | (18.1 | ) | | $ | 547.4 |
|
Other operating expenses, net | | | | | | | | | | | 37.2 |
|
Depreciation | | | | | | | | | | | 152.3 |
|
Amortization | | | | | | | | | | | 85.6 |
|
Impairment charges | | | | | | | | | | | 133.9 |
|
Interest expense, net | | | | | | | | | | | 159.9 |
|
Other expense, net | | | | | | | | | | | 58.1 |
|
Income tax benefit | | | | | | | | | | | (11.2 | ) |
Net loss | | | | | | | | | | | $ | (68.4 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | USA | | Canada | | EMEA | | Rest of World | | Other/ Elimin-ations(1) | | Consolidated |
| Year ended December 31, 2016 |
Gross profit: | | | | | | | |
Net sales | $ | 4,811.1 |
| | $ | 1,269.3 |
| | $ | 1,708.7 |
| | $ | 401.8 |
| | $ | (117.2 | ) | | $ | 8,073.7 |
|
Cost of goods sold (exclusive of depreciation) | 3,769.7 |
| | 1,047.4 |
| | 1,324.6 |
| | 322.1 |
| | (117.2 | ) | | 6,346.6 |
|
Gross profit (exclusive of depreciation) | $ | 1,041.4 |
| | $ | 221.9 |
| | $ | 384.1 |
| | $ | 79.7 |
| | $ | — |
| | $ | 1,727.1 |
|
| |
(1) | Other/Eliminations represents the elimination of intersegment transactions as well as unallocated corporate costs consisting of costs specifically related to parent company operations that do not directly benefit segments, either individually or collectively. |
USA.
|
| | | | | | |
Net sales percentage change due to: | | Gross profit percentage change due to: |
Acquisitions | 0.1 | % | | Acquisitions | 0.1 | % |
Reported sales volumes | (7.1 | )% | | Reported sales volumes | (7.1 | )% |
Sales pricing and product mix | 5.9 | % | | Sales pricing, product costs and other adjustments | 10.0 | % |
Total | (1.1 | )% | | Total | 3.0 | % |
External sales in the USA segment were $4,657.1 million, a decrease of $49.6 million, or 1.1%, in the year ended December 31, 2017 due to lower sales volumes, partially offset by higher average selling prices resulting from the Company's efforts to improve its sales force effectiveness, favorable changes in product mix and increases in certain chemical prices. The increase in external net sales from acquisitions was due to the March 2016 Bodine acquisition. Gross profit increased $30.8 million, or 3.0%, to $1,072.2 million in the year ended December 31, 2017. Gross profit increased from sales pricing, product costs and other adjustments primarily due to higher average selling prices and changes in product mix to higher margin products. The increase in gross profit from acquisitions was due to the March 2016 Bodine acquisition. Gross margin increased from 22.1% in the year
ended December 31, 2016 to 23.0% during the year ended December 31, 2017 primarily due to the factors impacting gross profit discussed above.
Outbound freight and handling expenses increased $1.3 million, or 0.7%, to $192.8 million in the year ended December 31, 2017 primarily due to higher delivery costs resulting from market capacity constraints and increasing fuel prices. Operating expenses increased $5.9 million, or 1.1%, to $529.4 million in the year ended December 31, 2017 of which $19.5 million is attributable to higher personnel costs primarily driven by higher variable compensation expense partially offset by lower salaries expense. Additionally, the increase in operating expenses is also due to higher environmental remediation expense of $3.0 million. These increases were partially offset by $3.8 million of lower lease expenses, $3.8 million in lower bad debt charges and $2.3 million in lower maintenance and repair expenses. The remaining $6.7 million decrease related to several insignificant components. Operating expenses as a percentage of external sales increased from 11.1% in the year ended December 31, 2016 to 11.4% in the year ended December 31, 2017.
Adjusted EBITDA increased by $23.6 million, or 7.2%, to $350.0 million in the year ended December 31, 2017. Adjusted EBITDA margin increased from 6.9% in the year ended December 31, 2016 to 7.5% in the year ended December 31, 2017 primarily as a result of higher gross margin, partially offset by increased operating expenses as a percentage of sales.
Canada.
|
| | | | | | |
Net sales percentage change due to: | | Gross profit percentage change due to: |
Acquisitions | 0.3 | % | | Acquisitions | 0.3 | % |
Reported sales volumes | 4.8 | % | | Reported sales volumes | 4.8 | % |
Sales pricing and product mix | 1.5 | % | | Sales pricing, product costs and other adjustments | (0.2 | )% |
Foreign currency translation | 2.2 | % | | Foreign currency translation | 2.2 | % |
Total | 8.8 | % | | Total | 7.1 | % |
External sales in the Canada segment were $1,371.5 million, an increase of $110.5 million, or 8.8%, in the year ended December 31, 2017. Foreign currency translation increased external sales dollars as the US dollar weakened against the Canadian dollar comparing the year ended December 31, 2017 to the year ended December 31, 2016. On a constant currency basis, external sales dollars increased $82.9 million or 6.6%. The increase in external net sales from acquisitions was due to the March 2016 Nexus Ag acquisition. The increase in external net sales was driven by higher reported sales volumes across all regions. The increase in external net sales from changes in sales pricing and product mix was primarily driven by higher average selling prices in key industrial chemical products. Gross profit increased $15.7 million, or 7.1%, to $237.6 million in the year ended December 31, 2017. The increase in gross profit from acquisitions was due to the March 2016 Nexus Ag acquisition. Gross profit decreased from sales pricing, product costs, and other adjustments due to change in market and product mix, partially offset by margin management efforts during the year ended December 31, 2017. Gross margin decreased from 17.6% in the year ended December 31, 2016 to 17.3% in the year ended December 31, 2017.
Outbound freight and handling expenses increased $3.2 million, or 9.4%, to $37.3 million primarily due to higher reported sales volumes and higher delivery costs resulting from changes in product mix. Operating expenses increased by $0.8 million, or 0.9%, to $86.2 million in the year ended December 31, 2017 and decreased as a percentage of external sales from 6.8% in the year ended December 31, 2016 to 6.3% in the year ended December 31, 2017. Foreign currency translation increased operating expenses by $1.8 million, or 2.1%. On a constant currency basis, operating expenses decreased $1.0 million, or 1.2%, primarily related to several insignificant components.
Adjusted EBITDA increased by $11.7 million, or 11.4%, to $114.1 million in the year ended December 31, 2017. Foreign currency translation increased Adjusted EBITDA by $2.2 million, or 2.1%. On a constant currency basis, Adjusted EBITDA increased $9.5 million, or 9.3%, primarily due to increased gross profit. Adjusted EBITDA margin increased from 8.1% in the year ended December 31, 2016 to 8.3% in the year ended December 31, 2017 primarily as a result of lower operating expenses as a percentage of sales, partially offset by lower gross margin.
EMEA.
|
| | | | | | |
Net sales percentage change due to: | | Gross profit percentage change due to: |
Reported sales volumes | (5.4 | )% | | Reported sales volumes | (5.4 | )% |
Sales pricing and product mix | 12.0 | % | | Sales pricing, product costs and other adjustments | 12.5 | % |
Foreign currency translation | 0.3 | % | | Foreign currency translation | 0.7 | % |
Total | 6.9 | % | | Total | 7.8 | % |
External sales in the EMEA segment were $1,821.2 million, an increase of $117.0 million, or 6.9%, in the year ended December 31, 2017 primarily due to higher average selling prices driven by mix improvement, margin management initiatives and chemical price inflation for certain products, partially offset by lower volumes. Foreign currency translation increased external sales dollars as the US dollar weakened against the euro, partially offset by the US dollar strengthening against the British pound, when comparing the year ended December 31, 2017 to the year ended December 31, 2016. Gross profit increased $29.9 million, or 7.8%, to $414.0 million in the year ended December 31, 2017. Gross profit increased due to changes in sales pricing, product costs and other adjustments primarily due to increased sales of higher margin pharmaceutical finished goods as well as the continued impact of favorable product and end market mix. Gross margin increased from 22.5% in the year ended December 31, 2016 to 22.7% in the year ended December 31, 2017 primarily due to the factors impacting gross profit discussed above.
Outbound freight and handling expenses increased $0.8 million, or 1.5%, to $55.7 million primarily due to higher delivery costs per ton due to lower bulk volume sales. Operating expenses increased $9.8 million, or 4.5%, to $229.1 million in the year ended December 31, 2017, and decreased as a percentage of external sales from 12.9% in the year ended December 31, 2016 to 12.6% in the year ended December 31, 2017. Foreign currency translation increased operating expenses by 1.0% or $2.1 million. On a constant currency basis, operating expenses increased $7.7 million, or 3.5%, which was driven by higher personnel costs of $5.4 million primarily due to higher variable compensation expense, higher environmental remediation expense of $1.8 million, and $1.4 million in higher bad debt charges. The increase was partially offset by a decrease of $1.0 million in lease expenses. The remaining offsetting $0.1 million increase related to several other insignificant components.
Adjusted EBITDA increased by $19.3 million, or 17.6%, to $129.2 million in the year ended December 31, 2017. Foreign currency translation decreased Adjusted EBITDA by 0.1% or $0.2 million. On a constant currency basis, Adjusted EBITDA increased $19.5 million, or 17.7%, which can be attributed to increased gross profit due to improved sales force execution and margin management initiatives together with increased sales of pharmaceutical finished goods compared to the year ended December 31, 2016. The pharmaceutical finished goods product line represented approximately 30% of Adjusted EBITDA in the EMEA segment for the year ended December 31, 2017. Adjusted EBITDA margin increased from 6.4% in the year ended December 31, 2016 to 7.1% in the year ended December 31, 2017 primarily due to higher gross margin and lower outbound freight and handling expenses and operating expenses as a percentage of sales.
Rest of World.
|
| | | | | | |
Net sales percentage change due to: | | Gross profit percentage change due to: |
Acquisitions | 1.0 | % | | Acquisitions | 2.6 | % |
Reported sales volumes | (16.3 | )% | | Reported sales volumes | (16.3 | )% |
Sales pricing and product mix | 13.9 | % | | Sales pricing, product costs and other adjustments | 13.2 | % |
Foreign currency translation | 1.9 | % | | Foreign currency translation | 3.0 | % |
Total | 0.5 | % | | Total | 2.5 | % |
External sales in the Rest of World segment were $403.9 million, an increase of $2.1 million, or 0.5%, in the year ended December 31, 2017. Foreign currency translation increased external sales dollars primarily due to the US dollar weakening against the Brazilian real, partially offset by the US dollar strengthening against the Mexican peso in the year ended December 31, 2017 as compared to the year ended December 31, 2016. The increase in external net sales from acquisitions was due to the September 2017 Tagma acquisition. The decrease in external net sales from reported sales volumes was due to weak industrial demand and in particular lower demand in upstream oil and gas products and solvents in Mexico.The increase in external net sales from changes in sales pricing and product mix was primarily due to favorable product mix and higher average selling prices resulting from the Company's efforts to improve its sales force effectiveness and higher chemical prices due to product shortages. Gross profit increased $2.0 million, or 2.5%, to $81.7 million in the year ended December 31, 2017. The increase in gross profit from acquisitions
was due to the September 2017 Tagma acquisition. Gross profit increased from sales pricing, product costs and other adjustments primarily due to favorable product mix and higher average selling prices, offset by lower volumes across the region for the year ended December 31, 2017. Gross margin increased from 19.8% in the year ended December 31, 2016 to 20.2% in the year ended December 31, 2017 primarily due to the factors discussed above.
Outbound freight and handling expenses increased $0.1 million, or 1.6%, to $6.2 million in the year ended December 31, 2017. Foreign currency translation increased outbound freight and handling expenses by 1.6% or $0.1 million. On a constant currency basis, outbound freight and handling expenses remained flat compared to prior year primarily due to lower reported sales volumes. Operating expenses remained flat at $46.8 million and 11.6% as a percentage of external sales when comparing the year ended December 31, 2017 to the year ended December 31, 2016. Foreign currency translation increased operating expenses by 2.8% or $1.3 million. On constant currency basis, operating expenses decreased $1.3 million, or 2.8% due to several insignificant components.
Adjusted EBITDA increased by $1.9 million, or 7.1%, to $28.7 million in the year ended December 31, 2017. Foreign currency translation increased Adjusted EBITDA by 3.7% or $1.0 million. On a constant currency basis, Adjusted EBITDA increased $0.9 million, or 3.4%, primarily due to increased gross profit. Adjusted EBITDA margin increased from 6.7% in the year ended December 31, 2016 to 7.1% in the year ended December 31, 2017 primarily due to higher gross margin.
Liquidity and Capital Resources
Our primary source of liquidity is cash generated from our operations as well as borrowings under our committed credit facilities. As of December 31, 2018,2019, our total liquidity was approximately $734.7$931.2 million, comprised of $613.1$600.9 million available under our credit facilities and $121.6$330.3 million of cash and cash equivalents. Our primary liquidity and capital resource needs are to service our debt and to finance working capital, capital expenditures, other liabilities cost of acquisitions and general corporate purposes. We believe that funds provided by these sources will be adequate to meet our liquidity and capital resource needs for at least the next 12 months under current operating conditions. We have significant working capital needs, although we have implemented several initiatives to improve our working capital and reduce the related financing requirements. The nature of our business, however, requires that we maintain inventories that enable us to deliver products to fill customer orders. As of December 31, 2018,2019, we maintained inventories of $803.3$796.0 million, equivalent to approximately 47.243.6 days of sales (which we calculate on the basissales.
Total debt as of cost of goods sold for the trailing 90-day period).
The funded status of our defined benefit pension plans is the difference between our plan assets and projected benefit obligations. Our pension plans in the US and certain other countries had an underfunded status of $212.4 million, $226.7 million and $271.8 million at December 31, 2018, 20172019 was $2,714.5 million, consisting of senior term loans, asset backed loans, senior unsecured notes, finance lease obligations and 2016, respectively. During 2018, we made contributions of $38.7 million. Based on current projections of minimum funding requirements, we expect to make cash contributions of $28.3 million to our defined benefit pension plans in 2019. 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 9: Employee benefit plans” in Item 8 of this Annual Report on Form 10-K.
As a result of the US Tax Act, the Company recorded provisional amounts in 2017 including a one-time repatriation tax of $76.5 million. The Company elected to pay this repatriation tax in cash over eight years in accordance with the laws prescribed under US Tax Reform. See also “Note 7: Income taxes” in Item 8 of this Annual Report on Form 10-K for more information.
short-term financing. We may from time to time repurchase our debt or take other steps to reduce our debt.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. Our affiliates may also purchase our debt from time to time, through open market purchases or other transactions. During the years ended December 31, 2016 and December 31, 2017, we restructured a significant portion of our long-term debt obligations. These debt amendments extended our debt maturity profile and reduced our future interest payments. Refer to “Note 16:18: Debt” in Item 8 of this Annual Report on Form 10-K for further information.
In connection withOur defined benefit pension plans had an underfunded status of $234.4 million and $212.4 million as of December 31, 2019 and 2018, respectively. Based on current projections of minimum funding requirements, we expect to make cash contributions of $22.9 million to our defined benefit pension plans in 2020. The timing for any such requirement in future years is uncertain given the Nexeo Acquisition,implicit uncertainty regarding the future developments of factors described in “Risk Factors” in Item 1A of this Annual Report on Form 10-K.
As a result of the 2017 US Tax Act, the Company intendsrecorded in 2017 a one-time Section 965 repatriation tax of $76.5 million. After offsetting allowable tax credits, we elected to financepay the cash portionremaining balance of the transaction$14.9 million over eight years, of which $9.2 remains at December 31, 2019.
We expect our 2020 capital expenditures for maintenance, safety and refinance Nexeo’s existing debt with a combination of available cashcost improvements and debt financing,investments in our digital capabilities to be approximately $120 million to $130 million. Interest payments for which the Company has received commitments. The Company entered into a commitment letter, dated September 17, 2018, with Goldman Sachs Bank USA, pursuant2020 are expected to which Goldman committedbe $115 million to provide $1.3 billion of incremental term loans.
Univar$130 million. We expect to fund our capital expenditures and Nexeo have announced an agreement for Nexeo to divest its plastics distribution business to an affiliate of One Rock Capital Partners, LLC for an enterprise value of $640.0 million, subject to customary closing adjustments. If this divestiture is successful, the Company anticipates using the net proceeds to reduce our indebtedness.
While additional indebtedness would increase our interest expensepayments 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 and cash outflow and,capital resource needs for at least in the short term, increase our leverage ratio, the Company believes our increased revenues from the Nexeo Acquisition and any proceeds received from the
divestiture of Nexeo’s plastics business, will be at least sufficient to adequately service our debt and reduce our leverage ratio nearly to 2018 levels.
In February 2019, S&P Global Ratings raised their corporate credit rating on Univar to BB from BB- with a “stable” outlook and Moody’s Investors Service, Inc. raised their corporate credit rating on Univar to Ba3 from B1 with a “stable” outlook. In addition, Fitch initiated a corporate credit rating on Univar of BB with a “positive” outlook.next 12 months under current operating conditions.
Cash Flows
The following table presents a summary of our cash flow activity for the periods set forth below:activity:
|
| | | | | | | | | | | |
| Fiscal Year Ended December 31, |
(in millions) | 2018 | | 2017 | | 2016 |
Net cash provided by operating activities | $ | 289.9 |
| | $ | 282.6 |
| | $ | 450.0 |
|
Net cash used by investing activities | (99.0 | ) | | (79.1 | ) | | (136.0 | ) |
Net cash used by financing activities | (518.3 | ) | | (112.4 | ) | | (166.5 | ) |
Cash Provided by Operating Activities | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
(in millions) | 2019 | | 2018 | | 2017 |
Net cash provided by operating activities | | $ | 363.9 | | | $ | 289.9 | | | $ | 282.6 | |
Net cash used by investing activities | | (433.1) | | | (99.0) | | | (79.1) | |
Net cash provided (used) by financing activities | | 295.2 | | | (518.3) | | | (112.4) | |
Year Ended December 31, 20182019 Compared to Year Ended December 31, 20172018
Cash Provided by Operating Activities
Cash provided by operating activities increased $7.3$74.0 million from $282.6to $363.9 million for the year ended December 31, 2017 to2019 from $289.9 million for the year ended December 31, 2018. The increase is primarily due to a net increasechanges in the changetrade working capital and prepaid expenses and other current assets, partially offset by changes in net working capital,income, exclusive of non-cash items. The change in net income, exclusive of non-cash items, and pensions and other postretirement benefit liabilities, partially offset by increasedprovided net cash outflows of $238.4 million related to other operating activities.
The Company adopted ASC 606 as of January 1, 2018, and although there was no impactreduced cash inflows when compared to total operating cash flows, there were a certain number of presentation changes to specific line itemsthe change in the consolidated balance sheetprior year. Net income, exclusive of non-cash items, provided net cash inflows of $150.0 million and within operating activities in the consolidated statement of cash flows. See “Note 2: Significant accounting policies,”$388.4 million for the impact to the consolidated balance sheet and statement of operations as ofyears ended December 31, 2018.2019 and December 31, 2018, respectively.
Excluding the presentation changes from the adoption
The change in trade working capital, which includes trade accounts receivable, net, inventories, and trade accounts payable, was aprovided net cash inflowinflows of $43.8$233.5 million (or awhen compared to the change in the prior year. Trade working capital provided cash inflowinflows of $14.2$195.1 million including the impacts of ASC 606) for the periodyear end December 31, 2019 compared to cash outflows of $38.4 million for the year ended December 31, 2018 compared2018. Cash inflows from trade accounts receivable, net is attributable to improvements in the period ended December 31, 2017.timing of customer payments and reduced sales volumes, excluding acquisitions, during the current year. Inventory cash inflows on a year-over-year basis are primarily related to prior yearreductions in the USA segment inventories due to reduced sales volumes and favorable supplier partner pricing. The year-over-year cash outflows that produced higher inventories as a result of drought conditions in Canada that led to a soft agriculture season. Cash inflows related to trade accounts receivable, netpayable are primarily dueattributable to prior year cash outflows as result of higher sales anddecreased inventory purchases in the timing of customer payments. The trade accounts payable cash outflows primarily related to prior year cash inflows due to higher purchases and timing of payments.current year.
The change in pensionsprepaid expenses and other current assets is primarily due to payment timing differences and favorable changes in expected product returns from customers. The change in pension and other postretirement benefit liabilities provided cash of $36.4 millionis primarily due to reductionsunfavorable changes in the returnactuarial valuations, partially offset by favorable changes in expected returns on plan assets and increases in actuarial losses when comparingassets.
Cash Used by Investing Activities
Cash used by investing activities increased $334.1 million to $433.1 million for the year ended December 31, 2018 to2019 from $99.0 million for the year ended December 31, 2017.2018. The increase is primarily related to the acquisition of the Nexeo business in 2019, net of the proceeds received for the sale and dispositions of Nexeo Plastics and the Environmental Sciences business. In 2018, the Company acquired Earthoil and Kemetyl. Refer to “Note 9: Employee benefit plans”3: Business combinations” and “Note 4: Discontinued operations and dispositions” in Item 8 of this Annual Report on Form 10-K for additional information.
The remaining cash outflow associated with operating activities of $109.1 million (or a cash outflow of $80.6 million including the impacts of ASC 606) is primarilyinformation related to reductions in current year customer prepayments in the Company’s agriculture business, higher compensation payments during the prior year,Company's acquisitions and prior year changes in the fair value of interest rate swaps.dispositions.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016Cash Provided (Used) by Financing Activities
Cash provided (used) by operatingfinancing activities decreased $167.4increased $813.5 million from $450.0to cash provided of $295.2 million for the year ended December 31, 2016 to $282.6 million for the year ended December 31, 2017.
Cash provided by operating activities increased by $66.4 million due to an increase in net income exclusive of non-cash items in the year ended December 31, 2017 compared to the year ended December 31, 2016. Refer to “Results of Operations” above for additional information.
The change in trade working capital; which includes trade accounts receivable, net, inventories and trade accounts payable; resulted in an increased use of cash of $176.8 million. Trade accounts receivable, net used cash of $58.5 million in the year ended December 31, 2017 and provided cash of $70.2 million in the year ended December 31, 2016. The increase in current year cash outflows is due to higher sales and the timing of customer payments compared to the prior year ended December 31, 2016.
Inventories used cash of $47.7 million in the year ended December 31, 2017 and provided cash of $42.0 million in the year ended December 31, 2016. The current year use of cash is primarily due to higher inventories as a result of drought conditions in Canada that led to a soft agriculture season. Trade accounts payable provided cash inflows of $53.6 million and $12.0 million for the years ended December 31, 2017 and December 31, 2016, respectively. The cash inflows related to trade accounts payable are primarily due to higher purchases and timing of payments.
Cash provided by operating activities related to pensions and other postretirement benefit liabilities decreased $78.7 million, which consisted of cash outflows of $51.8 million for the year ended December 31, 2017 and cash inflows of $26.9 million for the year ended December 31, 2016. The difference in the cash flows between the two respective periods is primarily due to reductions in the actuarial losses and increases in the return on plan assets when comparing the year ended December 31, 2017 to the year ended December 31, 2016. Refer to “Note 9: Employee benefit plans” in Item 8 of this Annual Report on Form 10-K for additional information. The decrease in cash provided by operating activities was also due to a $48.8 million decrease2019 from changes in prepaid expenses and other current assets. In the year ended December 31, 2017, prepaid expenses and other current assets used cash of $8.7 million primarily due to increases in supplier prepayments and sales tax receivables. In the year ended December 31, 2016, prepaid expenses and other current assets provided cash of $40.1 million primarily due to reductions in prepaid expenses related to rebates, deposits and several other insignificant components and the realization of an income tax refund in the amount of $14.1 million.
The remaining cash inflow associated with operating activities of $70.5 million is related to other, net, which consists of cash inflows of $44.6 million for the year ended December 31, 2017 and cash outflows of $25.9 million for the year ended December 31, 2016. The cash inflows for the year ended December 31, 2017 were primarily related to increases in accrued compensation, debt refinancing costs and several other insignificant components. The cash outflows for the year ended December 31, 2016 were primarily related to reductions in restructuring reserves, reductions in environmental reserves, increases in derivative assets and reductions in miscellaneous other liabilities, which were partially offset by increases in customer prepayments, sales taxes payable and several other insignificant components.
Cash Used by Investing Activities
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Cash used by investing activities increased $19.9 million from $79.1 million for the year ended December 31, 2017 to $99.0 million for the year ended December 31, 2018. The increase primarily relates to lower proceeds from the sale of property, plant and equipment of $14.7 million, primarily attributable to the prior year sale and subsequent leaseback of an operating facility within the Canadian business segment. Capital expenditures increased by $11.9 million in the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase in capital expenditures is primarily due to a land purchase within the Canadian business segment.
Partially offsetting the increase in cash used by investing activities were lower acquisition costs of $5.8 million. In 2017, cash outflows of $24.4 million were related to the acquisitions of Tagma Brazil, certain assets of PVS, and Nexus Ag purchase accounting adjustments. The 2018 net cash outflows of $18.6 million were related to cash outflows from the Earthoil and Kemetyl acquisitions, partially offset by cash inflows due to Tagma purchase accounting adjustments.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Cash used by investing activities decreased $56.9 million from $136.0 million for the year ended December 31, 2016 to $79.1 million for the year ended December 31, 2017. The decrease primarily relates to lower acquisition costs of $29.2 million in the year ended December 31, 2017 compared to the year ended December 31, 2016. We completed two acquisitions in each of the years ended December 31, 2017 and December 31, 2016. Refer to “Note 19: Business combinations” in Item 8 of this Annual Report on Form 10-K for additional information. Proceeds from the sale of property, plant and equipment increased by $19.8 million in the year ended December 31, 2017 compared to the year ended December 31, 2016, which was primarily due to the sale and subsequent leaseback of an operating facility within the Canadian business segment. In addition, capital expenditures decreased by $7.4 million in the year ended December 31, 2017 compared to the year ended December 31, 2016. The decrease in capital expenditures is primarily due to timing of capital projects. The remaining decrease in cash used by investing activities of $0.5 million did not contain any significant activity.
Cash Used by Financing Activities
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Cash used by financing activities increased $405.9 million from $112.4 million for the year ended December 31, 2017 to $518.3 million for the year ended December 31, 2018. The increase in financing cash used by financing activitiesflows is primarily due to an early repayment of $530.0 million onraising additional debt to finance the Company’s Senior Term B LoanFebruary 2019 Nexeo acquisition and debt refinancing activities that occurred during the period ended December 31, 2018.fourth quarter of 2019. The
early repayment of the Company’s Senior Term B Loan was increase in financing activities were partially offset by increased borrowings on the ABL facilities to fund the early payments and address seasonal working capital needs.
Cash used by financing activities also increased by $30.6 million due to fewer stock option exercises for the period ended December 31, 2018 compared to the period ended December 31, 2017. Partially offsetting the increased use of cashdebt repayments primarily due to the exercisesale of stock options was cash provided of $4.4 million relatedNexeo Plastics, where proceeds were used to taxes paid for the net share settlements of stock-based compensation awards.
The change in short-term financing, net resulted in cash inflows of $22.7 million primarily due to repayments during the period ended December 31, 2017.
Additionally, there were cash inflows of $3.3 million pertaining to acquisition related contingent consideration payments, which primarily related to cash outflow of $3.7 million for the period ended December 31, 2017. The Company reclassified the 2017 contingent consideration payments due to the adoption of ASU 2016-15 “Statement of Cash Flows” (Topic 230) - “Classification of Certain Cash Receiptspay down debt, and Cash Payments.”2019 fourth quarter refinancing activities. Refer to “Note 2: Significant accounting policies” in Item 8 of this Form 10-K for additional information.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Cash used by financing activities decreased $54.1 million from $166.5 million for the year ended December 31, 2016 to $112.4 million for the year ended December 31, 2017. A decrease in cash used by financing activities of $79.0 million was due to a net change in the cash used by the ABL facilities of $63.6 million and $142.6 million for the years ended December 31, 2017 and December 31, 2016, respectively. The change in the outstanding ABL facilities is due to changes in borrowings related to working capital funding requirements. Partially offsetting the decrease in cash used by financing activities are $13.3 million of cash outflows due to repayments of term debt; primarily inclusive of the Term B Loan and Euro Tranche Term Loan. The January 19, 2017 and November 28, 2017 agreements to amend the Senior Term B loan resulted in a net cash outflow of $4.4 million and $3.3 million of financing fees, respectively. Refer to “Note 16:18: 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 of December 31, 2019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payment Due by Period | | | | | | | | |
(in millions) | Total | | 2020 | | 2021 - 2022 | | 2023 - 2024 | | Thereafter |
Short-term financing (1) | $ | 0.7 | | | $ | 0.7 | | | $ | — | | | $ | — | | | $ | — | |
Finance leases | 74.6 | | | 22.6 | | | 34.6 | | | 11.1 | | | 6.3 | |
Long-term debt, including current maturities (1) | 2,668.9 | | | 4.0 | | | 138.9 | | | 1,646.0 | | | 880.0 | |
Interest (2) | 560.4 | | | 111.7 | | | 204.5 | | | 159.9 | | | 84.3 | |
Minimum operating lease payments | 185.2 | | | 53.6 | | | 73.1 | | | 33.8 | | | 24.7 | |
Estimated environmental liability payments (3) | 84.3 | | | 25.0 | | | 19.1 | | | 12.9 | | | 27.3 | |
2017 US repatriation tax | 9.2 | | | — | | | 2.5 | | | 6.7 | | | — | |
Other (4) | 112.6 | | | 54.6 | | | 28.0 | | | 30.0 | | | — | |
Total (5) | $ | 3,695.9 | | | $ | 272.2 | | | $ | 500.7 | | | $ | 1,900.4 | | | $ | 1,022.6 | |
| | | | | | | | | |
(1)See “Note 18: Debt” in Item 8 of this Annual Report on Form 10-K for additional information. Increased
(2)Interest payments on debt are calculated for future periods using interest rates in effect as of December 31, 2019 and obligations on that date. Projected interest payments include the related effects of interest rate swap agreements. 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.
(3)Included in the less than one year category is $11.7 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.
(4)Commitments related to capital leases resultedexpenditures and other contractual obligations.
(5)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 $22.9 million to our defined benefit pension plans in increased cash usage due to financing activities of $3.1 million.
Cash used by financing activities also decreased by $19.6 million due to a net increase in stock option exercises of $36.5 million and $16.9 million for the years ended December 31, 2017 and December 31, 2016, respectively. Partially offsetting the increase in cash due to the exercise of stock options was cash used for taxes paid related to net share settlements of stock-based compensation awards of $8.5 million, which was related to the year ended December 31, 2017.2020. The changetiming for any such requirement in short-term financing, net resultedfuture years is uncertain given the implicit uncertainty regarding the future developments of factors described in an increased usage“Risk Factors” in Item 1A of cash related to financing activitiesthis Annual Report on Form 10-K and “Note 11: Employee benefit plans” in Item 8 of $17.6 million due to increased repayments. Short-term financing, net used cashthis Annual Report on Form 10-K.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations that require us to make future cash payments as of December 31, 2018. The future contractual requirements include payments required for our operating and capital leases, indebtedness and other long-term liabilities reflected on our balance sheet.
|
| | | | | | | | | | | | | | | | | | | |
| Payment Due by Period |
(in millions) | Total | | 2019 | | 2020 - 2021 | | 2022 - 2023 | | Thereafter |
Short-term financing (1) | $ | 8.1 |
| | $ | 8.1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Capital leases (1) | 54.8 |
| | 21.7 |
| | 21.6 |
| | 10.4 |
| | 1.1 |
|
Long-term debt, including current maturities (1) | 2,340.5 |
| | — |
| | 134.7 |
| | 458.0 |
| | 1,747.8 |
|
Interest (2) | 581.3 |
| | 110.3 |
| | 220.8 |
| | 209.0 |
| | 41.2 |
|
Minimum operating lease payments | 196.2 |
| | 54.9 |
| | 70.4 |
| | 40.9 |
| | 30.0 |
|
Estimated environmental liability payments (3) | 88.6 |
| | 32.1 |
| | 19.1 |
| | 13.5 |
| | 23.9 |
|
Total (4)(5) | $ | 3,269.5 |
| | $ | 227.1 |
| | $ | 466.6 |
| | $ | 731.8 |
| | $ | 1,844.0 |
|
| | | | | | | | | |
| |
(1) | See “Note 16: Debt” in Item 8 of this Annual Report on Form 10-K for additional information. |
| |
(2) | Interest payments on debt are calculated for future periods using interest rates in effect as of December 31, 2018. Projected interest payments include the related effects of interest rate swap agreements. 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. The projected interest payments only pertain to obligations and agreements outstanding at December 31, 2018. See “Note 16: Debt” and “Note 18: Derivatives” in Item 8 of this Annual Report on Form 10-K for further discussion regarding our debt instruments and related interest rate agreements, respectively. |
| |
(3) | Included in the less than one year category is $11.4 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 20: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K. |
| |
(4) | Due to the high degree of uncertainty related to the timing of future cash outflows associated with unrecognized income tax benefits, we are unable to reasonably estimate beyond one year when settlement will occur with the respective taxing authorities and have excluded such liabilities from this table. At December 31, 2018, we reported a liability for unrecognized tax benefits of $0.4 million. For more information see “Note 7: Income taxes” in Item 8 of this Annual Report on Form 10-K. |
| |
(5) | 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 $28.3 million to our defined benefit pension plans in the year ended December 31, 2019. 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 9: 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 obligations and commitments with proceeds from available borrowing capacity under our New Senior ABL Facility or under future financings.
Off-Balance Sheet Arrangements
We have few off-balance sheet arrangements. In recent years, our principalWith the exception of letters of credit, we had no material off-balance sheet arrangements have consisted primarilyas of operating leases for facility space, rail carsDecember 31, 2019.
Critical Accounting Estimates
Preparation of our financial statements requires management to make estimates and some equipment leasing. Asassumptions that affect the reported amounts of January 1, 2019, operating leases will be recognized on the balance sheet due to the adoption of ASU 2016-02, refer toassets, 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. For additional information regarding operating leases, see “Note 20: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K. We do not use special purpose entities that would create off-balance sheet financing.
Critical Accounting Estimates
General
Preparation of our financial statements in accordance with GAAP requires management to make a number of significant estimates and assumptions that form the basis for our determinations as to the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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. We believe that the followingOur critical accounting estimates reflect ourare as follows:
Goodwill
We perform an annual impairment assessment of goodwill at the reporting unit level as of October 1 of each year, or more significant estimatesfrequently if indicators of potential impairment exist. The analysis may include both qualitative and assumptionsquantitative factors to assess the likelihood of an impairment. The reporting unit’s carrying value used in an impairment test represents the preparationassignment of our consolidatedvarious assets and liabilities, excluding certain corporate assets and liabilities, such as cash, investments, and debt.
Qualitative factors include industry and market considerations, overall financial statements. Our significant accounting policies are described in “Note 2: Significant accounting policies” in Item 8performance, and other relevant events and factors affecting the reporting unit. Additionally, as part of this Annual Report on Form 10-K.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.
Revenue Recognition
We recognize revenue when performance obligations underOur quantitative impairment test considers both the terms ofincome approach and the contract are satisfied, which generally occurs when goods are transferred to a customer or as services are provided to a customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services to customers. Net sales includes product sales, billings for freight and handling charges and fees earned for services provided, net of discounts, expected returns, customer rebates, variable consideration and sales or other revenue-based taxes. We recognize product sales and billings for freight and handling charges when products are considered delivered to the customer under the terms of the sale.
We are requiredmarket approach to estimate variable considerationa reporting unit’s fair value. Significant estimates include forecasted EBITDA, market segment growth rates, estimated costs, and customer returns related to revenue transactions, which limits reported revenues to the amount of consideration that is ultimately expected to be collected from customers. Specific to the crop sciences revenue stream, transaction prices may move during an agricultural growing season and changes may affect the amount of consideration the Company will receive. We estimates the revenue deferral related to variable consideration, transaction price, and customer returnsdiscount 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 combination of historical experience, current market conditions and the impact of weather on the current agriculture season.
Goodwill
Goodwill is tested for impairment annually, or between annual tests if an event occurs or circumstances change that would more likely than not reduce theestimated fair value of a reporting unit, below itsand therefore, impact the excess fair value above carrying amount. Goodwill is tested for impairment at a reporting unit level using either a qualitative assessment, commonly referred to as a “step zero” test, or a quantitative assessment,
commonly referred to as a “step one” test. For eachvalue of the reporting units,unit.
We test the Company hasreasonableness of the option to perform eitherinputs and outcomes of our discounted cash flow analysis against available market data. In the step zero or the step one test.
The step zero goodwill impairment test utilizes qualitative factors to determine whether it is more likely than not thatcurrent year, the fair value of the reporting units is less than its carrying value. Qualitative factors include: macroeconomic conditions; legal and regulatory environment; industry and market considerations; overall financial performance and cost factors to determine whether aCanada reporting unit, is at risk for goodwill impairment. Inexceeded the event a reporting unit fails the step zerocarrying value by 11 percent. Key assumptions in our goodwill impairment test it is necessary to performinclude an 11 percent estimated WACC for the step one goodwill impairment test.Canada business and a residual growth rate of 2.5 percent. A 100 basis point change in the discount rate and a terminal growth assumption of zero would not have reduced the fair values of the Canada reporting unit below carrying value. The fair value for all other reporting units substantially exceeds their carrying value.
The step one goodwill impairment test comparesBusiness Combinations
We allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on their estimated fair valuevalues at the time of each reporting unit with the reporting unit’s carrying value (including goodwill). Ifacquisition. This allocation involves a number of assumptions, estimates, and judgments in determining the fair value, as of the reporting unit is less than its carrying value,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 unit will recognize an impairmentunits of the business that are expected to benefit from the business combination.
Purchase Accounting for the lesserNexeo Solutions Acquisition
Our acquisition of eitherNexeo Solutions in 2019 was accounted for with ASC Topic 805, Business Combinations, as amended. As of December 31, 2019, the amount by which the reporting unit's carrying amount exceeds the fair valueallocation of the reporting unit orpurchase price to the reporting unit’s goodwill carrying value.acquired assets and assumed liabilities was considered preliminary. See “Note 13: Goodwill and intangible assets”3: Business combinations” in Item 8 of this Annual Report on Form 10-K for additional information related to goodwill.
At October 1, 2018, we performed our annual impairment review via step one and concluded the fair value exceeded the carrying value for all reporting units with goodwill balances. There were no events or circumstances from the date of assessment through December 31, 2018 that would affect this conclusion.information.
Determining the fair value of a reporting unitassets acquired and liabilities assumed requires management’s judgment, and involveswe utilized an independent valuation expert in the usevaluation of significantthe tangible and intangible assets. Critical estimates used in valuing tangible and assumptions by management. The inputs that create the most sensitivity in our goodwill valuation modelintangible assets include, but are the discount rate, terminal growth rate, estimated cash flow projections and market multiples. We can provide no assurance that a material impairment charge will not occur in alimited to, future period. Our estimates of futureexpected cash flows, may differ from actualdiscount 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 that are subsequently realized duediscounted 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 many factors, including future worldwide economic conditions and19.0 percent, depending on the expected benefits of our initiatives. Any of these potential factors, or other unexpected factors, may cause us to re-evaluate the carrying value of goodwill.country.
Environmental Liabilities
As more fully described in “Note 2: Significant accounting policies” and “Note 20: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K, weWe recognize environmental contingency liabilities for probable and reasonably estimable losses associated with environmental remediation. The estimated environmental contingency liability includes incremental direct costs of investigations, remediation efforts and post-remediation monitoring. The total environmental reserve at December 31, 2019 and 2018 was $78.7 million and 2017 was $83.5 million, respectively. See “Note 21: Commitments and $89.2 million, respectively.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 accurately 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, the choice of remediationour insurance coverage for these sites and, in the case of sites with multiple responsible parties, the number and financial strength of other potentially responsiblethose parties. In addition, our determination as to whether a loss is probable may change, particularly as new facts emerge as to the nature or extentcauses of any non-compliance withcontamination. We evaluate each environmental lawssite as new information and the costsfacts become available and make adjustments to reserves based upon our assessment of assessmentthese factors, using technical experts, legal counsel and remediation. Our revisions to the environmental reserve estimates have ranged between $12.3 million to $12.6 million between 2017 and 2018.other specialists.
Defined Benefit Pension and Other Postretirement Obligations
As described more fully in “Note 2: Significant accounting policies” and “Note 9: Employee benefit plans” in Item 8 of this Annual Report on Form 10-K, weWe sponsor defined benefit pension plans in the US and various other countries. We determineThe accounting for these pension costsplans depends on assumptions made by management, which are used by actuaries we engage to calculate the projected and accumulated benefit obligations using actuarial methodologies that use several statistical and judgmental factors.the annual expense recognized for these plans. These assumptions include discount rates, rates for expected return on assets, mortality rates,and retirement rates and for somecertain plans, rates for compensation increases, as determined by us within certain guidelines.increases. Actual experience different from those estimated and changes in 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 orand 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 ended December 31, 2019 and 2018, we increased our average pension discount rate by 46 basis points, resultingrecorded a mark to market loss of $50.9 million and $34.9 million, respectively. See “Note 11: Employee benefit plans” in a decrease in our pension plan benefit obligationItem 8 of $81.1 million. For the year ended December 31, 2017, our average pension discount rate decreased by 42 basis points, resulting in an increase in our pension plan benefit obligation of $63.2 million. Our expected long-term rate of returnthis Annual Report on pension plan assets is 5.54% and 6.02%Form 10-K for 2018 and 2017, respectively. Actual returns can vary from the expected long-term rate each year. Actual (losses) returns for 2018 and 2017 were ($59.6) million, or (5.4)%, and $117.4 million or 11.7%, respectively. Our expected return on plan assets is calculated using the actual fair value of plan assets. additional information.
Due to the phasing out of benefits under our postretirement benefit plan,plans, changes in assumptions have an immaterial effect on that obligation.
The following table demonstrates the impact of a 25 basis point reductionA change in the average pension discount rate on our pension plan benefit obligation as of the year ended December 31, 2018.
|
| | | |
(in millions) | 2018 Pension Benefit Obligation |
25 basis point decrease in discount rate | $ | 40.8 |
|
The following table demonstrates the impact of a 25 basis point decrease in our assumed discount rate and separately a 100 basis point decrease in our expected return on plan assets on our 2019 defined benefit pension cost (credit).asset rate would have the following effects:
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| | | |
(in millions) | 2019 Net Benefit Cost (Credit) |
25 basis point decrease in assumed discount rate | $ | (1.3 | ) |
100 basis point decrease in expected return on plan assets | 9.0 |
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| | | Increase (decrease) in | | |
(in millions) | Percentage Change | | 2020 Net Benefit Cost | | 2019 Pension Benefit Obligation |
Discount rate | 25 bps decrease | | $ | (2.0) | | | $ | 51.4 | |
Discount rate | 25 bps increase | | 1.8 | | | (48.4) | |
Expected return on plan assets | 100 bps decrease | | 10.4 | | | N/A |
Expected return on plan assets | 100 bps increase | | (10.4) | | | N/A |
Income Taxes
The Company is subject to income taxes in the jurisdictions in which it sells products and earn revenues, includingrevenues. We record income taxes under the United States, Canadaasset and various Latin American, Asian-Pacificliability method. Under this method, deferred tax assets and European jurisdictions. Byliabilities are recognized based on the future tax consequences to temporary differences between the financial statement carrying values of existing assets and liabilities and their nature, a numberrespective 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 Company'scarrying values of deferred tax positions require significant judgment in order to properly evaluate and quantify tax positions and to determineassets by a valuation allowance is required if, based on the provision for income taxes. GAAP sets forth a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence, indicates that it is more likely than not that the positionsuch assets will not be sustained upon examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. GAAP specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions and also requires expanded disclosures. See “Note 7: Income taxes” in Item 8 of this Annual Report on Form 10-K.
Although the Company believes it has adequately reserved for uncertain tax positions, the final outcome of these tax matters may be different than the provision. The Company adjusts its reserves for tax positions in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, the differences are recorded as adjustments to the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. The interest and penalties related to these reserves are recorded as a component of interest expense and warehousing, selling and administrative expenses, respectively.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act. The legislation significantly changes US tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act permanently reduced the US corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The SAB 118 measurement period ends when a company has obtained, prepared, and analyzed the information needed to complete the accounting requirements under ASC 740, “Income Taxes”, but no later than one year from the enactment date of December 22, 2017. In 2017 and the first nine months of 2018, the Company recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because the Company had not yet completed its enactment-date accounting for these effects. At December 31, 2018, the Company has now completed its accounting for all the enactment-date income tax effects of the Act. During 2018, the Company recognized adjustments of $6.8 million related to the provisional amounts recorded at December 31, 2017 and included these adjustments as a component of income tax expense from continuing operations.
Effective in 2018, the Company is subject to global intangible low tax income (“GILTI”) which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Due to the complexity of the GILTI tax rules, companies are allowed to make an accounting policy choice of either (1) treating taxes due on future US inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into a company’s measurement of its deferred taxes. The Company is electing to treat taxes due on future US inclusions in taxable income related to GILTI as a current-period expense when incurred and, therefore, there is no impact to the deferred tax rate in 2018.
The Company's future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, the Company is subject to examination of income tax returns by various tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provisions for income taxes.
The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. Significant judgment in the forecasting of taxable income using historical and projected future operating results is required in determining our provision for income tax and the related asset and liabilities.
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 the 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 operations and consolidated balance sheets.
The Company recorded a valuation allowance on certain deferred tax assets, including certain of its foreign net operating loss carry forwards, foreign tax credits and deferred interest expense.
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, forecastforecasted and appropriate character of future market growth, forecasted earnings, future taxable income, the duration of statutory carryforward periods, our experience with operating loss and prudenttax credit carryforwards not expiring unused and feasible tax planning 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.
The assumptions utilizedEffective in determining future taxable income require significant judgment and are consistent with the plans and estimates2018, the Company is usingsubject to manageglobal intangible low tax income (“GILTI”), which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We elect to treat taxes due on future US inclusions in taxable income related to GILTI as a current-period expense when incurred and during the underlying businesses. The Company believes it is more likely than not that the remaining deferred tax assetsyear ended December 31, 2019 and 2018, we recorded on the balance sheet will ultimately be realized. In the event the Company determined that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment$22.8 million and $19.9 million, respectively, due to the deferred tax assets would be charged to earnings in the period in which the Company makes such determination.impact of GILTI.
Recently Issued and Adopted Accounting Pronouncements
See “Note 2: Significant accounting policies” in Item 8 of this Annual Report on Form 10-K.
Accounting Pronouncements Issued But Not Yet AdoptedNon-GAAP Financial Measures
SeeWe 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 (loss) income, 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 2: Significant accounting policies”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), 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 and Brazil 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.
The following is a quantitative reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net (loss) income:
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| Year ended December 31, | | | | | | | | |
(in millions) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Net (loss) income | $ | (100.2) | | | $ | 172.3 | | | $ | 119.8 | | | $ | (68.4) | | | $ | 16.5 | |
Net (income) loss from discontinued operations | (5.4) | | | — | | | — | | | — | | | — | |
Depreciation and amortization | 214.7 | | | 179.5 | | | 200.4 | | | 237.9 | | | 225.0 | |
Interest expense, net | 139.5 | | | 132.4 | | | 148.0 | | | 159.9 | | | 207.0 | |
Income tax expense (benefit) from continuing operations | 104.5 | | | 49.9 | | | 49.0 | | | (11.2) | | | 10.2 | |
EBITDA | $ | 353.1 | | | $ | 534.1 | | | $ | 517.2 | | | $ | 318.2 | | | $ | 458.7 | |
Acquisition and integration related expenses | 152.1 | | | 22.0 | | | 3.1 | | | 5.5 | | | 7.1 | |
Saccharin legal settlement | 62.5 | | | — | | | — | | | — | | | — | |
(Gain) loss on sale of business, property, plant and equipment and other assets (1) | (51.3) | | | 2.0 | | | (11.3) | | | (0.7) | | | (2.8) | |
Pension mark to market loss (2) | 50.4 | | | 34.2 | | | 3.8 | | | 68.6 | | | 21.1 | |
Pension curtailment and settlement gains (2) | (1.3) | | | — | | | (9.7) | | | (1.3) | | | (4.0) | |
Non-operating retirement benefits (2) | (2.2) | | | (11.0) | | | (9.9) | | | (15.3) | | | (26.8) | |
Restructuring, employee severance and other facility closure costs (3) | 40.9 | | | 21.2 | | | 13.6 | | | 8.0 | | | 33.8 | |
Stock-based compensation expense | 25.1 | | | 20.7 | | | 19.7 | | | 10.4 | | | 7.5 | |
Loss (gain) on undesignated derivative contracts (6) | 26.7 | | | (1.1) | | | 1.9 | | | (8.3) | | | 10.7 | |
Loss on extinguishment of debt and debt refinancing costs (4) | 21.0 | | | 0.1 | | | 9.1 | | | — | | | 28.6 | |
Brazil VAT recovery | (8.3) | | | — | | | — | | | — | | | — | |
Foreign currency (gains) losses (6) | (7.4) | | | 7.5 | | | 22.5 | | | 14.3 | | | (8.1) | |
Impairment charges (5) | 7.0 | | | — | | | — | | | 133.9 | | | — | |
Inventory step-up adjustment | 5.3 | | | — | | | — | | | — | | | — | |
Other operating and non-operating expenses (3)(6) | 30.6 | | | 10.7 | | | 10.4 | | | 8.7 | | | 18.5 | |
Business transformation costs | — | | | — | | | 23.4 | | | 5.4 | | | — | |
Contract termination and advisory fees to CVC & CD&R | — | | | — | | | — | | | — | | | 29.0 | |
Adjusted EBITDA | $ | 704.2 | | | $ | 640.4 | | | $ | 593.8 | | | $ | 547.4 | | | $ | 573.3 | |
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(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 on December 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 2019, the pension mark to market loss of $50.4 million reflects a measurement loss of $169.1 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 $118.7 million attributable to the performance of plan assets during 2019. 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 ended December 31, 2019.
(6)Refer to “Note 8: Other expense, net” in Item 8 of this Annual Report on Form 10-K for more information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Risk Management Objectives and Policies
OurThe principal risks arising from our financial instruments other than derivatives, comprise credit facilitiesare interest rate and other long-term debt as well as cash and cash equivalents. We have various other financial instruments, such as accounts receivable and accounts payable, which arise directly from our operations. We make use of various financial instruments under a financial policy.foreign currency risk. We use derivative financial instruments to reduce exposure to fluctuations in foreign exchange rates and interest rates in certain limited circumstances described below. While these derivative financial instruments are subject to market risk, principally based on changes in currency exchange and interest rates, the impact of these changes on our financial position and results of operations is generally offset by a corresponding change in the financial or operating items we are seeking to hedge. We follow a strict policy that prohibits trading in financial instruments other than to acquire
and manage these hedging positions. We do not hold or issue derivative or other financial instruments for speculative purposes, or to hedge translation risk.
The principal risks arising from our financial instruments are interest rate risk, product price risk, foreign currency risk and credit risk. Our board of directors reviews and approves policies designed to manage each of these risks, which are summarized below. We also monitor the market-price risk arising from all financial instruments. The interest rate risk to which we are subject at year end is discussed below. Our accounting policies for derivative financial instruments are set out in our summary of significant accounting policies at “Note 2: Significant accounting policies” in Item 8 of this Annual Report on Form 10-K.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. Under our hedging policy, we seek to maintain an appropriate amount of fixed-rate debt obligations, either directly or effectively through interest rate derivative contracts that fix the interest rate payable on all or a portion of our floating rate debt obligations. We assess the anticipated mix of the fixed versus floating amount of debt once a year, in connection with our annual budgeting process, with the purpose of hedging variability of interest expense and interest payments on our variable rate bank debt and maintaining a mix of both fixed and floating rate debt. As of December 31, 2018,2019, approximately 81% of our debt was fixed rate after consideration of interest rate swap contracts.
The interest rates related to our long-term debt decreased since December 31, 2016 due to the January 2017 and November 2017 debt amendments. Refer to “Note 16:18: Debt” in Item 8 of this Annual Report on Form 10-K for additional information. As a result, the impact on our earnings before taxes has materially changed when considering a change in variable interest rates.
Below is a chart showing the sensitivity of both a 100 basis point and 200 basis point increase in interest rates (including the impact of derivatives), with other variables held constant on our earnings before tax.
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(in millions) | Year Ended December 31, 2018 |
100 basis point increase in variable interest rates | $ | 4.4 |
|
200 basis point increase in variable interest rates | 9.0 |
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| | | | | |
(in millions) | Year Ended December 31, 2019 |
100 basis point increase in variable interest rates | $ | 5.2 | |
200 basis point increase in variable interest rates | 10.4 | |
Foreign Currency Risk
Because we conduct our business on an international basis in multiple currencies, we may be adversely affected by foreign exchange rate fluctuations. Although we report financial results in US dollars, a substantial portion of our net sales and expenses are denominated in currencies other than the US dollar, particularly the euro, the Canadian dollar and European currencies other than the euro, including the British pound sterling. Fluctuations in exchange rates could therefore significantly affect our reported results from period to period as we translate results in local currencies into US dollars. We have not used derivative instruments to hedge the translation risk related to earnings of foreign subsidiaries.
Additionally, our investments in EMEA, Canada and Rest of WorldLATAM are subject to foreign currency risk. Currency fluctuations result in non-cash gains and losses that do not impact income before income taxes, but instead are recorded as accumulated other comprehensive loss in equity in our consolidated balance sheet. We do not hedge our investment in non-US entities because those investments are viewed as long-term in nature.
The majority of our currency risk arising on cash, accounts receivable, accounts payable and loan balances denominated in currencies other than those which we record the financial results for a business operation stem from exposures to the US dollar, euro or British pound sterling. The following table illustrates the sensitivity of our 20182019 consolidated earnings before income taxes (including the impact of foreign currency derivative instruments), to a 10% increase in the value of the US dollar, euro, and British pound sterling with all other variables held constant.
| | | | | |
(in millions) | Year ended December 31, 2019 |
10% strengthening of US dollar | $ | 2.3 | |
10% strengthening of Euro | (0.4) | |
10% strengthening of British pound | (0.3) | |
|
| | | |
(in millions) | Year ended December 31, 2018 |
10% strengthening of US dollar | $ | (1.8 | ) |
10% strengthening of Euro | 0.6 |
|
10% strengthening of British pound | (0.3 | ) |
Product Price Risk
Credit Risk
We have a credit policy in place and monitor exposure to credit risk on an ongoing basis. We perform credit evaluations on all customers requesting credit above a specified exposure level. In the normal course of business, we provide credit to our customers, perform ongoing credit evaluations of these customers and maintain reserves for potential credit losses. In certain situations, we will require upfront cash payment, collateral and/or personal guarantees based on the credit worthiness of the customers. We typically have limited risk from a concentration of credit risk as no individual customer represents greater than 10% of the outstanding accounts receivable balance.
Investments, if any, are only in liquid securities and only with counterparties with appropriate credit ratings. Transactions involving derivative financial instruments are with counterparties with which we have a signed netting agreement and which have appropriate credit ratings. We do not expect any counterparty to fail to meet its obligations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Univar Solutions Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Univar Solutions Inc. as of December 31, 20182019 and 2017,2018, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 20182019 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20182019 and 2017,2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework and our report dated February 21, 201925, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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| Environmental Liabilities |
Description of the Matter | At December 31, 2019, the Company’s environmental liability balance was $78.7 million. As discussed in Note 21 of the financial statements, the Company is subject to various federal, state and local environmental laws and regulations that require environmental assessment or remediation efforts (collectively “environmental remediation work”) at approximately 130 locations. In determining the appropriate level of environmental reserves, the Company considers several factors such as information obtained from investigatory studies; required scope and estimated costs of remediation; the interpretation, application and enforcement of laws and regulations; the development of alternative cleanup technologies and methods; and the level of the Company’s responsibility for remediating at various sites. |
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| Auditing management’s accrual for environmental liabilities was especially challenging because it involves judgmental underlying assumptions, including remediation methods, remediation time horizon and remediation cost estimates. These assumptions have a significant effect on the accrual for environmental liabilities. |
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How we addressed the Matter in Our Audit | We tested management’s controls that address the risks of material misstatement relating to the measurement and valuation of the environmental liabilities. For example, we tested controls over management’s review of the environmental liability calculations and, the significant assumptions and the data inputs provided to management’s specialists. |
| |
| To test the accrual for environmental liabilities, we involved our specialist to assist us in evaluating the reasonableness of the Company’s calculation and underlying assumptions. We performed audit procedures that included, among others, assessing key methodologies and testing the significant assumptions and the underlying data used by the management’s specialists. For example, we tested the site’s current remediation status and remediation strategy, which included an analysis of the site’s remediation timeline, regulatory requirements, remediation actions and related technologies and eligibility for discounting. In addition, we performed a search of various data sources for any unidentified environmental liabilities for which the Company may be a potential responsible party. |
| |
| Accounting for Nexeo Solutions Acquisition |
Description of the Matter | During 2019, the Company completed its acquisition of Nexeo Solutions, Inc (Nexeo) for net consideration of $1,814.8 million, as discussed in Note 3 to the consolidated financial statements. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. Assets acquired included intangible assets representing customer relationships of approximately $138.7 million. |
| |
| Auditing the Company’s accounting for its acquisition of Nexeo was complex due to the highly judgmental nature of the significant assumptions used to estimate the fair value of the intangible assets including the discount rates and certain assumptions that form the basis of the forecasted results such as sales growth rates, percentage of revenue attributable to customer relationships, customer attrition rates, and EBITDA margin. These significant assumptions are forward looking and could be affected by future economic and market conditions. |
| |
How we addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for determining the fair value of the acquired intangible assets, including controls over management’s review of the significant assumptions described above. |
| |
| To test the estimated fair value of the acquired intangible assets, we performed audit procedures that included, among others, evaluating the Company’s use of the income approach which utilized the excess earnings method and testing the significant assumptions used in the model, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market and economic trends, to the assumptions used to value similar assets in other acquisitions, to the historical results of the acquired business and to other guidelines used by companies within the same industry. We compared the prospective financial information for consistency with other prospective financial information prepared by the Company. We involved our specialists to assist in our evaluation of the significant assumptions described above. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2010.
Chicago, Illinois
February 21, 201925, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Univar Solutions Inc.
Opinion on Internal Control over Financial Reporting
We have audited Univar Solutions Inc.’s internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Univar Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2019, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Nexeo Solutions, Inc., which is included in the 2019 consolidated financial statements of the Company and constituted 32.5% total assets, as of December 31, 2019 and 16% of revenues, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Nexeo Solutions Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 20182019 consolidated financial statements of Univar Solutions Inc. and our report dated February 21, 2019,25, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment ofReport on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and applicable rules and regulation of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitation of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
February 21, 201925, 2020
UNIVAR SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | | | |
(in millions, except per share data) | Note | | 2019 | | 2018 | | 2017 |
Net sales | | | $ | 9,286.9 | | | $ | 8,632.5 | | | $ | 8,253.7 | |
Cost of goods sold (exclusive of depreciation) | | | 7,146.1 | | | 6,732.4 | | | 6,448.2 | |
Operating expenses: | | | | | | | |
Outbound freight and handling | | | 364.8 | | | 328.3 | | | 292.0 | |
Warehousing, selling and administrative | | | 1,068.8 | | | 931.4 | | | 919.7 | |
Other operating expenses, net | 6 | | | 298.2 | | | 73.5 | | | 55.4 | |
Depreciation | | | 155.0 | | | 125.2 | | | 135.0 | |
Amortization | | | 59.7 | | | 54.3 | | | 65.4 | |
Impairment charges | 16 | | 7.0 | | | — | | | — | |
Total operating expenses | | | $ | 1,953.5 | | | $ | 1,512.7 | | | $ | 1,467.5 | |
Operating income | | | | $ | 187.3 | | | $ | 387.4 | | | $ | 338.0 | |
Other (expense) income: | | | | | | | |
Interest income | | | 7.7 | | | 3.2 | | | 4.0 | |
Interest expense | | | (147.2) | | | (135.6) | | | (152.0) | |
Gain on sale of business | 4 | | | 41.4 | | | — | | | — | |
Loss on extinguishment of debt | 18 | | | (19.8) | | | (0.1) | | | (3.8) | |
Other expense, net | | 8 | | | (70.5) | | | (32.7) | | | (17.4) | |
Total other expense | | | | $ | (188.4) | | | $ | (165.2) | | | $ | (169.2) | |
(Loss) income before income taxes | | | | (1.1) | | | 222.2 | | | 168.8 | |
Income tax expense from continuing operations | | 9 | | | 104.5 | | | 49.9 | | | 49.0 | |
Net (loss) income from continuing operations | | | | $ | (105.6) | | | $ | 172.3 | | | $ | 119.8 | |
Net income from discontinued operations | | 4 | | | $ | 5.4 | | | $ | — | | | $ | — | |
Net (loss) income | | | | $ | (100.2) | | | $ | 172.3 | | | $ | 119.8 | |
| | | | | | | |
(Loss) income per common share: | | | | | | | | |
Basic from continuing operations | 10 | | | $ | (0.64) | | | $ | 1.22 | | | $ | 0.85 | |
Basic from discontinued operations | 10 | | | 0.03 | | | — | | | — | |
Basic (loss) income per common share | | | | $ | (0.61) | | | $ | 1.22 | | | $ | 0.85 | |
Diluted from continuing operations | 10 | | | $ | (0.64) | | | $ | 1.21 | | | $ | 0.85 | |
Diluted from discontinued operations | 10 | | | 0.03 | | | — | | | — | |
Diluted (loss) income per common share | | | | $ | (0.61) | | | $ | 1.21 | | | $ | 0.85 | |
| | | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Basic | 10 | | | 164.1 | | | 141.2 | | | 140.2 | |
Diluted | 10 | | | 164.1 | | | 142.2 | | | 141.4 | |
|
| | | | | | | | | | | | | |
| | | Year ended December 31, |
(in millions, except per share data) | Note | | 2018 | | 2017 | | 2016 |
Net sales | | | $ | 8,632.5 |
| | $ | 8,253.7 |
| | $ | 8,073.7 |
|
Cost of goods sold (exclusive of depreciation) | | | 6,732.4 |
| | 6,448.2 |
| | 6,346.6 |
|
Operating expenses: | | | | | | | |
Outbound freight and handling | | | 328.3 |
| | 292.0 |
| | 286.6 |
|
Warehousing, selling and administrative | | | 931.4 |
| | 919.7 |
| | 893.1 |
|
Other operating expenses, net | 4 | | 73.5 |
| | 55.4 |
| | 37.2 |
|
Depreciation | | | 125.2 |
| | 135.0 |
| | 152.3 |
|
Amortization | | | 54.3 |
| | 65.4 |
| | 85.6 |
|
Impairment charges | 14 | | — |
| | — |
| | 133.9 |
|
Total operating expenses | | | $ | 1,512.7 |
| | $ | 1,467.5 |
| | $ | 1,588.7 |
|
Operating income | | | $ | 387.4 |
| | $ | 338.0 |
| | $ | 138.4 |
|
Other (expense) income: | | | | | | | |
Interest income | | | 3.2 |
| | 4.0 |
| | 3.9 |
|
Interest expense | | | (135.6 | ) | | (152.0 | ) | | (163.8 | ) |
Loss on extinguishment of debt | 16 | | (0.1 | ) | | (3.8 | ) | | — |
|
Other expense, net | 6 | | (32.7 | ) | | (17.4 | ) | | (58.1 | ) |
Total other expense | | | $ | (165.2 | ) | | $ | (169.2 | ) | | $ | (218.0 | ) |
Income (loss) before income taxes | | | 222.2 |
| | 168.8 |
| | (79.6 | ) |
Income tax expense (benefit) | 7 | | 49.9 |
| | 49.0 |
| | (11.2 | ) |
Net income (loss) | | | $ | 172.3 |
| | $ | 119.8 |
| | $ | (68.4 | ) |
Income (loss) per common share: | | | | | | | |
Basic | 8 | | $ | 1.22 |
| | $ | 0.85 |
| | $ | (0.50 | ) |
Diluted | 8 | | 1.21 |
| | 0.85 |
| | (0.50 | ) |
Weighted average common shares outstanding: | | | | | | | |
Basic | 8 | | 141.2 |
| | 140.2 |
| | 137.8 |
|
Diluted | 8 | | 142.2 |
| | 141.4 |
| | 137.8 |
|
The accompanying notes are an integral part of these consolidated financial statements.
UNIVAR SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | | | |
(in millions) | Note | | 2019 | | 2018 | | 2017 |
Net (loss) income | | | | $ | (100.2) | | | $ | 172.3 | | | $ | 119.8 | |
Other comprehensive (loss) income, net of tax: | | | | | | | |
Impact due to adoption of ASU 2018-02 | 2 | | (3.2) | | | — | | | — | |
Impact due to adoption of ASU 2017-12 (1) | | | — | | | 0.5 | | | — | |
Foreign currency translation | 13 | | 22.8 | | | (97.0) | | | 107.1 | |
Pension and other postretirement benefits adjustment | 13 | | 0.1 | | | 0.1 | | | (2.4) | |
Derivative financial instruments | 13 | | (25.8) | | | 1.7 | | | 6.7 | |
Total other comprehensive (loss) income, net of tax | | | | $ | (6.1) | | | $ | (94.7) | | | $ | 111.4 | |
Comprehensive (loss) income | | | | $ | (106.3) | | | $ | 77.6 | | | $ | 231.2 | |
| | | | | | | |
(1)Impact due to the adoption of Accounting Standards Update (“ASU”) 2017-12 “Targeted Improvements to Accounting for Hedging Activities” on January 1, 2018. |
| | | | | | | | | | | | | |
| | | Year ended December 31, |
(in millions) | Note | | 2018 | | 2017 | | 2016 |
Net income (loss) | | | $ | 172.3 |
| | $ | 119.8 |
| | $ | (68.4 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | |
Impact due to adoption of ASU 2017-12 (1) | | | 0.5 |
| | — |
| | — |
|
Foreign currency translation | 11 | | (97.0 | ) | | 107.1 |
| | 36.3 |
|
Pension and other postretirement benefits adjustment | 11 | | 0.1 |
| | (2.4 | ) | | (1.8 | ) |
Derivative financial instruments | 11 | | 1.7 |
| | 6.7 |
| | — |
|
Total other comprehensive (loss) income, net of tax | | | $ | (94.7 | ) | | $ | 111.4 |
| | $ | 34.5 |
|
Comprehensive income (loss) | | | $ | 77.6 |
| | $ | 231.2 |
| | $ | (33.9 | ) |
| | | | | | | |
| |
(1) | Adjusted due to the adoption of Accounting Standards Update (“ASU”) 2017-12 “Targeted Improvements to Accounting for Hedging Activities” on January 1, 2018. Refer to “Note 2: Significant accounting policies” for more information. |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVAR SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | | | | |
| | | December 31, | | |
(in millions, except per share data) | Note | | 2019 | | 2018 |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | | $ | 330.3 | | | $ | 121.6 | |
Trade accounts receivable, net | | | 1,160.1 | | | 1,094.7 | |
Inventories | | | 796.0 | | | 803.3 | |
Prepaid expenses and other current assets | | | 167.2 | | | 169.1 | |
Total current assets | | | $ | 2,453.6 | | | $ | 2,188.7 | |
Property, plant and equipment, net | 14 | | | 1,152.4 | | | 955.8 | |
Goodwill | 15 | | | 2,280.8 | | | 1,780.7 | |
Intangible assets, net | 15 | | | 320.2 | | | 238.1 | |
Deferred tax assets | 9 | | | 21.3 | | | 24.8 | |
Other assets (1) | | | 266.5 | | | 84.3 | |
Total assets | | | $ | 6,494.8 | | | $ | 5,272.4 | |
Liabilities and stockholders’ equity | | | | | |
Current liabilities: | | | | | |
Short-term financing | 18 | | | $ | 0.7 | | | $ | 8.1 | |
Trade accounts payable | | | 895.0 | | | 925.4 | |
Current portion of long-term debt | 18 | | | 25.0 | | | 21.7 | |
Accrued compensation | | | 103.6 | | | 93.6 | |
Other accrued expenses (1) | 17 | | | 425.1 | | | 285.8 | |
Total current liabilities | | | $ | 1,449.4 | | | $ | 1,334.6 | |
Long-term debt | 18 | | | 2,688.8 | | | 2,350.4 | |
Pension and other postretirement benefit liabilities | 11 | | | 295.6 | | | 254.4 | |
Deferred tax liabilities | 9 | | | 56.3 | | | 42.9 | |
Other long-term liabilities (1) | | | 271.9 | | | 98.4 | |
Total liabilities | | | $ | 4,762.0 | | | $ | 4,080.7 | |
Stockholders’ equity: | | | | | |
Preferred stock, 200.0 million shares authorized at $0.01 par value with 0 shares issued or outstanding as of December 31, 2019 and 2018, respectively | | | $ | — | | | $ | — | |
Common stock, 2.0 billion shares authorized at $0.01 par value with 168.7 million and 141.7 million shares issued and outstanding at December 31, 2019 and 2018, respectively | | | 1.7 | | | 1.4 | |
Additional paid-in capital | | | 2,968.9 | | | 2,325.0 | |
Accumulated deficit | | | (858.5) | | | (761.5) | |
Accumulated other comprehensive loss | 13 | | | (379.3) | | | (373.2) | |
Total stockholders’ equity | | | $ | 1,732.8 | | | $ | 1,191.7 | |
Total liabilities and stockholders’ equity | | | $ | 6,494.8 | | | $ | 5,272.4 | |
| | | | | |
(1)Operating lease assets and operating lease liabilities are included in other assets, other accrued expenses and other long-term liabilities in 2019. Refer to “Note 22: Leasing” for more information. |
| | | | | | | | | |
| | | December 31, |
(in millions, except per share data) | Note | | 2018 | | 2017 |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | | $ | 121.6 |
| | $ | 467.0 |
|
Trade accounts receivable, net | | | 1,094.7 |
| | 1,062.4 |
|
Inventories | | | 803.3 |
| | 839.5 |
|
Prepaid expenses and other current assets | | | 169.1 |
| | 149.6 |
|
Total current assets | | | $ | 2,188.7 |
| | $ | 2,518.5 |
|
Property, plant and equipment, net | 12 | | 955.8 |
| | 1,003.0 |
|
Goodwill | 13 | | 1,780.7 |
| | 1,818.4 |
|
Intangible assets, net | 13 | | 238.1 |
| | 287.7 |
|
Deferred tax assets | 7 | | 24.8 |
| | 22.8 |
|
Other assets | | | 84.3 |
| | 82.3 |
|
Total assets | | | $ | 5,272.4 |
| | $ | 5,732.7 |
|
Liabilities and stockholders’ equity | | | | | |
Current liabilities: | | | | | |
Short-term financing | 16 | | $ | 8.1 |
| | $ | 13.4 |
|
Trade accounts payable | | | 925.4 |
| | 941.7 |
|
Current portion of long-term debt | 16 | | 21.7 |
| | 62.0 |
|
Accrued compensation | | | 93.6 |
| | 100.7 |
|
Other accrued expenses | 15 | | 285.8 |
| | 301.6 |
|
Total current liabilities | | | $ | 1,334.6 |
| | $ | 1,419.4 |
|
Long-term debt | 16 | | 2,350.4 |
| | 2,820.0 |
|
Pension and other postretirement benefit liabilities | 9 | | 254.4 |
| | 257.1 |
|
Deferred tax liabilities | 7 | | 42.9 |
| | 35.4 |
|
Other long-term liabilities | | | 98.4 |
| | 110.7 |
|
Total liabilities | | | $ | 4,080.7 |
| | $ | 4,642.6 |
|
Stockholders’ equity: | | | | | |
Preferred stock, 200.0 million shares authorized at $0.01 par value with no shares issued or outstanding as of December 31, 2018 and 2017 | | | — |
| | — |
|
Common stock, 2.0 billion shares authorized at $0.01 par value with 141.7 million and 141.1 million shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively | | | 1.4 |
| | 1.4 |
|
Additional paid-in capital | | | 2,325.0 |
| | 2,301.3 |
|
Accumulated deficit | | | (761.5 | ) | | (934.1 | ) |
Accumulated other comprehensive loss | 11 | | (373.2 | ) | | (278.5 | ) |
Total stockholders’ equity | | | $ | 1,191.7 |
| | $ | 1,090.1 |
|
Total liabilities and stockholders’ equity | | | $ | 5,272.4 |
| | $ | 5,732.7 |
|
The accompanying notes are an integral part of these consolidated financial statements.
UNIVAR SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | Year ended December 31, | | | | Year ended December 31, | |
(in millions) | Note | | 2018 | | 2017 | | 2016 | (in millions) | Note | | 2019 | | 2018 | | 2017 |
Operating activities: | | | | | | | Operating activities: | | | | | | | |
Net income (loss) | | $ | 172.3 |
| | $ | 119.8 |
| | $ | (68.4 | ) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | |
Net (loss) income | | Net (loss) income | | | $ | (100.2) | | | $ | 172.3 | | | $ | 119.8 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |
Depreciation and amortization | | 179.5 |
| | 200.4 |
| | 237.9 |
| Depreciation and amortization | | 214.7 | | | 179.5 | | | 200.4 | |
Impairment charges | 14 | | — |
| | — |
| | 133.9 |
| Impairment charges | 16 | | | 7.0 | | | — | | | — | |
Amortization of deferred financing fees and debt discount | | 7.6 |
| | 7.9 |
| | 7.9 |
| Amortization of deferred financing fees and debt discount | | 8.9 | | | 7.6 | | | 7.9 | |
Amortization of pension cost (credits) from accumulated other comprehensive loss | 9 | | 2.7 |
| | (0.2 | ) | | (4.5 | ) | Amortization of pension cost (credits) from accumulated other comprehensive loss | 11 | | | 0.1 | | | 2.7 | | | (0.2) | |
Gain on sale of business | | Gain on sale of business | 4 | | | (41.4) | | | — | | | — | |
Loss on extinguishment of debt | 16 | | 0.1 |
| | 3.8 |
| | — |
| Loss on extinguishment of debt | 18 | | | 13.1 | | | 0.1 | | | 3.8 | |
Loss (gain) on sale of property, plant and equipment and other assets | 4 | | 2.0 |
| | (11.3 | ) | | (0.7 | ) | |
(Gain) loss on sale of property, plant and equipment and other assets | | (Gain) loss on sale of property, plant and equipment and other assets | | | | (9.9) | | | 2.0 | | | (11.3) | |
Deferred income taxes | 7 | | 2.8 |
| | 11.7 |
| | (31.6 | ) | Deferred income taxes | 9 | | | 24.3 | | | 2.8 | | | 11.7 | |
Stock-based compensation expense | 10 | | 20.7 |
| | 19.7 |
| | 10.4 |
| Stock-based compensation expense | 12 | | | 25.1 | | | 20.7 | | | 19.7 | |
Charge for inventory step-up of acquired inventory | | Charge for inventory step-up of acquired inventory | | 5.3 | | | — | | | — | |
Other | | 0.7 |
| | (0.7 | ) | | (0.2 | ) | Other | | 3.0 | | | 0.7 | | | (0.7) | |
Changes in operating assets and liabilities: | |
| | | | | Changes in operating assets and liabilities: | | | |
Trade accounts receivable, net | | (62.1 | ) | | (58.5 | ) | | 70.2 |
| Trade accounts receivable, net | | 197.0 | | | (62.1) | | | (58.5) | |
Inventories | | 14.4 |
| | (47.7 | ) | | 42.0 |
| Inventories | | 69.0 | | | 14.4 | | | (47.7) | |
Prepaid expenses and other current assets | | (19.3 | ) | | (8.7 | ) | | 40.1 |
| Prepaid expenses and other current assets | | 54.3 | | | (19.3) | | | (8.7) | |
Trade accounts payable | | 9.3 |
| | 53.6 |
| | 12.0 |
| Trade accounts payable | | (70.9) | | | 9.3 | | | 53.6 | |
Pensions and other postretirement benefit liabilities | | (15.4 | ) | | (51.8 | ) | | 26.9 |
| Pensions and other postretirement benefit liabilities | | 21.9 | | | (15.4) | | | (51.8) | |
Other, net | | (25.4 | ) | | 44.6 |
| | (25.9 | ) | Other, net | | (57.4) | | | (25.4) | | | 44.6 | |
Net cash provided by operating activities | | $ | 289.9 |
| | $ | 282.6 |
| | $ | 450.0 |
| Net cash provided by operating activities | | | $ | 363.9 | | | $ | 289.9 | | | $ | 282.6 | |
Investing activities: | | | | | | | Investing activities: | | | | | | |
Purchases of property, plant and equipment | | $ | (94.6 | ) | | $ | (82.7 | ) | | $ | (90.1 | ) | Purchases of property, plant and equipment | | $ | (122.5) | | | $ | (94.6) | | | $ | (82.7) | |
Proceeds from sale of property, plant and equipment and other assets | | 14.5 |
| | 29.2 |
| | 9.4 |
| Proceeds from sale of property, plant and equipment and other assets | | 54.8 | | | 14.5 | | | 29.2 | |
Purchases of businesses, net of cash acquired | 19 | | (18.6 | ) | | (24.4 | ) | | (53.6 | ) | Purchases of businesses, net of cash acquired | 3 | | | (1,201.0) | | | (18.6) | | | (24.4) | |
Proceeds from sale of business | | Proceeds from sale of business | 4 | | | 838.3 | | | — | | | — | |
Other | | (0.3 | ) | | (1.2 | ) | | (1.7 | ) | Other | | (2.7) | | | (0.3) | | | (1.2) | |
Net cash used by investing activities | | $ | (99.0 | ) | | $ | (79.1 | ) | | $ | (136.0 | ) | Net cash used by investing activities | | | $ | (433.1) | | | $ | (99.0) | | | $ | (79.1) | |
Financing activities: | | | | | | | Financing activities: | | | | | | |
Proceeds from the issuance of long-term debt | 16 | | $ | 41.7 |
| | $ | 4,477.8 |
| | $ | — |
| Proceeds from the issuance of long-term debt | 18 | | | $ | 1,845.8 | | | $ | — | | | $ | 4,477.8 | |
Payments on long-term debt and capital lease obligations | 16 | | (561.9 | ) | | (4,585.7 | ) | | (178.2 | ) | |
Payments on long-term debt and finance lease obligations | | Payments on long-term debt and finance lease obligations | 18 | | | (1,545.9) | | | (561.9) | | | (4,588.7) | |
Net proceeds under revolving credit facilities | | Net proceeds under revolving credit facilities | 18 | | | 7.2 | | | 41.7 | | | 3.0 | |
Short-term financing, net | 16 | | 0.5 |
| | (22.2 | ) | | (4.6 | ) | Short-term financing, net | 18 | | | (9.2) | | | 0.5 | | | (22.2) | |
Financing fees paid | 16 | | (1.1 | ) | | (7.7 | ) | | — |
| Financing fees paid | 18 | | | (7.9) | | | (1.1) | | | (7.7) | |
Taxes paid related to net share settlements of stock-based compensation awards | | (4.1 | ) | | (8.5 | ) | | — |
| Taxes paid related to net share settlements of stock-based compensation awards | | (2.8) | | | (4.1) | | | (8.5) | |
Stock option exercises | 10 | | 5.9 |
| | 36.5 |
| | 16.9 |
| Stock option exercises | 12 | | | 6.6 | | | 5.9 | | | 36.5 | |
Contingent consideration payments | | (0.4 | ) | | (3.7 | ) | | (0.4 | ) | Contingent consideration payments | | — | | | (0.4) | | | (3.7) | |
Other | | 1.1 |
| | 1.1 |
| | (0.2 | ) | Other | | 1.4 | | | 1.1 | | | 1.1 | |
Net cash used by financing activities | | $ | (518.3 | ) | | $ | (112.4 | ) | | $ | (166.5 | ) | |
Net cash provided (used) by financing activities | | Net cash provided (used) by financing activities | | | $ | 295.2 | | | $ | (518.3) | | | $ | (112.4) | |
Effect of exchange rate changes on cash and cash equivalents | | $ | (18.0 | ) | | $ | 39.5 |
| | $ | 0.8 |
| Effect of exchange rate changes on cash and cash equivalents | | $ | (17.3) | | | $ | (18.0) | | | $ | 39.5 | |
Net (decrease) increase in cash and cash equivalents | | (345.4 | ) | | 130.6 |
| | 148.3 |
| |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | | | 208.7 | | | (345.4) | | | 130.6 | |
Cash and cash equivalents at beginning of period | | 467.0 |
| | 336.4 |
| | 188.1 |
| Cash and cash equivalents at beginning of period | | 121.6 | | | 467.0 | | | 336.4 | |
Cash and cash equivalents at end of period | | $ | 121.6 |
| | $ | 467.0 |
| | $ | 336.4 |
| Cash and cash equivalents at end of period | | $ | 330.3 | | | $ | 121.6 | | | $ | 467.0 | |
Supplemental disclosure of cash flow information: | | | | | | | Supplemental disclosure of cash flow information: | | | | | | |
Cash paid during the period for: | | | | | | | Cash paid during the period for: | |
Income taxes | | $ | 65.0 |
| | $ | 29.9 |
| | $ | 14.9 |
| Income taxes | | $ | 42.5 | | | $ | 65.0 | | | $ | 29.9 | |
Interest, net of capitalized interest | | 128.2 |
| | 140.2 |
| | 148.9 |
| Interest, net of capitalized interest | | 146.1 | | | 128.2 | | | 140.2 | |
Non-cash activities: | | | | | | | Non-cash activities: | |
Fair value of common stock issued for acquisition of business | | Fair value of common stock issued for acquisition of business | 3 | | | $ | 613.8 | | | $ | — | | | $ | — | |
Additions of property, plant and equipment included in trade accounts payable and other accrued expenses | | $ | 14.6 |
| | $ | 7.4 |
| | $ | 11.5 |
| Additions of property, plant and equipment included in trade accounts payable and other accrued expenses | | 9.8 | | | 14.6 | | | 7.4 | |
Additions of property, plant and equipment under a capital lease obligation | | 23.6 |
| | 19.9 |
| | 29.6 |
| |
Additions of property, plant and equipment under a finance lease obligation | | Additions of property, plant and equipment under a finance lease obligation | | 23.3 | | | 23.6 | | | 19.9 | |
Additions of assets under an operating lease obligation | | Additions of assets under an operating lease obligation | | 25.5 | | | — | | | — | |
The accompanying notes are an integral part of these consolidated financial statements.
UNIVAR SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share data) | Common stock (shares) | | Common stock | | Additional paid-in capital | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | Total |
Balance, January 1, 2017 | 138.8 | | | $ | 1.4 | | | $ | 2,251.8 | | | $ | (1,053.4) | | | $ | (389.9) | | | $ | 809.9 | |
Impact due to adoption of ASU, net of tax $0.2 (1) | — | | | — | | | 0.7 | | | (0.5) | | | — | | | 0.2 | |
Net income | — | | | — | | | — | | | 119.8 | | | — | | | 119.8 | |
Foreign currency translation adjustment, net of tax $(2.1) | — | | | — | | | — | | | — | | | 107.1 | | | 107.1 | |
Pension and other postretirement benefits adjustment, net of tax $0.6 | — | | | — | | | — | | | — | | | (2.4) | | | (2.4) | |
Derivative financial instruments, net of tax $(4.3) | — | | | — | | | — | | | — | | | 6.7 | | | 6.7 | |
Restricted stock units vested | 0.8 | | | — | | | — | | | — | | | — | | | — | |
Tax withholdings related to net share settlements of stock-based compensation awards | (0.3) | | | — | | | (8.5) | | | — | | | — | | | (8.5) | |
Stock option exercises | 1.8 | | | — | | | 36.5 | | | — | | | — | | | 36.5 | |
Employee stock purchase plan | — | | | — | | | 1.1 | | | — | | | — | | | 1.1 | |
Stock-based compensation | — | | | — | | | 19.7 | | | — | | | — | | | 19.7 | |
Balance, December 31, 2017 | 141.1 | | | $ | 1.4 | | | $ | 2,301.3 | | | $ | (934.1) | | | $ | (278.5) | | | $ | 1,090.1 | |
Impact due to adoption of ASU, net of tax $(0.3) (2) | — | | | — | | | — | | | 0.3 | | | 0.5 | | | 0.8 | |
Net income | — | | | — | | | — | | | 172.3 | | | — | | | 172.3 | |
Foreign currency translation adjustment, net of tax $2.4 | — | | | — | | | — | | | — | | | (97.0) | | | (97.0) | |
Pension and other postretirement benefits adjustment, net of tax $(0.1) | — | | | — | | | — | | | — | | | 0.1 | | | 0.1 | |
Derivative financial instruments, net of tax $(0.4) | — | | | — | | | — | | | — | | | 1.7 | | | 1.7 | |
Restricted stock units vested | 0.4 | | | — | | | — | | | — | | | — | | | — | |
Tax withholdings related to net share settlements of stock-based compensation awards | (0.1) | | | — | | | (4.1) | | | — | | | — | | | (4.1) | |
Stock option exercises | 0.3 | | | — | | | 5.9 | | | — | | | — | | | 5.9 | |
Employee stock purchase plan | — | | | — | | | 1.1 | | | — | | | — | | | 1.1 | |
Stock-based compensation | — | | | — | | | 20.7 | | | — | | | — | | | 20.7 | |
Other | — | | | — | | | 0.1 | | | — | | | — | | | 0.1 | |
Balance, December 31, 2018 | 141.7 | | | $ | 1.4 | | | $ | 2,325.0 | | | $ | (761.5) | | | $ | (373.2) | | | $ | 1,191.7 | |
Impact due to adoption of ASU (3) | — | | | — | | | — | | | 3.2 | | | (3.2) | | | — | |
Net loss | — | | | — | | | — | | | (100.2) | | | — | | | (100.2) | |
Foreign currency translation adjustment, net of tax $4.9 | — | | | — | | | — | | | — | | | 22.8 | | | 22.8 | |
Pension and other postretirement benefits adjustment | — | | | — | | | — | | | — | | | 0.1 | | | 0.1 | |
Derivative financial instruments, net of tax $7.0 | — | | | — | | | — | | | — | | | (25.8) | | | (25.8) | |
Common stock issued for the Nexeo acquisition (4) | 27.9 | | | 0.3 | | | 649.0 | | | — | | | — | | | 649.3 | |
Shares canceled | (1.5) | | | | | | (35.5) | | | — | | | — | | | (35.5) | |
Restricted stock units vested | 0.4 | | | — | | | — | | | — | | | — | | | — | |
Tax withholdings related to net share settlements of stock-based compensation awards | (0.2) | | | — | | | (2.8) | | | — | | | — | | | (2.8) | |
Stock option exercises | 0.3 | | | — | | | 6.6 | | | — | | | — | | | 6.6 | |
Employee stock purchase plan | 0.1 | | | — | | | 1.4 | | | — | | | — | | | 1.4 | |
Stock-based compensation | — | | | — | | | 25.1 | | | — | | | — | | | 25.1 | |
Other | — | | | — | | | 0.1 | | | — | | | — | | | 0.1 | |
Balance, December 31, 2019 | 168.7 | | | $ | 1.7 | | | $ | 2,968.9 | | | $ | (858.5) | | | $ | (379.3) | | | $ | 1,732.8 | |
| | | | | | | | | | | | |
(1)Adjusted due to the adoption of ASU 2016-09 “Improvement to Employee Share-Based Payment Accounting” on January 1, 2017. |
| | | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share data) | Common stock (shares) | | Common stock | | Additional paid-in capital | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | Total |
Balance, January 1, 2016 | 138.0 |
| | $ | 1.4 |
| | $ | 2,224.7 |
| | $ | (985.0 | ) | | $ | (424.4 | ) | | $ | 816.7 |
|
Net loss | — |
| | — |
| | — |
| | (68.4 | ) | | — |
| | (68.4 | ) |
Foreign currency translation adjustment, net of tax $23.9 | — |
| | — |
| | — |
| | — |
| | 36.3 |
| | 36.3 |
|
Pension and other postretirement benefits adjustment, net of tax $1.5 | — |
| | — |
| | — |
| | — |
| | (1.8 | ) | | (1.8 | ) |
Stock option exercises | 0.8 |
| | — |
| | 16.9 |
| | — |
| | — |
| | 16.9 |
|
Stock-based compensation | — |
| | — |
| | 10.4 |
| | — |
| | — |
| | 10.4 |
|
Other | — |
| | — |
| | (0.2 | ) | | — |
| | — |
| | (0.2 | ) |
Balance, December 31, 2016 | 138.8 |
| | $ | 1.4 |
| | $ | 2,251.8 |
| | $ | (1,053.4 | ) | | $ | (389.9 | ) | | $ | 809.9 |
|
Impact due to adoption of ASU, net of tax $0.2 (1) | — |
| | — |
| | 0.7 |
| | (0.5 | ) | | — |
| | 0.2 |
|
Net income | — |
| | — |
| | — |
| | 119.8 |
| | — |
| | 119.8 |
|
Foreign currency translation adjustment, net of tax ($2.1) | — |
| | — |
| | — |
| | — |
| | 107.1 |
| | 107.1 |
|
Pension and other postretirement benefits adjustment, net of tax $0.6 | — |
| | — |
| | — |
| | — |
| | (2.4 | ) | | (2.4 | ) |
Derivative financial instruments, net of tax ($4.3) | — |
| | — |
| | — |
| | — |
| | 6.7 |
| | 6.7 |
|
Restricted stock units vested | 0.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Tax withholdings related to net share settlements of stock-based compensation awards | (0.3 | ) | | — |
| | (8.5 | ) | | — |
| | — |
| | (8.5 | ) |
Stock option exercises | 1.8 |
| | — |
| | 36.5 |
| | — |
| | — |
| | 36.5 |
|
Employee stock purchase plan (2) | — |
| | — |
| | 1.1 |
| | — |
| | — |
| | 1.1 |
|
Stock-based compensation | — |
| | — |
| | 19.7 |
| | — |
| | — |
| | 19.7 |
|
Balance, December 31, 2017 | 141.1 |
| | $ | 1.4 |
| | $ | 2,301.3 |
| | $ | (934.1 | ) | | $ | (278.5 | ) | | $ | 1,090.1 |
|
Impact due to adoption of ASU, net of tax ($0.3) (3) | — |
| | — |
| | — |
| | 0.3 |
| | 0.5 |
| | 0.8 |
|
Net income | — |
| | — |
| | — |
| | 172.3 |
| | — |
| | 172.3 |
|
Foreign currency translation adjustment, net of tax $2.4 | — |
| | — |
| | — |
| | — |
| | (97.0 | ) | | (97.0 | ) |
Pension and other postretirement benefits adjustment, net of tax ($0.1) | — |
| | — |
| | — |
| | — |
| | 0.1 |
| | 0.1 |
|
Derivative financial instruments, net of tax ($0.4) | — |
| | — |
| | — |
| | — |
| | 1.7 |
| | 1.7 |
|
Restricted stock units vested | 0.4 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Tax withholdings related to net share settlements of stock-based compensation awards | (0.1 | ) | | — |
| | (4.1 | ) | | — |
| | — |
| | (4.1 | ) |
Stock option exercises | 0.3 |
| | — |
| | 5.9 |
| | — |
| | — |
| | 5.9 |
|
Employee stock purchase plan | — |
| | — |
| | 1.1 |
| | — |
| | — |
| | 1.1 |
|
Stock-based compensation | — |
| | — |
| | 20.7 |
| | — |
| | — |
| | 20.7 |
|
Other | — |
| | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
|
Balance, December 31, 2018 | 141.7 |
| | $ | 1.4 |
| | $ | 2,325.0 |
| | $ | (761.5 | ) | | $ | (373.2 | ) | | $ | 1,191.7 |
|
(2)Adjusted due to the adoption of ASU 2014-09 “Revenue from Contracts with Customers” on January 1, 2018.(3)Refer to “Note 2: Significant accounting policies” for more information. | |
(1) | Adjusted due to the adoption of ASU 2016-09 “Improvement to Employee Share-Based Payment Accounting” on January 1, 2017. |
| |
(2) | During November 2016, our Board of Directors approved the Univar Employee Stock Purchase Plan, or ESPP, authorizing the issuances of up to 2.0 million shares of the Company's common stock effective January 1, 2017. The total number of shares issued under the plan for the first two offering periods from January through December 2017 was 39,418 shares. |
| |
(3) | Adjusted due to the adoption of ASU 2014-09 “Revenue from Contracts with Customers” and ASU 2017-12 “Targeted Improvements to Accounting for Hedging Activities” on January 1, 2018. Refer to “Note 2: Significant accounting policies” for more information. |
(4)Refer to “Note 3: Business combinations” for more information.
The accompanying notes are an integral part of these consolidated financial statements.
UNIVAR SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20182019 AND 20172018 AND
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 2017 AND 20162017
1. Nature of operations
Headquartered in Downers Grove, Illinois, Univar Solutions Inc. (“Company” or “Univar”“Univar Solutions”) is a leading global chemical and ingredients distributor and provider of specialty services. The Company’s operations are structured into four operating4 reportable segments that represent the geographic areas under which the Company manages its business:
•Univar Solutions USA (“USA”)
•Univar Solutions Canada (“Canada”)
•Univar Solutions Europe, the Middle East and Africa (“EMEA”)
Rest of•Univar Solutions Latin America (“LATAM”)
In 2019, the World (“RestCompany renamed its “Rest of World”)
Rest of World segment “Latin America,” which includes certain developing businesses in Latin America (including Brazil and Mexico) and the Asia-Pacific region.
2. Significant accounting policies
Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Unless otherwise indicated, all financial data presented in these consolidated financial statements are expressed in US dollars.
Basis of consolidation and presentation
The consolidated financial statements include the financial statements of the Company and its majority-owned subsidiaries. Subsidiaries are consolidated if the Company has a controlling financial interest, which may exist based on ownership of a majority of the voting interest, or based on the Company’s determination that it is the primary beneficiary of a variable interest entity (“VIE”). The Company diddoes not have any material interests in VIEs during the years presented in these consolidated financial statements.VIEs. All intercompany balances and transactions are eliminated in consolidation. Unless otherwise indicated, all financial data presented in these consolidated financial statements are expressed in US dollars.
On our consolidated statements of cash flows for 2018 and 2017, the amounts included in “net proceeds under revolving credit facilities,” which were previously included in “proceeds from the issuance of long-term debt,” are now presented separately to conform to the current year presentation.
Use of estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions affecting the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ materially from these estimates.
Recently issued and adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606). On January 1, 2018,2019, the Company adopted the new Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
In August 2017, the FASB issued ASU 2017-12 “Derivatives and Hedging” (Topic 815) - “Targeted Improvements to Accounting for Hedging Activities.” The ASU better aligns hedge accounting with the Company’s risk management activities, simplifies the application of hedge accounting, and improves transparency as to the scope and results of hedging programs. The Company early adopted the new pronouncement effective January 1, 2018, using the modified retrospective approach by recognizing the cumulative effect of initially applying the new pronouncement as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The cumulative effect of the changes made to the January 1, 2018 consolidated balance sheet for the adoption of ASU 2014-09 “Revenue from Contracts with Customers” (Topic 606) and ASU 2017-12 “Derivatives and Hedging” (Topic 815) - “Targeted Improvements to Accounting for Hedging Activities” is as follows:
|
| | | | | | | | | | | | | | | | |
(in millions) | | Balance at December 31, 2017 | | Adjustments due to ASU 2014-09 | | Adjustments due to ASU 2017-12 | | Balance at January 1, 2018 |
Assets | | | | | | | | |
Trade accounts receivable, net | | $ | 1,062.4 |
| | $ | 41.3 |
| | $ | — |
| | $ | 1,103.7 |
|
Inventories | | 839.5 |
| | (2.1 | ) | | — |
| | 837.4 |
|
Prepaid expenses and other current assets | | 149.6 |
| | 1.8 |
| | — |
| | 151.4 |
|
Liabilities | | | | | | | | |
Trade accounts payable | | $ | 941.7 |
| | $ | 7.0 |
| | $ | — |
| | $ | 948.7 |
|
Other accrued expenses | | 301.6 |
| | 33.2 |
| | — |
| | 334.8 |
|
Equity | | | | | | | | |
Accumulated deficit | | $ | (934.1 | ) | | $ | 0.8 |
| | $ | (0.5 | ) | | $ | (933.8 | ) |
Accumulated other comprehensive loss | | (278.5 | ) | | — |
| | 0.5 |
| | (278.0 | ) |
The following tables summarize the impact of adopting the new revenue standard upon the Company’s consolidated balance sheet and statement of operations as of and for the year ended December 31, 2018:
|
| | | | | | | | | | | | |
| | Year ended December 31, 2018 |
(in millions) | | As reported | | Balances without adoption of ASC 606 | | Effect of change higher/(lower) |
Net sales | | $ | 8,632.5 |
| | $ | 8,626.4 |
| | $ | 6.1 |
|
Cost of goods sold (exclusive of depreciation) | | 6,732.4 |
| | 6,726.7 |
| | 5.7 |
|
| | | | | | |
Income tax expense | | $ | 49.9 |
| | $ | 49.8 |
| | $ | 0.1 |
|
Net income | | 172.3 |
| | 172.0 |
| | 0.3 |
|
|
| | | | | | | | | | | | |
| | December 31, 2018 |
(in millions) | | As reported | | Balances without adoption of ASC 606 | | Effect of change higher/(lower) |
Assets | | | | | | |
Trade accounts receivable, net | | $ | 1,094.7 |
| | $ | 1,047.8 |
| | $ | 46.9 |
|
Inventories | | 803.3 |
| | 814.4 |
| | (11.1 | ) |
Prepaid expenses and other current assets | | 169.1 |
| | 163.9 |
| | 5.2 |
|
Liabilities | | | | | | |
Trade accounts payable | | $ | 925.4 |
| | $ | 919.2 |
| | $ | 6.2 |
|
Other accrued expenses | | 285.8 |
| | 252.1 |
| | 33.7 |
|
Equity | | | | | | |
Accumulated deficit | | $ | (761.5 | ) | | $ | (762.6 | ) | | $ | 1.1 |
|
In March 2017, the FASB issued ASU 2017-07 “Compensation - Retirement Benefits” (Topic 715) - “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” On January 1, 2018, the Company adopted the amendments to ASC Topic 715 that improves the presentation of net periodic pension and postretirement benefit costs, by separating the presentation of service costs from other components of net periodic costs. The interest cost, expected return on assets, and amortization of prior service costs have been reclassified from warehousing, selling, and administrative expenses to other expense, net. The mark to market, curtailment, and settlement expenses have been reclassified from other operating expenses, net to other expense, net.
Adoption of ASU 2017-07 resulted in a retrospective presentation change to the net periodic cost for the defined benefit pension and other postretirement employee benefits (“OPEB”) plans within the consolidated income statement as follows:
|
| | | | | | | | | | | | |
| | Year ended December 31, 2017 |
(in millions) | | As revised | | Previously reported | | Effect of change higher/(lower) |
Warehousing, selling and administrative | | $ | 919.7 |
| | $ | 909.8 |
| | $ | 9.9 |
|
Other operating expenses, net | | 55.4 |
| | 49.5 |
| | 5.9 |
|
Other expense, net | | (17.4 | ) | | (33.2 | ) | | (15.8 | ) |
In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows” (Topic 230) - “Classification of Certain Cash Receipts and Cash Payments.” The ASU clarifies and provides specific guidance on eight cash flow classification issues that were not addressed within the previous guidance. The Company adopted the ASU as of January 1, 2018 and accordingly restated the consolidated statement of cash flows for the year ended December 31, 2017 to conform with the current period presentation under this new guidance. As a result of the adoption, the Company reclassified $3.7 million of cash outflows previously reported as operating activities to financing activities within the consolidated statement of cash flows related to contingent consideration payments for the year ended December 31, 2017.
The Company also adopted the following standards during 2018, none of which had a material impact to the financial statements or financial statement disclosures:
|
| | |
Standard | | Effective date |
2018-07 | Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting | July 1, 2018 |
2017-09 | Compensation - Stock Compensation - Scope of Modification Accounting | January 1, 2018 |
2017-04 | Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment | January 1, 2018 |
2017-01 | Business Combinations - Clarifying the Definition of a Business | January 1, 2018 |
2016-18 | Statement of Cash Flows - Restricted Cash | January 1, 2018 |
2016-16 | Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory | January 1, 2018 |
2016-01 | Financial Instrument - Recognition and Measurement of Financial Assets and Financial Liabilities | January 1, 2018 |
Accounting pronouncements issued but not yet adopted
In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842), which supersedes the lease recognition requirements in ASC Topic 840, “Leases.“Leases,” The core principal ofusing the guidance is that an entity should recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal years. The guidance is to be applied using a modified retrospective transition method withby applying the optionnew guidance to elect a packageall leases existing at the date of practical expedients.initial application and not restating comparative periods. The Company has established a project team to evaluate and implement the standard. The project team is in the final stages of implementing the standard to meet the ASU’s reporting and disclosure requirements.
Upon the January 1, 2019 adoption of this standard, the consolidated balance sheet will include a right of use asset and liability related to certain operating lease arrangements. The Company has elected to apply the transition requirements at the January 1, 2019, effective date rather than at the beginning of the earliest comparative period presented. This approach allows for a cumulative effect adjustment in the period of adoption, and prior periods will not be restated. The Company will elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforwardallowed the historical lease classification.classification to carry forward. The Company will makerecognized the cumulative effect of initially applying the new
lease standard as an accounting policy electionadjustment to keepthe 2019 opening balance sheet and also includes adjustments related to previously unrecognized finance leases with an initial term of 12 months or less off ofas follows:
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(in millions) | | Balance at December 31, 2018 | | Adjustments due to ASU 2016-02 | | Balance at January 1, 2019 |
Assets | | | | | | | | | |
Property, plant and equipment, net | | $ | 955.8 | | | | $ | 5.4 | | | | $ | 961.2 | |
Other assets | | 84.3 | | | | 166.8 | | | | 251.1 | |
Liabilities | | | | | | |
Current portion of long-term debt | | $ | 21.7 | | | $ | (4.5) | | | $ | 17.2 | |
Other accrued expenses | | 285.8 | | | 43.8 | | | 329.6 | |
Long-term debt | | 2,350.4 | | | 9.9 | | | 2,360.3 | |
Other long-term liabilities | | 98.4 | | | 123.0 | | | 221.4 | |
On January 1, 2019, the balance sheet. The Company will recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The Company estimates the impact of the additional lease assets and liabilities to range from $140 million to $190 million.
In January 2018, the FASB issuedadopted ASU 2018-02 “Income Statement - Reporting Comprehensive Income” (Topic 220) “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“AOCI”), which gives entitiesenabled the optionCompany to reclassify from AOCI to retained earnings, certain stranded tax effects, that the FASB refers to as having been stranded, resulting from the Tax Cuts and Jobs ActAct. Upon adoption, we reclassified $3.2 million of the stranded tax effects from AOCI to retained earnings. The new guidance may be applied retrospectively to each period inaccumulated deficit.
Accounting pronouncements issued but not yet adopted
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses” (Topic 326) which requires the effectmeasurement and recognition of the Tax Cuts and Jobs Act is recognized, or in the period of adoption.expected credit losses for financial assets held at amortized cost. The Company mustwill adopt this guidance for fiscal years beginning
after December 15, 2018 and interim periods within those fiscal years. The Company expects to record an adjustment to the accumulated deficit and accumulated other comprehensive loss financial statement line items in the range of $3.0 million to $4.0 million on theeffective January 1, 2019 adoption of2020 and is finalizing the ASU.impacts which are not expected to be material.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement” (Topic 820) - “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU amendswhich modifies the requirements related to fair value disclosures to include new disclosure requirements and eliminates or modifies certain historic disclosures. The ASU amendment was part ofCompany will adopt this guidance effective January 1, 2020 and is finalizing the FASB’s disclosure framework projectimpacts that is designed to increase the effectiveness of companies’ disclosures to the users of the financial statements and footnotes. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. The Company is currently determining the impact to the Company’s disclosure requirements, which will be reflected in the footnotefinancial statement disclosures, subsequentwhich are not expected to the ASU adoption on January 1, 2020.be material.
In August 2018, the FASB issued ASU 2018-14 “Compensation - Retirement Benefits - Defined Benefit Plans - General” (Subtopic 715-20) - “Disclosure Framework - Changes towhich amends the Disclosure Requirements for Defined Benefit Plans.” The ASU amends thedisclosure requirements related to defined benefit pension and other postretirement plan disclosures to include new disclosure requirements and eliminates or clarifies certain historic disclosures. The ASU amendment was part of the FASB’s disclosure framework project that is designed to increase the effectiveness of companies’ disclosures to the users of the financial statements and footnotes. This guidance will be effective for fiscal years beginning after December 15, 2020. Early adoption is permitted.plan. The Company will adopt this guidance effective January 1, 2021 and is currently determining the impact to the Company’s disclosure requirements, whichimpacts that will be reflected in financial statement disclosures.
In August 2018, the footnote disclosures subsequentFASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software” (Subtopic 350-40) - “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those for capitalizing implementation costs incurred to the ASU adoption ondevelop or obtain internal-use software. The Company will adopt this guidance effective January 1, 2021.2020 and is finalizing the impacts which are not expected to be material.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes” (Topic 740) – “Simplifying the Accounting for Income Taxes” which simplifies the accounting for income taxes. The Company has not yet adoptedwill adopt this guidance effective January 1, 2021 and is currently determining the following standards, noneimpacts of which is expected to have a material impact to the guidance on our consolidated financial statements or financial statement disclosures:
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Standard | | Expected adoption date |
2018-18 | Collaborative Arrangements (Topic 808) - Clarifying the Interaction between Topic 808 and Topic 606 | January 1, 2020 |
2018-17 | Consolidation (Topic 810) - Targeted Improvements to Related Party Guidance for Variable Interest Entities | January 1, 2020 |
2018-16 | Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes | January 1, 2019 |
2018-15 | Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) | January 1, 2020 |
2016-13 | Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | January 1, 2020 |
statements.Cash and cash equivalents
Cash and cash equivalents include highly-liquid investments with an original maturity of three months or less that are readily convertible into known amounts of cash. Cash at banks earn interest at floating rates based on daily bank deposit rates.
Trade accounts receivable, net
Trade accounts receivable are stated at the invoiced amount, net of an allowance for doubtful accounts.
In the normal courseaccounts of business, the Company provides credit to its customers, performs ongoing credit evaluations of these customers and maintains reserves for potential credit losses. In certain situations, the Company will require up-front cash payment, collateral and/or personal guarantees based on the credit worthiness of the customer.
The allowance for doubtful accounts was $11.2$12.9 million and $13.0$11.2 million at December 31, 20182019 and 2017,2018, respectively. The allowance for doubtful accounts is estimated based on an individual assessment of collectability based on factors that include current ability to pay, bankruptcy and payment history, as well as a general reserve related to prior experience.
Inventories
Inventories consist primarily of products purchased for resale and are stated at the lower of cost or net realizable value. Inventory cost is determined based on the weighted average cost method. Inventory costmethod and includes purchase price from producers net of rebates received, inbound freight and handling, and direct labor and other costs incurred to blend and repackage product, andbut excludes depreciation expense. The Company recognized $1.9 million, $3.3 million and $6.6 million
realizable value adjustments to certain of its inventories in the years ended December 31, 2018, 2017 and 2016, respectively. The expense related to these adjustments is included in cost of goods sold in the consolidated statements of operations.
Producer incentives
The Company has arrangements with certain producers that provide discounts when certain measures are achieved, generally related to purchasing volume. Volume rebates are generally earned and realized when the related products are purchased during the year. The reduction in cost of goods sold is recorded when the related products, on which the rebate was earned, are sold. As the right to receive discount incentives is contingent on purchases during the entire year, the Company's accounting estimates for producer incentives is dependent on the ability to accurately forecast annual purchases. Discretionary rebates are recorded when received. The unpaid portion of rebates from producers is recorded in prepaid expenses and other current assets in the consolidated balance sheets.
Property, plant and equipment, net
Property, plant and equipment are carried at historical cost, net of accumulated depreciation. Expenditures for improvements that add functionality and/or extend useful life are capitalized. The Company capitalizes interest costs on significant capital projects, as an increase to property, plant and equipment. Repair and maintenance costs are expensed as incurred. Depreciation is recorded on a straight-line basis over the estimated useful life of each asset from the time the asset is ready for its intended purpose, with consideration of expected residual values. Depreciation expense is recorded to depreciation within the consolidated statement of operations.
The estimated useful lives of property, plant and equipment are as follows:
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Buildings | 10-50 years |
Main components of tank farms | 5-40 years |
Containers | 2-15 years |
Machinery and equipment | 5-20 years |
Furniture, fixtures and others | 5-20 years |
Information technology | 3-10 years |
The Company evaluates the useful life and carrying value of property, plant and equipment for impairment if an event occurs or circumstances change that would indicate the carrying value may not be recoverable. If an asset is tested for possible impairment, the Company compares the carrying amount of the related asset group to future undiscounted net cash flows expected to be generated by that asset group. If the carrying amount of the asset group is not recoverable on an undiscounted cash flow basis, an impairment loss is recognized to the extent that the asset group's carrying amount exceeds its estimated fair value.
Leasehold improvements are capitalized and amortized over the lesser of the term of the applicable lease, including renewable periods if reasonably assured, or the useful life of the improvement.
Assets under capital leases where ownership transfers to the Company at the end of the lease term or the lease agreement contains a bargain purchase option are depreciated over the useful life of the asset. For remaining assets under capital leases, the assets are depreciated over the lesser of the term of the applicable lease, including renewable periods if reasonably assured, or the useful life of the asset with consideration of any expected residual value.
Refer to “Note 12: Property, plant and equipment, net” for further information.
Goodwill and intangible assets
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in business combinations.
Goodwill is tested for impairment annually on October 1, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at aThe Company’s reporting unit level using either a qualitative assessment, commonly referred to as a “step zero” test, or a quantitative assessment, commonly referred to as a “step one” test. units are USA, Canada, EMEA, Latin America and Asia-Pacific.
For each of the reporting units, the Company has the option to perform either the step zeroqualitative or the step onequantitative test. The Company’s reporting units are identical toIn the identified four operating segments: USA, Canada, EMEA, and Rest of World.
The Company elected the step one test to evaluate goodwill for impairment for each of the reporting units during 2018 and the step zero test in 2017. The step one goodwill impairment test compares the estimated fair value of eachevent a reporting unit withfails the reporting unit’s carrying value (including goodwill).qualitative assessment, it is required to perform the quantitative test. If the fair value of the reporting unit is less than its carrying value, the reporting
unit will recognize an impairment for the lesser of either the amount by which the reporting unit's carrying amount exceeds the fair value of the reporting unit or the reporting unit’s goodwill carrying value.
The step zero goodwill impairment test utilizes qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value. Qualitative factors include: macroeconomic conditions; legal and regulatory environment; industry and market considerations; overall financial performance and cost factors to determine whether a reporting unit is at risk for goodwill impairment. In the event a reporting unit fails the step zero goodwill impairment test, it is necessary to perform the step one goodwill impairment test.
Intangible assets consist of customer and producer relationships and contracts, intellectual property trademarks, trade names, non-compete agreements and exclusive distribution rights. Intangible assets have finite lives and are amortized over their respective useful lives of 2 to 20 years. Amortization of intangible assets is based on the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up; which is based on the undiscounted cash flows, or when not reliably determined, on a straight-line basis. Intangible assets are tested for impairment if an event occurs or circumstances change that indicates the carrying value may not be recoverable. Refer to “Note 14: Impairment charges” for further information.
Customer relationship intangible assets represent the fair value allocated in purchase price accounting for the ongoing relationships with an existing customer base acquired in a business combination. The fair value of customer relationships is determined using the excess earnings methodology, an income based approach. The excess earnings methodology provides an estimate of the fair value of customer relationship assets by deducting economic costs, including operating expenses and contributory asset charges, from revenue expected to be generated by the assets. These estimated cash flows are then discounted to the present value equivalent.
Refer to “Note 13: Goodwill and intangible assets” for further information.
Short-term financing
Short-term financing includes bank overdrafts and short-term lines of credit. Refer to “Note 16: Debt” for further information.
Long-term debt
Long-term debt consists of loans with original maturities greater than one year. Fees paid in connection with the execution of line-of-credit arrangements are included in other assets and fees paid in connection with the execution of a recognized debt liability as a direct deduction from the carrying amount of that debt liability. These fees are amortized using the effective interest method over the term of the related debt or expiration of the line-of-credit arrangement. Refer to “Note 16: Debt” for further information.
Income taxes
The Company is subject to income taxes in the US and numerous foreign jurisdictions. Significant judgment in the forecasting of taxable income using historical and projected future operating results is required in determining the Company’s provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Act”). The legislation significantly changes US tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act permanently reduces the US corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The SAB 118 measurement period ends when a company has obtained, prepared, and analyzed the information needed to complete the accounting requirements under ASC 740, "Income Taxes", but no later than one year from the enactment date of December 22, 2017. In 2017 and the first nine months of 2018, the Company recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because the Company had not yet completed its enactment-date accounting for these effects. At December 31, 2018, the Company has now completed its accounting for all the enactment-date income tax effects of the Act. As further discussed in “Note 7: Income taxes”, during 2018 the Company recognized adjustments of $6.8 million to the provisional amounts recorded at December 31, 2017 and included these adjustments as a component of income tax expense from continuing operations.
Effective in 2018, the Company is subject to global intangible low tax income (“GILTI”) which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Due to the complexity of the GILTI tax rules, companies are allowed to make an accounting policy choice of either (1) treating taxes due on future US inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into a company’s measurement of its deferred
taxes. The Company is electing to treat taxes due on future US inclusions in taxable income related to GILTI as a current-period expense when incurred and, therefore, there is no impact to the deferred tax rate in 2018.
In the event that the actual outcome of future tax consequences differs from the Company’s estimates and assumptions due to changes or future events such as tax legislation, geographic mix of the 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 statement of operations and consolidated balance sheets.
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 carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the revised tax rate is enacted.
The Company records valuation allowances to reduce deferred tax assets to the extent it believes it is more likely than not that a portion of such assets will not be realized. In making such determinations, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projectedforecasted and appropriate character of future taxable income, tax planning strategies, our experience with operating loss and tax credit carryforwards not expiring unused, tax planning strategies and the ability to carry back losses to prior years. Realization
The Company is dependent upon generating sufficientsubject to the global intangible low tax income (“GILTI”), which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company treats taxes due on future US inclusions in taxable income priorrelated to expiration of tax attribute carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized, or if not,GILTI as a valuation allowance has been recorded. The Company continues to monitor the value of its deferred tax assets, as the amount of the deferred tax assets considered realizable, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced, or current tax planning strategies are not implemented.
US GAAP prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step requires the Company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step requires the Company to recognize in the financial statements each tax position that meets the more likely than not criteria, measured at the amount of benefit that has a greater than fifty percent likelihood of being realized.current-period expense when incurred.
The Company recognizes interest and penalties related to unrecognized tax benefits within interest expense and warehousing, selling and administrative, respectively, in the accompanying consolidated statements of operations. Accrued interest and penalties are included within eitherin other accrued expenses orand other long-term liabilities in the consolidated balance sheets.
Refer to “Note 7: Income taxes” for further information.
Pension and other postretirementDefined benefit plans
The Company sponsors several defined benefit and defined contribution plans. The Company’s contributions to defined contribution plans are charged to income during the period of the employee’s service.
The benefit obligation and cost of defined benefit pension plans and other postretirement benefits are calculated based on actuarial valuations, which involves making assumptions about discount rates, expected rates of return on assets, future salary increases, future health care costs, mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty.
The projected benefit obligation is calculated separately for each plan based on the estimated future benefit employees have earned in return for their service based on the employee’s expected date of retirement. Those benefits are discounted to determine the present value of the benefit obligations using the projected unit-credit method. A liability is recognized on the balance sheet for each plan to the extent the projected benefit obligation is in excess of the fair value of plan assets. An asset is recorded for each plan to the extent the fair value of plan assets is in excess of the projected benefit obligation.
The Company recognizes actuarial gains or losses, known as “mark to market” adjustments, at eachthe measurement date, December 31. The mark to market adjustments primarily include gains and losses resulting from changes in discount rates and the difference between the expected and actual rate of return on plan assets and actual plan asset returns. Curtailment losses must be recognized in the statement of operations when it is probable that a curtailment will occur and its effects are reasonably estimable. However, a curtailment gain is recognized in the statement of operations when the related employees terminate or the plan suspension or amendment is adopted, whichever is applicable.assets. Settlement gains and losses are recognized in the period in which the settlement occurs, regardlessoccurs.
Service costs are recognized within warehousing, selling, and administrative expenses in the consolidated statement of operations. All other components of net periodic benefit cost are classified as other expense, net.
The fair value of plan assets is used to calculate the expected return on assets component of the net periodic benefit cost.
ReferLeases
At the commencement date of a lease, the Company recognizes a liability to “Note 9: Employee benefit plans” for further information.
Leases
All leasesmake lease payments and an asset representing the right to use the underlying asset during the lease term. The lease liability is measured at the present value of lease payments over the lease term, including variable fees that are determined notknown or subject to meet anya minimum floor. The lease liability includes lease component fees, while non-lease component fees are expensed as incurred for all asset classes. When a contract excludes an implicit rate, the Company utilizes an incremental borrowing rate based on information available at the lease commencement date including, lease term and geographic region. The initial valuation of the capitalright-of-use (“ROU”) asset includes the initial measurement of the lease criterialiability, lease payments made in advance of the lease commencement date and initial direct costs incurred by the Company and excludes lease incentives.
Leases with an initial term of 12 months or less are classified as operating leases. Operatingshort-term leases and are not recorded on the consolidated balance sheets. The lease costs areexpense for short-term leases is recognized as an expense in the statement of operations on a straight-line basis over the lease term.
The Company leases certain vehicles and equipment that qualify for capital lease classification. Assets under capital leases are carried at historical cost, net of accumulated depreciation and are included in property, plant and equipment, net in the consolidated balance sheets. DepreciationLegal costs
We expense related to the capital lease assets is included in depreciation expense in the consolidated statement of operations. Refer to “Note 12: Property, plant and equipment, net” for further information.
The present value of minimum lease payments under a capital lease is included in current portion of long-term debt and long-term debt in the consolidated balance sheets. The capital lease obligation is accreted utilizing the effective interest method and interest expense related to the capital lease obligation is included in interest expense in the consolidated statement of operations. Refer to “Note 20: Commitments and contingencies” for further information.
Contingencies
A loss contingency is recorded if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. The Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the ultimate loss. Changes in these factors and related estimates could materially affect the Company’s financial position and results of operations. Legal expenses are recordedlegal costs as legal services are provided. Refer to “Note 20: Commitments and contingencies” for further information.incurred.
Environmental liabilities
Environmental contingenciesliabilities are recognized for probable and reasonably estimable losses associated with environmental remediation. Incremental direct costs of the investigation, remediation effort and post-remediation monitoring are included in the estimated environmental contingencies.liabilities. Expected cash outflows related to environmental remediation for the next 12 months and amounts for which the timing is uncertain are reported as current within other accrued expenses in the consolidated balance sheets. The long-term portion of environmental liabilities is reported within other long-term liabilities in the consolidated balance sheets on an undiscounted basis, except for sites for which the amount and timing of future cash payments are fixed or reliably determinable. Environmental remediation expenses are included within warehousing, selling and administrative expenses in the consolidated statements of operations, unless associated with disposed operations, in which case such expenses are included in other operating expenses, net.
Environmental costs are capitalized if the costs extend the life of the property, increase its capacity and/or mitigate or prevent contamination from future operations.
Refer to “Note 20: Commitments and contingencies” for further information.
Revenue recognition
Revenue is recognized when performance obligations under the terms of the contract are satisfied, which generally occurs when goods are transferred to a customer or as services are provided to a customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goodsa good or providing services to customers. Net sales includes product sales, billings for freight and handling charges and fees earned for services provided, net of discounts, expected returns, customer rebates, variable consideration and sales or other revenue-based taxes. The Company recognizes product sales and billings for freight and handling charges when products are considered delivered toa service. Since the customer under the terms of the sale.
Refer to “Note 3: Revenue” for further information.
Foreign currency translation
The functional currency of the Company’s subsidiaries is the local currency, unless the primary economic environment requires the use of another currency. Transactions denominated in foreign currencies are recorded in the functional currency of each subsidiary at the rate of exchange on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are remeasured into the functional currency of each subsidiary at period-end exchange rates. These foreign currency transaction gains and losses are recognized in other (expense) income, net in the consolidated statements of operations.
Foreign currency gains and losses relating to intercompany borrowings that are considered a part of the Company’s investment in a foreign subsidiary are reflected as a component of currency translation within accumulated other comprehensive loss in stockholders’ equity. The following table provides information pertaining to total foreign currency gains or losses related to such intercompany borrowings:
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(in millions) | | Foreign Currency Gains / (Losses) |
Year ended December 31, 2018 | | $ | — |
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Year ended December 31, 2017 | | 4.8 |
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Year ended December 31, 2016 | | (34.8 | ) |
Assets and liabilities of foreign subsidiaries are translated into US dollars at period-end exchange rates. Income and expense accounts of foreign subsidiaries are translated into US dollars at the average exchange rates for the period. The net exchange gains and losses arising on this translation are reflected as a component of currency translation within accumulated other comprehensive loss in stockholders’ equity. Refer to “Note 11: Accumulated other comprehensive loss” for further information.
Stock-based compensation plans
The Company measures the total amount of employee stock-based compensation expense for a grant based on the grant date fair value of each award and recognizes the stock-based compensation expense for each separately vesting tranche of an award on a straight-line basis over the requisite service period. Stock-based compensation is based on unvested outstanding awards. The Company has elected to recognize forfeitures when realized. Stock-based compensation expense is classified within other operating expenses, net in the consolidated statements of operations. Refer to “Note 10: Stock-based compensation” for further information.
Share repurchases
The Company does not hold any treasury shares, as all shares of common stock are retired upon repurchase. Furthermore, when share repurchases occur and the common stock is retired, the excess of the repurchase price over par is allocated between additional paid-in capital and accumulated deficit such that the portion allocated to additional paid-in-capital is limited to the additional paid-in-capital created from that particular share issuance (i.e. the book value of those shares) plus any resulting leftover additional paid-in-capital from previous share repurchases in instances where the repurchase price was lower than the original issuance price.
Fair value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. US GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair-value hierarchy:
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| Level 1 | Quoted prices for identical instruments in active markets.
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| Level 2 | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuation in which all significant inputs and significant value drivers are observable in active markets.
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| Level 3 | Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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When available, the Company uses quoted market prices to determine fair value and classifies such items as Level 1. In cases where a market price is not available, the Company will make use of observable market-based inputs to calculate fair value, in which case the items are classified as Level 2. If quoted or observable market prices are not available, fair value is based on internally developed valuation techniques that use, where possible, current market-based or independently sourced market
information. Items valued using internally generated valuation techniques are classified according to the lowest level input that is significant to the valuation, and may be classified as Level 3 even though there may be significant inputs that are readily observable. Refer to “Note 17: Fair value measurements” for further information.
Certain financial instruments, such as derivative financial instruments, are required to be measured at fair value on a recurring basis. Other financial instruments, such as the Company’s own debt, are not required to be measured at fair value on a recurring basis. The Company elected to not make an irrevocable election to measure financial instruments and certain other items at fair value.
Derivatives
The Company uses derivative financial instruments, such as foreign currency contracts, interest rate swaps and interest rate caps, to manage its risks associated with foreign currency and interest rate fluctuations. Derivative financial instruments are recorded in either prepaid expenses and other current assets, other assets, other accrued expenses or other long-term liabilities in the consolidated balance sheets at fair value. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swaps is determined by estimating the net present value of amounts to be paid under the agreement offset by the net present value of the expected cash inflows based on market rates and associated yield curves. For derivative contracts with the same counterparty where the Company has a master netting arrangement with the counterparty, the fair value of the asset/liability is presented on a net basis within the consolidated balance sheets. Refer to “Note 17: Fair value measurements” for additional information relating to the gross and net balances of derivative contracts. Changes in the fair value of derivative financial instruments are recognized in the consolidated statements of operations, unless specific hedge accounting criteria are met. Cash flows associated with derivative financial instruments are recognized in the operating section of the consolidated statements of cash flows.
For the purpose of hedge accounting, derivatives are classified as either fair value hedges, where the instrument hedges the exposure to changes in the fair value of a recognized asset or liability; or cash flow hedges, where the instrument hedges the exposure to variability in cash flows that are either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction. Gains and losses on derivatives that meet the conditions for fair value hedge accounting are recognized immediately in the consolidated statements of operations, along with the offsetting gain or loss on the related hedged item. For derivatives that meet the conditions for cash flow hedge accounting, the effective and ineffective portion of the gain or loss on the derivative is recognized in accumulated other comprehensive loss on the consolidated balance sheets. Amounts in accumulated other comprehensive loss are reclassified to the consolidated statement of operations in the same period in which the hedged transactions affect earnings. For both fair value hedges and cash flow hedges, the gains and losses related to the derivative instruments are recognized within the same financial statement line item within the consolidated statement of operations as the gains and losses associated with the hedged items.
For derivative instruments designated as hedges, the Company formally documents the hedging relationship to the hedged item and its risk management strategy. The Company assesses the effectiveness of its hedging instruments at inception and on an ongoing basis. Hedge accounting is discontinued when the hedging instrument is sold, expired, terminated or exercised, or no longer qualifies for hedge accounting.
Refer to “Note 18: Derivatives” for further information.
Earnings per share
Basic earnings per share is based on the weighted average number of common shares outstanding during each period, which excludes non-vested restricted stock units, non-vested restricted stock and stock options. Diluted earnings per share is based on the weighted average number of common shares and dilutive common share equivalents outstanding during each period. The Company reflects common share equivalents relating to stock options, non-vested restricted stock and non-vested restricted stock units in its computation of diluted weighted average shares outstanding, unless the effect of inclusion is anti-dilutive. The effect of dilutive securities is calculated using the treasury stock method.
The Company has issued certain restricted stock awards, which are unvested stock-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents. These restricted shares are considered participating securities. Accordingly, the Company calculates net income applicable to common stock using the two-class method, whereby net income is allocated between common stock and participating securities.
Refer to “Note 8: Earnings per share” for further information.
3. Revenue
On January 1, 2018, the Company adopted the new revenue standard using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018
are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under ASC Topic 605. The Company recorded a net decrease to the opening accumulated deficit of $0.8 million as of January 1, 2018 due to the cumulative impact of adopting the new revenue standard.
The Company disaggregates revenues from contracts with customers by both geographic segments and revenue contract types. Geographic reportable segmentation is pertinent to understanding Univar’s revenues, as it aligns to how the Company reviews the financial performance of its operations. Revenue contract types are differentiated by the type of good or service Univar offers customers, since the contractual terms necessary for revenue recognition are unique to each of the identified revenue contract types.
The following table disaggregates external customer net sales by major stream:
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | USA | | Canada | | EMEA | | Rest of World | | Consolidated |
| | Year Ended December 31, 2018 |
Chemical Distribution | | $ | 4,775.2 |
| | $ | 877.6 |
| | $ | 1,974.4 |
| | $ | 383.8 |
| | $ | 8,011.0 |
|
Crop Sciences | | — |
| | 381.6 |
| | — |
| | — |
| | 381.6 |
|
Services | | 185.8 |
| | 43.1 |
| | 1.3 |
| | 9.7 |
| | 239.9 |
|
Total external customer net sales | | $ | 4,961.0 |
| | $ | 1,302.3 |
| | $ | 1,975.7 |
| | $ | 393.5 |
| | $ | 8,632.5 |
|
Revenue is recognized when performance obligations under the terms of the contract are satisfied, which generally occurs when goods or services are transferred to a customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Payment terms and conditions vary by regions where the Company performs business and contract types. The term between invoicing and when payment is due is generally oneless than a year, or less. As of December 31, 2018, none of the Company’s contracts containedCompany has not recognized a significant financing component.
Revenue for bill-and-hold arrangements is recognized if the Company has a substantive customer request, the materials are properly segregated and designated as belonging to the customer, materials are ready to be transferred to the customer and Univarthe Company is unable to direct the materials to service another customer. The Company has certain contractual relationships designated as an agency relationship, which requires the Company to recognize revenues on a net basis.
Chemical Distribution
The Company generates revenueRevenue is recognized when control for products isperformance obligations under the terms of the contract are satisfied, which generally occurs when goods are transferred to customers. Certain customers may receivea customer under the terms of the sale. Net sales include product sales and billings for freight and handling charges, net of discounts, off the transaction price, primarily due toexpected returns, customer price and volume incentives, and sales or return product for non-conformance, which are accounted for as variable consideration.other revenue-based taxes. The Company estimates the change in the transaction price that isand volume incentives, which are expected to be provided to customers, and expected returns based on historical experience, which impacts revenues recognized.experience.
Crop Sciences
The Company generates revenue when control for products is transferred to customers. The amount of consideration recorded varies due to price movements and rights granted to customers to return product. Customer payment terms often extend through a growing season, which may be up to six months.
Transaction prices may move during an agricultural growing season and changes mayare affected by special offers or volume discounts, which affect the amount of consideration the Company will receive. Transaction prices areCustomers also affected by special offers or volume discounts.may be provided rights to return eligible products. The Company estimates the expected returns and changes in the transaction price based on the combination of historical experience and the impact of weather on the current agriculture season. The adjustments to the transaction price are recognized as variable consideration and estimate of returns impacts revenues recognized.
When customers are provided rights to return eligible products, the Company estimates the expected returns based on the combination of historical experience and the impact of weather on the current agriculture season, which affects the revenues recognized.
Services
The Company generates revenue from services as they are performed and economic value is transferred to customers. Univar's servicesServices provided to customers are primarily related to waste management services and warehousing services. Waste management services
Foreign currency translation
Assets and liabilities of foreign subsidiaries are translated into US dollars at period-end exchange rates. Income and expense accounts of foreign subsidiaries are translated into US dollars at the average exchange rates for the period. The net exchange gains and losses arising on this translation are reflected as a component of currency translation within AOCI.
Transaction gains and losses are recognized in other expense, net in the consolidated statements of operations. Transaction gains and losses relating to intercompany borrowings that are an investment in a foreign subsidiary are reflected as a component of currency translation within AOCI in stockholders’ equity.
Stock-based compensation plans
The Company measures the total amount of employee stock-based compensation expense based on the grant date fair value of each award. Expense is recognized for each separately vesting tranche on a straight-line basis over the requisite service period, which is the shorter of the service period of the award or the period until the employees' retirement eligibility date. The Company recognizes forfeitures when incurred.
Fair value
Certain assets and liabilities are required to be recorded at fair value. The estimated fair values of those assets and liabilities have been determined using market information and valuation methodologies. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. There are three levels of inputs that may be used to measure fair value:
| | | | | | | | |
| Level 1 | Quoted prices for identical instruments in active markets. |
| | |
| Level 2 | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuation in which all significant inputs and significant value drivers are observable in active markets. |
| | |
| Level 3 | Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
Derivatives
The Company uses derivative financial instruments to manage risks associated with foreign currency and interest rate fluctuations. We do not use derivative instruments for speculative trading purposes. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swaps is determined by estimating the net present value of amounts to be paid under the agreement offset by the net present value of the expected cash inflows based on market rates and associated yield curves. For derivative contracts with the same counterparty where the Company has a master netting arrangement with the counterparty, the fair value of the asset/liability is presented on a net basis within the consolidated balance sheets. Changes in the fair value of derivative financial instruments are recognized in the consolidated statements of operations within interest expense or other expense, net, unless specific hedge accounting criteria are met. Cash flows associated with derivative financial instruments are recognized in the operating section of the consolidated statements of cash flows.
For derivatives designated as cash flow hedges, changes in the fair value of the derivative are recorded to AOCI and are reclassified to earnings when the underlying forecasted transaction affects earnings. For contracts designated as cash flow hedges, we reassess the probability of the underlying forecasted transactions occurring on a quarterly basis. For derivatives not designated as hedging instruments, all changes in fair value are recorded to earnings in the current period.
Earnings per share
Basic earnings per share is based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is based on the weighted average number of common shares and dilutive common share equivalents outstanding during each period. The Company reflects common share equivalents relating to stock options, non-vested restricted stock and non-vested restricted stock units in its computation of diluted weighted average shares outstanding, unless the effect of inclusion is anti-dilutive. The effect of dilutive securities is calculated using the treasury stock method.
We consider restricted stock awards to be participating securities, since holders of such shares have non-forfeitable dividend rights in the event the Company declares a common stock dividend.
3. Business combinations
Year ended December 31, 2019
Acquisition of Nexeo Solutions
On February 28, 2019, the Company completed an acquisition of 100% of the equity interest of Nexeo Solutions, Inc., 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.
The total purchase price of the acquisition was $1,814.8 million, composed of $1,201.0 million of cash paid (net of cash acquired of $46.8 million) and $613.8 million of newly issued shares of Univar Solutions common stock, which represented approximately 26.4 million shares, based on Univar Solutions’ closing stock price of $23.29 on February 27, 2019. The final 26.4 million shares issued include the cancellation of 1.5 million shares in connection with the appraisal litigation settlement, see “Note 21: Commitments and contingencies” for more information.
The cash portion of the purchase price, acquisition related costs and repayment of approximately $936.3 million of Nexeo’s debt and other long-term liabilities were funded using the proceeds from the issuance of Term B Loans, borrowings under the New Senior ABL Facility and the ABL Term Loan issued on February 28, 2019. Refer to “Note 18: Debt” for more information.
As of December 31, 2019, the Company updated the purchase price allocation to reflect fair value adjustments from the third-party valuation firm’s report valuing Nexeo’s tangible and intangible assets, working capital adjustments associated with the sale of the Nexeo plastics distribution business (“Nexeo Plastics”) as well as tax adjustments. The initial accounting for this acquisition is considered preliminary and is subject to adjustments on receipt of additional information relevant to the acquisition to complete the opening balances for deferred income taxes. The preliminary values and measurement period adjustments are shown below:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | At Acquisition Date | | Measurement Period Adjustments | | As Adjusted |
Trade accounts receivable, net | | $ | 286.9 | | | $ | 9.4 | | | $ | 296.3 | |
Inventories | | 149.0 | | | 1.2 | | | 150.2 | |
Prepaid expenses and other current assets | | 27.2 | | | 38.2 | | | 65.4 | |
Assets held for sale | | 1,030.9 | | | (142.7) | | | 888.2 | |
Property, plant and equipment, net | | 227.4 | | | 34.9 | | | 262.3 | |
Goodwill | | 682.2 | | | (126.5) | | | 555.7 | |
Intangible assets, net | | 173.9 | | | (35.2) | | | 138.7 | |
Other assets | | 37.0 | | | 0.4 | | | 37.4 | |
Trade accounts payable | | (133.7) | | | (4.0) | | | (137.7) | |
Other accrued expenses | | (94.9) | | | (50.9) | | | (145.8) | |
Liabilities held for sale | | (390.9) | | | 169.4 | | | (221.5) | |
Deferred tax liabilities | | (102.3) | | | 98.1 | | | (4.2) | |
Other long-term liabilities | | (77.9) | | | 7.7 | | | (70.2) | |
Purchase consideration, net of cash | | $ | 1,814.8 | | | $ | — | | | $ | 1,814.8 | |
Assets and liabilities held for sale are related to the Nexeo plastics distribution business. Nexeo Plastics was not aligned with the Company’s strategic objectives and on March 29, 2019, the business was sold for total proceeds of $664.3 million, net of cash disposed. Refer to “Note 4: Discontinued operations and dispositions” for further information.
The Company recorded $555.7 million of goodwill, consisting of $540.1 million in the USA segment, $3.8 million in Canada and $11.8 million in LATAM. The goodwill is primarily attributable to expected synergies from combining operations. The Company expects approximately $108.3 million of goodwill to be deductible for income tax purposes.
The identified intangible assets were related to plant maintenance, environmental contracting, environmental consultingcustomer relationships which have a weighted-average amortization period of ten years.
The Company assumed 50.0 million warrants, equivalent to 25.0 million Nexeo shares, with an estimated aggregate fair value of $26.0 million at the February 28, 2019 closing date. The warrants were converted into the right to receive, upon
exercise, the merger consideration consisting of approximately 7.6 million shares of Univar Solutions common stock plus cash. The warrants have an exercise price of $27.80 and will expire on June 9, 2021. The warrants as other long-term liabilities within the consolidated balance sheets. Refer to “Note 19: Fair value measurements” for more information.
The amounts of net sales and net income from continuing operations related to the Nexeo chemical distribution business, included in the Company’s consolidated statements of operations from March 1, 2019 to December 31, 2019 are as follows:
| | | | | | | | |
(in millions) | | |
Net sales | | $ | 1,489.3 | |
Net loss from continuing operations | | (12.1) | |
The following unaudited pro forma financial information combines the unaudited results of operations as if the acquisition of Nexeo had occurred at the beginning of the periods presented below and exclude the results of operations related to Nexeo Plastics, as this divestiture was reflected as discontinued operations. Refer to “Note 4: Discontinued operations and dispositions” for additional information.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | | | Year ended December 31, | | |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | | $ | 2,155.0 | | | $ | 2,437.4 | | | $ | 9,612.9 | | | $ | 10,685.5 | |
Net (loss) income from continuing operations | | (54.8) | | | (72.9) | | | (94.3) | | | 154.8 | |
The pro forma financial information is for comparative purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2018.
The unaudited pro forma information is based upon accounting estimates and judgments the Company believes are reasonable and reflects adjustments directly attributed to the business combination including amortization on acquired intangible assets, interest expense, transaction and acquisition related costs, depreciation related to purchase accounting fair value adjustments and the collectionrelated tax effects.
Year ended December 31, 2018
In the year ended December 31, 2018, the Company completed 2 acquisitions. On January 4, 2018, the Company completed a $7.5 million acquisition of Kemetyl Norge Industri AS (“Kemetyl”) as well as a definitive asset purchase agreement with Kemetyl Aktiebolag, leading distributors of chemical products in the Nordic region which provide bulk and disposalspecialty chemicals. On May 31, 2018, the Company completed a $13.3 million acquisition of Earthoil Plantations Limited (“Earthoil”), a supplier of pure, organic, fair trade essential and cold-pressed vegetable seed oils. The accounting for both hazardousacquisitions was completed in 2019.
4. Discontinued operations and non-hazardous waste products. Warehousing servicesdispositions
Discontinued operations
On March 29, 2019, the Company completed the sale of the Nexeo Plastics to an affiliate of One Rock Capital Partners, LLC (“Buyer”) for total proceeds of $664.3 million (net of cash disposed of $2.4 million), including $26.7 million for a working capital adjustment. The Nexeo preliminary purchase price allocation is primarily inclusive of blending, warehousing, logisticsthese working capital adjustments. Refer to “Note 3: Business combinations” for more information.
In connection with the transaction, the Company entered into a Transition Services Agreement (TSA), a Warehouse Service Agreement (WSA) and Real Property Agreements with the Buyer which are designed to ensure and facilitate an orderly transfer of business operations and will terminate at various times, between six and twenty-four months and can be renewed with a maximum of 2 twelve-month periods. The income and expense for the services will be reported as other operating expenses, net in the consolidated statements of operations. The Real Property Agreements will have a maximum tenure of 3 years. These arrangements do not constitute significant continuing involvement in the plastics distribution servicesbusiness.
The following table summarizes the operating results of the Company’s discontinued operations related to the sale described above for customers. Waste management and warehousing services are recognized over timethe year ended December 31, 2019, as presented in “Net income from discontinued operations” on the performance obligations are satisfied.consolidated statements of operations.
Costs | | | | | | | | |
(in millions) | | Year Ended December 31, 2019 |
External sales | | $ | 156.9 | |
Cost of goods sold (exclusive of depreciation) | | 136.7 | |
Outbound freight and handling | | 3.5 | |
Warehousing, selling and administrative | | 7.9 | |
Other expenses | | 1.4 | |
Income from discontinued operations before income taxes | | $ | 7.4 | |
Income tax expense from discontinued operations | | 2.0 | |
Net income from discontinued operations | | $ | 5.4 | |
There were no significant non-cash operating activities from the Company’s discontinued operations related to obtain or fulfill contracts with customersthe plastics distribution business.
Univar expenses costsDispositions
On December 31, 2019, the Company completed the sale of the Environmental Sciences business to obtain contracts when the contract term and benefit period is expected to be one year or less. Contract costs where the contract term and benefit period is expected to be more than a year are capitalized and amortized over the performance obligation period. Capitalized contract costsAEA Investors LP for total cash proceeds of $1.2$174.0 million (net of cash disposed of $0.7 million and $5.9 million areof transaction expenses) plus a $5.0 million ($2.4 million present value) subordinated note receivable (the “Transaction”) and subject to a working capital adjustment. The Company recorded a $41.4 million gain on sale of this business in the consolidated statements of operations and was included in other current assetsthe USA and other assetsCanada segments. The sale of the business did not meet the criteria to be classified as a discontinued operation in the Company’s financial statements because the disposition did not represent a strategic shift, that has, or will have, a major effect on the Company's operations and financial results.
The following summarizes the income before income taxes attributable to the Environmental Sciences business:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | |
(in millions) | | 2019 | | 2018 | | 2017 |
Income before income taxes | | $ | 28.6 | | | $ | 28.2 | | | $ | 28.7 | |
5. Revenue
The Company disaggregates revenues with customers by both geographic segments and revenue contract types. Geographic reportable segmentation is pertinent to understanding Univar Solutions’ revenues, as it aligns to how the Company reviews the financial performance of December 31, 2018.its operations. Revenue contract types are differentiated by the type of good or service since the contractual terms necessary for revenue recognition are unique to each of the identified revenue contract types.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | USA | | Canada | | EMEA | | LATAM | | Consolidated |
| | Year Ended December 31, 2019 | | | | | | | | |
Chemical Distribution | | $ | 5,507.2 | | | $ | 852.8 | | | $ | 1,784.2 | | | $ | 443.7 | | | $ | 8,587.9 | |
Crop Sciences | | — | | | 318.0 | | | — | | | — | | | 318.0 | |
Services | | 321.3 | | | 47.0 | | | 1.3 | | | 11.4 | | | 381.0 | |
Total external customer net sales | | $ | 5,828.5 | | | $ | 1,217.8 | | | $ | 1,785.5 | | | $ | 455.1 | | | $ | 9,286.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | USA | | Canada | | EMEA | | LATAM | | Consolidated |
| | Year Ended December 31, 2018 | | | | | | | | |
Chemical Distribution | | $ | 4,775.2 | | | $ | 877.6 | | | $ | 1,974.4 | | | $ | 383.8 | | | $ | 8,011.0 | |
Crop Sciences | | — | | | 381.6 | | | — | | | — | | | 381.6 | |
Services | | 185.8 | | | 43.1 | | | 1.3 | | | 9.7 | | | 239.9 | |
Total external customer net sales | | $ | 4,961.0 | | | $ | 1,302.3 | | | $ | 1,975.7 | | | $ | 393.5 | | | $ | 8,632.5 | |
Deferred revenue
Deferred revenues are recognized as a contract liability when customers provide Univar Solutions with consideration prior to the Company satisfying a performance obligation. The following table provides information pertaining to the deferred revenue balance and account activity:
|
| | | | |
(in millions) | | |
Deferred revenue as of January 1, 2018 | | $ | 100.9 |
|
Deferred revenue as of December 31, 2018 | | 45.6 |
|
Revenue recognized that was included in the deferred revenue balance at the beginning of the period | | 100.3 |
|
| | | | | | | | |
(in millions) | | |
Deferred revenue as of January 1, 2019 | | $ | 45.6 | |
Deferred revenue as of December 31, 2019 | | 65.5 | |
Revenue recognized that was included in the deferred revenue balance at the beginning of the period | | 44.5 | |
The deferred revenue balances are all expected to have a duration of one year or less and are recorded within the other accrued expenses line item of the consolidated balance sheet.
4.6. Other operating expenses, net
Other operating expenses, net consisted of the following items:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
(in millions) | 2019 | | 2018 | | 2017 |
Acquisition and integration related expenses | $ | 152.1 | | | $ | 22.0 | | | $ | 3.1 | |
Stock-based compensation expense | 25.1 | | | 20.7 | | | 19.7 | |
Restructuring charges | 2.6 | | | 4.8 | | | 5.5 | |
Other employee severance costs | 31.2 | | | 16.4 | | | 8.1 | |
Other facility closure costs (1) | 7.1 | | | — | | | — | |
(Gain) loss on sale of property, plant and equipment and other assets | (9.9) | | | 2.0 | | | (11.3) | |
Saccharin legal settlement | 62.5 | | | — | | | — | |
Business transformation costs | — | | | — | | | 23.4 | |
Other | 27.5 | | | 7.6 | | | 6.9 | |
Total other operating expenses, net | $ | 298.2 | | | $ | 73.5 | | | $ | 55.4 | |
| | | | | |
(1)Other facility closure costs includes $3.6 million recorded as an estimated withdrawal liability associated with a multi-employer pension plan related to an announced facility closure.
|
| | | | | | | | | | | |
| Year ended December 31, |
(in millions) | 2018 | | 2017 | | 2016 |
Stock-based compensation expense | $ | 20.7 |
| | $ | 19.7 |
| | $ | 10.4 |
|
Business transformation costs | — |
| | 23.4 |
| | 5.4 |
|
Restructuring charges | 4.8 |
| | 5.5 |
| | 6.5 |
|
Other employee termination costs | 16.4 |
| | 8.1 |
| | 1.5 |
|
Loss (gain) on sale of property, plant and equipment and other assets | 2.0 |
| | (11.3 | ) | | (0.7 | ) |
Acquisition and integration related expenses | 22.0 |
| | 3.1 |
| | 5.5 |
|
Other | 7.6 |
| | 6.9 |
| | 8.6 |
|
Total other operating expenses, net | $ | 73.5 |
| | $ | 55.4 |
| | $ | 37.2 |
|
5.7. Restructuring charges
Restructuring charges relate to the implementation of several regional strategic initiatives aimed at streamlining the Company’s cost structure and improving its operations. These actions primarily resulted in workforce reductions, lease termination costs and other facility rationalization costs. Restructuring charges are recorded in other operating expenses, net in the consolidated statement of operations.
2018 Restructuring
During the year ended December 31, 2018, the Company recordedmanagement approved a plan to consolidate departments resulting in restructuring charges of $3.2 million in USA, consisting of $3.1 million in employee terminationseverance costs and $0.1 million in other exit costs for employees impacted by a decisionand in Other, the Company recorded $0.9 million, relating to consolidate departments. Additionally,severance costs. In 2019, under the same program the Company recorded restructuring charges of $0.9$2.4 million in USA and $0.3 million in Other relating to employee terminationconsisting of severance costs. The Company expects to incur approximately $4.7$0.4 million of additional employee termination and other exit costsseverance over the next two yearsyear and expects this program to be substantially completed by 2020.
Also during the year ended December 31, 2018, the Company recorded restructuring charges of $0.9 million in EMEA relating to employee termination costs. The Company does not expect to incur materialrecorded restructuring charges of $0.1 million in facility exit costs induring the future related toyear ended December 31, 2019 and reduced its estimate by $0.2 million within employee termination costs for this restructuring program. The actions associated with this program are expected to be completed by the endcomplete as of December 31, 2019.
During the year ended December 31,In 2018, the Company recorded restructuring charges of $0.7 million for the Rest of WorldLATAM segment, consisting of $0.4 million in employee termination costs, $0.2 million in facility exit costs and $0.1 million in other exit costs. The actions associated with this program were completed as of December 31, 2018.
The cost information above does not contain any estimates for programs that may be developed and implemented in future periods.2014 to 2017 Restructuring
Between 2014 through 2017, management implemented several regional strategic initiatives aimed at streamlining the Company’s cost structure and improving its operations. Total cumulative charges recorded through December 31, 2018 for USA related to these restructuring programs were $39.5 million, which included $16.5 million in employee termination costs, $21.3 million in facility exit costs, and $1.7 million in other exit costs. The Company did not record restructuring charges for the programs during 2018. The actions associated with the restructuring programs were completed as of June 30, 2018, although administratively cash payments will be made into the future. During the year ended December 31, 2018, the Company reduced its estimate in the amount of $0.9 million within facility exit costs relating to a favorable lease buyout for USA.
Total cumulative charges recorded through December 31, 2018 for Canada were $5.7 million related to employee termination costs. There were no restructuring charges recorded for the programs during 2018. As of June 30, 2018, the actions associated with the restructuring programs were completed.
Total cumulative charges recorded through December 31, 2018 for EMEA were $32.8 million, which included $22.5 million in employee termination costs, $3.7 million in facility exit costs, and $6.6 million in other exit costs. During 2018, the Company did not record restructuring charges for the programs. The actions associated with the restructuring programs were completed as of June 30, 2018.2018, although cash payments will be made into the future.
TotalThe following table summarizes the cumulative chargesactivities recorded through December 31, 2018 for ROW were $6.4 million, which included $6.2 million in employee termination costs and $0.2 million in facility exit costs. The Company did not recordrelated to the Company's 2014 to 2017 restructuring charges for these programs during 2018. As of June 30, 2018, the Company completed this program.by segment:
Total cumulative charges recorded through December 31, 2018 for Other were $6.6 million, which included $5.8 million in employee termination costs and $0.8 million in other exit costs. There were no restructuring charges recorded for these programs during 2018. As of June 30, 2018, the Company completed this program. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | USA | | Canada | | EMEA | | LATAM | | Other | | Total |
Employee termination costs | $ | 16.5 | | | $ | 5.7 | | | $ | 22.5 | | | $ | 6.2 | | | $ | 5.8 | | | $ | 56.7 | |
Facility exit costs | 21.3 | | | — | | | 3.7 | | | 0.2 | | | — | | | 25.2 | |
Other exit costs | 1.7 | | | — | | | 6.6 | | | — | | | 0.8 | | | 9.1 | |
Total | $ | 39.5 | | | $ | 5.7 | | | $ | 32.8 | | | $ | 6.4 | | | $ | 6.6 | | | $ | 91.0 | |
The following tables summarize activity related to accrued liabilities associated with redundancy and restructuring:the restructuring liability:
| | (in millions) | January 1, 2018 | | Charge to earnings | | Cash paid | | Non-cash and other | | December 31, 2018 | (in millions) | January 1, 2019 | | Charge to earnings | | Cash paid | | Non-cash and other | | December 31, 2019 |
Employee termination costs | $ | 3.0 |
| | $ | 5.3 |
| | $ | (3.4 | ) | | $ | (0.7 | ) | | $ | 4.2 |
| Employee termination costs | $ | 4.2 | | | $ | 2.5 | | | $ | (3.0) | | | $ | — | | | $ | 3.7 | |
Facility exit costs | 10.2 |
| | (0.7 | ) | | (4.4 | ) | | (0.1 | ) | | 5.0 |
| Facility exit costs | 5.0 | | | 0.1 | | | (3.2) | | | — | | | 1.9 | |
Other exit costs | (0.5 | ) | | 0.2 |
| | (0.1 | ) | | 0.6 |
| | 0.2 |
| Other exit costs | 0.2 | | | — | | | — | | | — | | | 0.2 | |
Total | $ | 12.7 |
| | $ | 4.8 |
| | $ | (7.9 | ) | | $ | (0.2 | ) | | $ | 9.4 |
| Total | $ | 9.4 | | | $ | 2.6 | | | $ | (6.2) | | | $ | — | | | $ | 5.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | January 1, 2018 | | Charge to earnings | | Cash paid | | Non-cash and other | | December 31, 2018 |
Employee termination costs | $ | 3.0 | | | $ | 5.3 | | | $ | (3.4) | | | $ | (0.7) | | | $ | 4.2 | |
Facility exit costs | 10.2 | | | (0.7) | | | (4.4) | | | (0.1) | | | 5.0 | |
Other exit costs | (0.5) | | | 0.2 | | | (0.1) | | | 0.6 | | | 0.2 | |
Total | $ | 12.7 | | | $ | 4.8 | | | $ | (7.9) | | | $ | (0.2) | | | $ | 9.4 | |
|
| | | | | | | | | | | | | | | | | | | |
(in millions) | January 1, 2017 | | Charge to earnings | | Cash paid | | Non-cash and other | | December 31, 2017 |
Employee termination costs | $ | 6.9 |
| | $ | 2.9 |
| | $ | (7.2 | ) | | $ | 0.4 |
| | $ | 3.0 |
|
Facility exit costs | 13.2 |
| | 2.8 |
| | (5.5 | ) | | (0.3 | ) | | 10.2 |
|
Other exit costs | — |
| | (0.2 | ) | | (0.3 | ) | | — |
| | (0.5 | ) |
Total | $ | 20.1 |
| | $ | 5.5 |
| | $ | (13.0 | ) | | $ | 0.1 |
| | $ | 12.7 |
|
Restructuring liabilities of $5.9$5.3 million and $5.8$5.9 million were classified as current in other accrued expenses in the consolidated balance sheets as of December 31, 2018 and 2017, respectively. The long-term portion of restructuring liabilities of $3.5$0.5 million and $6.9$3.5 million were recorded in other long-term liabilities in the consolidated balance sheets as of December 31, 2019 and 2018, and 2017, respectively andrespectively. The long-term portion primarily consists of facility exit costs that are expected to be paid within the next five years.
While the Company believes the recorded restructuring liabilities are adequate, revisions to current estimates may be recorded in future periods based on new information as it becomes available.
8. Other expense, net
Other expense, net consisted of the following (losses) gains:
|
| | | | | | | | | | | |
| Year ended December 31, |
(in millions) | 2018 | | 2017 | | 2016 |
Pension mark to market loss (1)(2) | $ | (34.2 | ) | | $ | (3.8 | ) | | $ | (68.6 | ) |
Pension curtailment and settlement gains (1) | — |
| | 9.7 |
| | 1.3 |
|
Non-operating retirement benefits (1) | 11.0 |
| | 9.9 |
| | 15.3 |
|
Foreign currency transactions | (6.7 | ) | | (4.6 | ) | | (0.6 | ) |
Foreign currency denominated loans revaluation | (0.8 | ) | | (17.9 | ) | | (13.7 | ) |
Undesignated foreign currency derivative instruments (3) | 1.1 |
| | 0.3 |
| | (1.8 | ) |
Undesignated interest rate swap contracts (3) | — |
| | (2.2 | ) | | 10.1 |
|
Debt refinancing costs (4) | — |
| | (5.3 | ) | | — |
|
Other | (3.1 | ) | | (3.5 | ) | | (0.1 | ) |
Total other expense, net | $ | (32.7 | ) | | $ | (17.4 | ) | | $ | (58.1 | ) |
| | | | | |
| |
(1) | Refer to “Note 9: Employee benefit plans” for more information. |
| |
(2) | Includes mark to market loss related to defined benefit pension plans and other postretirement benefit plan. |
| |
(3) | Refer to “Note 18: Derivatives” for more information. |
| |
(4) | Refer to “Note 16: Debt” for more information. |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
(in millions) | 2019 | | 2018 | | 2017 |
Pension mark to market loss (1)(2) | $ | (50.4) | | | $ | (34.2) | | | $ | (3.8) | |
Pension curtailment and settlement gains (1) | 1.3 | | | — | | | 9.7 | |
Non-operating retirement benefits (1)(2) | 2.2 | | | 11.0 | | | 9.9 | |
Foreign currency transactions | (10.1) | | | (6.7) | | | (4.6) | |
Foreign currency denominated loans revaluation | 17.5 | | | (0.8) | | | (17.9) | |
Undesignated foreign currency derivative instruments (3) | (23.7) | | | 1.1 | | | 0.3 | |
Undesignated interest rate swap contracts (3) | (3.0) | | | — | | | (2.2) | |
Debt refinancing costs (4) | (1.2) | | | — | | | (5.3) | |
Other | (3.1) | | | (3.1) | | | (3.5) | |
Total other expense, net | | $ | (70.5) | | | $ | (32.7) | | | $ | (17.4) | |
| | | | | |
7.(1)Refer to “Note 11: Employee benefit plans” for more information.
(2)Represents mark to market loss and non-operating retirement benefits for both the defined benefit pension and other postretirement benefit plans.
(3)Refer to “Note 20: Derivatives” for more information.
(4)Refer to “Note 18: Debt” for more information.
9. Income taxes
Current income tax expense represents the amounts expected to be reported on the Company’s income tax returns, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Act”). The legislation significantly changes US tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act permanently reduces the US corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The SAB 118 measurement period ends when a company has obtained, prepared, and analyzed the information needed to complete the accounting requirements under ASC 740, "Income Taxes", but no later than one year from the enactment date of December 22, 2017. In 2017 and the first nine months of 2018, the Company recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because the Company had not yet completed its enactment-date accounting for these effects. At December 31, 2018, the Company has now completed its accounting for all the enactment-date income tax effects of the Act. As further discussed below, during 2018 the Company recognized adjustments of $6.8 million related to the provisional amounts recorded at December 31, 2017 and included these adjustments as a component of income tax expense from continuing operations. The main components of the SAB 118 adjustment of $6.8 million are increases due to additional transition tax of $13.0 million and deemed dividends of $9.2 million (tax) offset by a benefit for additional foreign tax credits utilized of $1.3 million (increase in foreign tax credit generated of $26.3 million offset by an increase in valuation allowance of $25.0 million), and a decrease in the valuation allowance on deferred interest expense of $13.8 million due to an increase in interest expense deduction.
Effective in 2018, the Company is subject to global intangible low tax income (“GILTI”) which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Due to the complexity of the GILTI tax rules, companies are allowed to make an accounting policy choice of either (1) treating taxes due on future US inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into a company’s measurement of its deferred taxes. The Company is electing to treat taxes due on future US inclusions in taxable income related to GILTI as a current-period expense when incurred and, therefore, there is no impact to the deferred tax rate in 2018.
For financial reporting purposes, (loss) income (loss) before income taxes includes the following components:
| | | Year ended December 31, | | Year ended December 31, | |
(in millions) | 2018 | | 2017 | | 2016 | (in millions) | 2019 | | 2018 | | 2017 |
Income (loss) before income taxes | | | | | | |
(Loss) income before income taxes | | (Loss) income before income taxes | | | | | |
United States | $ | 36.6 |
| | $ | 1.5 |
| | $ | (131.3 | ) | United States | $ | (194.5) | | | $ | 36.6 | | | $ | 1.5 | |
Foreign | 185.6 |
| | 167.3 |
| | 51.7 |
| Foreign | 193.4 | | | 185.6 | | | 167.3 | |
Total income (loss) before income taxes | $ | 222.2 |
| | $ | 168.8 |
| | $ | (79.6 | ) | |
Total (loss) income before income taxes | | Total (loss) income before income taxes | | $ | (1.1) | | | $ | 222.2 | | | $ | 168.8 | |
The expense (benefit) for income taxes is summarized as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
(in millions) | 2019 | | 2018 | | 2017 |
Current: | | | | | |
Federal | $ | 33.9 | | | $ | 13.8 | | | $ | 6.8 | |
State | 7.1 | | | 2.1 | | | 2.0 | |
Foreign | 39.2 | | | 31.2 | | | 28.5 | |
Total current | $ | 80.2 | | | $ | 47.1 | | | $ | 37.3 | |
Deferred: | | | | | |
Federal | $ | 12.2 | | | $ | 6.5 | | | $ | 26.5 | |
State | 3.4 | | | (0.5) | | | — | |
Foreign | 8.7 | | | (3.2) | | | (14.8) | |
Total deferred | $ | 24.3 | | | $ | 2.8 | | | $ | 11.7 | |
Total income tax expense from continuing operations | | $ | 104.5 | | | $ | 49.9 | | | $ | 49.0 | |
|
| | | | | | | | | | | |
| Year ended December 31, |
(in millions) | 2018 | | 2017 | | 2016 |
Current: | | | | | |
Federal | $ | 13.8 |
| | $ | 6.8 |
| | $ | (0.1 | ) |
State | 2.1 |
| | 2.0 |
| | 0.1 |
|
Foreign | 31.2 |
| | 28.5 |
| | 20.4 |
|
Total current | $ | 47.1 |
| | $ | 37.3 |
| | $ | 20.4 |
|
Deferred: | | | | | |
Federal | $ | 6.5 |
| | $ | 26.5 |
| | $ | (15.1 | ) |
State | (0.5 | ) | | — |
| | (3.0 | ) |
Foreign | (3.2 | ) | | (14.8 | ) | | (13.5 | ) |
Total deferred | $ | 2.8 |
| | $ | 11.7 |
| | $ | (31.6 | ) |
Total income tax expense (benefit) | $ | 49.9 |
| | $ | 49.0 |
| | $ | (11.2 | ) |
The reconciliationFor our continuing operations, differences between actual provisions for income taxes and provisions for income taxes at the US federal statutory tax rate (21.0% in 2019 and the Company’s effective tax rate is presented2018 and 35.0% in 2017) were as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
(in millions) | 2019 | | 2018 | | 2017 |
US federal statutory income tax (benefit) expense applied to (loss) income before income taxes | $ | (0.2) | | | $ | 46.7 | | | $ | 59.1 | |
State income taxes, net of federal benefit | 10.7 | | | 1.1 | | | 1.4 | |
Foreign tax rate differential | 8.7 | | | 8.1 | | | (18.0) | |
Effect of flow-through entities | 30.6 | | | (0.6) | | | 8.9 | |
Distributions from foreign subsidiaries | 31.9 | | | 9.0 | | | 17.6 | |
Global intangible low-taxed income | 22.8 | | | 19.9 | | | — | |
Gain on disposal | 12.9 | | | — | | | — | |
Change in valuation allowance, net | (18.8) | | | (11.6) | | | (18.1) | |
Foreign tax credit | (13.5) | | | (38.3) | | | (47.6) | |
Fines and penalties | 5.6 | | | — | | | 0.2 | |
Non-deductible employee expenses | 4.4 | | | 3.9 | | | 2.5 | |
Non-deductible acquisition costs | 3.5 | | | 0.3 | | | 0.2 | |
Shareholder settlements | 2.7 | | | — | | | — | |
Withholding and other taxes based on income | 1.7 | | | 0.5 | | | 0.5 | |
Warrants | 1.5 | | | — | | | — | |
Change in statutory income tax rates | (1.1) | | | — | | | (17.5) | |
Adjustment to prior year due to change in estimate | 1.0 | | | (0.8) | | | (0.5) | |
Net stock-based compensation | 0.6 | | | — | | | (3.7) | |
Foreign exchange rate remeasurement | (0.4) | | | (0.2) | | | 0.3 | |
Unrecognized tax benefits | (0.3) | | | (2.7) | | | (1.7) | |
Non-deductible expense | 0.3 | | | 0.6 | | | 0.4 | |
2017 US repatriation tax | — | | | 13.0 | | | 76.5 | |
Non-taxable interest income | — | | | (0.7) | | | (11.4) | |
Expiration of tax attributes | — | | | — | | | 0.1 | |
Foreign losses not benefited | — | | | — | | | 0.7 | |
Non-deductible interest expense | — | | | — | | | 0.1 | |
Other | (0.1) | | | 1.7 | | | (1.0) | |
Total income tax expense from continuing operations | | $ | 104.5 | | | $ | 49.9 | | | $ | 49.0 | |
Effective income tax rate | | (9,500.0) | % | | 22.5 | % | | 29.0 | % |
|
| | | | | | | | | | | |
| Year ended December 31, |
(in millions) | 2018 | | 2017 | | 2016 |
US federal statutory income tax expense (benefit) applied to income (loss) before income taxes | $ | 46.7 |
| | $ | 59.1 |
| | $ | (27.8 | ) |
State income taxes, net of federal benefit | 1.1 |
| | 1.4 |
| | (2.9 | ) |
Foreign tax rate differential | 8.1 |
| | (18.0 | ) | | (5.8 | ) |
Non-taxable interest income | (0.7 | ) | | (11.4 | ) | | (10.8 | ) |
Valuation allowance, net | (11.6 | ) | | (18.1 | ) | | (24.7 | ) |
Expiration of tax attributes | — |
| | 0.1 |
| | 4.4 |
|
Foreign losses not benefited | — |
| | 0.7 |
| | 8.0 |
|
Effect of flow-through entities | (0.6 | ) | | 8.9 |
| | (9.0 | ) |
Net stock-based compensation | — |
| | (3.7 | ) | | 1.7 |
|
Non-deductible expense | 4.8 |
| | 3.5 |
| | 3.4 |
|
Unrecognized tax benefits | (2.7 | ) | | (1.7 | ) | | (1.4 | ) |
Change in statutory income tax rates | — |
| | (17.5 | ) | | 2.7 |
|
Deemed dividends from foreign subsidiaries | 9.0 |
| | 17.6 |
| | 1.4 |
|
Global intangible low-taxed income | 19.9 |
| | — |
| | — |
|
Non-deductible interest expense | — |
| | 0.1 |
| | 2.6 |
|
Revaluation due to Section 987 tax law change | — |
| | — |
| | 45.0 |
|
Section 965 repatriation tax | 13.0 |
| | 76.5 |
| | — |
|
Foreign tax credit | (38.3 | ) | | (47.6 | ) | | — |
|
Other | 1.2 |
| | (0.9 | ) | | 2.0 |
|
Total income tax expense (benefit) | $ | 49.9 |
| | $ | 49.0 |
| | $ | (11.2 | ) |
The consolidated deferred tax assets and liabilities are detailed as follows:
|
| | | | | | | |
| December 31, |
(in millions) | 2018 | | 2017 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 49.4 |
| | $ | 68.6 |
|
Environmental reserves | 22.9 |
| | 25.3 |
|
Interest | 25.9 |
| | 35.7 |
|
Tax credit and capital loss carryforwards | 57.8 |
| | 37.2 |
|
Pension | 66.3 |
| | 68.2 |
|
Flow-through entities | 2.7 |
| | 2.5 |
|
Compensation | 12.2 |
| | 13.7 |
|
Inventory | 4.5 |
| | 4.2 |
|
Property, plant and equipment, net | 4.8 |
| | 3.3 |
|
Other temporary differences | 17.0 |
| | 15.1 |
|
Gross deferred tax assets | $ | 263.5 |
| | $ | 273.8 |
|
Valuation allowance | (106.3 | ) | | (117.2 | ) |
Deferred tax assets, net of valuation allowance | $ | 157.2 |
| | $ | 156.6 |
|
Deferred tax liabilities: | | | |
Property, plant and equipment, net | $ | (102.3 | ) | | $ | (98.7 | ) |
Intangible assets | (63.6 | ) | | (64.6 | ) |
Other temporary differences | (9.4 | ) | | (5.9 | ) |
Deferred tax liabilities | $ | (175.3 | ) | | $ | (169.2 | ) |
Net deferred tax liability | $ | (18.1 | ) | | $ | (12.6 | ) |
The changes in the valuation allowance were as follows:
|
| | | | | | | |
| December 31, |
(in millions) | 2018 | | 2017 |
Beginning balance | $ | 117.2 |
| | $ | 167.9 |
|
Change related to current net operating losses generated | — |
| | 0.7 |
|
Change related to current utilization of net operating loss carryforwards | (3.7 | ) | | (12.3 | ) |
Change related to future utilization of net operating loss carryforwards | (17.4 | ) | | (17.8 | ) |
Change related to generation/expiration of tax attributes | 21.3 |
| | 29.9 |
|
Change related to foreign currency | (1.3 | ) | | 7.1 |
|
Change related to utilization of deferred interest expense | (9.7 | ) | | (26.3 | ) |
Change related to tax rate change | 0.1 |
| | (31.6 | ) |
Change related to other items | (0.2 | ) | | (0.4 | ) |
Ending balance | $ | 106.3 |
| | $ | 117.2 |
|
| | | | | | | | | | | |
| December 31, | | |
(in millions) | 2019 | | 2018 |
Deferred tax assets: | | | |
Net operating loss carryforwards (“NOLs”) | $ | 39.1 | | | $ | 49.4 | |
Environmental reserves | 20.9 | | | 22.9 | |
Interest | 17.3 | | | 25.9 | |
Tax credit and capital loss carryforwards | 60.1 | | | 57.8 | |
Pension | 79.6 | | | 66.3 | |
Flow-through entities | — | | | 2.7 | |
Compensation | 16.0 | | | 12.2 | |
Inventory | 5.4 | | | 4.5 | |
Property, plant and equipment, net | 1.2 | | | 4.8 | |
Other temporary differences | 20.9 | | | 17.0 | |
Gross deferred tax assets | $ | 260.5 | | | $ | 263.5 | |
Valuation allowance | (87.5) | | | (106.3) | |
Deferred tax assets, net of valuation allowance | $ | 173.0 | | | $ | 157.2 | |
Deferred tax liabilities: | | | |
Property, plant and equipment, net | $ | (111.7) | | | $ | (102.3) | |
Intangible assets | (78.3) | | | (63.6) | |
Other temporary differences | (18.0) | | | (9.4) | |
Deferred tax liabilities | $ | (208.0) | | | $ | (175.3) | |
Net deferred tax liability | | $ | (35.0) | | | $ | (18.1) | |
As of December 31, 2018,2019, the total remaining tax benefit of available federal, state and foreign net operating loss carryforwards recognized on the balance sheet amounted to $33.4Company has approximately $39.1 million (tax benefiteffected) of operating losses of $49.4 million reduced by a valuation allowance of $16.0 million). Total net operating losses at December 31, 2018 and 2017 amounted to $186.4 million and $261.9 million, respectively. If not utilized, $19.0NOLs. Approximately $2.4 million of the available loss carryforwards will expire between 2019 and 2023; subsequent to 2023, $0.1 million will expire. The remaining losses of $167.3 million have an unlimited life. As of December 31, 2018, the Company also has foreign tax credit carryforwards of $55.3 million that if not utilizedNOLs will expire in 2027.
The Tax Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earningsthe period 2020 through 2026, and profits (“E&P”) through the year ended December 31, 2017. The Company reported $577.2approximately $4.1 million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized $89.5 million of income tax expensewill expire in the 2017 US Company tax return. As a result of the one-time deemed mandatory repatriation,period 2027 through 2039. The remaining $32.6 million has no expiration. Additionally, the Company generated foreign income tax credit (“FTC”) previously paid and allocable to the deemed repatriated foreign source income of $166.4 million. These income taxes were required to be reduced in the same proportion as the foreign source income generating the deemed income taxes paid as required under the
Tax Act, resulting in a net deemed income tax paid of $73.7 million. In addition, $0.3 million of withholding taxes incurred during the period were creditable. As such, the Company is eligible to claim a foreign tax credit relating to the foreign source income that generated the deemed income taxes paid and, accordingly, reported $74.0 million as a deferred tax asset generated at filing of the 2017 US tax return.
The FTC of $74.0 million generated in 2017 was not fully utilized due to adjustments required to be made against the foreign source income and an overall domestic loss, which limited the amount of the overall FTC utilization to $14.9 million in 2017. After the utilization of a net operating loss carry forward, general business credits and $14.9has approximately $57.8 million of foreign tax credits, the Company will pay additional US federal cash tax of approximately $14.9 million on the deemed mandatory repatriation, payable over eight years. At year ended December 31, 2018, the provisional FTC carryforward and related valuation allowance is estimated to be $55.3 million down from $59.1 million ($74.0 million generated in 2017 less $14.9 million utilization in 2017) reported with the filing of 2017 US tax return. The net change of $3.8 million in FTC balance is a combination of 2018 FTC utilization of $5.4 million (overall domestic loss recapture) less $1.6 million increase in FTC due to additional cash tax payments support collected from foreign tax authorities.credits. The Company does not expect future earnings of the appropriate character of taxable income which would allow it to utilize its excess FTC balance in future tax years, in addition to other required adjustments which reduce the amount of future foreign source income available to be offset by an FTC. Therefore, the Company will maintain a valuation allowance on the remaining provisional $55.3 million FTC.$57.8 million.
Difference Attributable to Foreign InvestmentsTax Effects
AsThe Company earns a resultsignificant amount of its operating income outside of the deemed mandatory repatriation provisions in the Tax Act,US. As of December 31, 2019, the Company has $493.2 million of undistributed earnings that has either been previously taxed or would qualify for the 100 percent dividends received deduction provided for in the Tax Act, and earnings that would not result in any significant foreign taxes. As a result, the Company does not intendis indefinitely reinvested with respect to distribute earnings in a taxable manner.its US directly-owned subsidiary earnings. Therefore, the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries. The Company is subject to US income tax on substantially all foreign earnings under the GILTI provisions of the 2017 Tax Cut and Jobs Act, while a significant portion of remaining foreign earnings are eligible for the new dividends received deduction. As a result, a portion of any future repatriation of $264.8 million of undistributed earnings may be subject to US income tax, as well as state and local income taxes, and currency translation gains or losses. It is impracticable to calculate the exact amount. Additionally, gains and losses on any future taxable dispositions of US-owned foreign affiliates continue to be subject to US income tax.
Tax Contingencies
The changes in unrecognized tax benefits included in other long-term liabilities, excluding interest and penalties, are as follows:
| | | | | | | | | | | |
| Year ended December 31, | | |
(in millions) | 2019 | | 2018 |
Beginning balance | $ | 0.4 | | | $ | 3.1 | |
Increase for tax positions of prior years related to acquired business | 1.3 | | | — | |
Reductions due to the statute of limitations expiration | (0.1) | | | (2.7) | |
Foreign exchange | (0.5) | | | — | |
Ending balance | $ | 1.1 | | | $ | 0.4 | |
|
| | | | | | | |
| Year ended December 31, |
(in millions) | 2018 | | 2017 |
Beginning balance | $ | 3.1 |
| | $ | 4.3 |
|
Increase for tax positions of prior years | — |
| | — |
|
Reductions due to the statute of limitations expiration | (2.7 | ) | | (1.5 | ) |
Foreign exchange | — |
| | 0.3 |
|
Ending balance | $ | 0.4 |
| | $ | 3.1 |
|
The Company has net $0.4At December 31, 2019 and 2018, there are $1.1 million and $3.1$0.4 million of unrecognized tax benefits at December 31, 2018 and 2017, respectively. As of December 31, 2018, the total amount of unrecognized tax benefits that if recognized would affect the effective tax rate for continuing operations was $0.4 million. No remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain, but for which there is uncertainty as to the timing of such deductibility. Recognition of these tax benefits, if any, would not have an impact on theannual effective tax rate. The Company files income tax returns in the US and various state and foreign jurisdictions. Generally, tax years are open for review by taxing authorities for a period of three years. As of December 31, 2019, the Company has limited audit activity for tax years back to 2007 and 2008, as well as for the periods 2012 through 2018. The Company continues to believe its positions are supportable; however, due to uncertainties in any tax audit outcome, the Company’s estimates of the ultimate settlement of uncertain tax positions may change and the actual tax benefits may differ from the estimates.
The total liability included in other long-term liabilities associated with the interest and penalties wasCompany recognized $0.5 million, $0.1 million and $0.4 million at December 31, 2018 and 2017, respectively. The Company recorded $0.1 million, $0.4 million and $0.3 millionof interest and/or penalties related to income tax matters in interest expense related to unrecognized tax benefits in the consolidated statements of operations for the years ended December 31, 2019, 2018 and 2017, and 2016, respectively.
The Company files income tax returnshad $1.3 million and $1.1 million of interest and penalties reflected in the US and various state and foreign jurisdictions. Asconsolidated balance sheets as of December 31, 2019 and 2018, the Company is subject to various local or foreign examinations by the tax authorities.respectively.
8.10. Earnings per share
The following table presents the basic and diluted earnings per share computations:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
(in millions, except per share data) | 2019 | | 2018 | | 2017 |
Basic: | | | | | |
Net (loss) income from continuing operations | | $ | (105.6) | | | $ | 172.3 | | | $ | 119.8 | |
Net income from discontinued operations | 5.4 | | | — | | | — | |
Net (loss) income | $ | (100.2) | | | $ | 172.3 | | | $ | 119.8 | |
Less: earnings allocated to participating securities | — | | | 0.3 | | | 0.2 | |
Earnings (loss) allocated to common shares outstanding | $ | (100.2) | | | $ | 172.0 | | | $ | 119.6 | |
| | | | | |
Weighted average common shares outstanding | 164.1 | | | 141.2 | | | 140.2 | |
Basic (loss) income per common share from continuing operations | | $ | (0.64) | | | $ | 1.22 | | | $ | 0.85 | |
Basic income per common share from discontinued operations | | 0.03 | | | — | | | — | |
Basic (loss) income per common share | $ | (0.61) | | | $ | 1.22 | | | $ | 0.85 | |
Diluted: | | | | | |
Net (loss) income from continuing operations | | $ | (105.6) | | | $ | 172.3 | | | $ | 119.8 | |
Net income from discontinued operations | 5.4 | | | — | | | — | |
Net (loss) income | | $ | (100.2) | | | $ | 172.3 | | | $ | 119.8 | |
Less: earnings allocated to participating securities | — | | | — | | | — | |
Earnings (loss) allocated to common shares outstanding | $ | (100.2) | | | $ | 172.3 | | | $ | 119.8 | |
| | | | | |
Weighted average common shares outstanding | 164.1 | | | 141.2 | | | 140.2 | |
Effect of dilutive securities: stock compensation plans (2) | — | | | 1.0 | | | 1.2 | |
Weighted average common shares outstanding – diluted | 164.1 | | | 142.2 | | | 141.4 | |
Diluted (loss) income per common share from continuing operations | $ | (0.64) | | | $ | 1.21 | | | $ | 0.85 | |
Diluted income per common share from discontinued operations | 0.03 | | | — | | | — | |
Diluted (loss) income per common share | $ | (0.61) | | | $ | 1.21 | | | $ | 0.85 | |
| | | | | |
(1)Stock options to purchase 3.0 million, 1.6 million, and 0.8 million shares of common stock were outstanding during the years ended December 31, 2019, 2018 and 2017, respectively and restricted stock of 0.8 million in 2019 and nil in both 2018 and 2017 were outstanding, but were not included in the calculation of diluted (loss) income per share as the impact of these stock options would have been anti-dilutive. Diluted shares outstanding also did not include 6.4 million shares of common stock issuable on the exercise of warrants because the warrants were out-of-the-money during the year ended December 31, 2019.
|
| | | | | | | | | | | |
| Year ended December 31, |
(in millions, except per share data) | 2018 | | 2017 | | 2016 |
Basic: | | | | | |
Net income (loss) | $ | 172.3 |
| | $ | 119.8 |
| | $ | (68.4 | ) |
Less: earnings allocated to participating securities | 0.3 |
| | 0.2 |
| | — |
|
Earnings allocated to common shares outstanding | $ | 172.0 |
| | $ | 119.6 |
| | $ | (68.4 | ) |
Weighted average common shares outstanding | 141.2 |
| | 140.2 |
| | 137.8 |
|
Basic income (loss) per common share | $ | 1.22 |
| | $ | 0.85 |
| | $ | (0.50 | ) |
Diluted: | | | | | |
Net income (loss) | $ | 172.3 |
| | $ | 119.8 |
| | $ | (68.4 | ) |
Less: earnings allocated to participating securities | — |
| | — |
| | — |
|
Earnings allocated to common shares outstanding | $ | 172.3 |
| | $ | 119.8 |
| | $ | (68.4 | ) |
Weighted average common shares outstanding | 141.2 |
| | 140.2 |
| | 137.8 |
|
Effect of dilutive securities: | | | | | |
Stock compensation plans (1) | 1.0 |
| | 1.2 |
| | — |
|
Weighted average common shares outstanding – diluted | 142.2 |
| | 141.4 |
| | 137.8 |
|
Diluted income (loss) per common share (2) | $ | 1.21 |
| | $ | 0.85 |
| | $ | (0.50 | ) |
| | | | | |
| |
(1) | Stock options to purchase approximately 1.6 million, 0.8 million, and 3.3 million shares of common stock were outstanding during the years ended December 31, 2018, 2017 and 2016, respectively, but were not included in the calculation of diluted income (loss) per share as the impact of these stock options would have been anti-dilutive. |
| |
(2) | As a result of changes in the number of shares outstanding during the year and rounding, the sum of the quarters’ earnings per share may not equal the earnings per share for any year-to-date period. |
9.11. Employee benefit plans
Defined benefit pension plans
The Company sponsors defined benefit plans that provide pension benefits for employees upon retirement in certain jurisdictions including the US, Canada, United Kingdom and several other European countries.
The US, Canada and United Kingdom defined benefit pension plans are closed to new entrants. On July 1, 2015, the accrual of future service credits ceased in Canada although future salary increases continue for remaining participants. Benefits accrued by participants in the United Kingdom plan were frozen as of December 1, 2010 and benefits accrued by participants in the US plans were frozen as of December 31, 2009. These amendments to freeze benefits were made in conjunction with a benefit plan review which provides for enhanced benefits under defined contribution plans available to all employees in the US, Canada and United Kingdom.
The following summarizes the Company’s defined benefit pension plans’ projected benefit obligations, plan assets and funded status:
| | | Domestic | | Foreign | | Total | | Domestic | | | Foreign | | | Total | |
| Year ended December 31, | | Year ended December 31, | | Year ended December 31, | | Year ended December 31, | | | Year ended December 31, | | | Year ended December 31, | |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | (in millions) | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Change in projected benefit obligations: | | | | | | | | | | | | Change in projected benefit obligations: | | | | | | | | | | | |
Actuarial present value of benefit obligations at beginning of year | $ | 721.9 |
| | $ | 719.7 |
| | $ | 612.0 |
| | $ | 555.5 |
| | $ | 1,333.9 |
| | $ | 1,275.2 |
| Actuarial present value of benefit obligations at beginning of year | $ | 625.7 | | | $ | 721.9 | | | $ | 537.5 | | | $ | 612.0 | | | $ | 1,163.2 | | | $ | 1,333.9 | |
Service cost | — |
| | — |
| | 2.7 |
| | 2.5 |
| | 2.7 |
| | 2.5 |
| Service cost | — | | | — | | | 2.4 | | | 2.7 | | | 2.4 | | | 2.7 | |
Interest cost | 27.3 |
| | 30.8 |
| | 15.4 |
| | 16.2 |
| | 42.7 |
| | 47.0 |
| Interest cost | 27.2 | | | 27.3 | | | 15.6 | | | 15.4 | | | 42.8 | | | 42.7 | |
Benefits paid | (37.5 | ) | | (34.2 | ) | | (26.7 | ) | | (27.9 | ) | | (64.2 | ) | | (62.1 | ) | Benefits paid | (33.5) | | | (37.5) | | | (28.4) | | | (26.7) | | | (61.9) | | | (64.2) | |
Plan amendments | — |
| | — |
| | 2.5 |
| | 2.7 |
| | 2.5 |
| | 2.7 |
| Plan amendments | — | | | — | | | — | | | 2.5 | | | — | | | 2.5 | |
Settlement | (38.5 | ) | | (44.3 | ) | | — |
| | — |
| | (38.5 | ) | | (44.3 | ) | Settlement | — | | | (38.5) | | | — | | | — | | | — | | | (38.5) | |
Actuarial (gain) loss | (47.5 | ) | | 49.9 |
| | (33.6 | ) | | 13.3 |
| | (81.1 | ) | | 63.2 |
| |
Curtailment | | Curtailment | | — | | | — | | | (1.3) | | | — | | | (1.3) | | | — | |
Actuarial loss (gain) | | Actuarial loss (gain) | | 103.0 | | | (47.5) | | | 66.6 | | | (33.6) | | | 169.6 | | | (81.1) | |
Foreign exchange and other | — |
| | — |
| | (34.8 | ) | | 49.7 |
| | (34.8 | ) | | 49.7 |
| Foreign exchange and other | — | | | — | | | 21.6 | | | (34.8) | | | 21.6 | | | (34.8) | |
Actuarial present value of benefit obligations at end of year | $ | 625.7 |
| | $ | 721.9 |
| | $ | 537.5 |
| | $ | 612.0 |
| | $ | 1,163.2 |
| | $ | 1,333.9 |
| Actuarial present value of benefit obligations at end of year | $ | 722.4 | | | $ | 625.7 | | | $ | 614.0 | | | $ | 537.5 | | | $ | 1,336.4 | | | $ | 1,163.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Change in the fair value of plan assets: | | | | | | | | | | | | Change in the fair value of plan assets: | |
Plan assets at beginning of year | $ | 532.3 |
| | $ | 509.1 |
| | $ | 574.9 |
| | $ | 494.3 |
| | $ | 1,107.2 |
| | $ | 1,003.4 |
| Plan assets at beginning of year | $ | 428.6 | | | $ | 532.3 | | | $ | 522.2 | | | $ | 574.9 | | | $ | 950.8 | | | $ | 1,107.2 | |
Actual (loss) return on plan assets | (39.9 | ) | | 80.0 |
| | (19.7 | ) | | 37.4 |
| | (59.6 | ) | | 117.4 |
| |
Actual return (loss) on plan assets | | Actual return (loss) on plan assets | 86.6 | | | (39.9) | | | 77.3 | | | (19.7) | | | 163.9 | | | (59.6) | |
Contributions by employer | 12.2 |
| | 12.1 |
| | 26.5 |
| | 26.1 |
| | 38.7 |
| | 38.2 |
| Contributions by employer | 13.5 | | | 12.2 | | | 13.8 | | | 26.5 | | | 27.3 | | | 38.7 | |
Benefits paid | (37.5 | ) | | (34.2 | ) | | (26.7 | ) | | (27.9 | ) | | (64.2 | ) | | (62.1 | ) | Benefits paid | (33.5) | | | (37.5) | | | (28.4) | | | (26.7) | | | (61.9) | | | (64.2) | |
Settlement | (38.5 | ) | | (34.7 | ) | | — |
| | (1.3 | ) | | (38.5 | ) | | (36.0 | ) | Settlement | — | | | (38.5) | | | — | | | — | | | — | | | (38.5) | |
Foreign exchange and other | — |
| | — |
| | (32.8 | ) | | 46.3 |
| | (32.8 | ) | | 46.3 |
| Foreign exchange and other | — | | | — | | | 21.9 | | | (32.8) | | | 21.9 | | | (32.8) | |
Plan assets at end of year | $ | 428.6 |
| | $ | 532.3 |
| | $ | 522.2 |
| | $ | 574.9 |
| | $ | 950.8 |
| | $ | 1,107.2 |
| Plan assets at end of year | $ | 495.2 | | | $ | 428.6 | | | $ | 606.8 | | | $ | 522.2 | | | $ | 1,102.0 | | | $ | 950.8 | |
Funded status at end of year | $ | (197.1 | ) | | $ | (189.6 | ) | | $ | (15.3 | ) | | $ | (37.1 | ) | | $ | (212.4 | ) | | $ | (226.7 | ) | Funded status at end of year | $ | (227.2) | | | $ | (197.1) | | | $ | (7.2) | | | $ | (15.3) | | | $ | (234.4) | | | $ | (212.4) | |
Net amounts related to the Company’s defined benefit pension plans recognized in the consolidated balance sheets consist of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Domestic | | | | Foreign | | | | Total | | |
| December 31, | | | | December 31, | | | | December 31, | | |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Overfunded net benefit obligation in other assets | $ | — | | | $ | — | | | $ | 65.4 | | | $ | 46.1 | | | $ | 65.4 | | | $ | 46.1 | |
Current portion of net benefit obligation in other accrued expenses | (3.5) | | | (3.5) | | | (2.1) | | | (2.0) | | | (5.6) | | | (5.5) | |
Long-term portion of net benefit obligation in pension and other postretirement benefit liabilities | (223.7) | | | (193.6) | | | (70.5) | | | (59.4) | | | (294.2) | | | (253.0) | |
Net liability recognized at end of year | $ | (227.2) | | | $ | (197.1) | | | $ | (7.2) | | | $ | (15.3) | | | $ | (234.4) | | | $ | (212.4) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Domestic | | Foreign | | Total |
| December 31, | | December 31, | | December 31, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Overfunded net benefit obligation in other assets | $ | — |
| | $ | — |
| | $ | 46.1 |
| | $ | 33.9 |
| | $ | 46.1 |
| | $ | 33.9 |
|
Current portion of net benefit obligation in other accrued expenses | (3.5 | ) | | (3.5 | ) | | (2.0 | ) | | (2.1 | ) | | (5.5 | ) | | (5.6 | ) |
Long-term portion of net benefit obligation in pension and other postretirement benefit liabilities | (193.6 | ) | | (186.1 | ) | | (59.4 | ) | | (68.9 | ) | | (253.0 | ) | | (255.0 | ) |
Net liability recognized at end of year | $ | (197.1 | ) | | $ | (189.6 | ) | | $ | (15.3 | ) | | $ | (37.1 | ) | | $ | (212.4 | ) | | $ | (226.7 | ) |
The following table summarizes defined benefit pension plans with accumulated benefit obligations in excess of plan assets:
| | | Domestic | | Foreign | | Total | | Domestic | | | Foreign | | | Total | |
| December 31, | | December 31, | | December 31, | | December 31, | | | December 31, | | | December 31, | |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | (in millions) | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Accumulated benefit obligation | $ | 625.7 |
| | $ | 721.9 |
| | $ | 187.7 |
| | $ | 211.4 |
| | $ | 813.4 |
| | $ | 933.3 |
| Accumulated benefit obligation | $ | 722.4 | | | $ | 625.7 | | | $ | 202.0 | | | $ | 187.7 | | | $ | 924.4 | | | $ | 813.4 | |
Fair value of plan assets | 428.6 |
| | 532.3 |
| | 147.7 |
| | 169.3 |
| | 576.3 |
| | 701.6 |
| Fair value of plan assets | 495.2 | | | 428.6 | | | 155.0 | | | 147.7 | | | 650.2 | | | 576.3 | |
The following table summarizes defined benefit pension plans with projected benefit obligations in excess of plan assets:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Domestic | | Foreign | | Total |
| December 31, | | December 31, | | December 31, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Projected benefit obligation | $ | 625.7 |
| | $ | 721.9 |
| | $ | 209.1 |
| | $ | 240.3 |
| | $ | 834.8 |
| | $ | 962.2 |
|
Fair value of plan assets | 428.6 |
| | 532.3 |
| | 147.7 |
| | 169.3 |
| | 576.3 |
| | 701.6 |
|
The total accumulated benefit obligation for domestic defined benefit pension plans as of December 31, 2018 and 2017 was $625.7 million and $721.9 million, respectively, and for foreign defined benefit pension benefit plans as of December 31, 2018 and 2017 was $187.7 million and $211.4 million, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Domestic | | | | Foreign | | | | Total | | |
| December 31, | | | | December 31, | | | | December 31, | | |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Projected benefit obligation | $ | 722.4 | | | $ | 625.7 | | | $ | 227.7 | | | $ | 209.1 | | | $ | 950.1 | | | $ | 834.8 | |
Fair value of plan assets | 495.2 | | | 428.6 | | | 155.0 | | | 147.7 | | | 650.2 | | | 576.3 | |
The following table summarizes the components of net periodic benefit cost (income) recognized in the consolidated statements of operations related to defined benefit pension plans:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Domestic | | Foreign | | Total |
| Year ended December 31, | | Year ended December 31, | | Year ended December 31, |
(in millions) | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
Service cost (1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2.7 |
| | $ | 2.5 |
| | $ | 2.5 |
| | $ | 2.7 |
| | $ | 2.5 |
| | $ | 2.5 |
|
Interest cost (2) | 27.3 |
| | 30.8 |
| | 32.0 |
| | 15.4 |
| | 16.2 |
| | 18.3 |
| | 42.7 |
| | 47.0 |
| | 50.3 |
|
Expected return on plan assets (2) | (31.3 | ) | | (30.9 | ) | | (32.5 | ) | | (25.1 | ) | | (26.0 | ) | | (28.7 | ) | | (56.4 | ) | | (56.9 | ) | | (61.2 | ) |
Amortization of unrecognized prior service cost (credits) (2) | — |
| | — |
| | — |
| | 2.7 |
| | (0.2 | ) | | — |
| | 2.7 |
| | (0.2 | ) | | — |
|
Settlement (3) | — |
| | (9.7 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (9.7 | ) | | — |
|
Curtailment (3) | — |
| | — |
| | — |
| | — |
| | — |
| | (1.3 | ) | | — |
| | — |
| | (1.3 | ) |
Actuarial loss (2) | 23.7 |
| | 0.8 |
| | 20.3 |
| | 11.2 |
| | 3.2 |
| | 48.5 |
| | 34.9 |
| | 4.0 |
| | 68.8 |
|
Net periodic benefit cost (income) | $ | 19.7 |
| | $ | (9.0 | ) | | $ | 19.8 |
| | $ | 6.9 |
| | $ | (4.3 | ) | | $ | 39.3 |
| | $ | 26.6 |
| | $ | (13.3 | ) | | $ | 59.1 |
|
| | | | | | | | | | | | | | | | | |
| |
(1) | Service cost is included in warehouse, selling and administrative expenses. |
| |
(2) | These amounts are included in other expense, net.
|
| |
(3) | In 2017, the settlement gain is related to a lump sum offering accepted by participants in the USA segment. In 2016, the curtailment gain is a result of the restructuring activities in the EMEA segment. Settlement and curtailment gains are included in other expense, net. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Domestic | | | | | | Foreign | | | | | | Total | | | | |
| Year ended December 31, | | | | | | Year ended December 31, | | | | | | Year ended December 31, | | | | |
(in millions) | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
Service cost (1) | $ | — | | | $ | — | | | $ | — | | | $ | 2.4 | | | $ | 2.7 | | | $ | 2.5 | | | $ | 2.4 | | | $ | 2.7 | | | $ | 2.5 | |
Interest cost (2) | 27.2 | | | 27.3 | | | 30.8 | | | 15.6 | | | 15.4 | | | 16.2 | | | 42.8 | | | 42.7 | | | 47.0 | |
Expected return on plan assets (2) | (25.1) | | | (31.3) | | | (30.9) | | | (20.1) | | | (25.1) | | | (26.0) | | | (45.2) | | | (56.4) | | | (56.9) | |
Amortization of unrecognized prior service cost (credits) (2) | — | | | — | | | — | | | 0.1 | | | 2.7 | | | (0.2) | | | 0.1 | | | 2.7 | | | (0.2) | |
Settlement (3) | — | | | — | | | (9.7) | | | — | | | — | | | — | | | — | | | — | | | (9.7) | |
Curtailment (3) | — | | | — | | | — | | | (1.3) | | | — | | | — | | | (1.3) | | | — | | | — | |
Actuarial loss (4) | 41.5 | | | 23.7 | | | 0.8 | | | 9.4 | | | 11.2 | | | 3.2 | | | 50.9 | | | 34.9 | | | 4.0 | |
Net periodic benefit cost (income) | $ | 43.6 | | | $ | 19.7 | | | $ | (9.0) | | | $ | 6.1 | | | $ | 6.9 | | | $ | (4.3) | | | $ | 49.7 | | | $ | 26.6 | | | $ | (13.3) | |
| | | | | | | | | | | | | | | | | |
(1)Service cost is included in warehouse, selling and administrative expenses.
(2)These amounts are included in other expense, net, and represent non-operating retirement benefits.
(3)In 2017, the settlement gain is related to a lump sum offering accepted by participants. Both settlements and curtailments are included in other expense, net.
(4)Actuarial loss, or mark to market, includes measurement gains and losses resulting from changes since the prior measurement date in assumptions and plan experience as well as the difference between the expected and actual return on plan assets. These amounts are recorded in other expense, net.
The following summarizes pre-tax amounts included in accumulated other comprehensive lossAOCI at December 31, 20182019 related to pension plan amendments:
|
| | | |
(in millions) | Defined benefit pension plans |
Net prior service cost | $ | (1.2 | ) |
| | | | | |
(in millions) | Defined benefit pension plans |
Net prior service cost | $ | (1.1) | |
The following table summarizes the amounts in accumulated other comprehensive lossAOCI at December 31, 20182019 that are expected to be amortized as components of net periodic benefit cost (income) during the next fiscal year related to pension amendments:
|
| | | |
(in millions) | Defined benefit pension plans |
Prior service cost | $ | (0.1 | ) |
| | | | | |
(in millions) | Defined benefit pension plans |
Prior service cost | $ | (0.1) | |
Other postretirement benefit plan
Other postretirement benefits relate toThe Company previously maintained a health care plan for retired employees in the US. In 2009, the Company approved a plan to phase out the benefits provided underThe obligation associated with this plan by 2020. As a result of this change, the benefit obligation was reduced by $76.8 million and a curtailment gain of $73.1 million was recognized in accumulated other comprehensive loss and was being amortized to the consolidated statements of operations over the average future service period, which was fully amortized as of December 31, 2016.
The following summarizes the Company’s other postretirement benefit plan’s accumulated postretirement benefit obligation, plan assets2019 and funded status:2018 was $1.4 million and $1.8 million, respectively.
|
| | | | | | | |
| Other postretirement benefits |
| Year ended December 31, |
(in millions) | 2018 | | 2017 |
Change in accumulated postretirement benefit obligations: | | | |
Actuarial present value of benefit obligations at beginning of year | $ | 2.5 |
| | $ | 2.8 |
|
Service cost | — |
| | — |
|
Interest cost | — |
| | 0.2 |
|
Contributions by participants | 0.5 |
| | 0.4 |
|
Benefits paid | (0.5 | ) | | (0.7 | ) |
Actuarial gain | (0.7 | ) | | (0.2 | ) |
Actuarial present value of benefit obligations at end of year | $ | 1.8 |
| | $ | 2.5 |
|
Change in the fair value of plan assets: | | | |
Plan assets at beginning of year | $ | — |
| | $ | — |
|
Contributions by employer | — |
| | 0.3 |
|
Contributions by participants | 0.5 |
| | 0.4 |
|
Benefits paid | (0.5 | ) | | (0.7 | ) |
Plan assets at end of year | $ | — |
| | $ | — |
|
Funded status at end of year | $ | (1.8 | ) | | $ | (2.5 | ) |
Net amounts related to the Company’s other postretirement benefit plan recognized in the consolidated balance sheets consist of: |
| | | | | | | |
| Other postretirement benefits |
| December 31, |
(in millions) | 2018 | | 2017 |
Current portion of net benefit obligation in other accrued expenses | $ | (0.4 | ) | | $ | (0.4 | ) |
Long-term portion of net benefit obligation in pension and other postretirement benefit liabilities | (1.4 | ) | | (2.1 | ) |
Net liability recognized at end of year | $ | (1.8 | ) | | $ | (2.5 | ) |
|
| | | | | | | | | | | |
| Other postretirement benefits |
| Year ended December 31, |
(in millions) | 2018 | | 2017 | | 2016 |
Service cost (1) | $ | — |
| | $ | — |
| | $ | — |
|
Interest cost (2) | — |
| | 0.2 |
| | 0.1 |
|
Amortization of unrecognized prior service credits (2) | — |
| | — |
| | (4.5 | ) |
Actuarial gain (2) | (0.7 | ) | | (0.2 | ) | | (0.2 | ) |
Net periodic benefit income | $ | (0.7 | ) | | $ | — |
| | $ | (4.6 | ) |
| | | | | |
| |
(1) | Service cost is included in warehouse, selling and administrative expenses. |
| |
(2) | These amounts are included in other expense, net. |
Actuarial assumptions
Defined benefit pension plans
The significant weighted average actuarial assumptions used in determining the benefit obligations and net periodic benefit cost (income) for the Company’s defined benefit plans are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Domestic | | | | Foreign | | |
| December 31, | | | | December 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Actuarial assumptions used to determine benefit obligations at end of period: | | | | | | | |
Discount rate | 3.28 | % | | 4.47 | % | | 2.14 | % | | 2.92 | % |
Expected annual rate of compensation increase | N/A | | N/A | | 2.85 | % | | 2.85 | % |
|
| | | | | | | | | | | |
| Domestic | | Foreign |
| December 31, | | December 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
Actuarial assumptions used to determine benefit obligations at end of period: | | | | | | | |
Discount rate | 4.47 | % | | 3.87 | % | | 2.92 | % | | 2.61 | % |
Expected annual rate of compensation increase | N/A |
| | N/A |
| | 2.85 | % | | 2.87 | % |
| | | Domestic | | Foreign | | Domestic | | | Foreign | |
| Year ended December 31, | | Year ended December 31, | | Year ended December 31, | | | Year ended December 31, | |
| 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
Actuarial assumptions used to determine net periodic benefit cost (income) for the period: | | | | | | | | | | | | Actuarial assumptions used to determine net periodic benefit cost (income) for the period: | | | | | | | | | | | |
Discount rate | 3.87 | % | | 4.39 | % | | 4.74 | % | | 2.61 | % | | 2.84 | % | | 3.65 | % | Discount rate | 4.47 | % | | 3.87 | % | | 4.39 | % | | 2.92 | % | | 2.61 | % | | 2.84 | % |
Expected rate of return on plan assets | 6.75 | % | | 7.00 | % | | 7.50 | % | | 4.43 | % | | 5.01 | % | | 6.18 | % | Expected rate of return on plan assets | 6.75 | % | | 6.75 | % | | 7.00 | % | | 3.83 | % | | 4.43 | % | | 5.01 | % |
Expected annual rate of compensation increase | N/A |
| | N/A |
| | N/A |
| | 2.87 | % | | 2.87 | % | | 2.86 | % | Expected annual rate of compensation increase | N/A | | N/A | | N/A | | 2.85 | % | | 2.87 | % | | 2.87 | % |
Discount rates are used to measure benefit obligations and the interest cost component of net periodic benefit cost (income). The Company selects its discount rates based on the consideration of equivalent yields on high-quality fixed income investments at each measurement date. Discount rates are based on a benefit cash flow-matching approach and represent the rates at which the Company’s benefit obligations could effectively be settled as of the measurement date.
For domestic defined benefit plans, the discount rates are based on a hypothetical bond portfolio approach. The hypothetical bond portfolio is constructed to comprise AA-rated corporate bonds whose cash flow from coupons and maturities match the expected future plan benefit payments.
The discount rate for the foreign defined benefit plans are based on a yield curve approach. For plans in countries with a sufficient corporate bond market, the expected future benefit payments are matched with a yield curve derived from AA-rated corporate bonds, subject to minimum amounts outstanding and meeting other selection criteria. For plans in countries without a sufficient corporate bond market, the yield curve is constructed based on prevailing government yields and an estimated credit spread to reflect a corporate risk premium.
The expected long-term rate of return on plan assets reflects management’s expectations on long-term average rates of return on funds invested to provide for benefits included in the benefit obligations. The long-term rate of return assumptions are based on the outlook for equity and fixed income returns, with consideration of historical returns, asset allocations, investment strategies and premiums for active management when appropriate. Assumptions reflect the expected rates of return at the beginning of the year.
Other postretirement benefit plan
For the other postretirement benefit plan, the discount rate used to determine the benefit obligation at December 31, 2018 and 2017 was 4.63% and 3.98%, respectively. The discount rate used to determine net periodic benefit credit for the year ended December 31, 2018, 2017 and 2016 was 3.98%, 4.37% and 4.54%, respectively. Health care cost increases did not have a significant impact on the Company’s postretirement benefit obligations in the years presented as a result of the 2009 plan to phase out the health care benefits provided under the US plan.
Plan assets
Plan assets for defined benefit plans are invested in global equity and debt securities through professional investment managers with the objective to achieve targeted risk adjusted returns and to maintain liquidity sufficient to fund current benefit payments. Each funded defined benefit plan has an investment policy that is administered by plan trustees with the objective of meeting targeted asset allocations based on the circumstances of that particular plan. The investment strategy followed by the Company varies by country
depending on the circumstances of the underlying plan. Less mature plan benefit obligations are funded by using more equity securities as they are expected to achieve long-term growth while exceeding inflation. More mature plan benefit obligations are funded using a higher allocation of fixed income securities as they are expected to produce current income with limited volatility. The Company has adopted a dynamic investment strategy whereby as the plan funded status improves, the investment strategy is migrated to more liability matching assets, and return seeking assets are reduced. Risk management practices include the use of multiple asset classes for diversification purposes. Specific guidelines for each asset class and investment manager are implemented and monitored.
The weighted average target asset allocation for defined benefit pension plans in the year ended December 31, 20182019 is as follows:
| | | Domestic | | Foreign | | Domestic | | Foreign |
Asset category: | | | | Asset category: | | | |
Equity securities | 50.0 | % | | 28.2 | % | Equity securities | 50.0 | % | | 15.3 | % |
Debt securities | 45.0 | % | | 66.1 | % | Debt securities | 45.0 | % | | 79.3 | % |
Other | 5.0 | % | | 5.7 | % | Other | 5.0 | % | | 5.4 | % |
Total | 100.0 | % | | 100.0 | % | Total | 100.0 | % | | 100.0 | % |