DIVERSEY HOLDINGS, LTD.
This management discussion and analysis ("MD&A") provides information we believe
is useful in understanding our operating results, cash flows and financial
condition. We provide quantitative and qualitative information about key drivers
behind revenue and earnings performance, including the impact of foreign
currency, acquisitions as well as changes in volume and pricing.
The MD&A should be read together with our Consolidated Financial Statements for
the year ended December 31, 2022 and the related Notes thereto, which are
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), and included in Item 8 of Part I of this
Annual Report on Form 10-K, The statements in this MD&A regarding industry
outlook, our expectations regarding our future performance, liquidity and
capital resources and other non-historical statements are forward-looking
statements. These forward-looking statements are subject to numerous risks and
uncertainties, including, but not limited to, the risks and uncertainties
described in the "Risk Factors" and in the "Cautionary Statement Regarding
Forward-Looking Information", and included in Items 1 and 1A of Part I of this
Annual Report on Form 10-K. Our actual results may differ materially from those
contained in or implied by any forward-looking statements.
Management Overview
Diversey Holdings, Ltd. (hereafter the "Company", "we," "us," and "our"), is a leading provider of hygiene, infection prevention and cleaning solutions. We develop mission-critical products, services and technologies that save lives and protect our environment. We were formed as an exempted company incorporated under the laws of theCayman Islands with limited liability onNovember 3, 2020 for the purpose of completing a public offering and related transactions and in order to carry on the business of our indirect wholly-owned operating subsidiaries. OnMarch 29, 2021 , we completed an initial public offering of 46,153,846 Ordinary Shares at a public offering price of$15.00 per share, receiving$654.3 million in net proceeds, after deducting the underwriting discount and offering expenses. OnApril 9, 2021 , we issued and sold an additional 5,000,000 Ordinary Shares pursuant to the underwriters' partial exercise of their option to purchase additional shares, receiving an incremental$71.4 million in net proceeds. Our Ordinary Shares trade on The Nasdaq Global Select Market under the ticker symbol "DSEY".
On
Bain Capital beneficially owned approximately 72.9% of our outstanding Ordinary Shares as ofDecember 31, 2022 . As a result, we are a "controlled company" within the meaning of the corporate governance standards ofThe Nasdaq Stock Market LLC ("Nasdaq"). Under Nasdaq listing rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain Nasdaq corporate governance requirements. We are currently relying on certain of these exemptions.
Recent Developments
Take-Private Merger Agreement. OnMarch 8, 2023 , we entered into the Merger Agreement with Parent and Merger Sub. We will survive the Merger as a wholly owned subsidiary of Parent, our Ordinary Shares will be delisted from the Nasdaq Global Select Market and we will cease to be a reporting company. Parent and Merger Sub are affiliates of Platinum. Parent will acquire all of our Ordinary Shares (except for Ordinary Shares held by BCPE) for$8.40 in cash per Ordinary Share. Ordinary Shares held by BCPE, other than the Rollover Shares, will be purchased by Parent for$7.84 in cash per Ordinary Share, and the Rollover Shares will be exchanged for certain common and preferred units of Topco at a value of$7.84 per Ordinary Share pursuant to the Rollover Agreement.. The consummation of the Merger is subject to customary conditions, including receipt of the vote in favor of the authorization of the Merger Agreement with the Requisite Shareholder Approval, expiration of waiting periods (and any extensions thereof), if any, applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain other specified regulatory approvals and other customary closing conditions. 37 --------------------------------------------------------------------------------
Subject to the satisfaction (or, if applicable, waiver) of such conditions, the Merger is expected to close in the second half of 2023.
Upon termination of the Merger Agreement by us or by Parent upon specified
conditions, we will be required to pay Parent a termination fee of
Reportable Segments
We report our results of operations in two segments: Institutional and Food & Beverage. •Institutional - Our Institutional solutions are designed to enhance cleanliness, safety, environmental sustainability, and efficiency for our customers. We offer a broad range of products, services, solutions, equipment and machines, including infection prevention and personal care, products, floor and building care chemicals, kitchen and mechanical warewash chemicals and machines, dosing and dispensing equipment, and floor care machines. We also offer a range of engineering, consulting and training services related to productivity management, water and energy management, and risk management, supported by data provided through our digital solutions. We deliver these solutions to customers in the healthcare, education, food service, retail and grocery, hospitality, and building service contractors industries. •Food & Beverage - Our Food & Beverage products are designed to maximize the hygiene, safety, and efficiency of our customers' production and cleaning processes while minimizing their impact on the natural resources they consume. We offer a broad range of products, solutions, equipment and machines including chemical products, engineering and equipment solutions, knowledge-based services, training through ourDiversey Hygiene Academy , and water treatment. We deliver these solutions to enhance food safety, operational excellence, and sustainability for customers in the brewing, beverage, dairy, processed foods, pharmaceutical, and agriculture industries. We evaluate the performance of each reportable segment based on the results of each segment. In addition, corporate reflects indirect costs that support all segments, but are not allocated or monitored by segment management, and include executive and administrative functions, finance and accounting, procurement, information technology and human resources. For additional information regarding key factors and measures used to evaluate our business, see "Non-GAAP Financial Measures" and "Net Sales by Segment".
Recent Trends and Events
Russia-Ukraine War. The geopolitical situation inEastern Europe intensified onFebruary 24, 2022 withRussia's invasion ofUkraine . The war between the two countries continues to evolve as military activity proceeds and additional economic sanctions are imposed onRussia by numerous countries throughout the world. In addition to the human toll and impact of the war locally inRussia ,Ukraine , and neighboring countries that conduct business with their counterparties, the war is increasingly affecting economic and global financial markets and exacerbating ongoing economic challenges, including issues such as rising inflation and global supply-chain disruption. TheRussia -Ukraine war has exacerbated the current inflationary environment both inRussia , as a result of economic sanctions that devalue its currency, and in other countries as their businesses and currencies react to the war's implications worldwide. It is possible that foreign currency restrictions or the development of multiple exchange rates could arise in certain countries. In addition, if there are inflationary pressures inRussia and the neighboring countries, we may be required to assess whether the economies of those countries have become highly inflationary, in which theU.S. dollar would replace the Russian ruble as the functional currency for our subsidiaries inRussia .
Our business in
Impact of COVID-19. The COVID-19 pandemic has had a meaningful impact on our business, especially within our Institutional segment. Beginning the second quarter of 2020 and continuing through the first quarter of 2021,
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strong demand for our infection prevention products and services offset volume
related declines in sales to restaurants, hotels and entertainment facilities.
In the remainder of 2021 and into 2022, we saw restrictions and lock-downs start
to ease in some markets, resulting in stronger than anticipated sales in those
markets, except for infection prevention products. Sales of infection products
normalized in the last three quarters of 2021 and in all of 2022.
As economies around the world reopened, increases in demand created significant
disruptions to the global supply chain during 2022, which affected our ability
to receive goods on a timely basis and at anticipated costs. These supply chain
disruptions have been caused and compounded by many factors, including changes
in supply and demand, industry capacity constraints, raw material shortages and
labor shortages. Global logistics network challenges have resulted in delays,
shortages of certain materials, and increased transportation costs. We have
materially mitigated to date the impact of these disruptions through the work of
our procurement and supply chain teams, but there continues to be significant
uncertainties regarding the future impact of supply chain disruptions, which we
cannot predict. Additionally, we are in the process of consolidating certain
facilities within North America , which includes opening a new manufacturing and
warehousing facility, which could present short-term operational challenges and
supply chain disruptions.
We are a diversified business in regards to both industry segments and global
geographic regions. These different aspects of our business are each impacted
differently by COVID-19, supply chain disruptions and broader economic
conditions. Therefore, the recovery cycle and related timing will also be
different for each segment and region.
Capital Investments. To support the expansion of our North American
Institutional business, our new manufacturing and warehouse facility site
located in northern Kentucky began warehouse operations in the second quarter of
2022 and manufacturing operations in the third quarter of 2022. This facility
will help us better serve our institutional customers, strengthen our business
and market position, and better manage our inventory and supply chain.
On January 24, 2022 , we acquired Shorrock Trichem Ltd , a distributor of cleaning
and hygiene solutions and services based in northwest England . This acquisition
increases our capabilities in providing an enhanced value proposition to our
customers, delivering access to mechanical ware washing, laundry machine leasing
and washroom solutions which complement the market leading products that we
provide for these areas.
Impact of Inflation. Inflation affects our manufacturing, distribution and
operating costs. We experienced unprecedented inflation in 2022, which impacted
the cost of our raw materials, packaging and transportation. We are committed to
maintaining our margins, and have taken actions to mitigate inflation through
price increases, cost control, raw material substitutions, and more efficient
logistics practices. However, our success is dependent on competitive pressures
and market conditions, and we cannot guarantee the negative impacts of inflation
can be fully recovered. In periods of significant inflation, we may experience a
lag between our ability to recover both the cost and margin in the short term.
Other Factors Affecting Our Operating Results
Our operating results have been, and will likely continue to be, affected by
numerous factors, including the increasing worldwide demand for our products and
services, increasing regulatory compliance costs, macroeconomic and political
conditions, the introduction of new and upgraded products, recent acquisitions
and foreign currency exchange rates. Each of these factors is briefly discussed
below.
Increasing Demand for Our Products and Services. Governmental regulations for
food safety and disease control, and consumer focus on hygiene and cleanliness
have increased significantly across the world in recent years. Climate change,
water scarcity and environmental concerns have combined to create further demand
for products, services and solutions designed to minimize waste and support
broader sustainability. In addition, many of our customers require tailored
cleaning solutions that can assist in reducing labor, energy, water-use and the
costs related to cleaning, sanitation and hygiene activities. We help our
customers realize efficiencies throughout the operation of their facilities by
developing customized solutions. We believe that our value-added customer
service approach and
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proven commitment to providing cost-savings and sustainable solutions position
us well to address these and other critical demand drivers in order to drive
revenue growth.
Increasing Regulatory Compliance Costs. Although our industry has always been
highly regulated, it is becoming more regulated with the introduction of, among
other things, the Environmental Protection Agency Biocidal Product Regulation
and the Globally Harmonized System of Classification and Labelling of Chemicals.
Compliance costs associated with these new regulations have impacted our cost of
doing business, and we expect these regulations and other existing and new
regulations to continue to affect our cost of doing business in the future.
Impact of Currency Fluctuations. We have significant international operations
with approximately 81.0% of our net sales for 2022 being generated from sales to
customers located outside of the United States . Our international operations are
subject to changes in regional and local economic conditions, including local
inflationary pressures.
We present our Consolidated Financial Statements in U.S. dollars. As a result,
we must translate the assets, liabilities, revenues and expenses of all of our
operations into U.S. dollars at applicable exchange rates. Consequently,
increases or decreases in the value of the U.S. dollar may affect the value of
these items with respect to our non-U.S. dollar businesses in our Consolidated
Financial Statements, even if their value has not changed in their local
currency. For example, a stronger U.S. dollar will reduce the relative value of
reported results of non-U.S. dollar operations, and, conversely, a weaker U.S.
dollar will increase the relative value of the non-U.S. dollar operations. These
translations could significantly affect the comparability of our results between
financial periods and/or result in significant changes to the carrying value of
our assets, liabilities and stockholders' equity.
In addition, many of our operations buy materials and incur expenses in a
currency other than their functional currency. As a result, our results of
operations are impacted by currency exchange rate fluctuations because we are
generally unable to match revenues received in foreign currencies with expenses
incurred in the same currency. From time to time, as and when we determine it is
appropriate and advisable to do so, we may seek to mitigate the effect of
exchange rate fluctuations through the use of derivative financial instruments.
Argentina . Argentina has been designated a highly inflationary economy under
U.S. GAAP effective July 1, 2018 , and the U.S. dollar replaced the Argentine
peso as the functional currency for our subsidiaries in Argentina . For more
information, see "Foreign currency (gain) loss related to hyperinflationary
subsidiaries" below.
Turkey . Turkey has been designated a highly inflationary economy under U.S. GAAP
effective April 1, 2022 , and the U.S. dollar replaced the Turkish lira as the
functional currency for our subsidiaries in Turkey . For more information, see
"Foreign currency (gain) loss related to hyperinflationary subsidiaries" below.
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--------------------------------------------------------------------------------Consolidated Operating Results
Year Ended December Year Ended December Year Ended December
(in millions except per share amounts) 31, 2022 31, 2021 31, 2020
Net sales $ 2,765.9 $ 2,618.9 $ 2,629.2
Cost of sales 1,890.1 1,601.6 1,559.4
Gross profit 875.8 1,017.3 1,069.8
Selling, general and administrative expenses 797.6 826.8 835.7
Transaction and integration costs 51.3 45.8 37.0
Management fee - 19.4 7.5
Amortization of intangible assets 90.2 96.7 98.2
Restructuring and exit costs 48.7 38.4 32.1
Operating income (loss) (112.0) (9.8) 59.3
Interest expense 112.0 126.3 127.7
Foreign currency (gain) loss related to
hyperinflationary subsidiaries (1.9) (2.1) 1.6
Loss on extinguishment of debt - 15.6 -
Other (income) expense, net (36.6) (0.1) (40.7)
Loss before income tax provision (benefit) (185.5) (149.5) (29.3)
Income tax provision (benefit) (16.2) 25.3 9.2
Net loss $ (169.3) $ (174.8) $ (38.5)
Basic and diluted loss per share $ (0.53) $ (0.60) $ (0.16)
Basic and diluted weighted average shares
outstanding 320.2 290.4 243.2
Results of Operations
Net sales by Segment. In "Net sales by Segment" and in certain of the
discussions and tables that follow, we exclude the impact of foreign currency
translation when presenting net sales information, which we define as "constant
dollar," and we exclude acquisitions in the first year after closing and the
impact of foreign currency translation when presenting net sales information,
which we define as "organic." Changes in net sales excluding the impact of
foreign currency translation is a Non-GAAP financial measure. As a global
business, it is important that we take into account the effects of foreign
currency translation when we view our results and plan our strategies.
Nonetheless, we cannot control changes in foreign currency exchange rates.
Consequently, when we look at our financial results to measure the core
performance of our business, we may exclude the impact of foreign currency
translation by translating our current period results at prior period foreign
currency exchange rates. We also may adjust for the impact of foreign currency
translation when making incentive compensation determinations. As a result, we
believe that these presentations are useful internally and useful to investors
in evaluating our performance.
The following tables set forth net sales by segment:
Year Ended December Year Ended December Year Ended December
(in millions) 31, 2022 31, 2021 31, 2020
Institutional $ 1,951.5 $ 1,918.4 $ 1,995.3
Food & Beverage 814.4 700.5 633.9
Total $ 2,765.9 $ 2,618.9 $ 2,629.2
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2022 vs 2021 (in millions, except percentages) Institutional Food & Beverage Total 2021 Net Sales$ 1,918.4 73.3 %$ 700.5 26.7 %$ 2,618.9
Organic change (Non-GAAP) 174.8 9.1 % 152.6 21.8 % 327.4 12.5 % Acquisition 49.3 2.6 % 42.6 6.1 % 91.9 3.5 % Constant dollar change (Non-GAAP) 224.1 11.7 % 195.2 27.9 % 419.3 16.0 % Foreign currency translation (191.0) (10.0) %
(81.3) (11.6) % (272.3) (10.4) % Total change
33.1 1.7 % 113.9 16.3 % 147.0 5.6 %
2022 Net Sales $ 1,951.5 70.6 % $ 814.4 29.4 % $ 2,765.9
Institutional. Net sales increased $33.1 million , or 1.7%, in 2022 compared with
2021. Foreign currency translation had a negative effect of $191.0 million . On a
constant dollar basis, net sales increased $224.1 million , or 11.7%, with our
acquisitions contributing $49.3 million of growth. Organic sales increased by
9.1% in 2022 as compared to 2021, primarily due to price increases to mitigate
the effect of inflation, and volume growth (excluding Infection Prevention
products) through a combination of new customer wins, innovation, and continued
expansion with our existing customers. These increases were partially offset by
a decrease in sales of Infection Prevention products, which have returned to a
more normalized level, after demand increased significantly in 2020 and in the
first quarter of 2021.
Food & Beverage. Net sales increased $113.9 million , or 16.3%, in 2022 compared
with 2021. Foreign currency translation had a negative effect of $81.3 million .
On a constant dollar basis, net sales increased $195.2 million , or 27.9%, with
our acquisitions contributing $42.6 million of growth. Organic sales increased
by 21.8% primarily due to price increases, volume growth through new customer
wins, and success with the rollout of water treatment solutions.
2021 vs 2020
(in millions, except
percentages) Institutional Food & Beverage Total
2020 Net Sales $ 1,995.3 75.9 % $ 633.9 24.1 % $ 2,629.2
Organic change (Non-GAAP) (116.6) (5.8) % 44.2 7.0 % (72.4) (2.8) %
Acquisition 6.2 0.3 % 17.7 2.8 % 23.9 0.9 %
Constant dollar change
(Non-GAAP) (110.4) (5.5) % 61.9 9.8 % (48.5) (1.8) %
Foreign currency translation 33.5 1.7 % 4.7 0.7 % 38.2 1.5 %
Total change (76.9) (3.9) % 66.6 10.5 % (10.3) (0.4) %
2021 Net Sales 1,918.4 73.3 % 700.5 26.7 % 2,618.9
Institutional. Net sales decreased $76.9 million , or 3.9%, in 2021 compared with
2020. Foreign currency translation had a positive effect of $33.5 million . On a
constant dollar basis, net sales decreased $110.4 million , or 5.5%, with our
acquisitions contributing $6.2 million of growth. Organic sales decreased 5.8%
in 2021 as compared to 2020, primarily due to a decrease in sales of Infection
Prevention products as demand slowed in 2021 to levels below the peak demand
from 2020. This decrease was slightly offset by a recovery in certain geographic
markets, which led to an increase in sales in areas that were primarily impacted
by COVID-19 related shutdowns, particularly in restaurants, hotels, and
entertainment facilities.
Food & Beverage. Net sales increased $66.6 million , or 10.5%, in 2021 compared
with 2020. Foreign currency translation had a positive effect of $4.7 million .
On a constant dollar basis, net sales increased $61.9 million , or 9.8%, with our
acquisitions contributing $17.7 million of growth. Organic sales increased 7.0%,
as our Food & Beverage segment was less affected by the COVID-19 pandemic as
many of our customers were considered essential businesses and did not
experience shutdowns to the extent experienced in the Institutional segment. The
increase in sales is primarily driven by new customer wins, pricing actions, and
success with the rollout of water treatment solutions.
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Cost of sales and gross profit. Cost of sales is primarily comprised of direct
materials and supplies consumed in the production of product, as well as labor
and direct overhead expense necessary to acquire and convert the purchased
materials and supplies into finished products. Also included are expenses
associated with service organization, quality oversight, warranty costs and
share-based compensation.
2022 vs 2021
Our gross profit was$875.8 million in 2022 and$1,017.3 million in 2021, and our gross margin was 31.7% in 2022 and 38.8% in 2021. Gross profit for 2022 was unfavorably impacted by$99.4 million of foreign currency translation,$84.8 million of non-recurring costs related to consolidating certain manufacturing and warehousing facilities withinEurope andNorth America , and an$18.3 million charge for excess inventory related to COVID-19, which were offset by a$7.8 million decrease in share-based compensation. Excluding the impact of these items, gross profit decreased by$53.2 million during 2022, and was positively impacted by price increases and higher sales volumes as described above, which were offset by increased inflation, additional freight costs, and higher labor and manufacturing costs. 2021 vs 2020 Our gross profit was$1,017.3 million in 2021 and$1,069.8 million in 2020, and our gross margin was 38.8% in 2021 and 40.7% in 2020. Gross profit in 2021 was favorably impacted by$16.1 million of foreign currency translation, and was offset by a$13.9 million charge for excess inventory related to COVID-19 and a$7.5 million increase in share-based compensation related to the cash long-term incentive plan as a result of our IPO. Customer demand for sanitizer products surged at the outset of COVID-19, and we met the rapidly increasing demand and sold the vast majority of the sanitizer inventory. However, COVID-19 variant-related delays of customer reopenings and consumer activity resulted in a small portion of excess sanitizer inventory. Excluding the impact of these items, gross profit decreased by$47.2 million during 2021, and was negatively impacted by lower sales volumes as described above, as well as additional freight costs, increased inflation, and higher labor and manufacturing costs, which were partially offset by other cost reduction initiatives and price increases.
Selling, general and administrative expenses. Selling, general and administrative expenses are comprised primarily of marketing, research and development and administrative costs. Administrative costs, among other things, include share-based compensation, professional consulting expenditures, administrative salaries and wages, certain software and hardware costs and facilities costs.
2022 vs 2021
Selling, general and administrative expenses were$797.6 million in 2022 compared to$826.8 million in 2021. The decrease of$29.2 million during 2022 was due in part in part to a$51.2 million decrease in share-based compensation and$65.3 million of favorable foreign currency translation. These decreases were partially offset by increases in employee compensation and benefit costs due to inflationary labor increases.
2021 vs 2020
Selling, general and administrative expenses were$826.8 million in 2021 compared to$835.7 million in 2020. The decrease of$8.9 million during 2021 was due in part to cost saving initiatives, reduced spending and cost control measures in response to COVID-19 implemented during 2021. These savings were partially offset by a$40.2 million increase in share-based compensation and$8.8 million of unfavorable foreign currency translation. Transaction and integration costs. Transaction and integration costs were$51.3 million ,$45.8 million , and$37.0 million during 2022, 2021 and 2020, respectively. These costs consist primarily of professional and consulting services which are non-operational in nature, costs related to strategic initiatives, acquisition-related costs, and costs incurred in preparing to become a publicly traded company. Costs incurred in 2022 and 2021 in connection with becoming a publicly traded company were$8.0 million and$14.7 million , respectively. 43 -------------------------------------------------------------------------------- Management fee. Pursuant to a management agreement withBain Capital , we were obligated to payBain Capital an annual management fee of$7.5 million plus reasonable out-of-pocket expenses incurred in connection with management services provided. The management agreement was terminated inMarch 2021 , pursuant to its terms upon the consummation of our IPO, and we recorded a termination fee of$17.5 million during 2021. We paidBain Capital $19.4 million and$7.5 million in management fees during 2021 and 2020, respectively. Amortization of intangible assets acquired. In connection with our various business acquisitions, the acquired assets, including separately identifiable intangible assets, and assumed liabilities were recorded as of the acquisition date at their respective fair values. Amortization of intangible assets acquired was$90.2 million ,$96.7 million , and$98.2 million during 2022, 2021 and 2020, respectively. Restructuring and exit costs. We recorded restructuring and exit costs of$48.7 million ,$38.4 million , and$32.1 million during 2022, 2021 and 2020, respectively. In 2021, we began a strategic initiative to consolidate certain manufacturing and warehousing facilities withinEurope andNorth America , which also includes opening a new manufacturing and warehousing facility inNorth America . We anticipate that these actions will both expand our production capacity and allow us to better manage our inventory, supply chain and workforce. We expect to incur approximately$138.0 million of total costs related to this project, and charged$120.0 million over the life of the project and$111.9 million during the year endedDecember 31, 2022 . Costs incurred in 2022 of$27.1 million are reflected in restructuring and exit costs and$84.8 million of non-recurring other costs related to facilities consolidations are reflected in Cost of sales. Our remaining costs for this project are approximately$18.5 million atDecember 31, 2022 . Cost estimates for these projects have been impacted by an inflationary macro environment with constraints around materials, freight and labor. Extraordinary short-term measures were taken to minimize disruption to customers. These measures include lengthening warehouse leases, temporarily establishing additional warehouses, paying higher freight costs during warehouse transitions and paying carriers to guarantee delivery. In the fourth quarter of 2022, we also incurred restructuring costs related to a reduction in headcount to realign our personnel resources with our business needs, which was aimed at maintaining a competitive cost structure and workforce optimization. See Note 18 - Restructuring and Exit Activities in the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.
Non-operating results. Our non-operating results were as follows:
Year Ended December Year Ended December Year Ended December
(in millions) 31, 2022 31, 2021 31, 2020
Interest expense 112.0 $ 126.3 $ 127.7
Foreign currency (gain) loss related to
hyperinflationary subsidiaries (1.9) (2.1) 1.6
Loss on extinguishment of debt - 15.6 -
Other (income) expense, net (36.6) (0.1) (40.7)
$ 73.5 $ 139.7 $ 88.6
Interest Expense. We incurred interest expense during 2022 of $73.0 million ,
$23.4 million and $8.3 million related to the Senior Secured Credit Facilities,
the 2021 Senior Notes and other financial instruments (primarily derivatives),
respectively. The Senior Secured Credit Facilities are variable-interest rate
debt, and the increase in interest expense during 2022 is due to an increase in
LIBOR. The 2021 Senior Notes are fixed-interest rate debt, and the decrease in
interest expense during 2022 is due to our September 2021 debt refinancing,
which reduced the fixed rate of interest. The decrease in interest expense
during 2022 for the other financial instruments is primarily due to the impact
of our interest rate and currency derivatives.
We incurred interest expense during 2021 of $57.2 million , $28.7 million and
$13.1 million related to the Senior Secured Credit Facilities, the 2021 and 2017
Senior Notes and other financial instruments (primarily derivatives),
respectively.
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We incurred interest expense during 2020 of $83.0 million , $30.3 million and
$3.1 million related to the Senior Secured Credit Facilities, the 2017 Senior
Notes and other financial instruments (primarily derivatives), respectively.
Amortization of deferred financing costs and original issue discount totaling
$7.3 million , $27.3 million , and $11.3 million for 2022, 2021 and 2020,
respectively, are included in the interest expense line item disclosed above.
Amortization expense in 2021 included $18.9 million of accelerated interest
amortization was incurred during 2021.
Foreign currency loss related to hyperinflationary subsidiaries. The economies
of Argentina and Turkey were designated as highly inflationary economies under
U.S. GAAP on July 1, 2018 and April 1, 2022 , respectively. Therefore, the U.S.
dollar replaced the Argentine peso and the Turkish lira as the functional
currency for our subsidiaries in these countries. All local currency denominated
monetary assets and liabilities are remeasured into U.S. dollars using the
current exchange rate available to us, and any changes in the exchange rate are
reflected in foreign currency (gain) loss related to our hyperinflationary
subsidiaries.
Loss on extinguishment of debt. On September 29, 2021 , we completed the sale of
$500.0 million in aggregate principal amount of 4.625% Senior Notes due 2029
(the "2021 Senior Notes") in a private placement to qualified institutional
buyers in reliance on Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act"), and to non-U.S. persons (as defined in Regulation S)
pursuant to Regulation S under the Securities Act. We used the net proceeds from
the issuance of the 2021 Senior Notes, together with borrowings under our New
Senior Secured Credit Facilities (as defined below) and cash on hand, to redeem
all of the €450.0 million aggregate principal amount of 5.625% Senior Notes due
2025 (the "2017 Senior Notes"), pay fees and/or expenses incurred in connection
with the issuance of the 2021 Senior Notes and for general corporate purposes.
We redeemed the 2017 Senior Notes at the redemption price (expressed as
percentages of principal amount) of 101.4%, for a total of $536.7 million , which
consisted of $529.1 million of principal amount and $7.6 million of redemption
premium. The premium cost and the balance of the unamortized deferred financing
costs related to the 2017 Senior Notes of $8.0 million were charged to Loss on
Extinguishment of Debt during 2021.
Other (income) expense, net. Our other (income) expense, net was as follows:
Year Ended December Year Ended December Year Ended December
(in millions) 31, 2022 31, 2021 31, 2020
Interest income $ (4.8) $ (9.9) $ (5.9)
Unrealized foreign exchange (gain) loss (5.9) 12.9 (25.1)
Realized foreign exchange (gain) loss (2.1) 5.9 (0.9)
Non-cash pension and other post-employment benefit plan
(14.2) (15.7) (12.9)
Adjustment for tax indemnification asset 4.7 6.9 2.8
Factoring and securitization fees 5.7 4.7 4.3
Tax receivable agreement adjustments (22.6) (10.1) -
Other, net 2.6 5.2 (3.0)
Total other (income) expense, net $ (36.6) $ (0.1) $ (40.7)
The change in the interest income was primarily due to the fluctuation of our cash balances.
Unrealized foreign exchange gains and losses were primarily due to the change in the value of the Euro versus theU.S. dollar, which impacts ourU.S. dollar denominated debt held at our Euro functional entity. These were partially offset by an inverse impact on our tax receivable agreement.
The realized foreign exchange gains and losses were primarily due to internal cash-pooling activity.
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In accordance with the provisions contained in Accounting Standards Update
2017-07, Compensation - Retirement Benefits, we record net pension income when
the expected return on plan assets exceeds the interest costs associated with
these plans.
The adjustment of our tax indemnification asset was due to the lapse of statute of limitations for unrecognized tax benefits. See Note 14 - Income Taxes
in
the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.
The tax receivable agreement adjustments were due to changes in tax laws and changes in the valuation allowance against the deferred tax assets; therefore there was a net reduction of the tax benefits under the tax receivable agreement. See Note 14 - Income Taxes in the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.
Income tax provision. For 2022, the difference in the statutory income tax
benefit of
For 2021, the difference in the statutory income tax benefit of$(28.4) million and the recorded income tax provision of$25.3 million was primarily attributable to$15.6 million of income tax expense related to non-deductible share-based compensation, and a net$23.8 million increase in the valuation allowance as a result of changes in the assessment of the realizability of deferred tax assets. For 2020, the difference in the statutory income tax benefit of$(7.3) million and the recorded income tax provision of$9.2 million was primarily attributable to$16.9 million of income tax expense related to non-deductible share-based compensation and$14.5 million of income tax expense driven by changes to tax laws impacting our deferred tax liabilities, offset by a net favorable change of$10.3 million from audit settlements and changes to unrecognized tax benefits.
Adjusted EBITDA by Segment. Adjusted EBITDA for each of our reportable segments is as follows:
Year Ended December Year Ended December Year Ended December
(in millions) 31, 2022 31, 2021 31, 2020
Institutional $ 264.8 $ 319.8 $ 336.4
Food & Beverage 96.5 133.7 111.9
Total Segment Adjusted EBITDA 361.3 453.5 448.3
Corporate costs (31.2) (43.4) (47.1)
Consolidated Adjusted EBITDA $ 330.1 $ 410.1 $ 401.2
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2022 vs 2021 (in millions, except percentages) Institutional Food & Beverage Corporate Total 2021 Adjusted EBITDA$ 319.8 78.0 %$ 133.7 32.6 %$ (43.4) (10.6) %$ 410.1 Adj EBITDA margin 16.7 % 19.1 % 15.7 % Organic change (non-U.S. GAAP) (26.4) (8.3) % (31.0) (23.2) % 11.7 27.0 % (45.7) (11.1) % Acquisition 6.8 2.1 % 3.5 2.6 % - - % 10.3 2.5 % Constant dollar change (Non-GAAP) (19.6) (6.1) % (27.5) (20.6) % 11.7 27.0 % (35.4) (8.6) % Foreign currency translation (35.4) (11.1) % (9.7) (7.3) % 0.5 1.2 % (44.6) (10.9) % Total change (U.S. GAAP) (55.0) (17.2) % (37.2) (27.8) % 12.2 28.1 % (80.0) (19.5) % 2022 Adjusted EBITDA$ 264.8 80.2 %$ 96.5 29.2 %$ (31.2) (9.5) %$ 330.1 Adj EBITDA margin 13.6 % 11.8 % 11.9 % Institutional. Adjusted EBITDA decreased$55.0 million , or 17.2%, in 2022 as compared to 2021. Foreign currency translation had a negative effect of$35.4 million . On a constant dollar basis, Adjusted EBITDA in 2022 decreased$19.6 million , or 6.1%, as compared with 2021. Our acquisitions contributed$6.8 million of growth in 2022. Adjusted EBITDA margin decreased from 16.7% in 2021 to 13.6% in 2022, which reflected a decline in profit margin due to increased inflation, higher freight costs, higher manufacturing costs, higher labor costs, and a decrease in sales of Infection Prevention products. These were partially offset by volume growth (excluding Infection Prevention products) and price increases. In periods of significant inflation, we may experience a lag between our ability to recover both the cost and margin in the short term. Food & Beverage. Adjusted EBITDA decreased$37.2 million , or 27.8%, in 2022 compared with 2021. Foreign currency translation had a negative effect of$9.7 million . On a constant dollar basis, Adjusted EBITDA in 2022 decreased$27.5 million , or 20.6%, when compared to 2021. Our acquisitions contributed$3.5 million of growth in 2022. Adjusted EBITDA margin decreased from 19.1% in 2021 to 11.8% in 2022, which reflected a decline in gross profit margin due to high input cost inflation, particularly inEurope due to theRussia -Ukraine war, which were partially offset by volume growth and price increases. In periods of significant inflation, we may experience a lag between our ability to recover both the cost and margin in the short term. Corporate Costs. Corporate costs decreased from$43.4 million in 2021 to$31.2 million in 2022. The reduction was primarily driven by decreases in employee incentive compensation and changes in realized foreign exchange gains and other (income) expense, net. 47
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2021 vs 2020 (in millions, except percentages) Institutional Food & Beverage Corporate Total 2020 Adjusted EBITDA 336.4 83.8 % 111.9 27.9 % (47.1) (11.7) % 401.2 Adj EBITDA margin 16.9 % 17.7 % 15.3 % Organic change (Non-GAAP) (23.5) (7.0) % 18.1 16.2 % 3.5 7.4 % (1.9) (0.5) % Acquisition 1.1 0.3 % 3.5 3.1 % - - % 4.6 1.1 % Constant dollar change (Non-GAAP) (22.4) (6.7) % 21.6 19.3 % 3.5 7.4 % 2.7 0.7 % Foreign currency translation 5.8 1.7 % 0.2 0.2 % 0.2 0.4 % 6.2 1.5 % Total change (U.S. GAAP) (16.6) (4.9) % 21.8 19.5 % 3.7 7.9 % 8.9 2.2 % 2021 Adjusted EBITDA 319.8 78.0 % 133.7 32.6 % (43.4) (10.6) % 410.1 Adj EBITDA margin 16.7 % 19.1 % 15.7 % Institutional. Adjusted EBITDA decreased$16.6 million , or 4.9%, in 2021 as compared to 2020. Foreign currency translation had a positive effect of$5.8 million . On a constant dollar basis, Adjusted EBITDA in 2021 decreased$22.4 million , or 6.7%, as compared with 2020. Our acquisitions contributed$1.1 million to growth in 2021. Adjusted EBITDA margin decreased from 16.9% in 2020 to 16.7% in 2021, which reflected a decline in gross profit margin due to lower sales volumes and higher freight costs, inflation, and higher manufacturing costs reflecting social distancing and higher employee absenteeism from COVID-19, which was partially offset by cost saving initiatives. Food & Beverage. Adjusted EBITDA increased$21.8 million , or 19.5%, in 2021 compared to 2020. Foreign currency translation had a positive effect of$0.2 million . On a constant dollar basis, Adjusted EBITDA in 2021 increased$21.6 million , or 19.3%, when compared to 2020. Our acquisitions contributed$3.5 million of growth in 2021. Adjusted EBITDA margin improved from 17.7% in 2020 to 19.1% in 2021, which was driven by price increases and cost control measures including in-year and carry over from prior year structural cost savings, headcount freezes, furlough assistance received in certain jurisdictions, and lower travel spend in response to the global COVID-19 pandemic.
Corporate Costs. Corporate costs decreased from
48
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Non-GAAP Financial Measures
We present financial information that conforms to U.S. GAAP. We also present
financial information that does not conform to U.S. GAAP, as we believe it is
useful to investors. In addition, Non-GAAP measures are used by management to
review and analyze our operating performance and, along with other data, as
internal measures for setting annual budgets and forecasts, assessing financial
performance, providing guidance and comparing our financial performance with our
peers.
Non-GAAP financial measures also provide management with additional means to
understand and evaluate the core operating results and trends in our ongoing
business by eliminating certain expenses and/or gains (which may not occur in
each period presented) and other items that management believes might otherwise
make comparisons of our ongoing business with prior periods and peers more
difficult, obscure trends in ongoing operations or reduce management's ability
to make useful forecasts. Non-GAAP measures do not purport to represent any
similarly titled U.S. GAAP information and are not an indicator of our
performance under U.S. GAAP. Investors are cautioned against placing undue
reliance on these Non-GAAP measures. Further, investors are urged to review and
consider carefully the adjustments made by management to the most directly
comparable U.S. GAAP financial measure to arrive at these Non-GAAP financial
measures, described below.
Our Non-GAAP financial measures may also be considered in calculations of our
performance measures set by our Board of Directors for purposes of determining
incentive compensation. The Non-GAAP financial metrics exclude items that we
consider to be certain specified items ("Special Items"), such as restructuring
charges, transition and transformation costs, certain transaction and other
charges related to acquisitions and divestitures, gains and losses related to
acquisitions and divestitures, and certain other items. We evaluate unusual or
Special Items on an individual basis. Our evaluation of whether to exclude an
unusual or Special Item for purposes of determining our Non-GAAP financial
measures considers both the quantitative and qualitative aspects of the item,
including among other things (i) its nature, (ii) whether it relates to our
ongoing business operations, and (iii) whether we expect it to occur as part of
our normal ongoing business on a regular basis.
Our calculation of these Non-GAAP measures may not be comparable to similarly
titled measures of other companies due to potential differences between
companies in the method of calculation. As a result, the use of these Non-GAAP
measures has limitations and should not be considered superior to, in isolation
from, or as a substitute for, related U.S. GAAP measures.
EBITDA and Adjusted EBITDA
We believe that the financial statements and other financial information presented have been prepared in a manner that complies, in all material respects, withU.S. GAAP, and are consistent with current practices with the exception of the presentation of certain Non-GAAP financial measures, including EBITDA and Adjusted EBITDA. EBITDA consists of net income (loss) before income tax provisions (benefit), interest expense, interest income, depreciation and amortization. Adjusted EBITDA consists of EBITDA adjusted to (i) eliminate certain non-operating income or expense items, (ii) eliminate the impact of certain non-cash and other items that are included in net income and EBITDA that we do not consider indicative of our ongoing operating performance, and (iii) eliminate certain unusual and non-recurring items impacting results in a particular period. EBITDA and Adjusted EBITDA are supplemental measures that are not required by, or presented in accordance with,U.S. GAAP. EBITDA and Adjusted EBITDA are not measures of our financial performance underU.S. GAAP and should not be considered as an alternative to revenues, net income (loss), income (loss) before income tax provision or any other performance measures derived in accordance withU.S. GAAP, nor should they be considered as alternatives to cash flows from operating activities as a measure of liquidity in accordance withU.S. GAAP. In addition, our method of calculating EBITDA and Adjusted EBITDA may vary from the methods used by other companies. We consider EBITDA and Adjusted EBITDA to be key indicators of our financial performance. Additionally, we believe EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. We also believe that investors, analysts and rating agencies consider EBITDA and Adjusted EBITDA useful means of measuring our ability to meet our debt service obligations and evaluating our financial performance, and management uses these measures for one or more of these purposes. 49 -------------------------------------------------------------------------------- Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as a substitute for analysis of our results as reported underU.S. GAAP. The use of EBITDA and Adjusted EBITDA instead of net income has limitations as an analytical tool, including the following: •EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; •EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; •EBITDA and Adjusted EBITDA do not reflect our income tax expense or the cash requirements to pay our income taxes; •Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; •EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; and •Other companies in our industry may calculate these measures differently than we do, limiting their usefulness as a comparative measure. Adjusted EBITDA includes adjustments that represent a cash expense or that represent a non-cash charge that may relate to a future cash expense, and some of these expenses are of a type that we expect to incur in the future, although we cannot predict the amount of any such future charge. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as a replacement for net income or as a measure of discretionary cash available to us to service our indebtedness or invest in our business. We compensate for these limitations by relying primarily on ourU.S. GAAP results and using EBITDA and Adjusted EBITDA only for supplemental purposes.
Adjusted Net Income and Adjusted Earnings (Loss) Per Share
Adjusted Net Income and Adjusted Earnings (Loss) Per Share ("Adjusted EPS") are
also Non-GAAP financial measures. We define Adjusted Net Income as net income
(loss) adjusted to (i) eliminate certain non-operating income or expense items,
(ii) eliminate the impact of certain non-cash and other items that are included
in net income that we do not consider indicative of our ongoing operating
performance, (iii) eliminate certain unusual and non-recurring items impacting
results in a particular period, and (iv) reflect the tax effect of items (i)
through (iii) and other tax special items. We define Adjusted EPS as our
Adjusted Net Income divided by the number of weighted average shares outstanding
in the period.
We believe that, in addition to our results determined in accordance with U.S.
GAAP, Adjusted Net Income and Adjusted EPS are useful in evaluating our
business, results of operations and financial condition. We believe that
Adjusted Net Income and Adjusted EPS may be helpful to investors because they
provide consistency and comparability with past financial performance and
facilitate period to period comparisons of our operations and financial results,
as they eliminate the effects of certain variables from period to period for
reasons that we do not believe reflect our underlying operating performance or
are unusual or infrequent in nature. However, Adjusted Net Income and Adjusted
EPS are presented for supplemental informational purposes only and should not be
considered in isolation or as a substitute or alternative for financial
information presented in accordance with U.S. GAAP.
Adjusted Net Income and Adjusted EPS have limitations as an analytical tool; some of these limitations are:
• Adjusted Net Income and Adjusted EPS do not reflect changes in, or cash
requirements for, our working capital needs;
• other companies, including companies in our industry, may calculate Adjusted
Net Income and Adjusted EPS differently, which reduce their usefulness as
comparative measures; and
• in the future we may incur expenses that are the same as or similar to some of
the adjustments in our calculation of Adjusted Net Income and Adjusted EPS and
our presentation of Adjusted Net Income and Adjusted EPS
50
--------------------------------------------------------------------------------should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of Adjusted Net Income or Adjusted EPS.
Because of these limitations, you should consider Adjusted Net Income and Adjusted EPS alongside other financial performance measures, including net loss, basic and diluted loss per share, and our otherU.S. GAAP results. Adjusted Net Income and Adjusted EPS are not presentations made in accordance withU.S. GAAP and the use of these terms may vary from other companies in our industry. The most directly comparableU.S. GAAP measure to Adjusted Net Income is net loss and the most directly comparableU.S. GAAP measure to Adjusted EPS is basic and diluted loss per share.
The following table reconciles loss before income tax provision (benefit) to EBITDA and Adjusted EBITDA for the periods presented:
Year Ended December Year Ended December Year Ended December
(in millions) 31, 2022 31, 2021 31, 2020
Loss before income tax provision (benefit) $ (185.5) $
(149.5) $ (29.3)
Interest expense 112.0 126.3 127.7
Interest income (4.8) (9.9) (5.9)
Amortization expense of intangible assets acquired 90.2 96.7 98.2
Depreciation expense included in cost of sales 80.3 82.7 89.5
Depreciation expense included in selling, general
and administrative expenses 10.0 8.1 7.9
EBITDA 102.2 154.4 288.1
Transaction and integration costs(1) 51.3 45.8 37.0
Restructuring and exit costs(2) 48.7 38.4 32.1
Other costs related to facilities
consolidations(3) 84.8 - -
Foreign currency (gain) loss related to
hyperinflationary subsidiaries(4) (1.9) (2.1) 1.6
Adjustment for tax indemnification asset(5) 4.7 6.9 2.8
Acquisition accounting adjustments(6) 1.3 - -
Bain Capital management fee(7) - 19.4 7.5
Non-cash pension and other post-employment benefit plan(8)
(14.2) (15.7) (12.9)
Unrealized foreign currency exchange (gain)
loss(9) (5.9) 12.9 (25.1)
Factoring and securitization fees(10) 5.7 4.7 4.3
Share-based compensation(11) 56.2 115.2 67.5
Tax receivable agreement adjustments(12) (22.6) (10.1) -
Loss on extinguishment of debt(13) - 15.6 -
Realized foreign currency exchange loss on debt
refinancing(14) - 4.5 -
COVID-19 inventory charges(15) 18.3 13.9 -
Other items 1.5 6.3 (1.7)
Consolidated Adjusted EBITDA $ 330.1 $ 410.1 $ 401.2
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--------------------------------------------------------------------------------The following table reconciles net loss to Adjusted Net Income and basic and diluted loss per share to Adjusted EPS for the periods presented:
Year Ended December 31, Year Ended December 31,
2022 2021 Year Ended December 31, 2020
Basic and Basic and Basic and
Net Income diluted Net Income diluted diluted(in millions, except per share amounts) (Loss) EPS(19) (Loss) EPS(19) Net Income (Loss) EPS(19) Reported (GAAP)
$ (169.3) $ (0.53) $
(174.8)
90.2 0.28 96.7 0.33 98.2 0.40
Transaction and integration costs(1) 51.3 0.16 45.8 0.16 37.0 0.15
Restructuring and exit costs(2) 48.7 0.15 38.4 0.13 32.1 0.13
Other costs related to facilities
consolidations(3) 84.8 0.26 0.0 0.00 0.0 0.00
Foreign currency (gain) loss related to
hyperinflationary subsidiaries(4) (1.9) (0.01) (2.1) (0.01) 1.6 0.01
Adjustment for tax indemnification
asset(5) 4.7 0.01 6.9 0.02 2.8 0.01
Acquisition accounting adjustments(6) 1.3 - - - - -
Bain Capital management fee(7) - - 19.4 0.07 7.5 0.03
Non-cash pension and other
post-employment benefit plan(8) (14.2) (0.04) (15.7) (0.05) (12.9) (0.05)
Unrealized foreign currency exchange
(gain) loss(9) (5.9) (0.02) 12.9 0.04 (25.1) (0.10)
Share-based compensation(11) 56.2 0.18 115.2 0.40 67.5 0.28
Tax receivable agreement adjustments(12) (22.6) (0.07) (10.1) (0.03)
- -
Loss on extinguishment of debt(13) - - 15.6 0.05 - -
Realized foreign currency exchange loss
on debt refinancing(14) - - 4.5 0.02 - -
COVID-19 inventory charges(15) 18.3 0.06 13.9 0.05 - -
Accelerated expense of deferred
financing and original issue discount
costs(16) - - 18.9 0.07 - -
Other items 1.5 - 6.3 0.01 (1.7) (0.01)
Tax effects related to non-GAAP
adjustments(17) (69.1) (0.20) (69.3) (0.24) (33.3) (0.14)
Discrete tax adjustments(18) 12.7 0.04 29.3 0.10 (11.6) (0.04)
Adjusted (Non-GAAP) $ 86.7 $ 0.27 $ 151.8 $ 0.52 $ 123.6 $ 0.51
(1)These costs consist primarily of professional and consulting services which
are non-operational in nature, costs related to strategic initiatives,
acquisition-related costs, and costs incurred in preparing to become a publicly
traded company.
(2)Includes costs related to restructuring programs and business exit
activities. See Note 18 - Restructuring and Exit Activities in the Notes to
our Consolidated Financial Statements included elsewhere in this Annual Report
on Form 10-K for additional information.
(3)Represents other costs related to consolidating certain manufacturing and
warehousing facilities within Europe and North America , which are non-recurring
and included in Cost of Sales in our Consolidated Statements of Operations.
(4)Argentina and Turkey were deemed to have highly inflationary economies and
the functional currencies for our Argentina and Turkey operations were changed
from the Argentine peso and Turkish lira to the U.S. dollar and remeasurement
charges/credits are recorded in our Consolidated Statements of Operations rather
than as a component of Cumulative Translation Adjustment on our Consolidated
Balance Sheets.
52
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(5)In connection with the Diversey Acquisition, the purchase agreement governing
the transaction includes indemnification provisions with respect to tax
liabilities. The offset to this adjustment is included in income tax provision.
See Note 14 - Income Taxes in the Notes to our Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K for additional
information.
(6)In connection with various acquisitions we recorded fair value increases to our inventory. These amounts represent the amortization of this increase.
(7)Represents fees paid toBain Capital pursuant a management agreement whereby we have received general business consulting services; financial, managerial and operational advice; advisory and consulting services with respect to selection of advisors; advice in different fields; and financial and strategic planning and analysis. The management agreement was terminated inMarch 2021 pursuant to its terms upon the consummation of the IPO, and we recorded a termination fee of$17.5 million during 2021. (8)Represents the net impact of the expected return on plan assets, interest cost, and settlement cost components of net periodic defined benefit income related to our defined benefit pension plans. See Note 13 - Retirement Plans in the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information. (9)Represents the unrealized foreign currency exchange impact on our operations, primarily attributed to the valuation of theU.S. dollar-denominated debt held by our European entity and our tax receivable agreement.
(10)Represents the fees to complete the sale of the receivables without recourse under our accounts receivable factoring and securitization agreements. See
Note 6 - Financial Statement Details to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.
(11)Represents compensation expense associated with our share-based equity and liability awards. See Note 17 - Share-Based Compensation in the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information. (12)Represents the adjustment to our tax receivable agreement liability due to changes in valuation allowances that impact the realizability of the attributes of the tax receivable agreement. See Note 14 - Income Taxes in the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information. (13)Represents the costs incurred in connection with the redemption of the 2017 Senior Notes on September 29, 2021. See Note 10 - Debt and Credit Facilities in the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information. (14)During 2021, we incurred a realized foreign currency exchange loss related to the refinancing of the Senior Secured Credit Facilities. See Note 10 - Debt and Credit Facilities in the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.
(15)Represents charges for excess inventory and estimated disposal costs related to COVID-19.
(16)Represents accelerated non-cash expense of deferred financing costs and
original issue discount costs as certain debt facilities were fully repaid or
paid down significantly in
(17)The tax rate used to calculate the tax impact of the pre-tax adjustments is based on the jurisdiction in which the charge was recorded.
(18)Represents adjustments related to discrete tax items including uncertain tax
provisions, impacts from rate changes in certain jurisdictions and changes in
our valuation allowance.
(19)For purposes of calculating earnings (loss) per share we have
retrospectively presented earnings (loss) per share as if the Reorganization
Transactions (See Note 1 - General and Description of Business in the Notes
to our Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-K for additional information) had occurred at the beginning of
the earliest period presented. Such retrospective presentation reflects an
increase of approximately 47.4 million shares due to the exchange of shares in
Constellation for shares in the Company.
53
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Liquidity and Capital Resources
Our primary sources of cash are the collection of trade receivables generated
from the sales of our products and services to our customers, amounts available
under our Revolving Credit Facility (as defined below) and accounts receivable
securitization program. Our primary uses of cash are payments for operating
expenses, investments in working capital, capital expenditures, interest, taxes,
debt obligations, restructuring expenses and other long-term liabilities. Our
principal source of liquidity, in addition to cash from operating activities,
has been through our Revolving Credit Facility. As of December 31, 2022 , we had
cash and cash equivalents of $205.6 million and unused borrowing capacity of
$444.6 million under our Revolving Credit Facility. We believe that cash flow
from operations, available cash on hand and available borrowing capacity under
our Revolving Credit Facility will be adequate to service our debt, meet our
liquidity needs and fund necessary capital expenditures for the next twelve
months. We also believe these financial resources will allow us to manage our
business operations for the foreseeable future, including mitigating unexpected
reductions in revenues and delays in payments from our customers. Our future
capital requirements will depend on many factors including our growth rate, the
timing and extent of spending to support development efforts, the expansion of
sales and marketing activities and the introduction of new and enhanced products
and services offerings.
Material Cash Requirements. In 2021, we began a strategic initiative to
consolidate certain manufacturing and warehousing facilities within Europe and
North America , which also includes opening a new manufacturing and warehousing
facility in North America . We anticipate that these actions will both expand our
production capacity and allow us to better manage our inventory, supply chain
and workforce. We expect to spend an estimated $200.0 million in total cash on
the strategic initiative through 2023, which consists of $65.0 million of
capital expenditures and $135.0 million of expenses. Of these amounts, we paid
$111.9 million for expenses during the year ended December 31, 2022 . Our
remaining cash requirements for 2023 are estimated at $6.7 million for capital
expenditures and $20.0 million for expenses. Cost estimates for these projects
have been impacted by an inflationary macro environment with constraints around
materials, freight and labor. Extraordinary short-term measures were taken to
minimize disruption to customers. These measures include lengthening warehouse
leases, temporarily establishing additional warehouses, paying higher freight
costs during warehouse transitions and paying carriers to guarantee delivery. We
believe that cash flow from operations and available cash on hand will meet our
ongoing need to fund this strategic initiative.
Historical Cash Flows. Note that the table below and discussion that follows
include restricted cash as part of net cash in accordance with the provisions of
ASU 2016-18, Statement of Cash Flows - Restricted Cash. We include restricted
cash from our factoring arrangements and compensating balance deposits as part
of our cash and cash equivalents and restricted cash for purposes of preparing
our Consolidated Statements of Cash Flows.
The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities:
Year Ended Year Ended Year Ended
(in millions) December 31, 2022 December 31, 2021 Change December 31, 2020 Change
Net cash provided by (used in)
operating activities $ 33.7 $ (88.7) $ 122.4 $ 103.0 $ (191.7)
Net cash used in investing
activities $ (176.7) $ (134.4) $ (42.3) $ (70.8) $ (63.6)
Net cash provided by financing
activities $ 157.5 $ 237.2 $ (79.7) $ 23.6 $ 213.6
Operating activities
Cash flows from operating activities increased $122.4 million during 2022 as
compared to 2021, and was primarily attributable to favorable fluctuations in
working capital items totaling $251.7 million . The changes in working capital
reflect favorable fluctuations in accounts payable of $101.0 million , other
assets and liabilities of $99.3 million (primarily relating to timing of payroll
related accruals, rebates and lease receivables), trade receivables of $50.5
million (primarily securitization activity) and inventory of $0.9 million .
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Cash flows from operating activities decreased $191.7 million during 2021 as
compared to 2020, and was primarily attributable to a decrease in net income and
unfavorable fluctuations in working capital items totaling $162.7 million . The
changes in working capital reflect unfavorable fluctuations in trade receivables
of $143.8 million (primarily relating to increased sales in 2021 in Latin
America and the Middle East and Africa , which have longer payment terms, and the
securitization of receivables in 2020) and other assets and liabilities of $95.0
million (primarily relating to timing of payroll related accruals, rebates and
lease receivables), partially offset by a favorable fluctuation in accounts
payable of $75.3 million .
Investing activities
Cash flows from investing activities are primarily impacted by the timing of business acquisitions and capital investments in the business.
In 2022, we purchased
Our investments in dosing and dispensing equipment and capital expenditures totaled$136.9 million ,$119.2 million and$87.0 million during 2022, 2021 and 2020, respectively, due to new customer wins and opening a new warehouse and manufacturing facility inNorth America in the second half of 2022.
Cash received from beneficial interests on sold receivables was
In 2021, we purchasedAvmor Ltd. ,Birko Corporation and Tasman Chemicals, and entered into a global exclusive license agreement withHalomine, Inc. for their patented HaloFilmTM disinfectant technology. Our total cash paid for acquisitions in 2021 was$56.3 million . In 2020, we purchased Wypetech and SaneChem for a total of$51.2 million .
Financing activities
Cash flows from financing activities primarily reflect proceeds from the issuance of ordinary shares in our IPO and follow-up offering, derivative transactions, and borrowings and repayment of debt.
In 2022, we terminated several existing derivative agreements, receiving net proceeds of$186.1 million , and simultaneously entered into new at-market derivative agreements with the same notional amounts and maturity dates as the terminated derivatives. Additionally, we paid$17.8 million on short-term and long-term borrowings. In 2021, we received net proceeds from our IPO and follow-up offering of$940.1 million , and combined with amending our credit facilities as noted below, paid down long-term borrowings of$668.8 million . Additionally, we paid$42.7 million in deferred financing costs, original issue discount costs and bond redemption premium costs, primarily related to amending our credit facilities.
In 2020, we received net proceeds from long-term borrowings of
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Debt Capitalization. We had $205.6 million and $207.6 million of cash and cash
equivalents as of December 31, 2022 and December 31, 2021 , respectively. The
following table details our debt outstanding:
(in millions) December 31, 2022 December 31, 2021
Senior Secured Credit Facilities
2021 U.S. Dollar Term Loan $ 1,485.0 $ 1,500.0 Revolving Credit Facility - - 2021 Senior Notes 500.0 500.0 Short-term borrowings 3.8 10.7 Finance lease obligations 11.6 4.4 Financing obligations 21.9 23.1 Unamortized deferred financing costs (30.1) (35.3) Unamortized original issue discount (7.0) (8.3) Total debt 1,985.2
1,994.6
Less: Current portion of long-term debt (12.4) (10.9) Short-term borrowings (3.8) (10.7) Long-term debt $ 1,969.0 $ 1,973.0 OnSeptember 29, 2021 , we entered into an amendment to our Senior Secured Credit Facilities, which provided for a new$1,500.0 million senior securedU.S. dollar denominated term loan (the "2021 U.S. Dollar Term Loan") in addition to the existing$450.0 million revolving credit facility (the "Revolving Credit Facility," and together with the 2021 U.S. Dollar Term Loan, the "New Senior Secured Credit Facilities"). The 2021 U.S. Dollar Term Loan matures onSeptember 29, 2028 , while the Revolving Credit Facility matures onMarch 28, 2026 . AtDecember 31, 2022 , the interest rate for the 2021 U.S. Dollar Term Loan is 7.17%. AtDecember 31, 2022 , we were in compliance with all covenants under the agreements governing the New Senior Secured Credit Facilities. OnSeptember 29, 2021 , we completed the sale of$500.0 million in aggregate principal amount of Senior Notes due 2029 (the "2021 Senior Notes") in a private placement to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and to non-U.S. persons (as defined in Regulation S) pursuant to Regulation S under the Securities Act. We used the net proceeds from the issuance of the 2021 Senior Notes, together with borrowings under our New Senior Secured Credit Facilities and cash on hand, to redeem all of the €450.0 million aggregate principal amount of 5.625% Senior Notes due 2025 (the "2017 Senior Notes"), pay fees and/or expenses incurred in connection with the issuance of the 2021 Senior Notes and for general corporate purposes. The 2021 Senior Notes mature onOctober 1, 2029 , bear interest at 4.625%, and interest is payable semi-annually onApril 1 andOctober 1 of each year, beginning onApril 1, 2022 . AtDecember 31, 2022 , we were in compliance with all covenants under the indenture governing the 2021 Senior Notes. The Merger, if consummated as contemplated in the Merger Agreement, is expected to constitute a "change of control" with respect the 2021 U.S. Dollar Term Loan and the 2021 Senior Notes. As such, it is expected that the 2021 U.S. Dollar Term Loan will be repaid and, with respect to the 2021 Senior Notes, we expect we will either make a Change of Control Offer (as defined in the indenture governing the 2021 Senior Notes (the "Indenture")) at a price equal to the Change of Control Payment (as defined in the Indenture) or redeem (which may include a satisfaction and discharge) the 2021 Senior Notes at the redemption price set forth in the Indenture, in each case, substantially concurrently with the closing of the Merger. 56 -------------------------------------------------------------------------------- Critical Accounting Policies and Estimates The preparation of the consolidated financial statements in accordance withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the applicable reporting period. Actual results could differ from these estimates. These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are beyond management's control. As a result, actual amounts could differ from these estimates. Revenue Recognition. Our revenue earning activities primarily involve manufacturing and selling products and services. Revenue from contracts with customers is recognized using a five-step model consisting of the following: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) we satisfy a performance obligation. Performance obligations are satisfied when we transfer control of a good or service to a customer, which can occur over time or at a point in time. The amount of revenue recognized is based on the consideration to which we expect to be entitled in exchange for those goods or services, including the expected value of variable consideration. The customer's ability and intent to pay the transaction price is assessed in determining whether a contract exists with the customer. If collectability of substantially all of the consideration in a contract is not probable, consideration received is not recognized as revenue unless the consideration is nonrefundable and we no longer have an obligation to transfer additional goods or services to the customer or collectability becomes probable.
Product sales, to end-customers or distributors, represents approximately 98% of our revenue and is recognized at a point-in-time, which is generally at the point in time when products have been shipped, right to payment has been obtained and risk of loss has been transferred.
Revenue is measured based on the consideration to which we expect to be entitled based on customer contracts. For sales to distributors, revenue is adjusted for variable consideration amounts, including but not limited to estimated discounts and distributor rebate programs. These estimates are determined based upon historical experience, contract terms, inventory levels in the distributor channel and other related factors. Adjustments to variable consideration estimates are recorded when circumstances indicate revisions may be necessary. Business Combinations. Business combinations are accounted for under the acquisition method of accounting, which requires the acquired assets, including separately identifiable intangible assets, and assumed liabilities to be recorded as of the acquisition date at their respective fair values. Any excess of the purchase price over the fair value of the assets acquired, including separately identifiable intangible assets, and liabilities assumed is recorded as goodwill. Fair value determination is subject to a significant degree of estimates. The determination of the fair value of assets acquired and liabilities assumed involves assessments of factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount rates at the date of the acquisition. Where appropriate, external advisors are consulted to assist in the determination of fair value. For non-observable market values, fair value has been determined using acceptable valuation principles (e.g., multiple excess earnings, relief from royalty and cost methods) which is considered to be a Level 3 fair value.
The results of operations for businesses acquired are included in the consolidated financial statements from the acquisition date.
Long-Lived Assets. Long-lived assets represent a significant portion of our total assets, the aggregate amount of which was$1,513.7 million and$1,602.2 million , as ofDecember 31, 2022 andDecember 31, 2021 , respectively. Such long-lived assets primarily consist of definite-lived intangible assets in an aggregate amount of$1,165.9 million and$1,292.6 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively. We perform an impairment review for definite-lived intangible assets, such as customer relationships, contracts, intellectual property, and for other long-lived assets, such as property and equipment, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Such events may include, but are not limited to, a significant decrease in the market price of an asset or asset group, change in manner 57 -------------------------------------------------------------------------------- in which an asset is being used, significant change in business climate and significant cash flow or operating losses that demonstrate continuing losses associated with the use of the asset. We calculate the undiscounted value of the projected cash flows expected to result from the use and eventual disposition of the asset or asset group and compare this estimated amount to the carrying value of the asset or asset group. If the carrying amount is found to be greater than the undiscounted value of the projected cash flows of the asset or asset group, we record an impairment loss of the excess of carrying value over the fair value of the asset or asset group. In addition, we re-evaluate the remaining useful lives of the assets and modify them, as appropriate. Definite-lived intangible assets, such as trade names and customer relationships are amortized over their estimated economic lives. The reasonableness of the useful lives of these assets is regularly evaluated. Once these assets are fully amortized, they are removed from the balance sheet. We evaluate these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
We review goodwill for possible impairment on a reporting unit level, which are consistent with our operating segments.Goodwill and and indefinite-lived intangible assets are reviewed on an annual basis as ofOctober 1st of each year, or more frequently if an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit or the fair value of an indefinite-lived intangible asset has declined below its carrying value. Such events may include, but are not limited to, impairment of other assets or establishment of valuation allowances on deferred tax assets, cash flow or operating losses at a reporting unit, negative current events or long-term outlooks for our industry, and negative adjustments to future forecasts. In performing the annual goodwill impairment assessment, we have the option underU.S. GAAP to qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we conclude from the qualitative assessment that there are no indicators of impairment, we do not perform a quantitative test, which would require a valuation of the reporting unit as ofOctober 1 .U.S. GAAP provides a set of qualitative factors such as macroeconomic, industry, market and company specific factors, including cost factors, overall financial performance, market capitalization, and other events specific to the Company to consider in performing the qualitative assessment described above, which factors are not all inclusive; management considers the factors it deems relevant in making its more likely than not assessments. If we conclude from our qualitative assessment that there are indicators of impairment and that a quantitative test is required, the annual or interim quantitative goodwill impairment test involves comparing the fair value of each of our reporting units with goodwill to its carrying value, including the goodwill allocated to the reporting unit. If the fair value of the reporting unit exceeds its carrying value, there is no impairment and no further testing is required. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recognized in an amount of the excess, limited to the amount of goodwill allocated to the reporting unit. Our annual assessment of the recovery of goodwill begins with management's reassessment of its operating segments and reporting units. A reporting unit is an operating segment or one level below an operating segment, which is referred to as a component. This reassessment of reporting units is also made each time we change our operating segments. If the goodwill of a reporting unit is allocated to newly-formed reporting units, the allocation is made to each reporting unit based upon their relative fair values. Based on the results of our 2022 and 2021 annual qualitative assessments, we concluded that it was more likely than not that the fair value of each of the reporting units exceeded its carrying value. As such, it was not necessary to perform a quantitative impairment analysis, and we concluded that our reporting units were not impaired. For our 2020 annual assessment, we elected to bypass performing the qualitative screen and went directly to performing the quantitative test, which did not identify any impairment. As ofDecember 31, 2020 , the estimate of the excess of fair value over carrying value was greater than 20.0% of the fair value for both of our reporting units. 58 -------------------------------------------------------------------------------- The fair value of our reporting units is determined using both an income approach, which is based on discounted cash flows ("DCF"), and a market approach when we quantitatively test goodwill for impairment, either on an interim basis or annual basis as ofOctober 1 of each year. Significant judgments inherent in using a DCF analysis include the selection of appropriate discount and long-term growth rates and estimating the amount and timing of expected future cash flows. The expected cash flows used in the DCF analyses are based on our most recent forecast and budget and, for years beyond the budget, our estimates, which are based, in part, on forecasted growth rates. The discount rates and growth rates used in the DCF analyses are intended to reflect the risks inherent in the expected future cash flows of the respective reporting units. Assumptions used in the DCF analyses, including the discount rate and the long-term growth rate, are assessed based on each reporting unit's current results and forecasted future performance, as well as macroeconomic and industry specific factors, and reflect our best estimate as of the impairment testing date. Any changes in such assumptions or estimates as a result of changes in our budgets, forecasts or negative macroeconomic trends could significantly affect the value of our reporting units which could impact whether an impairment of goodwill has occurred. The discount rate used in the quantitative test for determining the fair value of our reporting units was 9.0% in 2020. Determining fair value using a market approach considers multiples of financial metrics based on both acquisitions and trading multiples of a selected peer group of companies. From the comparable companies, a representative market multiple is determined which is applied to financial metrics to estimate the fair value of a reporting unit. To determine a peer group of companies for our respective reporting units, we considered companies relevant in terms of consumer use, monetization model, margin and growth characteristics, and brand strength operating in their respective sectors. If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment equal to the excess is recorded. The 2022, 2021 and 2020 annual assessments of the indefinite-lived intangible asset did not identify any impairments. When performing a quantitative test, we determine the fair value of the indefinite-lived intangible asset using a relief from royalty DCF valuation analysis. Significant judgments inherent in this analysis include the selection of appropriate royalty and discount rates and estimating the amount and timing of expected future cash flows. The discount rates used in the DCF analyses are intended to reflect the risks inherent in the expected future cash flows generated by the respective intangible assets. The royalty rates used in the DCF analyses are based upon an estimate of the royalty rates that a market participant would pay to license our trade names. The future cash flows are based on our most recent forecast and budget and, for years beyond the budget, our estimates, which are based, in part, on forecasted revenue growth rates. Assumptions used in the relief from royalty DCF analyses, including the discount rate and royalty rate, are assessed annually based on the actual and projected cash flows related to the asset, as well as macroeconomic and industry specific factors. The discount rates used in our annual indefinite-lived impairment assessment was 9.5% in 2022 and 9.0% in 2020, and the royalty rate used in 2022 and 2020 was 3.0%. Based on the results of our 2021 annual qualitative assessment, we concluded that it was more likely than not that the fair value of the indefinite-lived intangible asset exceeded the carrying value. As such, it was not necessary to perform a quantitative impairment analysis, and we concluded that the indefinite-lived intangible asset was not impaired. Estimating the fair value of a reporting unit and the indefinite-lived intangible asset involves uncertainties because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy. Changes in projected revenue growth rates, projected operating income margins or estimated discount rates due to uncertain market conditions, loss of one or more key customers, changes in our strategy, or other factors could negatively affect the fair value of our reporting units or the indefinite-lived intangible asset and result in a material impairment charge in the future. Income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets are also recognized for operating losses and tax credit carry forwards. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date. 59 -------------------------------------------------------------------------------- We do not provide for income taxes on undistributed earnings of foreign subsidiaries that are intended to be indefinitely reinvested. Where we do not intend to indefinitely reinvest earnings of foreign subsidiaries, we provide for income taxes and foreign withholding taxes, where applicable, on undistributed earnings. We recognize the benefit of an income tax position only if it is "more likely than not" that the tax position will be sustained. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized. Additionally, we recognize interest and penalties accrued related to unrecognized tax benefits as a component of provision (benefit) for taxes on income.
Pension Benefits. In connection with the Diversey Acquisition, we assumed
certain defined benefit plan obligations and acquired certain related plan
assets for current employees of our subsidiaries. In addition, we implemented a
replacement retiree health care reimbursement plan for certain
The projected benefit obligation and the net periodic benefit cost are based on third-party actuarial assumptions and estimates that are reviewed and approved by management on a plan-by-plan basis each fiscal year. The principal assumptions concern the discount rate used to measure future obligations, the expected future rate of return on plan assets and the expected rate of future compensation increases. We revise these assumptions based on an annual evaluation of long-term trends and market conditions that may have an impact on the cost of providing retirement benefits. In determining the discount rate, we utilize market conditions and other data sources management considers reasonable based upon the profile of the remaining service life of eligible employees. The expected long-term rate of return on plan assets is determined by taking into consideration the weighted-average expected return on our asset allocation, asset return data, historical return data, and the economic environment. We believe these considerations provide the basis for reasonable assumptions of the expected long-term rate of return on plan assets. The rate of compensation increase is based on our long-term plans for such increases. The measurement date used to determine benefit obligations and plan assets isDecember 31 . In general, material changes to the principal assumptions could have a material impact on the costs and liabilities recognized in our Consolidated Financial Statements. See Note 13 - Retirement Plans in the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further information. Recent Accounting Pronouncements Refer to the sub-section, "New Accounting Guidance," within Note 3 - Summary of Significant Accounting Policies in the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussions. Off Balance Sheet Arrangements We have reviewed our offbalance sheet arrangements and have determined that none of our arrangements that are not already disclosed in our consolidated financial statements have a material current effect or is reasonably likely to have a material future effect on our consolidated financial statements, liquidity, capital expenditures or capital resources.
Guarantees and Indemnification Obligations. We are party to many contracts containing guarantees and indemnification obligations. These contracts primarily consist of:
• product and service warranties with respect to certain products sold to
customers in the ordinary course of business. These warranties typically provide
that products will conform to specifications. We generally do not establish a
liability for product warranty based on a percentage of sales or other formula.
We accrue a product warrant liability on a transactionspecific basis depending
on the individual facts and circumstances related to each sale. Both the
liability and annual expense related to product warranties are immaterial to our
consolidated financial position and results of operations; and
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--------------------------------------------------------------------------------• licenses of intellectual property by us to third parties in which we have agreed to indemnify the licensee against third party infringement claims.
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