SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2020
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from to
Commission File Number 001-37443
Univar Solutions Inc.
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of|
incorporation or organization)
|3075 Highland Parkway, Suite 200||Downers Grove,||Illinois||60515|
|(Address of principal executive offices)||(Zip Code)|
Registrant’s telephone number, including area code: (331) 777-6000
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading symbol(s)||Name of each exchange on which registered|
|Common Stock ($0.01 par value)||UNVR||New York Stock Exchange|
Securities registered pursuant to Section 12(g) of the Act:
Warrants to acquire 0.1525 shares of common stock, $0.01 par value per share, of Univar Solutions Inc. and $1.51 in cash
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☒||Accelerated filer||☐||Non-accelerated filer||☐||Smaller reporting company||☐||Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Aggregate market value of common stock held by non-affiliates of registrant on June 30, 2020: $2.8 billion (see Item 12, under Part III hereof), based on a closing price of registrant’s Common Stock of $16.86 per share.
At February 11, 2021, 169,388,143 shares of the registrant’s common stock, $0.01 par value, were outstanding.
Documents Incorporated by Reference
Certain portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 6, 2021 and to be filed within 120 days after the registrant’s fiscal year ended December 31, 2020 (hereinafter referred to as “Proxy Statement”) are incorporated by reference into Part III.
Univar Solutions Inc.
TABLE OF CONTENTS
In this Annual Report on Form 10-K, “Univar Solutions,” “Company,” “we,” “our” and “us” refer to Univar Solutions Inc., a Delaware corporation, and its subsidiaries included in the consolidated financial statements, except as otherwise indicated or as the context otherwise requires.
Our fiscal year ends on December 31, and references to “fiscal” when used in reference to any twelve month period ended December 31, refer to our fiscal years ended December 31.
The term “GAAP” refers to accounting principles generally accepted in the United States of America.
Forward-looking statements and information
Certain parts of this annual report on Form 10-K contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally accompanied by words such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. All forward-looking statements made in this Annual Report on Form 10-K are qualified by these cautionary statements.
Any forward-looking statements represent our views only as of the date of this report and should not be relied upon as representing our views as of any subsequent date, and we undertake no obligation, other than as may be required by law, to update any forward-looking statement. We caution you that forward-looking statements are not guarantees of future performance and that our actual performance may differ materially from those made in or suggested by the forward-looking statements contained in this Annual Report on Form 10-K. Forward-looking statements include, but are not limited to, statements about:
•the impact of the coronavirus (COVID-19) pandemic and economic conditions on our end markets, operations, financial condition and operating results;
•our expense control and cost reduction plans and other strategic plans and initiatives;
•our ability to solve customer technical challenges and accelerate product development cycles;
•demand for products, systems and services that meet growing customer sustainability standards, expectations and preferences and our ability to provide such products, systems and services to maintain our competitive position;
•our ability to sell specialty products at higher profit;
•our human capital management strategies;
•the continuation of the trend of outsourcing of chemical distribution by chemical manufacturers;
•significant factors that may adversely affect us and our industry;
•the outcome and effect of ongoing and future legal proceedings;
•market conditions and outlook;
•our liquidity outlook and the funding thereof, and cash requirements and adequacy of resources to fund them;
•future contributions to, and withdrawal liability in connection with, our pension plans and cash payments for postretirement benefits;
•future capital expenditures and investments; and
•the impact of ongoing tax guidance and interpretations.
Potential factors that could affect such forward-looking statements include, among others:
•general economic conditions, particularly fluctuations in industrial production and consumption and the timing and extent of economic downturns;
•the sustained geographic spread of the COVID-19 pandemic, the duration and severity of the COVID-19 pandemic, current and new actions that may be taken by governmental authorities to address or otherwise mitigate the impact of the COVID-19 pandemic, the potential negative impacts of COVID-19 on the global economy and our employees, customers, vendors and suppliers, and the overall impact of the COVID-19 pandemic on our business, results of operations and financial condition;
•significant changes in the business strategies of producers or in the operations of our customers;
•increased competitive pressures, including as a result of competitor consolidation;
•significant changes in the pricing, demand and availability of chemicals;
•our indebtedness, the restrictions imposed by, and costs associated with, our debt instruments, and our ability to obtain additional financing;
•the broad spectrum of laws and regulations that we are subject to, including extensive environmental, health and safety laws and regulations;
•potential business disruptions and security breaches, including cybersecurity incidents;
•an inability to generate sufficient working capital;
•increases in transportation and fuel costs and changes in our relationship with third party providers;
•accidents, safety failures, environmental damage, product quality issues, delivery failures or hazards and risks related to our operations and the hazardous materials we handle;
•potential inability to obtain adequate insurance coverage;
•ongoing litigation, potential product liability claims and recalls, and other environmental, legal and regulatory risks;
•challenges associated with international operations;
•exposure to interest rate and currency fluctuations;
•risks associated with integration of legacy business systems;
•possible impairment of goodwill and intangible assets;
•an inability to integrate the business and systems of companies we acquire, including failure to realize the anticipated benefits of such acquisitions;
•negative developments affecting our pension plans and multi-employer pensions;
•labor disruptions associated with the unionized portion of our workforce; and
•the other factors described in “Risk Factors” in Item 1A of this Annual Report on Form 10-K.
ITEM 1. BUSINESS
We are a leading global chemical and ingredient distributor and provider of value-added services to customers across a wide range of diverse industries. We purchase chemicals and ingredients from thousands of chemical producers worldwide to warehouse, repackage, blend, dilute, transport and sell those chemicals to more than 100,000 customer locations across approximately 125 countries. We operate an extensive worldwide chemical and ingredient distribution network, comprised of more than 600 facilities and serviced by hundreds of tractors, railcars, tankers and trailers operating daily through our facilities.
Chemical and ingredient producers rely on us to warehouse, repackage, transport, and sell their products as a way to expand their market access, enhance their geographic reach, lower their cost to serve, and grow their business. Customers who purchase products and services from us benefit from a lower total cost of ownership, as they are able to simplify their chemical sourcing process by outsourcing functions to us such as “just-in-time delivery,” product availability and selection, packaging, mixing, blending and technical expertise. They also rely on us for safe and secure delivery and off-loading of chemicals compliant with increasing local and federal regulations.
Originally formed in 1924 as a brokerage business and through the continued expansion with various acquisitions, we were acquired in 2007 by investment funds advised by CVC Capital Partners Advisory (US), Inc. and in 2010 by investment funds controlled by Clayton, Dubilier & Rice, LLC. We closed our initial public offering on June 23, 2015. As of September 30, 2019, all of the foregoing investment funds had fully divested or reduced ownership in the Company and are no longer considered significant stockholders.
On February 28, 2019, we acquired Nexeo Solutions, Inc. (“Nexeo”), a leading global chemicals and plastics distributor. The acquisition expanded and strengthened our presence in North America and provides expanded opportunities to create the largest North American sales force in chemical and ingredients distribution coupled with a broad and deep product offering. See “Note 3: Business combinations” in Item 8 of this Annual Report on Form 10-K for additional information.
The effects of market conditions on our operations are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
On September 1, 2020, we sold our industrial spill and emergency response businesses to EnviroServe Inc. and on November 30, 2020, we sold our Canadian Agriculture services business.
On December 18, 2020, we acquired a business of Zhuhai Techi Chem Silicone Industry Corporation (“Techi Chem”), a leading distributor of specialty silicone solutions used primarily for the coatings, adhesives, sealants, and elastomers (CASE) market within the China marketplace.
At the beginning of the fourth quarter of 2020, the Company decided to wind down its Canadian Agriculture wholesale distribution business, which was operationally completed by December 31, 2020 when all of the inventory had been sold.
See “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.
Our business is organized and managed in four geographical segments: Univar Solutions USA (“USA”), Univar Solutions Europe and the Middle East and Africa (“EMEA”), Univar Solutions Canada (“Canada”), and Univar Solutions Latin America (“LATAM”), which includes developing businesses in Latin America (including Brazil and Mexico) and the Asia-Pacific region. For additional information on our geographical segments, see “Note 23: Segments” in Item 8 of this Annual Report on Form 10-K.
The following graph reflects the breakdown by segment of our 2020 consolidated net sales of $8.3 billion.
We are the largest distributor of commodity and specialty chemicals and ingredients with a centralized network in the US. With locations spanning the US, our personnel are strategically located where customers and suppliers need them and are ready to provide agile, reliable support for our customers' business needs. In addition to our broad chemical and ingredients offering, we offer specialized services to a wide range of end markets, touching a majority of the manufacturing and industrial production sectors in the US and all of the Company's end markets. Our Solution Centers provide value-added laboratory services and blending, mixing and packaging capabilities.
Our sales force is deployed through specialized account management across the US to serve our focused customer end markets and through a geographic sales district model to support the local and bulk chemical distribution and services end markets. We repackage and blend bulk chemicals for shipment by our transportation fleet as well as common carriers and utilize our network of terminal and supply locations to optimize bulk shipment deliveries. We believe our close proximity to customers, combined with our extensive product knowledge and end market expertise, serve as a competitive advantage.
We maintain a strong presence in the United Kingdom and continental Europe with sales offices in 20 countries. We also have two sales offices in the Middle East and Africa and maintain Solution Centers throughout the EMEA region.
We execute primarily on a pan-European basis, leveraging centralized or shared information technology systems, raw materials procurement, logistics, route operations and the management of producer relationships where possible to benefit from economies of scale and improve cost efficiency. We have strong end market expertise and key account management capability across Europe to better support sales representatives in each country and for serving our key customer end markets, in industrial production, pharmaceutical ingredients, food ingredients, coating and adhesives and personal care.
Our Canadian operations are regionally focused through sales offices, Solution Centers and distribution sites with a sales force supplying a broad offering of commodity and specialty chemicals and services across a wide range of end markets. In Eastern Canada, we have deep product knowledge in end markets such as food ingredients, beauty and personal care, pharmaceutical ingredients, coatings and adhesives, and chemical manufacturing as well as homecare and industrial cleaning, energy and mining. In Western Canada, our deep end market expertise in forestry and energy (e.g., midstream gas pipeline, oil sands processing and oil refining) complements our offerings across other end markets. While we wound down our agriculture wholesale distribution business at the end of the 2020 season, we remain active in the agriculture end market developing biological crop nutrition solutions for Canadian growers via NexusBioAg.
We offer generic and specialty chemicals and ingredients, as well as technical and market expertise, specialized services and key account management to a wide range of end markets including industrial production, personal care, coatings and adhesives, energy and agriculture through sales offices, Solution Centers and distribution sites in Mexico, Brazil, Colombia and to a lesser extent the Asia-Pacific region. With the acquisition of Tagma Brasil Ltda. in 2017, we started to provide formulation services for crop protection manufacturers in Brazil.
Product and End Markets
We source and inventory chemicals and ingredients in large quantities such as barge loads, railcars or full truck loads from chemical and ingredient producers and break down the bulk quantities to repackage, sell and distribute smaller quantities to our customers.
In addition to selling and distributing chemicals, we use our transportation and warehousing infrastructure, along with our broad knowledge of chemicals and hazardous materials handling to provide important distribution and specialized services for our producers and our customers.
We have state-of-the-art Solutions Centers at locations across the globe, consisting of formulation labs, development and research centers, and test kitchens, with specialized industry expertise and innovative technical capabilities to solve our customer's technical challenges and accelerate product development cycles.
In the first quarter of 2020, we organized our product portfolio offering into the following end markets: Industrial Solutions, Consumer Solutions, General Industrial, Refining & Chemical Processing and Services and Other Markets. A further description of these end markets is as follows:
•Coatings and Adhesives. We sell resins, pigments, solvents, thickeners, dispersants and other additives used to make paints, inks, and coatings. Our product line includes epoxy resins, polyurethanes, titanium dioxide, fumed silica, esters, plasticizers, silicones and specialty amines.
•Homecare & Industrial Cleaning. We offer an extensive range of quality ingredients for cleaners, detergents, and disinfectant products. We distribute chemicals manufactured by many of the industry’s leading producers of enzymes, surfactants, solvents, dispersants, thickeners, bleaching aides, builders, sealants, acids, alkalis and other chemicals that are used as ingredients and processing aids in the manufacturing of cleaning and sanitation products.
•Metalworking & Lubricants. Our broad and diverse range of products include base stocks, performance-enhancing additives for both lubricants and metalworking fluids.
•Pharmaceutical Ingredients and Finished Products. Our portfolio includes products along the medicinal production chain, where we offer a broad portfolio of excipients, solvents, reactants, active pharmaceutical ingredients and intermediates to pharmaceutical ingredient producers.
•Beauty and Personal Care. We are a full-line distributor in the beauty and personal care industry, providing a wide variety of specialty and basic chemicals and ingredients used in skin and hair care products.
•Food Ingredients and Products. We distribute a diverse portfolio of commodity and specialty products that are sold into the food industry. The major food and beverage markets we serve are meat processing, baked goods, dairy, grain mill products, processed foods, carbonated soft drinks, fruit drinks and alcoholic beverages.
•Chemical Manufacturing. We distribute a full suite of chemical products in support of the chemical manufacturing industry (organic, inorganic and polymer chemistries).
•Agricultural. During 2020, in Canada we were a wholesale distributor of crop protection products to independent retailers and specialty applicators. In addition, we provided storage, packaging and logistics services for major crop protection companies. However, in the fourth quarter of 2020, we sold the Canadian Agriculture services business and shut down the Canadian Agriculture wholesale distribution business. This will allow us to focus our efforts in the Canadian agriculture end market on serving growers' crop nutrition needs with inoculants, micronutrients, nitrogen stabilizers and foliar products.
•Industrial and Municipal Water Treatment. We provide the chemistries and products used to sanitize, balance and supplement municipal and industrial water.
•Forestry, Lumber, Paper. We serve the forest industry in the US and Canada, supplying a complete range of chemical products for use at all stages of production, from sap stain prevention to pulp and paper manufacturing.
•Mining. Within the mining industry in the US and Canada we provide the chemistries necessary to leach ore body as well as balance and manage tailing ponds and mining water sources.
Refining & Chemical Processing
•Energy (up, mid and downstream). We provide chemicals and service to offshore production, midstream pipeline and downstream refinery operators primarily in the US and Canada, including oil sands production. We also service the upstream US shale hydraulic-fracturing sector by providing bulk chemicals to drill sites.
Services & Other Markets
•Chemical Waste Removal. Our ChemCare waste management business collects both hazardous and non-hazardous waste products at customer locations in the US and Canada, and then works with select vendors in the waste disposal business to safely transport these materials to licensed third party treatment, storage and disposal facilities.
•Inventory Management. We manage our inventory in order to meet customer demands on short notice whenever possible. Our value as a channel partner of chemical producers also enables us to obtain access to chemicals in times of short supply, when smaller chemical distributors may not be able to obtain or maintain stock. Further, our global distribution network permits us to stock products locally to enhance “just-in-time” delivery, providing outsourced inventory management to our customers in a variety of end markets.
•Mixing, Blending and Repackaging. We provide a full suite of blending and repackaging services for our customers across diverse industries. Additionally, we can fulfill small orders through our repackaging services, enabling customers to maintain smaller inventories.
•Specialized Formulation and Blending. Leveraging our technical expertise, we are able to utilize our blending and mixing capabilities to create specialty chemical formulations to meet specific customer performance demands for products.
Commodity chemicals and ingredients represent the largest portion of our business by sales and volume. Our commodity portfolio includes acids and bases, surfactants, glycols, inorganic compounds, alcohols and general chemicals used extensively throughout most end markets. Our specialty chemicals and ingredient sales represent an important, high-value, higher-growth
portion of the chemical distribution market. We typically sell specialty products in lower volumes, but at a higher profit than commodity products.
We source materials from thousands of producers around the globe and we typically maintain relationships with multiple producers in order to protect against disruption in supply and distribution logistics, as well as to ensure competitive pricing of our supply. For the year ended December 31, 2020, our 10 largest producers accounted for approximately 32% of our total chemical purchases.
We have multiple channels to market, including both warehouse delivery and direct-to-consumer delivery. The principal determinants of the way a customer is serviced include the size, scale and level of customization of a particular order, the nature of the product and the customer, and the location of the product inventories.
Our warehouse distribution channel is the core of our operations and connects large producers with smaller volume customers whose consumption patterns tend to make them uneconomical to be served directly by producers. Thus, the core customer serviced via our warehouses is a small or medium-volume consumer of chemicals and ingredients. We purchase chemicals and ingredients in truck load or larger quantities from producers based on contracted demands of our customers and our estimates of anticipated customer purchases. Once received, products are stored in one or more of our distribution facilities for sale and distribution in smaller, less-than-truckload quantities to our customers. Our warehouses have various facilities for services such as repackaging, blending and mixing to create specialized solutions needed by our customers in ready-to-use formulations.
In direct distribution, we sell and service large quantity purchases that are shipped directly from producers through our logistics infrastructure, which provides our customers with sourcing and logistics support services for inventory management and delivery.
The chemical and ingredient distribution and sales markets are highly competitive. Most of the products that we distribute are made to standard specifications and are either produced by or available from multiple sources. 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.
Chemical and ingredient distribution itself is a fragmented market in which only a small number of competitors have substantial international operations. Our principal international competitor is Brenntag, which has a particularly strong position in 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, 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 Barentz and some of our regional competitors in Europe include Azelis, Helm, Barentz and IMCD.
Chemical and ingredient producers may also sell their products through a direct sales force, digital marketplace or multiple chemical distributors, limit their use of third party distributors, particularly with respect to higher margin products, or partner with other chemical and ingredient producers for distribution. Each of which could impact our competitive position.
Human Capital Management
As of December 31, 2020, we had approximately 9,457 employees on a full-time equivalent basis worldwide, with 5,360 represented in the USA, 2,252 in EMEA, 678 in Canada and 1,167 in LATAM. We had 302 senior leaders, nine of which represent executive officers of the Company, and 1,595 people managers. Based on self-identification data, 34.8% of employees are female and 64.3% are male. Of our people managers, 32% are female and 67.5% are male. At the director and above level, 24.2% are female and 75.8% are male. In the US, 17.8% of our people managers are racially and ethnically diverse. Of our 10 members of the Board of Directors, 20% are female, 80% are male, 10% Black/African American and 90% White. As of December 31, 2020, approximately 24% of our labor force is covered by a collective bargaining agreement, including approximately 12%, 46% and 23% of our labor force in the US, Europe and Canada, respectively.
In our efforts to drive continued growth and increased profitability, we are intently focused on building a place that attracts top talent and develops the skills necessary to drive differentiation for our business. We have developed key recruitment and retention strategies that guide our human capital management approach as part of the overall management of our business. These strategies are advanced through a number of programs and initiatives as outlined below:
Employee Hiring Practices. We recruit the best people for the job regardless of race, color, nationality, gender, age, disability, sexual orientation or any other status protected by law and it is our policy to comply fully with all domestic, foreign and local laws relating to discrimination in the workplace.
Employee Compensation. Our compensation programs are designed to align the compensation of our employees with the Company’s performance and to provide the proper incentives to attract, retain and motivate employees to achieve superior results. We engage nationally recognized outside compensation and benefits consulting firms to independently evaluate the effectiveness of our executive compensation and benefit programs and to provide benchmarking against our peers within the industry. The Company's executive compensation programs blend base salary, short-term cash incentives and long-term equity awards in a structure that encourages alignment with shareholder interests. We provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location. Full-time US employees are eligible for health, dental and vision insurance, paid and unpaid leaves, 401(K) plan, life and disability/accident coverage. Employees outside of the US are eligible for a variety of supplemental benefits based on local markets practices and all employees worldwide are eligible for an Employee Assistance Program.
Training and Development. Employees have access to on-demand learning resources for their own professional development on a range of diverse topics such as digital transformation skills, professional effectiveness, diversity, equity and inclusion, business skills, productivity and collaboration tools to leadership development. Our internal programs range from multi-day, instructor-led trainings to short, on-demand eLearning programs. As appropriate, additional training hours are delivered and monitored locally, often focusing on material handling and safety for specific roles. We regularly conduct anonymous employee engagement surveys to gauge our progress and identify the areas where we excel and areas for improvement in the employee experience. The results of these engagement surveys are shared with individual managers, who are then tasked with taking action based on their employees' anonymous feedback.
Performance Management. Career development planning resources are available to all employees. Our performance management process is designed to help ensure priorities are clear, provide a framework for ongoing feedback and coaching, document accountability, provide a focus on living our values, communicate the expectation of how we work together and identify opportunities for development to improve in an individual's current role and prepare for future roles.
Health and Safety. Our Company is serious about safety and this is embedded in our global operations. Specific initiatives include, among others, data driven and causality-based accident prevention work, improved process and facility controls, mandatory general education and role specific safety training, joint management-worker health and safety committees, safety audits, incident investigation and improvement measures. 2020 was our safest year on record with a Total Case Incident Rate, the rate of recordable injuries per 200,000 hours worked, of 0.36, significantly below our global target of 0.68.
Our efforts to ensure the safety of our employees during the COVID-19 pandemic included implementing contingency and continuity plans to help position the Company to respond effectively and efficiently to identified risks, safe work practices in accordance with the guidance provided by both the World Health Organization (WHO) and the US Centers for Disease Control and Prevention (CDC), and flexible working policies. In addition, we leveraged technology to enable approximately 5,000 employees to transition to remote working in a short time frame and enhanced sanitation and hygiene practices at our office and branch locations.
Diversity, Equity & Inclusion (DEI). The Company is committed to fostering a safe, collaborative, supporting and respectful environment that values diverse perspectives, mitigates unconscious bias and enables a culture where employees are able to bring their authentic self to work. In the past year we increased our score on the Human Rights Campaign Corporate Equality Index from 85 in 2019 to 100 in 2020.
In 2020, we launched an Office of Inclusion made up of employee volunteers with interest and aptitude in advancing DEI, a Global Inclusion Council made up of a cross section of business leaders and DEI stakeholders to direct global strategy and areas of focus, and regional Councils for the USA and Canada to help align focus and guide customized programming to meet local needs. In addition, we had a total of 7 Employee Resource Networks, including the Ability Network (focused on employees with visible and invisible disabilities), the Black African American Leadership Network, the Canada Indigenous Network, the Hispanic or Latinx Network, the LGBT+ Network, the Veterans Network and the Women’s Inclusion Network. The employee participation in these collective networks exceeded 1,300 employees globally.
We operate in a number of jurisdictions and are subject to numerous international, federal, state and local laws and regulations covering a wide variety of subject matters. We are subject to extensive environmental, health and safety laws and
regulations in multiple jurisdictions because we blend, manage, handle, store, sell, transport and arrange for the disposal of chemicals, hazardous materials and hazardous waste. These include, without limitation, laws regulating discharges of hazardous substances into the soil, air and water, blending, managing, handling, storing, selling, transporting and disposing of hazardous substances, investigation and remediation of contaminated properties and protecting the safety of our employees and others. Some of these laws and regulations include the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund), the Toxic Substances Control Act (TSCA), the Resource Conservation and Recovery Act (RCRA), Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), among others. Some of our operations are required to hold environmental permits and licenses to be compliant and certain of our services businesses are also impacted by these laws.
In addition to environmental laws and regulations, we are subject to various laws and regulations around the world. For example, our business is subject to competition laws in the various jurisdictions where we operate, including the Sherman Antitrust Act and related federal and state antitrust laws in the United States, as well as similar foreign laws and regulations. These laws and regulations generally prohibit competitors from fixing prices, boycotting competitors, or engaging in other conduct that unreasonably restrains competition, and such laws and regulations may impact potential business relationships or transactions with third parties in the future. The Company is also required to comply with increasingly complex and changing laws and regulations enacted to protect business and personal data in the United States and other jurisdictions regarding privacy, data protection and data security, including those related to the collection, storage, use, transmission and protection of personal information and other consumer, customer, vendor or employee data. Further, an increasing number of laws and regulations focused on hazardous products and substances could also impact our ability to distribute and sell certain products or require significant capital expenditures to meet regulatory requirements. With respect to the laws and regulations noted above, as well as other applicable laws and regulations, the Company's compliance programs may under certain circumstances involve material investments in the form of additional processes, training, personnel, information technology and capital.
Information related to government regulation applicable to our business is included in this Annual Report on Form 10-K, including: (i) Part I, Item 1A - Risk Factors; (ii) Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (iii) “Note 2: Significant accounting policies” and “Note 21: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K.
We expect that there will be a continued increase in demand for products, systems and services that meet growing customer sustainability standards, expectations and preferences. We recognize that our ability to continue to provide these products and services requires our business to further advance environmentally and socially responsible means of operating, reflecting the challenges and opportunities presented through increased legal requirements, climate parameters and market developments. We believe that use of the precautionary principle is a key directive of responsible environmental and social governance and is an important factor in the journey toward a more sustainable future.
We demonstrate our commitment through our global sustainability goals, which help us focus on reducing our contribution to global climate change while addressing remediation. In 2018, we became a signatory to the United Nations Global Compact, reaffirming our ongoing commitments to responsible business, and in 2019 adopted ‘Advancing a Circular Economy’ as a goal to 2021.
We continue to implement the principles set out in our Global Sustainability Policy, working together in the spirit of our guiding principles to minimize environmental impacts and promote resource conservation. To ensure that Univar Solutions maintains its course on the journey toward a more sustainable future, it is crucial that our efforts remain material and allow us to deliver value to all stakeholders.
We continue to improve Environmental, Social and Governance (“ESG”) initiatives and disclosures throughout our business. In conjunction with support from management, we incorporate ESG initiatives into our business values and priorities of safety, sustainability and value creation. We emphasize constant improvement by continually striving to improve our industry leading safety record, reducing our environmental impact, and increasing transparency. In 2020, we demonstrated our ongoing commitment to ESG practices with 7% of net sales related to food ingredients and products, 6% of net sales related to homecare and industrial cleaning and 4% of net sales related to industrial and municipal water treatment.
We consider intellectual property, particularly trade secrets and proprietary technology, as important to our success. We hold some patents and own numerous trademarks in multiple jurisdictions. Further, we have various patent and trademark applications pending in jurisdictions worldwide. Although we consider our patents, trademarks, copyrights and trade secrets to constitute valuable assets, we do not regard any of our businesses as being materially dependent upon an individual patent, trademark, copyright or trade secret.
No single customer accounted for more than 10% of net sales in any of the years presented.
No material part of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any government.
Information about our Executive Officers
See Part III, Item 10, Directors, Executive Officers and Corporate Governance.
We maintain a website at www.univarsolutions.com and make available free of charge at this website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The information on our website is not, and will not be deemed to be, a part of this Annual Report on Form 10-K, or incorporated into any of our other filings with the SEC, except where we expressly incorporated such information. If you wish to receive a paper copy of any exhibit to our reports filed with or furnished to the SEC, the exhibit may be obtained by writing to: Corporate Secretary, Univar Solutions Inc., 3075 Highland Parkway Suite 200, Downers Grove, Illinois 60515.
Dissemination of Company Information
We intend to make future announcements regarding Company developments and financial performance through our website, www.univarsolutions.com, as well as through press releases, filings with the Securities and Exchange Commission, conference calls and webcasts.
Item 1A. RISK FACTORS
The following are certain risk factors that could affect our business, financial condition and results of operations. These risk factors should be considered along with the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results or financial condition to differ materially from those projected in forward-looking statements. Although the risks are organized by headings, and each risk is discussed separately, many are interrelated. The following discussion is not an all-inclusive listing of risks, although we believe these are the more material risks that we face. If any of the following occur, our business, financial condition and results of operations could be adversely affected.
Business and Economic Risks
We are affected by general economic conditions, particularly fluctuations in industrial production and consumption, and an economic downturn could adversely affect business, financial condition and results of operations.
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. Additionally, the increasing focus on the potential effects of climate change could result in the restriction, delay or cancellation of drilling programs or development or production activities by fossil-fuel providers, which would curtail the supply of various organic chemicals that we distribute to a broad array of end markets. 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 the impact of the COVID-19 pandemic, 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. For example, the COVID-19 pandemic caused growth in certain of our end markets such as in Homecare and Industrial Cleaning and Pharmaceuticals, while other end markets such as the upstream refining market, remained depressed.
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 COVID-19 pandemic could adversely impact our business, financial condition and results of operations.
The novel coronavirus identified in China in late 2019 has spread globally and has resulted in authorities implementing numerous measures to try to contain the virus, including travel restrictions, quarantines, shelter in place orders, and shutdowns. These measures have adversely impacted and may further adversely impact our workforce and operations and those of our customers, vendors and suppliers by, among other things, causing facility closures, production delays and capacity limitations; disrupting our supply chain and reducing the availability of products; straining our supply chain as a result of increased demand for certain of our products; reducing the demand for certain of our products; affecting the collectability of our accounts receivable; disrupting the transport of products from our supply chain to us and from us to our customers and causing delays; restricting our operations and sales, marketing and distribution efforts; and delaying the implementation of our strategic plans and initiatives. For additional disclosures on the effect of the pandemic on our business, see "Market Conditions and Outlook" in Item 7 of this Annual Report on Form 10-K. The COVID-19 pandemic has also caused disruption in the capital markets and could make financing more difficult and/or expensive to obtain in the short term. To the extent that the Company and its employees, customers, vendors and suppliers continue to be impacted by the COVID-19 pandemic, this could materially interrupt the Company’s business operations and have a material adverse effect on our financial condition and results of operations.
In addition, the COVID-19 pandemic has caused us to modify our business practices (including restricting employee travel, changing employee work locations, and limiting the use of in-person meetings, events and conferences) and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, vendors and suppliers. Our operations and our ability to perform critical functions may be disrupted if a significant number of employees are ill, quarantined or otherwise limited in their ability to work remotely, such as in the event of a natural disaster, power outage, connectivity issue, or other event that impacts our employees’ ability to work remotely. The increase in remote working may also result in increased cyber security and fraud risks, as well as a potential loss in productivity.
As permitted and where possible, we will endeavor to have our business-critical employees return to working from our offices and facilities, at least partially. This could result in an increased COVID-19 positivity rate amongst our employee population and could result in an increased volume of workers compensation claims. In addition, employee relations challenges may arise as we work to balance business needs with employee preferences on remote working arrangements.
The potential duration and impact of the pandemic on the global economy and on our business are difficult to predict and cannot be estimated with any degree of certainty, but the pandemic has significantly increased economic and demand uncertainty and caused significant disruptions to global financial markets. We might not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impact to our results.
Significant changes in the business strategies of producers or in the operations of our customers could adversely affect our business, financial condition and results of operations.
Significant changes in the business strategies of producers could disrupt our supply. Large chemical manufacturers may elect to sell certain products (or products in certain regions) directly to customers or utilize digital marketplaces, bypassing distributors such as us. While we do not believe that our results depend materially on access to any individual producer’s products, a reversal of the trend toward more active use of distributors would likely result in increasing margin pressure or products becoming unavailable to us.
In addition, unpredictable events may have a significant impact on the industries in which many of our customers operate, reducing demand for products that we normally distribute in significant volumes. Significant disruptions of supply and disruptions in customer industries could have a material adverse effect on our business, financial condition and results of operations.
The markets in which we operate are highly competitive and we may not be able to compete successfully.
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. Consolidation 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.
The prices and costs of the products we purchase may be subject to large and significant price increases. We might not be able to pass such cost increases through to our customers. We could experience financial losses if our inventories of one or more chemicals exceed our sales and the price of those chemicals decreases significantly while in our inventories or if our inventories fall short of our sales and the purchase price of those chemicals increases significantly.
We purchase and sell a wide variety of chemicals, the price and availability of which may fluctuate, and may be subject to large and significant price increases. Many of our contracts with producers include chemical prices that are not fixed or are tied to an index, which allows our producers to change the prices of the chemicals we purchase as the price of the chemicals fluctuates in the market. Changes in chemical prices affect our net sales and cost of goods sold, as well as our working capital requirements, levels of debt and financing costs. We might not always be able to reflect increases in our chemical costs, transportation costs and other costs in our own pricing. Any inability to pass cost increases onto customers may adversely affect our business, financial condition and results of operations.
In order to meet customer demand, we typically maintain significant inventories, and we are therefore subject to a number of risks associated with our inventory levels, including the following:
•declines in the prices of chemicals that are held by us;
•the need to maintain a significant inventory of chemicals that may be in limited supply and therefore difficult to procure;
•buying chemicals in bulk for the best pricing and thereby holding excess inventory;
•responding to the fluctuating demand for chemicals;
•cancellation of customer orders; and
•responding to customer requests for rapid delivery.
In order to manage our inventories successfully, we must estimate demand from our customers and purchase chemicals that substantially correspond to that demand. If we overestimate demand and purchase too much of a particular chemical, we face a risk that the price of that chemical will fall, leaving us with inventory that we cannot sell profitably or have to write down such inventory from its recorded value. If we underestimate demand and purchase insufficient quantities of a particular chemical and prices of that chemical rise, we could be forced to purchase that chemical at a higher price and forego profitability in order to meet customer demand. Our business, financial condition and results of operations could suffer a material adverse effect if either or both of these situations occur frequently or in large volumes.
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. 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.
We depend on transportation assets, some of which we do not own, in order to deliver products to our customers.
Although we maintain a significant portfolio of owned and leased transportation assets, including trucks, trailers and 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.
Accidents, safety failures, environmental damage, product quality issues, delivery failures or hazards and risks relate to our operations and the 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 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.
Any of these risks, if they materialize, could have a material adverse effect on our business, financial condition and results of operations.
Our business exposes us to significant risks, not all of which are covered by insurance.
Because we are engaged in the blending, managing, handling, storing, selling, transporting and disposing of chemicals, chemical waste products and other hazardous materials, product liability, health impacts, fire damage, safety, cyber security and environmental risks are significant concerns for us. We are also exposed to present and future chemical exposure claims by employees, contractors on our premises, other persons located nearby, as well as related workers' compensation claims. Although we carry insurance to protect us against many risks involved in the conduct of our business, we do not insure against all such risks and the insurance we carry is subject to limitations, including exclusions, deductibles and coverage limits. 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. We also may be unable to obtain at commercially reasonable rates in the future adequate insurance coverage for the risks we currently insure against, and certain risks are or could become completely uninsurable or eligible for coverage only to a reduced extent. Increased insurance premiums or the occurrence of significant uncovered losses could have a material adverse effect 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 financial condition and results of operations.
We carry significant goodwill and intangible assets on our balance sheet. As of December 31, 2020, 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 2020 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.
Risks Related to Technology
Our business could be seriously impacted by business disruptions and security breaches, including cybersecurity incidents.
Business and/or supply chain disruptions, plant downtime, and/or power outages, and information technology system and/or network disruptions, regardless of cause, including acts of sabotage, employee error or other actions, geo-political activity, military actions, terrorism (including cyber-attacks), weather events, and natural disasters could seriously harm our operations as well as the operations of our customers and suppliers. Any such event could have a negative impact on our business, results of operations, financial condition, and cash flows.
Cyber-attacks or security breaches could compromise confidential, business critical information, cause a disruption in the Company’s operations or harm the Company’s reputation. Additionally, the increase in remote working as a result of the COVID-19 pandemic may also result in increased cyber-security and fraud risks. While the Company has a comprehensive cyber-security program that is continuously reviewed, maintained and upgraded, there can be no assurance that such procedures, controls, and intelligence will be sufficient to prevent security breaches from occurring. If any security breaches were to occur, they could lead to losses of sensitive information, critical infrastructure or capabilities essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations or cash flows, and could result in claims being brought against us.
The integration of our business systems may negatively impact our business, financial condition and results of 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 by year 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 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.
Risks Related to Our Indebtedness
Our indebtedness may adversely affect our business, financial condition and results of operations.
As of December 31, 2020, we had $2,640.6 million of total debt. Our indebtedness may have material adverse effects on our business, financial condition and operating results. The amount of our debt, as well as any additional debt or other obligations that we may incur in the future, could have important consequences for holders of our common stock, including, but not limited to:
•our ability to satisfy obligations to lenders or note holders 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, 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 North American ABL Facility and Euro ABL Facility include certain financial covenants.
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. 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. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility.
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 $1.9 billion, or 72 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. In July 2017, The U.K. Financial Conduct Authority, which regulates LIBOR,
announced that it intends to phase out all LIBOR tenors by the end of 2021. However, in late 2020, the ICE Benchmark Administration announced that certain tenors of LIBOR may be extended until mid-2023. At this time, it is uncertain if applicable tenors of LIBOR will cease to exist after calendar year 2021, or whether additional reforms to LIBOR may be enacted, or whether alternative reference rates will gain market acceptance as a replacement for LIBOR 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. In addition, the COVID-19 pandemic has caused disruption in the capital markets and could make financing more difficult and/or expensive to obtain in the short term. 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.
Litigation, Environmental and Regulatory Risk
As a result of our current and past operations, we are subject to extensive environmental, health and safety laws and regulations, which expose us to risks that could have a material adverse effect on our business, financial condition and results of operations.
We are subject to extensive environmental, health and safety laws and regulations in multiple jurisdictions because we blend, manage, handle, store, sell, transport and arrange for the disposal of chemicals, hazardous materials and hazardous waste. These include laws and regulations governing our management, storage, transportation and disposal of chemicals; product regulation; air, water and soil contamination; greenhouse gas emissions; and the investigation and cleanup of contaminated sites, including any spills or releases that may result from our management, handling, storage, sale, or transportation of chemicals and other products. Compliance with these laws and regulations, and with the permits and licenses we hold, requires that we expend significant amounts for ongoing compliance, investigation and remediation. If we fail to comply with such laws, regulations, permits or licenses, we may be subject to fines, damages and other civil, administrative or criminal sanctions and investigations, including the revocation of permits and licenses necessary to continue our business activities. In addition, future changes in laws and regulations, or the interpretation of existing laws and regulations, could have an adverse effect on us by adding restrictions, reducing our ability to do business, increasing our costs of doing business, reducing our profitability or reducing the demand for our products.
Previous operations, including those of acquired companies, have resulted in contamination at a number of current and former sites, which must be investigated and remediated. We have ongoing investigations and remediation activities, or are contributing to cleanup costs, at approximately 104 currently or formerly owned, operated or used sites or other sites impacted by our operations. We have spent substantial sums on such investigation and remediation and we expect to continue to incur such expenditures in the future. We may incur losses in connection with investigation and remediation obligations that exceed our environmental reserve. There is no guarantee that our estimates will be accurate, that new contamination will not be discovered or that new environmental laws or regulations will not require us to incur additional costs. Any such inaccuracies, discoveries or new laws or regulations, or the interpretation of existing laws and regulations, could have a material adverse effect on our business, financial condition and results of operations.
We could be held liable for the costs to investigate, remediate or otherwise address contamination at any real property we have ever owned, leased, operated or used or other sites impacted by our operations. Some environmental laws could impose on us the entire cost of cleanup of contamination present at a site even though we did not cause all of the contamination. These laws often identify parties who can be strictly and jointly and severally liable for remediation. The discovery of previously unknown contamination at current or former sites or the imposition of other environmental liabilities or obligations in the future, including additional investigation or remediation obligations with respect to contamination that has impacted other properties, could lead to additional costs or the need for additional reserves that have a material adverse effect on our business, financial condition and results of operations. In addition, we may be required to pay damages or civil judgments related to third party claims, including those relating to personal injury (including exposure to hazardous materials or chemicals we blend, handle, store, sell, transport or dispose of), product quality issues, property damage or contribution to remedial obligations. We
have been identified as a potentially responsible party at certain third party sites at which we have arranged for the disposal of our hazardous wastes. We may be identified as a potentially responsible party at additional sites beyond those for which we currently have financial obligations. Such developments could have a material adverse effect on our business, financial condition and results of operations.
Societal concerns regarding the safety of chemicals in commerce and their potential impact on the environment have resulted in a growing trend towards increasing levels of product safety and environmental protection regulations. These concerns could influence public perceptions, impact the commercial viability of the products we sell and increase the costs to comply with increasingly complex regulations, which could have a negative impact on our business, financial condition and results of operations. Additional findings by government agencies that chemicals pose significant environmental, health or safety risks may lead to their prohibition in some or all of the jurisdictions in which we operate.
Our business exposes us to potential product liability claims and recalls, which could adversely affect our business, financial condition and results of operations.
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 releases 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 confidence in our products or services 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.
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.
International Market Risk
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 US, and foreign tax and other laws limiting our ability to repatriate earnings to the US;
•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.
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.
Employee and Benefit Plan Risk
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 US. 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, 2020, our pension plans were underfunded by $228.9 million and our unfunded postretirement plan liabilities were approximately $1.6 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 Central States, Southeast and Southwest Areas Pension Plan, which 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, 2020, approximately 24% of our labor force is covered by a collective bargaining agreement, including approximately 12%, 46% and 23% of our labor force in the US, Europe and Canada, respectively. Approximately 4% 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.
Risks Related to Our Common Stock
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 Bylaws 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. 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.
General Risk Factors
Our business is subject to additional general regulatory requirements, which increase our cost of doing business, could result in claims and enforcement actions, and could restrict our business in the future.
Our general business operations are subject to a broad spectrum of international, federal, state, and local laws and regulations, including, without limitation, those relating to antitrust, environmental, food and drug, labor and human resources, tax, trade compliance, unclaimed property, transportation, anti-bribery, banking and treasury, privacy and data protection (including the European Union's General Data Protection Regulation), among others. These laws and regulations add cost to our conduct of business and could, in some instances, result in claims or enforcement actions or could reduce our ability to pursue business opportunities. Any changes in the laws and regulations applicable to us, the enactment of any additional laws or regulations, or the failure to comply with, or increased enforcement activity of, such laws and regulations, could significantly impact our products and services and have a material adverse effect on our business, financial condition and results of operations. Additionally, governmental agencies may refuse to grant or renew our operating licenses and permits.
We are exposed to 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 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. The occurrence of any of these events could have a material adverse effect on our business, financial condition or 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
Our principal executive office is located in Downers Grove, Illinois under a lease expiring in June 2024. As of December 31, 2020, we had 322 locations in the US in 47 states and 310 locations outside of the US 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 material to the operation of our business.
ITEM 3. LEGAL PROCEEDINGS
See “Note 21: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K for information regarding legal proceedings, the content of which is incorporated by reference to this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
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.
Holders of Record
As of December 31, 2020, there were 11 holders of our Common Stock, as determined by counting our record holders and the number 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 on behalf of their customers, we do not know the actual number of unique shareholders represented by these record holders.
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 from December 31, 2015 through December 31, 2020. The graph assumes $100 was invested in each of the Company's common stock, the S&P 500 and S&P 500 Chemical Index as of the market close on December 31, 2015. Note that historic stock price performance is not necessarily indicative of future stock price performance.
|Univar Solutions Inc.||$||100 ||$||167 ||$||182 ||$||104 ||$||143 ||$||112 |
|S&P 500||100 ||112 ||136 ||130 ||171 ||203 |
|S&P 500 Chemical Index||100 ||110 ||140 ||123 ||150 ||178 |
We have never declared or paid any cash dividend on our common stock. We currently intend to retain any future earnings and we have no current plans to pay dividends in the near future. In addition, our credit facilities contain limitations on our ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
This “Selected Financial Data” should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K and our audited consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K.
| ||Year ended December 31,|
|(in millions, except per share data)||2020|
|Consolidated Statements of Operations|
|Net sales||$||8,265.0 ||$||9,286.9 ||$||8,632.5 ||$||8,253.7 ||$||8,073.7 |
Operating income (2)
|282.2 ||187.3 ||387.4 ||338.0 ||138.4 |
|Net income (loss) from continuing operations||52.9 ||(105.6)||172.3 ||119.8 ||(68.4)|
|Net income (loss)||52.9 ||(100.2)||172.3 ||119.8 ||(68.4)|
|Income (loss) per common share from continuing operations – diluted||0.31 ||(0.64)||1.21 ||0.85 ||(0.50)|
|Income (loss) per common share – diluted||0.31 ||(0.61)||1.21 ||0.85 ||(0.50)|
|Consolidated Balance Sheet|
|Cash and cash equivalents||$||386.6 ||$||330.3 ||$||121.6 ||$||467.0 ||$||336.4 |
|Total assets||6,355.0 ||6,494.8 ||5,272.4 ||5,732.7 ||5,389.9 |
|Long-term liabilities||3,155.7 ||3,312.6 ||2,746.1 ||3,223.2 ||3,240.5 |
|Stockholders’ equity||1,792.3 ||1,732.8 ||1,191.7 ||1,090.1 ||809.9 |
|Other Financial Data|
Cash provided by operating activities (3)
|$||226.9 ||$||363.9 ||$||289.9 ||$||282.6 ||$||450.0 |
|Cash used by investing activities||(41.3)||(433.1)||(99.0)||(79.1)||(136.0)|
Cash (used) provided by financing activities (3)
|Capital expenditures||111.3 ||122.5 ||94.6 ||82.7 ||90.1 |
Adjusted EBITDA (2)(4)
|635.8 ||704.2 ||640.4 ||593.8 ||547.4 |
Adjusted EBITDA margin (2)(4)
|7.7 ||%||7.6 ||%||7.4 ||%||7.2 ||%||6.8 ||%|
(1)Effective January 1, 2019, the Company adopted ASU 2016-02 "Leases" (Topic 842) by applying the new guidance to all leases existing at the date of initial application and not restating prior year amounts. On February 28, 2019, the Company completed the Nexeo acquisition. See “Note 3: Business combinations.”
(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 comparable GAAP financial measure. 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 to its most comparable GAAP measure, see “Analysis of Segment Results” within this Item and “Note 23: Segments” to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K. Refer to “Non-GAAP Financial Measures” within this Item for more information about our use of Non-GAAP financial measures.
Our MD&A is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flow. This section of this Annual Report on Form 10-K discusses year-to-year comparisons between 2020 and 2019. Discussions of year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, filed on February 25, 2020, which is incorporated herein by reference.
Univar Solutions Inc. is a leading global chemical and ingredient distributor and provider of value-added services to customers across a wide range of diverse industries. We purchase chemicals from thousands of chemical producers worldwide and warehouse, repackage, blend, dilute, transport and sell those chemicals to more than 100,000 customer locations across approximately 125 countries.
Our operations are structured into four reportable segments that represent the geographic areas under which we operate and manage our business. These segments are Univar Solutions USA (“USA”), Univar Solutions Canada (“Canada”), Univar Solutions Europe and the Middle East and Africa (“EMEA”), and Univar Solutions Latin America (“LATAM”), which includes developing businesses in Latin America (including Brazil and Mexico) and the Asia-Pacific region. Prior to its renaming in 2019, LATAM was previously referred to as “Rest of World.”
Recent Developments and Items Impacting Comparability
On February 28, 2019, we completed the acquisition of 100% of the equity interest of Nexeo, a leading global chemicals and plastics distributor. The acquisition expands and strengthens Univar Solutions’ presence in North America and provides expanded opportunities to create the largest North American sales force in chemical and ingredients distribution and the broadest product offering. On March 29, 2019, the Company completed the sale of the Nexeo plastics distribution business which is presented as a discontinued operation in the Company’s results of operations for the year ended December 31, 2019.
On December 31, 2019, we sold our Environmental Sciences business. The sale of the business did not meet the criteria to be classified as a discontinued operations in the Company's financial statements.
On September 1, 2020, we sold our industrial spill and emergency response businesses and on November 30, 2020, we sold our Canadian Agriculture services business. The sale of these businesses did not meet the criteria to be classified as discontinued operations in the Company’s financial statements.
On December 18, 2020, we acquired a business of Techi Chem, a leading distributor of specialty silicone solutions used primarily for coatings, adhesives, sealants, and elastomers (CASE) market within the China marketplace.
At the beginning of the fourth quarter of 2020, the Company decided to wind down its Canadian Agriculture wholesale distribution business, which was operationally completed by December 31, 2020 when all of the inventory had been sold.
Market Conditions and Outlook
We sell chemicals that are used in manufacturing processes and as components of or ingredients in other products. Our sales are correlated with and affected by fluctuations in the levels of industrial production, manufacturing output, and general economic activity. The level of industrial production, which tends to decline in the fourth quarter of each year, can impact our sales.
Certain of our end markets experience seasonal fluctuations, which also affect our net sales and results of operations. For example, our sales to the agricultural end market, particularly in Canada, tend to peak in the second quarter in each year, depending in part on weather-related variations in demand for agricultural chemicals. Sales to other end markets such as paints and coatings may also be affected by changing seasonal weather conditions, the construction industry and automotive production. Demand for our oil, gas and mining products and services is affected by factors such as the level of exploration, drilling, development and production activity of, and the corresponding capital spending by, oil, gas and mining companies and oilfield service providers, and trends in oil, gas and mineral prices.
We continue to monitor the current and expected future impact of the COVID-19 pandemic on our global business. The full financial impact of the COVID-19 pandemic on global economic conditions, as well as our business, remains unknown at this time and will depend on the duration of government restrictions, including travel restrictions, quarantines, shelter in place orders and shutdowns, and the duration of the economic slowdown and nature and timing of a recovery. Our top priority is the safety and health of employees, customers, and suppliers. We activated a global, cross-functional response team, which is closely monitoring the situation and implementing additional safety measures to help ensure the well-being of the Company’s employees, customers and suppliers, minimize disruptions and provide for the safe and reliable supply of chemicals and ingredients. The Company has implemented recommended policies and practices to help protect our workforce so they can
safely and effectively carry out their essential work. As government restrictions are lifted or reinstated in the different jurisdictions where we operate, we are implementing agile worksite plans that can adapt to changing circumstances and help maximize the safety of our employees. As part of these plans, employees who are reasonably able to work remotely are increasingly utilizing a hybrid working model with some days being spent working from a Company office and other days being spent working from a remote location, which is often a person's home. The Company is following guidelines from global health experts and has taken additional precautionary steps to help protect our employees working in our distribution centers and other worksites.
As of the date of this filing, the Company’s global distribution centers continue to be operational and supplying products that help preserve essential businesses and infrastructure. This includes providing products and services that are essential for maintaining clean drinking water, waste water treatment and home, industrial and health care facility sanitization and that are used in the manufacturing of food and pharmaceuticals.
We are actively monitoring key product availability, remaining up to date with the current status of our primary modes of transportation and staying up to date with current port operating statuses. We continue to stay connected with our customers to understand impacts on their operations, including whether operations remain open with no change or reduced operations or if operations have closed and whether closure is temporary or permanent. The primary impacts of the COVID-19 pandemic and the current economic events on our end markets are as follows:
Industrial Solutions (30%) – Full-year business impact was down high single digits due largely to the shutdown in automotive at the start of the COVID-19 pandemic. Business performance suffered as well in industrial coatings and related chemistries as capital investment was halted in key markets. Declines were partially offset by the sale of cleaning related agents for household cleaning and DIY products which provided a lift in the second half of the year with net growth in the fourth quarter.
Consumer Solutions (20%) – Performance for the year exceeded prior year by mid-single digits largely from pharmaceuticals. Demand for vitamins, supplements and general pharmaceuticals were supported by product-line expansion and by leveraging our unique position in selling key solvents within the industry. Personal care was impacted by retail closures in the second quarter, but saw double digit growth in the second half of the year. Similarly, food demand declined due to systemic shutdowns in the food services industry, with some offsets in the retail and prepared foods markets.
General Industrial (30%) – Business performance was down high single digits for the year, largely due to COVID-19 related shutdowns. First quarter and fourth quarter performance were flat to prior year, with the middle half of the year down double digits. Chemical manufacturing saw a return to activity in the third quarter while lumber, pulp & paper and transportation remained depressed. Water related chemistries performed well as we strengthened our position in the marketplace.
Services and Other Markets (12%) – The services business has exposure to the energy, automotive and aerospace industries. Second half of the year performance improved over the first half as industrial activity returned on a limited basis leaving performance down mid-single digits for the year.
Refining & Chemical Processing (8%) – Volume and profitability were down double digits for 2020, due to widespread reductions in oil and gas extraction and processing. The upstream business stabilized during the year but is down double digits for the year compared to prior year. Downstream and refining activity showed improvement over the second half of the year.
The Company took steps to maintain sufficient cash and additional credit availability in recognition of the increased risk and uncertainty related to the COVID-19 pandemic and challenging macroeconomic headwinds during 2020. See “Liquidity and Capital Resources” in Item 7 of this Annual Report on Form 10-K for a discussion on our liquidity. In anticipation of ongoing challenges, the Company carefully managed its working capital and realized cost reductions to maintain financial health while continuing to help serve supplier and customer needs. Cash outflows related to operating expenses decreased due to lower travel and event costs, overtime and temporary labor, as well as hiring freezes, elimination of certain workforce positions and delays of some discretionary annual merit increases, temporary furloughs to match changes in demand in certain locations and deferral of certain capital project spending. We will continue to monitor customer activity and match our workforce with demand to the extent possible, as we plan for these risks and uncertainties into the next year.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law and it provides for certain tax law changes. See “Results of Operations” within Item 7 of this Annual Report on Form 10-K for further information. See also, “Note 9: Income taxes” in Item 8 of this Annual Report on Form 10-K where the impact of the law change, a benefit of $12.8 million, is included in the $69.3 million benefit from “Change in valuation allowance, net.”
The current business environment and quickly evolving market conditions require significant management judgment to interpret and quantify the potential impact on our assumptions about future operating cash flows. To the extent changes in the
current business environment impact our ability to achieve levels of forecasted operating results and cash flows, if our stock price were to trade below book value per share for an extended period of time and/or should other events occur indicating the carrying value of our assets might be impaired, we may be required to recognize impairment losses on goodwill, intangible and tangible assets.
See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for further information of the possible impact of the COVID-19 pandemic on our business.
Management is focused, in the near and long term, on the following priorities:
•growth by improving margins through value-based pricing, mix enrichment, divesting non-core chemical businesses and warehouse and logistics productivity;
•globalizing industrial and consumer solutions by delivering technical and application development excellence through our global network of Solutions Centers;
•growth by increasing share through sales force effectiveness while leveraging scale and improving customer satisfaction;
•investing in, and continued advancement, of our digital capabilities, bringing value to customers and suppliers as we work to attain our goal of being the easiest to do business with;
•growing the market through new product authorizations and strategic partners;
•network optimization, as we progress with the integration of Nexeo, continuing to realize synergy cost savings;
•continuing to successfully achieve important Systems Integration milestones;
•delivering on our commitment to focus on our core chemical and ingredient businesses through strategic divestitures and acquisitions globally; and
•advancing our Streamline 2022 (S22) goals to reduce leverage below 3.0x by the end of 2021 and improve Adjusted EBITDA Margins to 9% by the end of 2022.
Currency impacts on consolidated and segment results have been derived by translating current period financial results in local currency using the average exchange rate for the prior period to which the financial information is being compared. We believe providing constant currency information, which information is considered non-GAAP, provides valuable supplemental information regarding our results of operations, consistent with how we evaluate our performance. We calculate constant currency by applying the foreign currency exchange rate from the prior period to the local currency results for the current period.
Results of Operations
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
| ||Year ended December 31,|
|Net sales||$||8,265.0 ||100.0 ||%||$||9,286.9 ||100.0 ||%||$||(1,021.9)||(11.0)||%|
|Cost of goods sold (exclusive of depreciation)||6,262.8 ||75.8 ||%||7,146.1 ||76.9 ||%||883.3 ||(12.4)||%|
|Outbound freight and handling||344.4 ||4.2 ||%||364.8 ||3.9 ||%||20.4 ||(5.6)||%|
|Warehousing, selling and administrative||1,022.3 ||12.4 ||%||1,068.8 ||11.5 ||%||46.5 ||(4.4)||%|
|Other operating expenses, net||90.2 ||1.1 ||%||298.2 ||3.2 ||%||208.0 ||(69.8)||%|
|Depreciation||162.9 ||2.0 ||%||155.0 ||1.7 ||%||(7.9)||5.1 ||%|
|Amortization||60.0 ||0.7 ||%||59.7 ||0.6 ||%||(0.3)||0.5 ||%|
|Impairment charges||40.2 ||0.5 ||%||7.0 ||0.1 ||%||(33.2)||474.3 ||%|
|Total operating expenses||$||1,720.0 ||20.8 ||%||$||1,953.5 ||21.0 ||%||$||233.5 ||(12.0)||%|
|Operating income||$||282.2 ||3.4 ||%||$||187.3 ||2.0 ||%||$||94.9 ||50.7 ||%|
|Other (expense) income:|
|Interest income||2.1 ||— ||%||7.7 ||0.1 ||%||(5.6)||(72.7)||%|
|Interest expense||(114.5)||(1.4)||%||(147.2)||(1.6)||%||32.7 ||(22.2)||%|
|(Loss) gain on sale of business||(50.6)||(0.6)||%||41.4 ||0.4 ||%||(92.0)||N/M|
|Loss on extinguishment of debt||(1.8)||— ||%||(19.8)||(0.2)||%||18.0 ||(90.9)||%|
|Other expense, net||(58.4)||(0.7)||%||(70.5)||(0.8)||%||12.1 ||(17.2)||%|
|Total other expense||$||(223.2)||(2.7)||%||$||(188.4)||(2.0)||%||$||(34.8)||18.5 ||%|
|Income (loss) from continuing operations before income taxes||59.0 ||0.7 ||%||(1.1)||— ||%||60.1 ||N/M|
|Income tax expense from continuing operations||6.1 ||0.1 ||%||104.5 ||1.1 ||%||98.4 ||(94.2)||%|
|Net income (loss) from continuing operations||$||52.9 ||0.6 ||%||$||(105.6)||(1.1)||%||$||158.5 ||N/M|
|Net (loss) income from discontinued operations||— ||— ||%||5.4 ||0.1 ||%||(5.4)||(100.0)||%|
|Net income (loss)||$||52.9 ||0.6 ||%||$||(100.2)||(1.1)||%||$||153.1 ||N/M|
Net sales were $8,265.0 million in the year ended December 31, 2020, a decrease of $1,021.9 million, or 11.0%, from the year ended December 31, 2019. Net sales decreased due to lower demand in the global industrial end markets, the Environmental Sciences divestiture and price deflation. The decrease was partially offset by higher demand for our products in certain essential end markets and the February 2019 Nexeo acquisition in USA, Canada and LATAM segments. Refer to the “Analysis of Segment Results” for additional information.
Gross profit (exclusive of depreciation)
Gross profit (exclusive of depreciation) decreased $138.6 million, or 6.5%, to $2,002.2 million for the year ended December 31, 2020. The decrease in gross profit (exclusive of depreciation) was attributable to lower sales volumes in USA, Canada and EMEA segments due to soft demand across most industrial end markets and the Environmental Sciences divestiture. The decrease was partially offset by favorable changes in product mix from essential end markets. Gross margin increased from 23.1% for the year ended December 31, 2019 to 24.2% for the year ended December 31, 2020. Refer to the “Analysis of Segment Results” for additional information.
Outbound freight and handling
Outbound freight and handling expenses decreased $20.4 million, or 5.6%, to $344.4 million for the year ended December 31, 2020, primarily due to lower sales volumes. On a constant currency basis, outbound freight and handling expenses decreased $19.5 million, or 5.3%. Refer to the “Analysis of Segment Results” for additional information.
Warehousing, selling and administrative
Warehousing, selling and administrative expenses decreased $46.5 million, or 4.4%, to $1,022.3 million for the year ended December 31, 2020. On a constant currency basis, the $40.7 million decrease is primarily due to cost reduction measures across all of our segments. The decrease was partially offset by higher insurance and legal expenses and higher bad debt charges. Refer to the “Analysis of Segment Results” for additional information.
Other operating expenses, net
Other operating expenses, net decreased $208.0 million, or 69.8%, to $90.2 million for the year ended December 31, 2020. The decrease was primarily due to lower acquisition and integration related expenses, the absence of the saccharin legal settlement, lower employee severance costs and stock-based compensation expense as well as the gain on sale of property, plant and equipment. Refer to “Note 6: Other operating expenses, net” in Item 8 of this Annual Report on Form 10-K for additional information.
Depreciation and amortization
Depreciation expense increased $7.9 million, or 5.1%, to $162.9 million for the year ended December 31, 2020, primarily due to the February 2019 Nexeo acquisition.
Amortization expense increased $0.3 million, or 0.5%, to $60.0 million for the year ended December 31, 2020, primarily attributable to the February 2019 Nexeo acquisition.
Impairment charges of $40.2 million were recorded in the year ended December 31, 2020 related to property, plant and equipment in connection with the Company's decision to cease further investment in, and seek to restructure or exit a contract related to, certain technology assets within the Other segment as well as intangibles and property, plant and equipment in connection with the sale of the industrial spill and emergency response businesses within the USA segment and the announced closure of certain production facilities. Refer to “Note 16: Impairment charges” in Item 8 of this Annual Report on Form 10-K for additional information.
Interest expense decreased $32.7 million, or 22.2%, to $114.5 million for the year ended December 31, 2020, primarily due to lower average outstanding borrowings as well as lower interest rates. Refer to “Note 18: Debt” in Item 8 of this Annual Report on Form 10-K for additional information.
Loss (gain) on sale of business
A loss of $50.6 million was recorded in the year ended December 31, 2020 related to the sale of the industrial spill and emergency response businesses as well as the Canadian Agriculture services business which were completed during 2020. The loss also related to a working capital adjustment on the sale of the Environmental Sciences business, which was completed on December 31, 2019. 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 $1.8 million for the year ended December 31, 2020 was driven by the partial prepayment of the Term B-3 Loan due 2024. The prior year period included a $19.8 million loss which was due to the February and November 2019 debt refinancing and repayment activities.
Other expense, net
Other expense, net decreased $12.1 million, or 17.2%, to $58.4 million for the year ended December 31, 2020. The change was primarily related to gains on undesignated foreign currency derivative instruments and foreign currency transactions as well as an increase in non-operating pension income. The change was partially offset by foreign currency denominated loans revaluation losses, losses on interest rate swaps and the increase in pension mark to market loss. Refer to “Note 8: Other expense, net” in Item 8 of this Annual Report on Form 10-K for additional information.
Income tax expense from continuing operations
Income tax expense was $6.1 million for the year ended December 31, 2020, resulting in an effective income tax rate of 10.3%, compared to the US federal statutory rate of 21.0%. The Company’s effective income tax rate for the year ended December 31, 2020 was lower than the US federal statutory rate of 21.0%, primarily due to 2019 return to provision adjustments and the release of valuation allowances on previously non-deductible interest impacted by the CARES Act, offset by US income tax on foreign earnings.
Income tax expense was $104.5 million for the year ended December 31, 2019, resulting in an effective income tax rate of (9500.0)%. The Company’s effective income tax rate for the year ended December 31, 2019 was higher than the US federal statutory rate of 21.0%, primarily due to increased international tax impacts, including those related to US tax reform and transactions with foreign subsidiaries, tax gain in excess of book gain on the sale of the Environmental Sciences business and nondeductible expenses, including the Saccharin legal settlement, 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.
Net income from discontinued operations
Net income from 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
|Year ended December 31,||Favorable (unfavorable)||% Change|
|External customers||$||5,006.2 ||$||5,828.5 ||$||(822.3)||(14.1)||%|
|Inter-segment||81.2 ||100.2 ||(19.0)||(19.0)||%|
|Total net sales||$||5,087.4 ||$||5,928.7 ||$||(841.3)||(14.2)||%|
|Cost of goods sold (exclusive of depreciation)||3,829.1 ||4,550.9 ||721.8 ||(15.9)||%|
Inventory step-up adjustment (1)
|— ||5.3 ||(5.3)||(100.0)||%|
|Outbound freight and handling||239.3 ||254.6 ||15.3 ||(6.0)||%|
|Warehousing, selling and administrative ||625.8 ||673.8 ||48.0 ||(7.1)||%|
|Adjusted EBITDA||$||393.2 ||$||454.7 ||$||(61.5)||(13.5)||%|
|Year ended December 31,||Favorable (unfavorable)||% Change|
|Gross profit (exclusive of depreciation):|
|Net sales||$||5,087.4 ||$||5,928.7 ||$||(841.3)||(14.2)||%|
|Cost of goods sold (exclusive of depreciation)||3,829.1 ||4,550.9 ||721.8 ||(15.9)||%|
|Gross profit (exclusive of depreciation)||$||1,258.3 ||$||1,377.8 ||$||(119.5)||(8.7)||%|
Inventory step-up adjustment (1)
|— ||5.3 ||(5.3)||(100.0)||%|
Adjusted gross profit (exclusive of depreciation) (1)
|$||1,258.3 ||$||1,383.1 ||$||(124.8)||(9.0)||%|
(1)See definition of adjusted gross profit (exclusive of depreciation) at the end of this Item under “Non-GAAP Financial Measures.” Adjusted gross profit (exclusive of depreciation) excludes the inventory fair value step-up adjustment resulting from our February 2019 Nexeo acquisition.
External sales in the USA segment were $5,006.2 million, a decrease of $822.3 million, or 14.1%, in the year ended December 31, 2020. The decrease in external net sales was primarily related to lower energy and industrial end market demand, the Environmental Sciences divestiture and price deflation on certain products partially offset by higher demand for our products in certain essential end markets and the February 2019 Nexeo acquisition.
Gross profit (exclusive of depreciation) decreased $119.5 million, or 8.7%, to $1,258.3 million in the year ended December 31, 2020, primarily due to lower sales volumes due to soft demand across most industrial and energy end markets and the Environmental Sciences divestiture. Gross margin increased from 23.6% for the year ended December 31, 2019 to 25.1% for the year ended December 31, 2020. The increase was primarily related to favorable changes in product mix from essential end markets.
Outbound freight and handling expenses decreased $15.3 million, or 6.0%, to $239.3 million in the year ended December 31, 2020, primarily due to lower sales volumes.
Warehousing, selling and administrative expenses decreased $48.0 million, or 7.1%, to $625.8 million in the year ended December 31, 2020, primarily due to the Environmental Sciences divestiture and cost reduction measures partially offset by higher insurance and legal expenses. Warehousing, selling and administrative expenses as a percentage of external sales increased from 11.6% in the year ended December 31, 2019 to 12.5% in the year ended December 31, 2020.
Adjusted EBITDA decreased by $61.5 million, or 13.5%, to $393.2 million in the year ended December 31, 2020 primarily as a result of lower demand for chemicals in most industrial and energy end markets and the Environmental Sciences divestiture, partially offset by higher demand for our products in certain essential end markets. Adjusted EBITDA margin increased from 7.8% in the year ended December 31, 2019 to 7.9% in the year ended December 31, 2020 primarily as a result of higher gross margin, partially offset by increased warehousing, selling and administrative expenses as a percentage of sales.
|Year ended December 31,||Favorable (unfavorable)||% Change|
|External customers||$||1,697.1 ||$||1,785.5 ||$||(88.4)||(5.0)||%|
|Inter-segment||3.1 ||3.3 ||(0.2)||(6.1)||%|
|Total net sales||$||1,700.2 ||$||1,788.8 ||$||(88.6)||(5.0)||%|
|Cost of goods sold (exclusive of depreciation)||1,274.4 ||1,363.9 ||89.5 ||(6.6)||%|
|Outbound freight and handling||56.5 ||59.1 ||2.6 ||(4.4)||%|
|Warehousing, selling and administrative ||226.6 ||222.5 ||(4.1)||1.8 ||%|
|Adjusted EBITDA||$||142.7 ||$||143.3 ||$||(0.6)||(0.4)||%|
|Year ended December 31,||Favorable (unfavorable)||% Change|
|Gross profit (exclusive of depreciation):|
|Net sales||$||1,700.2 ||$||1,788.8 ||$||(88.6)||(5.0)||%|
|Cost of goods sold (exclusive of depreciation)||1,274.4 ||1,363.9 ||89.5 ||(6.6)||%|
|Gross profit (exclusive of depreciation)||$||425.8 ||$||424.9 ||$||0.9 ||0.2 ||%|
External sales in the EMEA segment were $1,697.1 million, a decrease of $88.4 million, or 5.0%, in the year ended December 31, 2020. On a constant currency basis, external sales decreased $99.8 million, or 5.6%, primarily due to lower sales volumes in most end markets, partially offset by strong demand for our products in certain essential end markets.
Gross profit (exclusive of depreciation) increased $0.9 million, or 0.2%, to $425.8 million in the year ended December 31, 2020. On a constant currency basis, gross profit (exclusive of depreciation) decreased $3.1 million, or 0.7% primarily due to increased market pressures in the pharmaceutical finished goods product line and lower sales volumes. Gross margin increased from 23.8% in the year ended December 31, 2019 to 25.1% in the year ended December 31, 2020 primarily due to the favorable changes in product mix, including higher demand in certain essential end markets.
Outbound freight and handling expenses decreased $2.6 million, or 4.4%, to $56.5 million for the year ended December 31, 2020, driven by lower sales volumes.
Warehousing, selling and administrative expenses increased $4.1 million, or 1.8%, to $226.6 million in the year ended December 31, 2020. On a constant currency basis, warehousing, selling and administrative expenses increased $1.1 million, or 0.5%, primarily due to higher variable compensation costs. As a percentage of external sales, warehousing, selling and administrative expenses increased from 12.5% in the year ended December 31, 2019 to 13.4% in the year ended December 31, 2020.
Adjusted EBITDA decreased by $0.6 million, or 0.4%, to $142.7 million in the year ended December 31, 2020. On a constant currency basis, Adjusted EBITDA decreased $0.6 million, or 0.4%, primarily due to increased market pressures in the pharmaceutical finished goods product line, partially offset by demand for our products in certain essential end markets. Adjusted EBITDA margin increased from 8.0% in the year ended December 31, 2019 to 8.4% in the year ended December 31, 2020 primarily as a result of higher gross margin.
|Year ended December 31,||Favorable (unfavorable)||% Change|
|External customers||$||1,110.7 ||$||1,217.8 ||$||(107.1)||(8.8)||%|
|Inter-segment||2.5 ||6.2 ||(3.7)||(59.7)||%|
|Total net sales||$||1,113.2 ||$||1,224.0 ||$||(110.8)||(9.1)||%|
|Cost of goods sold (exclusive of depreciation)||898.1 ||990.3 ||92.2 ||(9.3)||%|
|Outbound freight and handling||38.9 ||41.9 ||3.0 ||(7.2)||%|
|Warehousing, selling and administrative ||86.5 ||91.6 ||5.1 ||(5.6)||%|
|Adjusted EBITDA||$||89.7 ||$||100.2 ||$||(10.5)||(10.5)||%|
|Year ended December 31,||Favorable (unfavorable)||% Change|
|Gross profit (exclusive of depreciation):|
|Net sales||$||1,113.2 ||$||1,224.0 ||$||(110.8)||(9.1)||%|
|Cost of goods sold (exclusive of depreciation)||898.1 ||990.3 ||92.2 ||(9.3)||%|
|Gross profit (exclusive of depreciation)||$||215.1 ||$||233.7 ||$||(18.6)||(8.0)||%|
External sales in the Canada segment were $1,110.7 million, a decrease of $107.1 million, or 8.8%, in the year ended December 31, 2020. On a constant currency basis, external sales decreased $95.3 million, or 7.8%, primarily related to the Environmental Sciences divestiture, lower demand from Canada's energy sector and price deflation on certain products. The decrease was partially offset by higher demand for our products in certain essential end markets and the February 2019 Nexeo acquisition.
Gross profit (exclusive of depreciation) decreased $18.6 million, or 8.0%, to $215.1 million in the year ended December 31, 2020. On a constant currency basis, gross profit (exclusive of depreciation) decreased $16.3 million, or 7.0%, primarily due to the Environmental Sciences divestiture, unfavorable changes in product mix resulting from the Canadian Agriculture wholesale distribution exit and lower demand from Canada's energy sector, partially offset by favorable changes in product mix from essential end markets. Gross margin increased from 19.2% in the year ended December 31, 2019 to 19.4% in the year ended December 31, 2020.
Outbound freight and handling expenses decreased $3.0 million, or 7.2%, to $38.9 million in the year ended December 31, 2020, primarily due to lower sales volumes.
Warehousing, selling and administrative expenses decreased by $5.1 million, or 5.6%, to $86.5 million in the year ended December 31, 2020. On a constant currency basis, warehousing, selling and administrative expenses decreased $4.1 million, or 4.5%, primarily due to cost reduction measures. Warehousing, selling and administrative expenses as a percentage of external sales increased from 7.5% in the year ended December 31, 2019 to 7.8% in the year ended December 31, 2020.
Adjusted EBITDA decreased by $10.5 million, or 10.5%, to $89.7 million in the year ended December 31, 2020. On a constant currency basis, Adjusted EBITDA decreased $9.6 million, or 9.6%, primarily as a result of unfavorable changes in product mix resulting from the Canadian Agriculture wholesale distribution exit, lower demand from Canada's energy sector and the Environmental Sciences divestiture, partially offset by favorable changes in product mix from essential end markets. Adjusted EBITDA margin decreased from 8.2% in the year ended December 31, 2019 to 8.1% in the year ended December 31, 2020.
|Year ended December 31,||Favorable (unfavorable)||% Change|
|External customers||$||451.0 ||$||455.1 ||$||(4.1)||(0.9)||%|
Total net sales (1)
|$||451.0 ||$||455.1 ||$||(4.1)||(0.9)||%|
|Cost of goods sold (exclusive of depreciation)||348.0 ||350.7 ||2.7 ||(0.8)||%|
|Outbound freight and handling||9.7 ||9.2 ||(0.5)||5.4 ||%|
|Warehousing, selling and administrative ||50.6 ||50.8 ||0.2 ||(0.4)||%|
Brazil VAT charge (recovery) (1)
Adjusted EBITDA (1)
|$||43.0 ||$||36.1 ||$||6.9 ||19.1 ||%|
|Year ended December 31,||Favorable (unfavorable)||% Change|
|Gross profit (exclusive of depreciation):|
|Net sales||$||451.0 ||$||455.1 ||$||(4.1)||(0.9)||%|
|Cost of goods sold (exclusive of depreciation)||348.0 ||350.7 ||2.7 ||(0.8)||%|
Gross profit (exclusive of depreciation) (1)
|$||103.0 ||$||104.4 ||$||(1.4)||(1.3)||%|
Brazil VAT charge (recovery) (1)
|0.4 ||(9.7)||10.1 ||(104.1)||%|
|Adjusted gross profit (exclusive of depreciation)||$||103.4 ||$||94.7 ||$||8.7 ||9.2 ||%|
(1)In 2020, net sales and gross profit (exclusive of depreciation) includes a $0.4 million Brazil VAT charge. The charge of $0.3 million, net of associated fees, is excluded from Adjusted EBITDA in 2020. In 2019, net sales and gross profit (exclusive of depreciation) include a $9.7 million benefit related to a Brazil VAT recovery. The benefit of $8.3 million, net of associated fees, is excluded from Adjusted EBITDA in 2019. See “Note 21: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K for further information regarding the Brazil VAT recovery for the year ended December 31, 2020.
External sales in the LATAM segment were $451.0 million, a decrease of $4.1 million, or 0.9%, in the year ended December 31, 2020. On a constant currency basis, external sales increased $58.5 million, or 12.9%, primarily due to higher demand for our products in certain essential end markets, the February 2019 Nexeo acquisition and from contributions from the energy sector and Brazilian agriculture sector.
Gross profit (exclusive of depreciation) decreased $1.4 million, or 1.3%, to $103.0 million in the year ended December 31, 2020. On a constant currency basis, gross profit (exclusive of depreciation) increased $16.4 million, or 15.7%, due to favorable changes in product and end market mix. Including the prior year Brazil VAT recovery, gross margin decreased from 22.9% for the year ended December 31, 2019 to 22.8% for the year ended December 31, 2020 and excluding the prior year Brazil VAT recovery, increased from 20.8% for the year ended December 31, 2019 to 22.9% for the year ended December 31, 2020.
Outbound freight and handling expenses increased $0.5 million, or 5.4%, to $9.7 million in the year ended December 31, 2020, primarily due to higher sales volumes.
Warehousing, selling and administrative expenses decreased $0.2 million, or 0.4%, to $50.6 million in the year ended December 31, 2020. On constant currency basis, warehousing, selling and administrative expenses increased $7.7 million, or 15.2%, primarily due to higher variable compensation costs and higher bad debt charges. As a percentage of external sales, warehousing, selling and administrative expenses remained flat at 11.2%.
Adjusted EBITDA increased by $6.9 million, or 19.1%, to $43.0 million in the year ended December 31, 2020. On a constant currency basis, Adjusted EBITDA increased $15.1 million, or 41.8%, primarily due to increased gross profit (exclusive of depreciation) due to higher demand for our products in certain essential end markets, the energy sector and the Brazilian agriculture sector. Adjusted EBITDA margin increased from 7.9% to 9.5% in the year ended December 31, 2019 when compared to December 31, 2020.
Liquidity and Capital Resources
The Company's primary source of liquidity is cash generated from its operations and borrowings under our committed North American and European credit facilities (“facilities”). As of December 31, 2020, liquidity for the Company was approximately $855.0 million, comprised of $386.6 million of cash and cash equivalents and $468.4 million available under our
credit facilities. These facilities are guaranteed by certain significant subsidiaries and secured by such parties’ eligible trade receivables and inventory with the maximum borrowing capacity under these credit facilities of $1.5 billion and €200 million. Significant reductions in the Company’s trade receivables and inventory would reduce our availability to access liquidity under these facilities. The Company has no active financial maintenance covenants in its credit agreements, however, there is a springing fixed charge coverage ratio (“FCCR”) under the revolving credit facilities of 1.0x, applicable only if availability is less than or equal to 10% of the borrowing capacity. If the FCCR was applicable, the calculation would have been 4.5x as of December 31, 2020.
The Company's primary liquidity and capital resource needs are to service its debt and to finance operating expenses, working capital, capital expenditures, other liabilities, costs of integration and general corporate purposes. The majority of the Company’s debt obligations mature in 2024 and beyond. Management continues to balance its focus on sales and earnings growth with continuing efforts in cost control and working capital management. In anticipation of ongoing, challenging macroeconomic headwinds, including the impact of the COVID-19 pandemic, the Company has been carefully managing its working capital and implementing operating cost reductions to maintain our financial health while continuing to help serve supplier and customer needs. The Company has significant working capital needs, although the Company has implemented several initiatives to improve its working capital and reduce the related financing requirements. The nature of the Company's business, however, requires the Company to maintain inventories that enable it to deliver products to fill customer orders. As of December 31, 2020, the Company maintained inventories of $674.0 million, equivalent to approximately 38.3 days of sales.
Total debt as of December 31, 2020 was $2,642.7 million, consisting of senior term loans, senior unsecured notes, asset backed loans, finance lease obligations and short-term financing. The Company's access to debt capital markets has historically provided the Company with sources of liquidity. We do not anticipate having difficulty in obtaining financing from those markets in the future with our history of favorable results in the debt capital markets and strong relationships with global financial institutions. However, the COVID-19 pandemic has caused disruption in the capital markets and could make financing more difficult and/or expensive to obtain in the short term. Additionally, our ability to continue to access the debt capital markets with favorable interest rates and other terms will depend, to a significant degree, on maintaining our current ratings assigned by the credit rating agencies. The Company may from time to time repurchase its debt or take other steps to reduce its debt or interest cost. These actions may include open market repurchases, negotiated repurchases or opportunistic refinancing of debt. The amount of debt, if any, that may be repurchased or refinanced will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. On January 7, 2020, using the proceeds from the sale of the Environmental Sciences business, the Company repaid $174.0 million of the Term B-3 Loan due 2024. Refer to “Note 18: Debt” in Item 8 of this Annual Report on Form 10-K for further information.
The Company's defined benefit pension plans had an underfunded status of $228.9 million and $234.4 million as of December 31, 2020 and 2019, respectively. Based on current projections of minimum funding requirements, we expect to make cash contributions of $19.1 million to our defined benefit pension plans in 2021. The timing for any such requirement in future years is uncertain given the implicit uncertainty regarding the future developments of the “Risk Factors” described in Item 1A of this Annual Report on Form 10-K.
We expect our 2021 capital expenditures for maintenance, safety and cost improvements and investments in our digital capabilities to be approximately $120 million to $130 million. Interest payments for 2021 are expected to be $95 million to $105 million. We expect to fund our capital expenditures and our interest payments with cash from operations or cash on hand.
We believe funds provided by our primary sources of liquidity will be adequate to meet our liquidity, debt repayment obligations and capital resource needs for at least the next 12 months under current operating conditions.
The following table presents a summary of our cash flow activity:
| ||Year ended December 31,|
|Net cash provided by operating activities||$||226.9 ||$||363.9 ||$||289.9 |
|Net cash used by investing activities||(41.3)||(433.1)||(99.0)|
|Net cash (used) provided by financing activities||(140.0)||295.2 ||(518.3)|
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Cash Provided by Operating Activities
Cash provided by operating activities decreased $137.0 million to $226.9 million for the year ended December 31, 2020 from $363.9 million for the year ended December 31, 2019. The decrease is primarily due to changes in trade working capital and prepaid expenses and other current assets, partially offset by the change in net income, exclusive of non-cash items.
The change in net income, exclusive of non-cash items, provided net cash inflows of $186.8 million from $336.8 million and $150.0 million for the years ended December 31, 2020 and 2019.
The change in trade working capital, which includes trade accounts receivable, net, inventories, and trade accounts payable, provided net cash outflows of $274.4 million when compared to the change in the prior year. Trade working capital provided cash outflows of $79.3 million for the year ended December 31, 2020 compared to cash inflows of $195.1 million for the year ended December 31, 2019. Cash outflows from trade accounts receivable, net is attributable to an unfavorable change in timing of customer payments. Inventory cash inflows on a year-over-year basis are primarily related to reductions in the USA segment inventories due to reduced sales volumes. The year-over-year cash outflows related to trade accounts payable are primarily attributable to decreased inventory purchases in the current year and the timing of vendor payments.
The change in prepaid expenses and other current assets provided cash outflows of $53.1 million, primarily due to payment timing differences.
Cash Used by Investing Activities
Cash used by investing activities decreased $391.8 million to $41.3 million for the year ended December 31, 2020 from $433.1 million for the year ended December 31, 2019. The decrease 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. Refer to “Note 3: Business combinations” and “Note 4: Discontinued operations and dispositions” in Item 8 of this Annual Report on Form 10-K for additional information related to the Company's acquisitions and dispositions.
Cash (Used) Provided by Financing Activities
Cash (used) provided by financing activities decreased $435.2 million to cash used of $140.0 million for the year ended December 31, 2020 from cash provided of $295.2 million for the year ended December 31, 2019. The decrease in financing cash flows is primarily due to the prior year increase in debt used to finance the February 2019 Nexeo acquisition. The decrease was partially offset by cash inflows attributable to lower repayments of long-term debt during the year ended December 31, 2020 compared to the year ended December 31, 2019. Refer to “Note 18: Debt” in Item 8 of this Annual Report on Form 10-K for additional information related to the Company’s debt.
Contractual Obligations and Commitments
Our contractual obligations and commitments as of December 31, 2020 are as follows:
| ||Payment Due by Period|
|(in millions)||Total||2021||2022 - 2023||2024 - 2025||Thereafter|
Short-term financing (1)
|$||2.1 ||$||2.1 ||$||— ||$||— ||$||— |
|109.8 ||28.8 ||41.4 ||24.5 ||15.1 |
Long-term debt, including current maturities (1)
|2,559.1 ||137.5 ||8.0 ||1,537.6 ||876.0 |
|402.7 ||95.9 ||172.4 ||82.7 ||51.7 |
Minimum operating lease payments(2)
|198.3 ||50.8 ||69.4 ||31.1 ||47.0 |
Estimated environmental liability payments (4)
|79.6 ||26.5 ||22.7 ||13.8 ||16.6 |
|16.3 ||16.3 ||— ||— ||— |
|$||3,367.9 ||$||357.9 ||$||313.9 ||$||1,689.7 ||$||1,006.4 |
(1)See “Note 18: Debt” in Item 8 of this Annual Report on Form 10-K for additional information.
(2)See "Note 22: Leasing" in Item 8 of this Annual Report on Form 10-K for additional information.
(3)Interest payments on debt are calculated for future periods using interest rates in effect as of December 31, 2020 and obligations on that date. Projected interest payments include the related effects of interest rate swap agreements and cross currency swaps. Certain of these projected interest payments may differ in the future based on changes in floating interest rates, foreign currency fluctuations or other factors or events.
(4)Included in the less than one year category is $10.8 million related to environmental liabilities for which the timing is uncertain. The timing of payments is unknown and could differ based on future events. For more information, see “Note 21: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K.
(5)Commitments related to an acquisition, dispositions and other contractual obligations.
(6)This table excludes our pension and postretirement medical benefit obligations. Based on current projections of minimum funding requirements, we expect to make cash contributions of $19.1 million to our defined benefit pension plans in the year ended December 31, 2021. The timing for any such requirement in future years is uncertain given the implicit uncertainty regarding the future developments of factors described in “Risk Factors” in Item 1A of this Annual Report on Form 10-K and “Note 11: Employee benefit plans” in Item 8 of this Annual Report on Form 10-K.
We expect that we will be able to fund our remaining obligations and commitments with cash flow from operations. To the extent we are unable to fund these obligations and commitments with cash flow from operations, we intend to fund these
obligations and commitments with proceeds from available borrowing capacity under our ABL Facilities or under future financings.
Off-Balance Sheet Arrangements
With the exception of letters of credit, we had no material off-balance sheet arrangements as of December 31, 2020.
Critical Accounting Estimates
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in “Note 2: Significant accounting policies” in Item 8 of this Annual Report on Form 10-K. We consider an accounting estimate to be critical if that estimate requires that we make assumptions about matters that are highly uncertain at the time we make that estimate and if different estimates that we could reasonably have used or changes in accounting estimates that are reasonably likely to occur could materially affect our consolidated financial statements. Our critical accounting estimates are as follows:
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 10.7 percent. Key assumptions in our goodwill impairment test include a 9.5 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 would not have reduced the fair value of the Canada reporting unit below its carrying value. A quantitative assessment was also performed on the USA reporting unit due to the relative size of its carrying value and goodwill balance. The calculated fair value of the USA reporting unit exceeded its carrying value by a significant margin.
Through qualitative assessments performed on the EMEA, LATAM, and APAC reporting units, we concluded that it was more likely than not that each reporting unit’s fair value exceeded its carrying value. As such, quantitative assessments were not performed for these reporting units.
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
We completed the acquisition of Nexeo Solutions in 2019 and finalized the purchase price allocation on March 30, 2020. See “Note 3: Business combinations” in Item 8 of this Annual Report on Form 10-K for additional information.
Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, and we utilized an independent valuation expert in the valuation of the tangible and intangible assets. Critical estimates used in valuing tangible and intangible assets include, but are not limited to, future expected cash flows, discount rates, market prices and asset lives. The valuation of customer relationships utilized an income approach, using an excess earnings methodology. Additionally, the total recurring revenue attributable to the customer relationship was based upon the relative split between specialty and commodity chemicals. Key assumptions used in the business enterprise valuation include the forecasted cash flows discounted using the WACC, which reflects the macroeconomic, industry and geographic factors of the risk of achieving the forecasted cash flows, and ranged from 10.5 percent to 19.0 percent, depending on the country.
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, 2020 and 2019 was $79.6 million and $78.7 million, respectively. See “Note 21: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K.
Our environmental reserves are subject to numerous uncertainties that affect our ability to estimate our costs, or our share of costs if multiple parties are responsible. These uncertainties involve the legal, regulatory and enforcement parameters governing environmental assessment and remediation, the nature and extent of contamination at these sites, the extent and cost of assessment and remediation efforts required, our insurance coverage for these sites and, in the case of sites with multiple responsible parties, the number and financial strength of those parties. In addition, our determination as to whether a loss is probable may change, particularly as new facts emerge as to the causes of contamination. We evaluate each environmental site as new information and facts become available and make adjustments to reserves based upon our assessment of these factors, using technical experts, legal counsel and other specialists.
Defined Benefit Pension and Other Postretirement Obligations
We sponsor defined benefit pension plans in the US and other countries. The accounting for these plans depends on assumptions made by management, which are used by actuaries we engage to calculate the projected and accumulated benefit obligations and the annual expense recognized for these plans. These assumptions include discount rates, expected return on assets, mortality and retirement rates and for certain plans, rates for compensation increases. Actual experience different from those estimated assumptions can result in the recognition of gains and losses in earnings as our accounting policy is to recognize changes in the fair value of plan assets and each plan’s projected benefit obligation in the fourth quarter of each year (the “mark to market” adjustment), unless an earlier remeasurement is required. For the year ended December 31, 2020 and 2019, we recorded a mark to market loss of $52.6 million and $50.9 million, respectively. See “Note 11: Employee benefit plans” in Item 8 of this Annual Report on Form 10-K for additional information.
Due to the phasing out of benefits under our postretirement plans, changes in assumptions have an immaterial effect on that obligation.
A change in the assumed discount rate and return on plan assets rate would have the following effects: