UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the Fiscal Year Ended December 31 , 2022
Or
For the transition period from__________to__________
Commission File No. 001-40293
(Exact name of registrant as specified in its charter)
| 2842 | Not applicable | |||||||||||||||||||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) | ||||||||||||||||||
| (Address of registrant's principal executive offices) | (Zip Code) | |||||||||||||||||||
(803 ) 746-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of the exchange on which registered | |||||||||||||||||||||
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 15(d) of the Securities Exchange 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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Aggregate market value of voting and non-voting common equity held by non-affiliates of registrant on June 30, 2022, the last business day of the Registrant’s most recently completed second fiscal quarter: $437,383,267 , based on a closing price of registrant’s Ordinary Shares of $6.60 per share.
As of January 31, 2023, there were 324,576,615 shares of the registrant's Ordinary Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DIVERSEY HOLDINGS, LTD.
FORM 10-K
For the Year Ended December 31, 2022
TABLE OF CONTENTS
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PART I
Except where the context otherwise requires, references in this Form 10-K to “Diversey,” “Company,” “we” and “our” are to Diversey Holdings, Ltd. and its subsidiaries, collectively.
Item 1. Business.
Our Business
Our Mission. Diversey’s mission is to protect and care for people through leading hygiene, infection prevention and cleaning solutions. We develop and deliver innovative, mission-critical products, services and technologies that save lives and protect our environment.
Our Foundation. Over the course of 100 years, the Diversey brand has become synonymous with product quality, service and innovation. Our fully-integrated suite of solutions combines patented chemicals, dosing and dispensing equipment, cleaning machines, services and digital analysis and serves more than 85,000 customers in over 80 countries via our vast network of approximately 9,000 employees globally. We are the leading global pure play provider to the approximately $46 billion cleaning and hygiene industry for the Institutional and Food & Beverage markets, where we hold the first or second position in the key markets in which we operate. We are also one of only two large, global players able to serve global strategic accounts (“GSAs”). We consider our scale to be a distinct competitive advantage given the fragmentation of our industry, and our customer relationships are deep and longstanding, resulting in highly recurring revenue streams.
Our Value Proposition. We are a trusted partner to our customers in delivery of hygiene, infection prevention, and cleaning solutions that provide peace of mind and help our customers maintain their brand integrity and grow their businesses. Through our end-to-end, repeatable services, we focus on achieving the following outcomes for our customers:
• Improved hygiene, infection prevention and cleaning results
• Improved operational efficiency and environmental sustainability
• Reduced costs
• High consistency and high standards across customer locations and geographies
Our customer engagement model drives a virtuous circle of customer acquisition, service expansion, and long-term retention that enables our history of strong growth and resiliency. Through our customer engagement model we strive to:
• Understand Customer Needs and Goals. We partner with customers to determine what matters most to them, with a focus on outcomes rather than specific products.
• Design Custom Solutions. We then design custom solutions, leveraging our 1,300 patents and patent applications from our library of more than 2,000 unique chemical formulations as well as our extensive and differentiated suite of dosing and dispensing equipment and floor care machines.
• Integrate Solutions with Customer Workflows. We train our customers’ end users on how to operate the products and equipment that make up our customized solutions, with a specific focus on health and safety considerations, sustainability, and service requirements.
• Optimize Performance. After implementation, we remain engaged with our customers on a regular basis and leverage our digital monitoring capabilities to ensure their equipment is operating properly, the workforce is fully trained, and solutions are optimized.
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• Expand the Value Proposition. As we continue to engage with our customers, we continually review our performance, compare ourselves against benchmarks, and work to identify ways to expand or enhance our services through new products and innovation, creating ‘win-win’ solutions for us and our customers, and further solidifying our partnership.
Initial Public Offering. On March 29, 2021, we completed an initial public offering of 46,153,846 Ordinary Shares at a public offering price of $15.00 per Ordinary Share, receiving $654.3 million in net proceeds, after deducting the underwriting discount and offering expenses (the "IPO"). On April 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, after deducting the underwriting discount and offering expense. Our Ordinary Shares trade on The Nasdaq Global Select Market under the ticker symbol "DSEY".
On November 15, 2021, we issued and sold 15,000,000 Ordinary Shares at a public offering price of $15.00 per Ordinary Share, receiving $214.4 million in net proceeds, after deducting the underwriting discount and offering expenses.
Prior to the formation of Diversey Holdings, Ltd., the organizational structure consisted of Constellation (BC) 2 S.à r.l ("Constellation"), which was incorporated on June 30, 2017, and organized under the laws of Luxembourg as a Société à Responsabilité Limitée for an unlimited period under the direction of Bain Capital, LP (“Bain Capital”). Diamond (BC) B.V., an indirect wholly-owned subsidiary of Constellation, was formed on March 15, 2017 for the purpose of consummating the acquisition of the Diversey Care division and the food hygiene and cleaning business of Sealed Air Corporation (“Sealed Air”) (together, the “Diversey Business”), including certain assets and all the capital stock of certain entities engaged in the Diversey Business (the “Diversey Acquisition”), which acquisition closed on September 6, 2017.
Business Developments: Take-Private Merger Agreement
On March 8, 2023, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Olympus Water Holdings IV, L.P., a Cayman Islands exempted limited partnership (“Parent”) and Diamond Merger Limited, a Cayman Islands exempted company and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will merge with and into us (the “Merger”). 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 Equity Advisors, LLC (“Platinum”), and affiliates of Solenis LLC, which is a portfolio company of Platinum. Parent will acquire all of our Ordinary Shares (except for Ordinary Shares held by BCPE Diamond Investor, LP (“BCPE”), our controlling shareholder and an affiliate of Bain Capital, LP) for $8.40 in cash per Ordinary Share. Ordinary Shares held by BCPE (other than the Rollover Shares, as defined below) will be purchased by Parent for $7.84 in cash per Ordinary Share.
On March 8, 2023, concurrently with the execution of the Merger Agreement, BCPE and Olympus Water Holdings I, L.P., a Cayman Islands exempted limited partnership (“Topco”), an affiliate of Platinum and, following the consummation of the Merger, our indirect parent, entered into the Rollover Contribution Agreement (the “Rollover Agreement”), pursuant to which BCPE will contribute certain of its Ordinary Shares (the “Rollover Shares”) to Topco (such Rollover Shares being valued at $7.84 per Ordinary Share), and Topco will accept such Rollover Shares in exchange for certain common and preferred units of Topco.
The consummation of the Merger is subject to customary conditions, including receipt of the vote in favor of the authorization of the Merger Agreement by the holders of at least two-thirds of the Ordinary Shares present and voting in person or by proxy at the shareholders’ meeting (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. Subject to the satisfaction (or, if applicable, waiver) of such conditions, the Merger is expected to close in the second half of 2023.
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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 $92.0 million. Upon termination of the Merger Agreement by us under other specified conditions, Parent will be required to pay us a termination fee of $125.0 million.
Our Business Segments
We report our results of operations in two segments: Institutional and Food & Beverage.
Institutional Segment
We hold leading market positions in our regional core markets and believe we held the number one or number two market position in North America, Europe, the Middle East and Africa, Latin America and the Asia-Pacific region based on net sales for 2022. Our Institutional segment generated $1,951.5 million in net sales and $264.8 million in Adjusted EBITDA, which implies 13.6% margins for the year ended December 31, 2022.
Our high performance 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 & Grocery, Hospitality, and Building Service Contractors industries.
Our Institutional segment’s revenue base is recurring and stable due to the ‘sticky’ nature of our business model. Our cleaning products are consumable in nature and require periodic replacement, generating highly recurring revenue. Additionally, the optimal application of our chemicals is controlled by our proprietary dosing and dispensing equipment installed at customer sites, which increases customer switching costs and generates operating efficiencies for our customers.
Key Institutional products and services include:
Infection Prevention: Hard Surface & Personal Care. We manufacture, source, market, sell and provide services for infection prevention and personal care products. Our products are designed to enhance the safety and well-being of our customers’ employees and visitors by reducing the risk of infection at our customers’ facilities. Our products are offered in many different formats, including wipes, ready to use chemicals, and concentrates and they are dispensed through portable dosing systems, canisters, spray bottles, large-format totes, and automated wall-mounted dilution systems, among others. Many of our products rely on Diversey-owned propriety technology including our patented AHP® formulation, our IntelliCare® dispensers and our MoonBeam™ 3 UV disinfection technology.
Floor & Building Care Chemicals. We manufacture, source, market, sell and provide services for Floor and Building Care Chemicals. Our chemicals are offered in many different formats and tailored towards all segments and sizes of customers. Formats include ready-to-use chemicals as well as concentrates that are dispensed through portable and automated wall-mounted dosing and dilution control systems.
Our floor care products combine chemicals, tools, machines, and services to deliver cleaner, safer floors while lowering operational costs to maintain the floor. Key products include floor strippers, cleaners, maintainers, finishes, sealers, carpet care, concrete and stone care, and wood care. Many of our chemical formulas rely on Diversey-owned propriety polymer technology including our floor finish Signature® and use our patented Diamond floor polishing technology Twister™.
Our building care products are designed to enhance our customers’ experience by increasing productivity and safety and optimizing the total cost of ownership by reducing the usage of chemicals, water and labor at their sites. Key products include restroom cleaners, glass cleaners, general purpose cleaners, and air care. Many of our products rely on Diversey-owned propriety closed-loop chemical dispensing technologies including our patented The J-Fill®
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QuattroSelect® wall mounted system and our J-Flex™ / RTD® portable dilution technologies. In addition, many customers apply these chemicals and concentrates with Diversey-sourced and owned cleaning tools including our proprietary TASKI® Jonmaster workstations and trolleys, as well as other microfiber floor and surface tools and consumables.
Kitchen & Mechanical Warewash Chemicals and Machines. We manufacture, source, market, sell and provide services for kitchen and mechanical warewash solutions. Our products are designed to optimize our customers' resource utilization and chemical efficiency as well as protect their brand in compliance with hygiene, safety and sustainability standards. Our products include a full range of ready-to-use and concentrated chemistry that is available in many different sizes and packaging formats as well as dosing and dispensing systems that are either portable or wall mounted for spray, bucket and sink applications. Our products cover a complete range of applications and methods in kitchen cleaning and mechanical warewash for all sizes of customer sites. Many of our products rely on Diversey-owned patented chemistry formulas such as Suma® Dime or Suma Glass Protect, proprietary dosing and dispensing systems such as Divermite® and DiverFlow®, as well as our proprietary connected dishwashing monitoring system IntelliDish®.
Fabric Care. We manufacture, source, market, sell and provide services for fabric care. Our solutions and application expertise are designed to enhance guest experience, extend linen life, improve hygiene, reduce operational costs and promote sustainability. Our product offerings consist of a full range of fabric care chemistries to support both on-premise and commercial laundry operations and are available in different packaging formats, including ready-to-use and concentrated solutions and correlating wall mounted dosing and dispensing systems. Many of our products rely on Diversey-owned patented chemistry formulas such as Clax® Advance and Xcellence, for low and high temperature washing, as well as our proprietary IntelliLinen® dispensing system which includes remote monitoring.
Dosing & Dispensing Equipment. We manufacture, market, sell and provide technical services for dosing and dispensing equipment for a wide variety of applications in all of our core businesses. Applications include dilution and dosing platforms for Infection Prevention, Building Care, Kitchen Care, Mechanical Warewash, Food & Beverage and Fabric Care, among others. Our product offering is designed to protect our customers' brands and enhance the safety and sustainability profile of our chemicals while also optimizing productivity and operational costs for our customers. Many of our products rely on Diversey-owned closed-loop chemical dispensing technologies including our proprietary Divermite® wall mounted systems, patented SmartDose® portable dosing system, as well as the Diversey owned SafePackTM technology.
Floor Care Machines. We manufacture, market, sell and provide services for floor care machines under the TASKI® brand. Products cover all indoor cleaning needs and are designed to enhance our customers’ efficiency and productivity in a wide variety of floor cleaning tasks. Our product offering is tailored for all sizes of hard and soft floor types and consists of floor scrubber driers, wet and dry vacuums, single discs, sprayers, steam cleaners and carpet machines.
The TASKI® machines rely on many Diversey-owned patented and proprietary features and technologies including our intelligent squeegee design, our IntelliFlowTM speed dependent solution dosing, and the IntelliTrail® fleet management system, among others.
Food & Beverage Segment
We believe we held the number one or number two market position in North America, Europe, the Middle East and Africa, Latin America and the Asia-Pacific region based on net sales for 2022. Our Food & Beverage segment generated $814.4 million in net sales and $96.5 million in Adjusted EBITDA, which implies 11.8% Adjusted EBITDA margins for the year ended December 31, 2022.
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 our Diversey Hygiene Academy, and water
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treatment. We deliver these solutions to enhance food safety, operational excellence, and sustainability for customers in the Brewing, Beverage, Dairy, Processed Foods, Pharma, Protein and Agriculture industries.
Our Food & Beverage segment's revenue base is also recurring and stable. Our Cleaning-In-Place (“CIP”) and Open Plant Systems integrate our chemicals, lubricants, floor care equipment, and cleaning and dispensing tools, while our highly skilled technical application experts help customers achieve production efficiencies through customized solutions that utilize our products. The highly integrated and customized nature of the resulting solutions drive operational efficiencies as well as high switching costs for our customers, leading to very high customer retention. The recent addition of water treatment solutions to our Food & Beverage segment also fulfills a longstanding customer need for a bundled solution and offers future opportunities for cross-selling.
Key Food & Beverage products and services include:
Cleaning Products. We manufacture, source, market, sell and provide services for Food & Beverage chemicals. Our products consist of a full range of chemistry, equipment and expertise to enhance Food & Beverage manufacturing operations. Key solutions include cleaning-in-place systems, bottle care, conveyor lubrication, membrane cleaning, open plant cleaning, fogging systems, and farm hygiene. Many of our products rely on proprietary chemistry formulas and dosing and dispensing equipment, such as CIP systems which are designed to efficiently clean and disinfect our customers’ enclosed processing equipment, and Divo® BottleCare which increases the lifespan of our customers’ equipment and reduces their total glass consumption.
Engineering & Equipment Solutions. We market, sell and provide engineering services for our Food & Beverage customers. Our solutions include complete hygiene centers for cold aseptic filling, automated external filler and conveyor cleaning, centralized and decentralized foam stations that help reduce overall cleaning times, and hot water washing and pasteurizing equipment for meat harvesting and processing operations. We are able to respond quickly and efficiently to our customers’ engineering needs, offering full project management for the design and installation of hygiene and sanitation systems.
Knowledge-Based Services. We market, sell and provide knowledge-based services ("KBS") to the Food & Beverage industry. Our KBS offering provides a holistic approach to constantly measure, monitor and improve operational efficiency and food safety throughout our customers’ operations. This offering also addresses key industry challenges related to productivity, water and energy usage, yield management, and food safety. The KBS solutions we offer are Diversey-owned and include Aquacheck, which is a site-tailored approach to water management, and Diversey-patented CIPTEC technology, which enables determination of the efficiency of CIP and verification of the hygiene of production lines.
Training. We market, sell and provide training for the Food & Beverage industry. The Diversey Hygiene Academy provides e-learning for Food & Beverage manufacturing professionals. A wide range of proprietary courses are available in multiple languages and have been accredited by the Continuous Professional Development Certification Service.
Water Treatment. We manufacture, market, sell and provide technical services for water treatment within Food & Beverage production facilities. Our products are designed to enhance both effectiveness and efficiency as well as reduce costs by combining Diversey chemicals and equipment with water treatment capabilities to provide a holistic approach to process, water and production hygiene management in the Food & Beverage industry. Our products cover a wide range of Diversey-owned chemical and equipment solutions for asset, process and product protection, utility usage, water hygiene and regulatory compliance across heating and cooling systems, specialized Food & Beverage processes, and wastewater treatment.
In 2021, we entered into a global partnership agreement with Solenis, a leading global producer of specialty chemicals for water-intensive industries, including the pulp, paper, oil and gas, petroleum refining, chemical processing, mining, biorefining, power and municipal markets. Solenis' product portfolio includes a broad array of process, functional and water treatment chemistries as well as state-of-the-art monitoring and control systems. These technologies are used by customers to improve operational efficiencies, enhance product quality, protect plant assets
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and minimize environmental impact. With this partnership, we are Solenis’ distribution partner for its complete portfolio of water and process treatment chemicals to the Food & Beverage industry.
Pharmaceutical & Agriculture. We manufacture, market, sell and provide services for the Pharmaceutical and Agricultural markets. In addition to providing the necessary products, we partner with our customers to identify the unique cleaning and disinfection procedures to address their needs and to ensure safe, sustainable and efficient pharmaceutical and agricultural production. Our product offering consists of a full range of chemistry, equipment and services. Many of our products rely on Diversey-owned proprietary chemistry formulas and patented dosing and dispensing equipment such as the Deosan® Dairy Farming.
Our Sustainability Strategy
Protect. Care. Sustain. Our sustainability strategy will guide our environmental, social and governance ("ESG") priorities and actions. ESG is core to how we create value and drive growth. The strategy is supported by both 2030 goals and near-term targets which will further reduce our environmental footprint, address social inequality and deliver solutions to help our customers reach their own sustainability goals.
Our strategy builds upon Diversey’s longstanding sustainability mission:
We protect our planet and conserve natural resources. We care about our people, our partnerships, and our customers and are committed to address critical social challenges and reduce risk in our operations. We work tirelessly to sustain the highest standards in responsible business practices and transparency.
In the development of all products and services, we adhere to a green cleaning philosophy. This is defined as the use of cleaning products, equipment and methods that protect the health of building occupants, lower the total cost of cleaning and prevent environmental impacts. Green cleaning also considers chemicals’ and materials’ end of life to ensure that their disposal does not harm the environment. This ensures that all Diversey products and services are designed to enhance not only cleanliness and efficiency, but also safety and environmental sustainability for our customers and communities.
Hundreds of Diversey products are third-party certified, verifying that they meet the highest health, safety and sustainability standards. Among the certifications that our products feature:
• Cradle-to-Cradle
• EPA (Safer Choice)
• EU Ecolabel
• Green Seal
• Nordic Swan
• UL Environment: ECOLOGO, GREENGUARD
Sustainability is core to the value proposition we provide our customers. We partner with our customers to design solutions that enable them to meet their effectiveness, efficiency, and sustainability goals. Given how engrained our products and services are in our customers’ operations, we are in a position to help them improve their performance in many key environmental areas, including reducing water, transportation, energy, greenhouse gas, packaging, waste, and chemical usage, as well as helping them extend equipment and product life and improve chemical and employee safety.
Our comprehensive approach to sustainability is also reflected in our commitment to our own employees. We have set internal goals to eliminate workplace injuries, train 100% of our employees on our Code of Conduct, and strengthen our community relations in the locations in which we operate. Protecting and caring for our people also means investing in their future. We believe in providing our employees with resources to help them develop leadership capabilities and advance their careers. We seek to maintain a company culture that fosters a true sense of purpose among our people that we believe will drive long-term success.
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Finally, we lead by example by improving the environmental impact of our own operations. We have identified ambitious operational goals to continue to reduce and improve the impact we have on our planet. Key goals include, but are not limited to, achieving 100% compliance with our Responsible Chemistry Policy, Net zero carbon emissions by 2050, 100% of our packaging contributing to a circular economy by 2030, and a net positive ratio which demonstrates that our products save more energy, water, waste, and greenhouse gases for our customers than our operational footprint generates.
As we look to the future, we believe sustainability will continue to grow in importance for our customers. We are investing heavily and are well positioned to support our customers’ growing needs in this area, and as we do so, we will have the opportunity to further embed ourselves in their operations and grow with them.
We team up with our customers to forge socially responsible circularity. Our three social impact initiatives, Soap For Hope, Linens For Life, and Coffee Briques, illustrate our long-standing commitment to sustainability. Instead of discarding materials in landfills at the end of their useful life, we repurpose, or “upcycle,” soap products, linens and coffee briques in ways that create economic and social value, particularly for people in need. In recognition of the value of these initiatives and their benefit to the community, we were named winner of the "Profit with Purpose" award at the World Sustainability Awards 2022 for our Soap For Hope program, and were previously awarded "Asia's Best Community Care Company of the Year".
We believe our mission, culture, and social impact initiatives increase our employee engagement and ultimately lead to creating value and innovation for our employees, customers, and stakeholders.
Our Business Operations
Manufacturing and Supply Chain Inputs. We manufacture a diverse portfolio of finished goods utilizing a combination of internal manufacturing facilities and strategic contract manufacturing. We maintain a global manufacturing network, operating twenty facilities on a global basis, with six factories in North America, six factories in Europe, three factories in Latin America, three factories in the Asia-Pacific region, and two factories in the Middle East and Africa region. Our facilities provide a strong base of owned and leased production facilities in established geographies and key emerging markets.
Our manufacturing strategy consists of using both internal and external manufacturing, which enables a flexible and geographically effective supply chain network for our solutions. Contract manufacturing complements our internal manufacturing capabilities and supports our existing offerings as well as innovations and new product launches, while also allowing us to pursue an asset-light business model. We contract with approximately 50 large strategic contract manufacturers which we believe efficiently augment our global supply chain network with additional geographic coverage and production capabilities. In developed markets, we use these strategic contract manufacturers to leverage variable capacity for unique production capabilities. In emerging markets, contract manufacturers provide strategic capacity where we do not yet have critical mass. Where contract manufacturing is used, the production processes mirror those of our internal manufacturing plants to ensure quality control.
Our primary raw material inputs include caustic soda, solvents, waxes, phosphates, surfactants, polymers and resins, chelates, fragrances and wipes substrate material, all of which are generally available from multiple suppliers. Our packaging purchases include bag-in-the-box containers, bottles, corrugated boxes, drums, pails, totes, aerosol cans, caps, triggers and valves. Our equipment and accessories purchases include dilution control equipment, warewashing and laundry equipment, floor care machines, air care dispensers, floor care applicators, mops, microfiber, buckets, carts and other items used in facility maintenance.
We have long-term relationships with an extensive network of suppliers. Supplier contracts are typically multiyear, with set pricing and renewal features built in and flexibility to adjust prices on the basis of underlying fluctuations in raw material costs. The majority of our critical raw material inputs are common to the industry and produced in all regions by multiple large, global suppliers, ensuring attractive input prices. We believe most components related to raw materials, equipment and accessories are readily available from multiple sources and to the extent possible, we offset higher costs of materials through pricing increases.
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We generally operate on a yearly contracting cycle, using competitive request for proposal processes, e-auctions and open market events to select suppliers. Supply agreements are generally requirement-based, linked to demand in the annual operating plan and contain no or minimal contingent liability extending beyond one to two years.
Sales and Marketing. We reach customers through a combination of direct sales channels and distribution channels. Direct sales channels represented approximately 80% of our net sales for the year ended December 31, 2022, including “ship-through” sales, where the customer relationship is managed by Diversey, while distribution channels represented the remaining 20% of our sales for the year ended December 31, 2022. We employ a balanced marketing strategy with a global direct sales force as well as a broad network of third-party distributors in key locations, whereas many of our competitors sell solely or primarily through third-party distributors. We believe that this hybrid sales approach differentiates us, as our direct-sales capability is highly valued by many of our customers given the increasing importance of hygiene, while our use of third-party distributors helps us optimize operations in a cost-effective manner.
Our manufacturing network is supported by a global customer facing team of approximately 6,000 sales, marketing, technical service and customer service representatives. Our direct sales force manages relationships with our large global and regional customers while our third-party distributor partners enable us to reach end-users that would not be as efficient for us to serve on a direct basis. We have invested in extensive training for our direct sales force and the management of our distributor network, and we support our sales force with a deep bench of technical service representatives.
Our global strategic accounts help differentiate us from many of our competitors and are a source of significant market insight and growth through our “acquire, retain, and grow strategy”. Global strategic accounts help us build long-term contractual relationships, set standards of hygiene, infection prevention and cleaning, facilitate adoption of industry best practices, and provide a platform for local growth. In our Institutional business we have approximately 70 global strategic accounts, representing approximately 20% of our net sales for the year ended December 31, 2022, and a robust pipeline of strategic accounts with projects under implementation and opportunities to win substantial incremental sales. Sales for our global strategic accounts in 2022 were above 2021.
Research and Development. We maintain significant R&D capabilities to ensure we continue to remain an innovator and technological leader. We develop new products, applications, services, and processes while providing technical assistance to improve our customers’ operations.
Our value proposition is rooted in the integration of our proprietary technologies with our customers’ manufacturing and service delivery value chain. We have R&D and application support facilities in locations around the globe, including in North America, South America, Europe and Asia, to facilitate hands-on interaction with our customers. Our R&D engineering personnel innovate through both internal creation and development as well as through identifying and integrating third-party resources and technologies. We maintain a robust pipeline of new product development projects, which are in various stages of discovery and development.
Customers. Our Institutional and Food & Beverage segments serve customers across a wide variety of stable and growing end-markets. We are one of only two global players with the capabilities to serve GSAs, which represents more than 20% of our revenues. Approximately 84% of our customer relationships exceed 10 years in length. We have minimal customer concentration and high customer diversity as our largest customer accounted for 2.0% of our net sales for the year ended December 31, 2022, while our top 10 and top 50 customers represented 12% and 26% of our net sales over the same period, respectively. Our highly fragmented customer base adds to the stability of our revenue streams as activity across different customer groups is diverse and independent of activity among other customer verticals.
Our end-users span a wide range of business verticals, including, among other, healthcare, food service, retail and grocery, educational institutions, food and beverage, building service contractors, cash and carry establishments, government institutions, industrial plants, and on-premises laundry.
Our customers value both the products we sell as well as our application expertise, deep industry process knowledge, and project engineering capabilities. These capabilities maximize product and operational efficiency for our customers, resulting in sticky relationships. Additionally, we provide customized solutions for customers that are
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integrated into their sites, which encourage mutual investment in infrastructure and expands our value proposition, resulting in customer loyalty and retention.
Our Competition
In general, the markets in which we operate are led by two large companies: Diversey and Ecolab Inc., with the rest of the markets served by smaller entities focusing on more limited geographic regions or a smaller subset of products and services. Our business competes on the basis of its demonstrated value, technical expertise, innovation, chemical formulations, customer support, detection equipment, monitoring capabilities, and dosing and dispensing equipment. Given our scale and global reach, we are able to uniquely service GSAs and provide consistent, quality solutions across sites. Our machines also differentiate us from our competitors, as no other competitor offers an equivalent range of product and service offerings, as well as machines, allowing us to provide our customers with end-to-end solutions.
Our scale provides a competitive benefit versus smaller local or regional competitors, as we are able to leverage our distribution network to service smaller customers in a cost-effective way.
Given the size and fragmented nature of the markets in which we operate, we do not currently have significant concern about our competition.
We believe that the fragmented nature of our markets, combined with our flexible go-to-market strategy and diverse product and solution set, should enable Diversey to grow organically and via an acquisition strategy.
Our Intellectual Property
We strategically manage our portfolio of patents, trade secrets, copyrights, trademarks and other intellectual property. Specifically, we rely upon trade secrets to protect the formulation of many of our chemical products, as well as our manufacturing processes. We own or license patents and trademarks which are used in connection with our business. Some of these patents or licenses cover significant product formulations and processes used to manufacture our products. As of December 31, 2022, we held approximately 1,300 patents in the United States and in countries throughout the world, and have numerous pending patent applications. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims.
The trademarks of major products in each business are registered in key jurisdictions or licensed from third parties. Certain intellectual property is also protected by confidentiality agreements or other agreements with suppliers, employees and other third parties. In part, our success can be attributed to the existence and continued protection of these trademarks, patents and trade secrets.
The Diversey trademark and a select number of major sub-brands, including CLAX, SUMA and TASKI are material to our business. We own the Diversey and sub-brand trademarks used in our business. While the Diversey trademark and certain other assets in our intellectual property portfolio are important, we do not believe that our overall business is materially dependent on any individual trade name, trademark or patent.
Human Capital Resources
As of December 31, 2022, we had approximately 9,000 employees worldwide, including full-time and part-time employees. Approximately 1,000 of these employees were in the U.S., and approximately 8,000 employees were outside the U.S. In various countries, certain of our employees are unionized and, where local law requires, participate in works councils. Our customer facing team is comprised of approximately 6,000 employees and includes sales, marketing, technical service and customer service representatives. We believe that our employee relations are satisfactory.
Our employees are at the heart of our mission and strategies, and we focus on our culture to drive both.
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Our Core Values.
Our culture starts, first and foremost, with our mission: “To protect and care for people through providing leading hygiene, infection prevention, and cleaning solutions.” Our mission unites and aligns our employees to serve a greater good in this world. This unity has been most evident during the recent global COVID-19 pandemic, as our employees have worked heroically to help protect and care for people around the world. In 2022, we reaffirmed the behaviors that we want Diversey to be known for as part of the way we work and hold each other accountable. Our behaviors are not empty words to be hung on a wall. The things we do, and the way we behave, define our culture. They empower us to deliver what we promise.
These behaviors are:
Inclusive. A culture of collaboration. Diversey is a place that welcomes thoughts and ideas from all of our employees. People who feel comfortable coming to work and being themselves can achieve more. We hire and promote based on merit and develop talent within the organization. Our customers are diverse and operate in many different industries; therefore, we cannot be an organization with just one way of thinking. Our culture is inclusive of ideas and people. Sharing information and best practices improves all that we do.
Customer driven. Delighting customers is at the heart of our business. Diversey elevates our customers and their experiences. We engage with our customers to know how we can protect them; how we can take care of them and how we can help solve their problems.
Bias for Action. Action unleashes our potential. Without action, achievement is impossible. Diversey is rightly proud of its place as an industry thought leader. Thoughts are seeds for action. We plan, we act with speed - all while taking calculated risks.
Always improving. Experience drives our improvement every day, and we are committed to continuously evolving. We believe that we can always find ways to improve. We take our experience, in the form of data and insights, and use it to drive customer satisfaction, revenue growth, and margins.
Accountable for results. Results inform our actions. We are responsible for owning our results and we commit to understanding them, good or bad. We speak clearly and honestly about our accomplishments and help each other avoid failure and replicate success. Being accountable for results is the end and beginning of everything we do.
Diversity and Inclusion
We seek to protect and care for our employees by creating a diverse, equitable & inclusive work environment where everyone feels free to be themselves. We have a goal to increase diverse representation in our workforce, starting with achieving gender diversity in our leadership population of 40% globally and ethnic diversity of 25% in the United States by 2030. We have also established Employee Representation Groups, which are grassroots employee networks that bring people together who share common interests and/or backgrounds and offer our employees a variety of benefits that support employees, including paid parental leave, flexible time off and solutions for nursing mothers.
Environmental Matters, Health and Safety and Governmental Regulations
As a manufacturer, we are subject to many laws, rules, standards and regulations in the countries, jurisdictions and localities in which we operate. These cover: the safe procurement, processing, storage and use of chemical raw materials and parts for tools, equipment and packaging; the potential release of materials into the environment; standards for the treatment, storage and disposal of hazardous wastes; or otherwise relate to the protection of the environment. We review environmental, health and safety laws and regulations pertaining to our operations and believe that compliance with current environmental and workplace health and safety laws and regulations has not had a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. In some jurisdictions in which our products are sold or used, laws and regulations have been adopted or proposed that seek to regulate, among other things, minimum levels of recycled or reprocessed material and, more generally, the
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design for reuse of packaging materials. We maintain programs designed to comply with these laws and regulations and to closely monitor their evolution.
Various federal, state, local and foreign laws and regulations regulate our products and often require us to obtain pre-market approval of our products and comply with specified requirements. In the U.S., we must register our sanitizing and disinfecting products with the U.S. Environmental Protection Agency and products intended for controlling microbial growth on humans, animals and processed foods with the U.S. Food and Drug Administration. Such products are regulated in a similar way at the European Union level by the European Chemical Agency or by member state competent authorities. Similar requirements exist in other countries such as China, Russia and South Korea. To date, the cost of complying with such product registration requirements has not had a material adverse effect on our business, consolidated financial condition, results of operations or cash flows.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC at https://www.sec.gov.
General information about us, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website at https://ir.diversey.com as soon as reasonably practicable after we file them with, or furnish them to, the SEC.
In addition, the following governance materials are available on our web site at https://ir.diversey.com/corporate-governance: (i) charters of the Audit, People Resources and Nominating and Governance committees of our Board of Directors; (ii) our Code of Conduct; (iii) our Board Corporate Governance Policy; and (iv) our Code of Ethics for Senior Financial Officers.
We include our website addresses throughout this report for reference only. The information contained on our websites, including the corporate responsibility and climate reports identified in this report, is not incorporated by reference into this report.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”, “project”, “plan”, “intend”, “believe”, “may”, “will”, “should”, “can have”, “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results or our plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
• uncertainties associated with the proposed Merger, including the failure to complete the Merger in a timely manner or at all, restrictions on business conduct and potential lawsuits related to the proposed Merger;
• the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;
• the inability to complete the proposed Merger due to the failure to satisfy conditions precedent, including satisfaction of the Requisite Shareholder Approval;
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• risks related to disruption of management’s attention from our ongoing business operations due to the proposed Merger;
• the effect of the announcement of the proposed Merger on our relationships with our customers and on our operating results and business generally;
• the costs of the proposed Merger if the proposed Merger is not consummated;
• uncertain global economic conditions which have had and could continue to have an adverse effect on our consolidated financial condition and results of operations;
• the global nature of our operations exposes us to numerous risks that could materially adversely affect our consolidated financial condition and results of operations;
• fluctuations between non-U.S. currencies and the U.S. dollar could materially impact our consolidated financial condition or results of operations;
• political and economic instability and risk of government actions affecting our business and our customers or suppliers may adversely impact our business, results of operations and cash flows;
• raw material pricing, availability and allocation by suppliers as well as energy-related costs may negatively impact our results of operations, including our profit margins;
• if we do not develop new and innovative products or if customers in our markets do not accept them, our results would be negatively affected;
• cyber risks and the failure to maintain the integrity of our operational or security systems or infrastructure;
• the introduction of the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting may adversely affect our effective rate of tax in future periods;
• the consolidation of customers may adversely affect our business, consolidated financial condition or results of operations;
• we experience competition in the markets for our products and services and in the geographic areas in which we operate;
• instability and uncertainty in the credit and financial markets could adversely impact the availability of credit that we and our customers need to operate our business;
• new and stricter regulations may affect our business and consolidated condition and results of operations; and
• the other risks described under “Risk Factors” below.
We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.
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We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Form 10-K are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
SUMMARY RISK FACTORS
We are providing the following summary of the risk factors contained in our Form 10-K to enhance the readability and accessibility of our risk factor disclosures. We encourage our shareholders to carefully review the full risk factors contained in this Annual Report on Form 10-K in their entirety for additional information regarding the risks and uncertainties that could cause our actual results to vary materially from recent results or from our anticipated future results.
Risks Related to the Proposed Merger
•Uncertainties associated with the Merger could adversely affect our business, results of operations, stock price and financial condition.
•Failure to complete the Merger could adversely affect our business and the market price of our shares of common stock.
•The Merger Agreement contains provisions that limit our ability to pursue alternatives to the Merger.
•We are subject to certain restrictions on the conduct of our business under the terms of the Merger Agreement.
•Lawsuits may be filed against us and the members of our board of directors arising out of the proposed Merger, which may delay or prevent the proposed Merger.
Business and Industry Risks
•The global nature of our operations exposes us to numerous risks that could materially adversely affect our consolidated financial condition and results of operations.
•We experience competition in the markets for our products and services and in the geographic areas in which we operate.
•The consolidation of customers may adversely affect our business, consolidated financial condition or results of operations.
•Environmental, social and governance, or ESG, issues, including those related to climate change and sustainability, may have an adverse effect on our business, consolidated financial condition and results of operations and damage our reputation.
•We are subject to taxation in multiple jurisdictions. As a result, our annual effective income tax rate can change materially as a result of changes in our mix of U.S. and non-U.S. earnings and other factors, including changes in tax laws and changes made by regulatory authorities.
•Russia’s invasion of Ukraine has significantly impacted geopolitical stability, increased economic uncertainty and disrupted capital markets.
Operational Risks
•Rising inflation may adversely affect us by increasing costs of materials, labor and other costs beyond what we can recover through price increases.
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•Uncertain global economic conditions have had and could continue to have an adverse effect on our consolidated financial condition and results of operations.
•Political, social and economic instability and risk of government actions affecting our business and our customers or suppliers may adversely impact our business, consolidated financial condition and results of operations.
•Fluctuations between non-U.S. currencies and the U.S. dollar could materially impact our consolidated financial condition or results of operations.
•Fluctuations in raw material pricing, availability and allocation by suppliers as well as energy-related costs may negatively impact our results of operations, including our profit margins and net sales.
•If we are not able to protect our trade secrets or maintain our trademarks, patents and other intellectual property, we may not be able to prevent competitors from developing similar products or from marketing their products in a manner that capitalizes on our intellectual property, and this loss of a competitive advantage could decrease our profitability and liquidity.
•Cyber risk and the failure to maintain the integrity of our operational or security systems or infrastructure, or those of third parties with which we do business, could have a materially adverse effect on our business, consolidated financial condition and results of operations.
Strategic Risks
•If we do not develop new and innovative products or if such products are not accepted by customers in our markets or fail to meet sales or margin expectations, our results could be negatively affected.
•Our inability to consummate and effectively incorporate acquisitions into our business operations may adversely affect our results of operations.
•Unfavorable consumer responses to price increases could have a material adverse impact on our sales and earnings.
Legal, Regulatory and Compliance Risks
•We are subject to various government laws and regulations. Compliance with, or changes in such laws and regulations, may cause us to incur significant expenses, which may affect our business, consolidated financial condition and operations.
•Product and other liability claims or regulatory actions could adversely affect our financial results or harm our reputation or the value of our brands.
•A failure of our internal controls over financial reporting or our regulatory compliance efforts could harm our financial and operating results or could result in fines or penalties.
•Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.
Financial Risks
•Our substantial indebtedness makes us more sensitive to adverse economic conditions, may limit our ability to plan for or respond to significant changes in our business and requires a significant amount of cash to service our debt payment obligations that we may be unable to generate or obtain.
•Despite current indebtedness levels and restrictive covenants, we may still be able to incur substantially more indebtedness or make certain restricted payments, which could further exacerbate the risks associated with our substantial indebtedness.
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•The terms of the financing documents governing our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
•We entered into a tax receivable agreement that required us to make payments in relation to certain tax attributes of Constellation and its subsidiaries to persons who were shareholders of Constellation prior to the initial public offering and to certain other members of management, which payments are expected to be substantial.
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Item 1A. Risk Factors
RISK FACTORS
The following are important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Form 10-K. See the section entitled “Forward-Looking Statements” set forth above.
We may also refer to this disclosure to identify factors that may cause results to differ materially from those expressed in other forward-looking statements including those made in oral presentations, including telephone conferences and/or webcasts open to the public.
Risks Related to the Proposed Merger
Uncertainties associated with the Merger could adversely affect our business, results of operations, stock price and financial condition.
On March 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. There is no guarantee that all closing conditions will be satisfied (or waived, if permitted by the Merger Agreement and applicable law). Many of the conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, if permitted by the Merger Agreement and applicable law). In addition, the Merger may fail to close for other reasons.
The announcement and pendency of the Merger, as well as any delays in the expected timeframe, could cause disruption in and create uncertainties, which could have an adverse effect on our business, results of operations, stock price and financial condition, regardless of whether the Merger is completed, and could cause us not to realize some or all of the benefits that we expect to achieve if the Merger is successfully completed within its expected timeframe. These risks include, but are not limited to:
•an adverse effect on our relationship with vendors, customers and employees, including if our vendors, customers or others attempt to negotiate changes in existing business relationships, consider entering into business relationships with parties other than us, delay or defer decisions concerning their business with us, or terminate their existing business relationships with us during the pendency of the Merger;
•a diversion of a significant amount of management time and resources towards completion of the Merger;
•being subject to certain restrictions on the conduct of our business;
•impacts on the price of our Ordinary Shares;
•the requirement that we pay a termination fee of approximately $92.0 million if the Merger Agreement is terminated under certain circumstances;
•developments beyond our control, including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the Merger;
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•stockholder litigation that could prevent or delay the Merger or otherwise negatively impact our business and operations;
•possibly foregoing certain business opportunities that we might otherwise pursue absent the pending Merger; and
•difficulties attracting and retaining key employees.
Failure to complete the Merger could adversely affect our business and the market price of our Ordinary Shares.
The closing of the Merger may not occur on the expected timeline or at all. The Merger Agreement contains customary termination provisions for both us and Parent, and provides that, in connection with the termination of the Merger Agreement under specified circumstances, including termination by us to accept and enter into an agreement with respect to a Superior Proposal (as defined in the Merger Agreement), we will pay Parent a termination fee of approximately $92.0 million. If we are required to pay this termination fee, such fee, together with costs incurred to execute the Merger Agreement and pursue the Merger, could have a material adverse effect on our financial condition and results of operations.
If the Merger Agreement is terminated and the Merger is not consummated, the price of our Ordinary Shares may decline and you may not recover your investment or receive a price for your shares similar to what has been offered pursuant to the Merger. In addition, the price of our Ordinary Shares has in the past and may continue to fluctuate substantially in the event that the Merger is not consummated. Factors affecting the trading price of our Ordinary Shares may include:
•actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to it;
•changes in the market’s expectations about our operating results;
•success of competitors;
•our operating results failing to meet market expectations in a particular period;
•changes in financial estimates and recommendations by securities analysts concerning us or the cleaning and hygiene industry and market in general;
•operating and stock price performance of other companies that investors deem comparable to us;
•our ability to market new and enhanced products on a timely basis;
•changes in laws and regulations affecting our business;
•commencement of, or involvement in, litigation involving us;
•changes in its capital structure, such as future issuances of securities or the incurrence of additional debt;
•the volume of Ordinary Shares available for public sale;
•any significant change in our board or management;
•sales of substantial amounts of Ordinary Shares by our directors, executive officers or significant shareholders or the perception that such sales could occur; and
•general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
Broad market and industry factors may depress the market price of our Ordinary Shares irrespective of our operating performance. The stock market in general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our Ordinary Shares, may not be predictable. A loss of investor confidence in the market for stocks of other companies which investors perceive to be similar to us could depress its stock price regardless of its business, prospects, financial conditions or results of operations. A decline in the market price of our Ordinary Shares also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
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The Merger Agreement contains provisions that limit our ability to pursue alternatives to the Merger.
Under the Merger Agreement, we are restricted from soliciting, initiating, proposing or inducing the making, submission or announcement of, or knowingly encouraging, facilitating or assisting, any proposal or offer that constitutes or could reasonably be expected to lead to, an Acquisition Proposal (as defined in the Merger Agreement) from third parties and/or providing non-public information to third parties in response to any inquiries regarding, or the submission of any proposal or offer that constitutes, or could reasonably be expected to lead to, any Acquisition Proposal. These provisions could discourage a third party that may have an interest in acquiring all or a significant part of our business from considering or proposing that acquisition, even if such third party were prepared to pay consideration with a higher value than the value of the consideration in the Merger.
We are subject to certain restrictions on the conduct of our business under the terms of the Merger Agreement.
Under the terms of the Merger Agreement, we have agreed to certain restrictions on the operations of our business. We have agreed to limit the conduct of our business to those actions undertaken in the ordinary course of business and to refrain from, subject to certain specified exceptions (as set forth in the Merger Agreement): incurring debt; entering into, adopting, amending, modifying or terminating any employee plans; increasing the compensation of any director, officer, employee or independent contractor, or hiring or terminating certain employees (other than for “cause”); settling certain pending or threatened legal proceedings; changing our methods, procedures, principles or practices of financial accounting; resolving, settling, compromising, or abandoning any material tax action (as well as having the obligation to notify Parent of certain actions with respect to material tax actions); and incurring certain capital expenditures. Because of these restrictions, we may be prevented from undertaking certain actions with respect to the conduct of our business that we might otherwise have taken if not for the Merger Agreement. Such restrictions could prevent us from pursuing certain business opportunities that arise prior to the effective time of the Merger and are outside the ordinary course of business, and could otherwise adversely affect our business and operations prior to completion of the Merger.
Lawsuits may be filed against us and the members of our board of directors arising out of the proposed Merger, which may delay or prevent the proposed Merger.
Putative stockholder complaints, including stockholder class action complaints, and other complaints may be filed against us, our board of directors, Solenis, BCPE, Bain Capital, LP, Platinum and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain, and we may not be successful in defending against any such future claims. Lawsuits that may be filed against us, our board of directors, Solenis, Bain Capital, LP, Platinum or others could delay or prevent the Merger, divert the attention of our management and employees from our day-to-day business, and otherwise adversely affect our business, results of operations, and financial condition.
Business and Industry Risks
The global nature of our operations exposes us to numerous risks that could materially adversely affect our consolidated financial condition and results of operations.
We operate in approximately 54 countries, and our products are distributed in those countries as well as approximately 26 countries in other parts of the world. A large portion of our manufacturing operations are located outside of the United States and a majority of our net sales are generated outside of the United States. These operations, particularly in developing regions, are subject to various risks that may not be present or as significant for our U.S. operations. Economic uncertainty in some of the geographic regions in which we operate, including developing regions, could result in the disruption of commerce and negatively impact cash flows from our operations in those areas.
Risks inherent in our international operations include:
•tax rates, currency exchange controls and currency exchange rate fluctuations;
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•changes in regional and local economic conditions, including local inflationary pressures;
•government restrictions on transfer or repatriation of funds;
•trade barriers such as anti-dumping duties, tariffs, embargoes and economic sanctions;
•exchange controls and other import and export limits;
•uncertain legal protections, including enforcement of intellectual property and contractual rights;
•presence of unions, collective bargaining agreements or works councils;
•changes in labor conditions and difficulties in staffing and managing international operations;
•import and export delays;
•social plans and regulations that prohibit or increase the cost of certain restructuring actions;
•foreign ownership and investment restrictions;
•nationalization of enterprises or facilities; and
•unsettled political conditions and threat of terrorism.
Any or all of the foregoing risks could have a significant impact on our ability to sell our products on a competitive basis in international markets and may adversely affect our business, consolidated financial condition and results of operations. In addition, a number of these risks may adversely impact consumer confidence and consumption, which could reduce sales volumes of our products or result in a shift in our product mix from higher margin to lower margin product offerings.
We experience competition in the markets for our products and services and in the geographic areas in which we operate.
Our products compete with similar products made by other manufacturers and with a number of other types of materials or products. We compete on the basis of performance characteristics of our products, service, price and innovations in technology. A number of competing U.S. and non-U.S. companies are well-established.
The market for our products is highly competitive. Our products face significant competition from global, national, regional and local companies within some or all of our product lines in each sector that we serve.
Our inability to maintain a competitive advantage could result in lower prices or lower sales volumes for our products. Additionally, we may not successfully implement our pricing actions. These factors may have an adverse impact on our consolidated financial condition or results of operations.
The consolidation of customers may adversely affect our business, consolidated financial condition or results of operations.
Customers in the food service, food and beverage processing, building care, lodging, industrial distribution and healthcare sectors have been consolidating in recent years, and we believe this trend may continue. Such consolidation could have an adverse impact on the pricing of our products and services and our ability to retain customers, which could in turn adversely affect our business, consolidated financial condition or results of operations.
The ultimate scale and scope of recurring outbreaks stemming from the COVID-19 pandemic and the pace and degree of recovery are unknown and may continue to impact our business for an extended period.
The COVID-19 pandemic has disrupted, and it may in the future disrupt, our business and has materially affected, and may in the future affect, operating results, cash flows and/or financial condition. The COVID-19 pandemic and the pace of recovery has in the past adversely impacted our business and financial condition in specific ways, and it may continue to do so, including its impact on: our ability to maintain sufficient qualified personnel due to employee illness, quarantine, willingness to return to work, vaccine and/or testing mandates, face-coverings and other safety requirements, general scarcity of employees, or other restrictions; closure or reduced operating hours of our key customers; consumer inability to purchase our products due to prolonged inventory shortages, illness or government
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implemented restrictions and any resulting changes in consumer preference; legal actions or proceedings related to COVID-19; the pace of return of employees to offices; and our ability to maintain a cost-effective supply chain as COVID-19 may continue to adversely affect our suppliers and distributors.
The duration and extent of the impact from COVID-19 depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of different variants, the extent and effectiveness of governmental responses and other preventative, treatment and containment actions, including the distribution and acceptance of vaccines, availability of testing, shifts in behavior going forward and the impact of these and other factors on our employees, clients, customers, suppliers and partners. In addition, even after the COVID-19 pandemic subsides, any permanent increase in and acceptance of remote and hybrid working arrangements may continue to adversely impact our revenues and business model in our business & industry sector. There is the risk that certain mitigation and cost-saving initiatives to date may not be sustainable or repeatable, or that the prolonged effects of COVID-19 may be different than what we have experienced thus far, including permanent closures of client facilities or reductions in product and service offerings.
In addition, we have experienced higher costs in certain areas as a result of COVID-19 such as transportation and logistics, warehouse, and production employee compensation, as well as incremental costs associated with enhanced cleaning and sanitation protocols to protect our employees at our facilities, which may continue, increase or become necessary in these or other areas. Although the potential effects that COVID-19 may continue to have on the our business are not clear, such impacts could materially adversely affect our business, financial condition and results of operations.
Severe public health outbreaks not limited to COVID-19 may adversely impact our business.
Our business could be adversely affected by the effect of a future public health outbreak. The United States and other countries have experienced, and may experience in the future, public health outbreaks such as Zika virus, Avian Flu, SARS, H1N1 influenza, and COVID-19. A prolonged occurrence of a contagious disease such as these could result in a significant downturn in the food service, hospitality and travel industries and also may result in health or other government authorities imposing restrictions on travel further impacting our end-markets. Any of these events could result in a significant drop in demand for some of our products and services and adversely affect our business.
Environmental, social and governance, or ESG, issues, including those related to climate change and sustainability, may have an adverse effect on our business, consolidated financial condition and results of operations and damage our reputation.
Companies across all industries are facing increasing scrutiny relating to their ESG policies. Increased focus and activism related to ESG may hinder our access to capital, as investors may reconsider their capital investment as a result of their assessment of our ESG practices. In particular, customers, consumers, investors and other stakeholders are increasingly focusing on environmental issues, including climate change, water use, deforestation, plastic waste, and other sustainability concerns. Changing consumer preferences may result in increased demands regarding plastics and packaging materials, including single-use and non-recyclable plastic packaging, and other components of our products and their environmental impact on sustainability; a growing demand for natural or organic products and ingredients; or increased consumer concerns or perceptions (whether accurate or inaccurate) regarding the effects of ingredients or substances present in certain consumer products. These demands could cause us to incur additional costs or to make changes to our operations to comply with such demands.
Concern over climate change or plastics and packaging materials, in particular, may result in new or increased legal and regulatory requirements to reduce or mitigate impacts to the environment. Increased regulatory requirements, including in relation to various aspects of ESG including disclosure requirements, or environmental causes may result in increased compliance or input costs of energy, raw materials or compliance with emissions standards, which may cause disruptions in the manufacture of our products or an increase in operating costs. Any failure to achieve our ESG goals or a perception (whether or not valid) of our failure to act responsibly with respect to the environment or to effectively respond to new, or changes in, legal or regulatory requirements concerning
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environmental or other ESG matters, or increased operating or manufacturing costs due to increased regulation or environmental causes could adversely affect our business and reputation.
If we do not adapt to or comply with new regulations, or evolving investor, industry or stakeholder expectations and standards, or if we are perceived to have not responded appropriately to the growing concern for ESG issues, customers and consumers may choose to stop purchasing our products or purchase products from another company or a competitor, and our business, consolidated financial condition and results of operations may be adversely affected.
We are subject to taxation in multiple jurisdictions. As a result, our annual effective income tax rate can change materially as a result of changes in our mix of U.S. and non-U.S. earnings and other factors, including changes in tax laws and changes made by regulatory authorities.
We are subject to taxation in, and to the tax laws and regulations of, multiple jurisdictions as a result of the international scope of our operations and our corporate and financing structure. Our overall effective income tax rate is equal to our total tax expense as a percentage of total earnings before tax. However, income tax expense and benefits are not recognized on a global basis but rather on a jurisdictional or legal entity basis. Losses in one jurisdiction may not be used to offset profits in other jurisdictions and may cause an increase in our tax rate. Changes in the mix of earnings (or losses) between jurisdictions and assumptions used in the calculation of income taxes, among other factors, could have a significant effect on our overall effective income tax rate.
We are also subject to transfer pricing laws with respect to our intercompany transactions, including those relating to the flow of funds among our companies. Adverse developments in these laws or regulations, or any change in position regarding the application, administration or interpretation thereof, in any applicable jurisdiction, could have a material adverse effect on our business, consolidated financial condition or results of our operations. In addition, the tax authorities in any applicable jurisdiction may disagree with the positions we have taken or intend to take regarding the tax treatment or characterization of any of our transactions. If any applicable tax authorities were to successfully challenge the tax treatment or characterization of any of our transactions, it could have a material adverse effect on our business, consolidated financial condition or results of operations.
Changes in tax laws or tax rulings related thereto could affect our financial position and results of operations. For example, in light of continuing global fiscal challenges, various levels of government and international organizations such as the Organisation for Economic Co-operation and Development, or OECD, and the European Union are increasingly focused on tax reform and other legislative or regulatory action to increase tax revenue. These tax reform efforts, such as the OECD-led base erosion and profit sharing, or BEPS, are designed to ensure that corporate entities are taxed on a larger percentage of their earnings. Although some countries have passed tax laws based on findings from the BEPS project, the final nature, timing and extent of any such tax reforms or other legislative or regulatory actions is unpredictable, and it is difficult to assess their overall effect. These tax reforms, or any other changes in tax laws in any of the jurisdictions in which we operate, could increase our effective tax rate and adversely impact our financial results.
Russia’s invasion of Ukraine has significantly impacted geopolitical stability, increased economic uncertainty and disrupted capital markets.
U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions as a consequence of Russia's invasion of Ukraine on February 24, 2022. Although the length and impact of the war in Ukraine is highly unpredictable, the war in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.
Additionally, the war in Ukraine has led to sanctions and other penalties being levied by the United States, European Union, United Kingdom and other countries against Russia. The U.S. government and other governments in jurisdictions in which we operate have also threatened additional sanctions and controls against Russia. The impact of these measures, as well as potential responses to them by Russia, is currently unknown and they could adversely affect our business, consolidated financial condition and results of operations.
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Although our business has not been materially impacted by the war in Ukraine to date, it is impossible to predict the extent to which our operations, or those of our suppliers, will be impacted in the short and long term, or the ways in which the conflict may impact our business. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial.
Operational Risks
Rising inflation may adversely affect us by increasing costs of materials, labor and other costs beyond what we can recover through price increases.
Inflation can adversely affect us by increasing the costs of materials, labor and other costs required to manage and grow our business. In the current inflationary environment, depending on the terms of our contracts and other economic conditions, we may be unable to raise prices enough to keep up with the rate of inflation, which would reduce our profit margins and returns. If we are unable to increase our prices to offset the effects of inflation, our business, consolidated financial condition and results of operations could be materially and adversely affected.
Uncertain global economic conditions have had and could continue to have an adverse effect on our consolidated financial condition and results of operations.
Uncertain global economic conditions have had and may continue to have an adverse impact on our business in the form of lower net sales due to weakened demand, unfavorable changes in product price/mix, or lower profit margins. For example, global economic downturns have adversely impacted some of our end-users and customers, such as food processors, distributors, supermarket retailers, hotels, restaurants, retail establishments, business service contractors, e-commerce fulfillment firms, and other end-users that are particularly sensitive to business and consumer spending.
During economic downturns or recessions, there can be a heightened competition for sales and increased pressure to reduce selling prices as our customers may reduce their volume of purchases from us. If we lose significant sales volume or reduce selling prices significantly, then there could be a negative impact on our consolidated financial condition or results of operations, profitability and cash flows.
Reduced availability of credit may also adversely affect the ability of some of our customers and suppliers to obtain funds for operations and capital expenditures. This could negatively impact our ability to obtain necessary supplies as well as our sales of materials and equipment to affected customers. This could additionally result in reduced or delayed collections of outstanding accounts receivable.
Political, social and economic instability and risk of government actions affecting our business and our customers or suppliers may adversely impact our business, consolidated financial condition and results of operations.
We have offices, factories and warehouses located across the world and we are exposed to risks inherent in doing business in each of the countries or regions in which we, our customers, or suppliers operate, including: civil unrest, acts of terrorism, sabotage, epidemics, force majeure, war or other armed conflict and related government actions, including sanctions/embargoes, the deprivation of contract rights, the inability to obtain or retain licenses required by us to operate our plants or import or export our goods or raw materials, the expropriation or nationalization of our assets, and restrictions on travel, payments or the movement of funds. As some of our customers operate in the hospitality industry that supports both domestic and international tourism, their business and indirectly ours, could be exposed to the negative consequences of travel pattern disruptions due to major terrorist threats. Also, if additional restrictions on trade with China and Russia are adopted by the United States, the European Union or the United Nations, and are applicable to our products, we could lose sales and experience lower growth rates in the future.
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Any social unrest in the jurisdictions in which our offices, factories or warehouses, or those of our suppliers, are located could materially affect our, or our suppliers’, ability to operate in such jurisdictions. Prolonged disruptions because of social unrest in the markets in which we operate could disrupt our relationships with customers, employees and referral sources located in affected areas and, in the case of our corporate office, our ability to provide administrative support services, including billing and collection services. Future civil insurrection, social unrest, protests, looting, strikes or street demonstrations may adversely affect our business, consolidated financial condition and results of operations.
Instability and uncertainty in the credit and financial markets could adversely impact the availability of credit that we and our customers need to operate our or their businesses.
We depend upon the availability of credit to operate our business. Our customers and suppliers also require access to credit for their businesses. Instability and uncertainty in the credit and financial markets could adversely impact the availability of future financing and the terms on which it might be available to us, our customers and our suppliers. Inability to access credit markets, or a deterioration in the terms on which financing might be available to us or our customers, could have an adverse effect on our business, financial condition and results of operations.
If we are unable to attract, develop and retain key employees and other personnel, our consolidated financial condition or results of operations may be adversely affected.
Our success depends largely on the efforts and abilities of our management team and other key personnel. Their experience and industry contacts significantly benefit us and we need their expertise to execute our business strategies. Our ability to recruit and retain our senior management, key personnel, and other skilled employees may be affected as a result of the announcement of the Merger. If any of our senior management or other key personnel cease to work for us, including as a result of the announcement of the Merger, and we are unable to successfully replace any departing senior management or key personnel, our business, consolidated financial condition or results of operations may be materially adversely affected.
As a result of the substantial workers council and labor union representation in certain jurisdictions in which we operate, we will need to consult or negotiate with employee representatives on operational matters concerning the organization of our labor force, salary inflation or other benefits and re-organizations, which may lead to reduced flexibility in managing our operations and labor force to respond to opportunities, market changes or cost challenges, and reorganizing or restructuring our business.
In Europe and Latin America, most of our employees are represented by either labor unions or workers’ councils and are covered by collective bargaining agreements that are generally renewable on an annual basis. As is the case with any negotiation or consultation, we may not be able to negotiate mutually acceptable new collective bargaining agreements, which could result in delays, strained employee relations and after escalation, potential strikes or work stoppages by affected workers, each of which could materially affect our business. Renewal of collective bargaining agreements could also result in higher wages or benefits paid to union members. A disruption in operations or higher ongoing labor costs could materially affect our business.
Fluctuations between non-U.S. currencies and the U.S. dollar could materially impact our consolidated financial condition or results of operations.
A significant portion of our net sales are generated outside the United States. We translate sales and other results denominated in non-U.S. currency into U.S. dollars for our consolidated combined financial statements included elsewhere in this report. As a result, we are exposed to currency fluctuations both in receiving cash from our international operations and in translating our financial results back to U.S. dollars. During periods of a strengthening U.S. dollar, our reported international sales and net income could be reduced because non-U.S. currencies may translate into fewer U.S. dollars. We cannot predict the effects of exchange rate fluctuations on our future operating results. As exchange rates vary, our results of operations and profitability may be harmed. While we may use financial instruments to hedge certain non-U.S. currency exposures, this does not insulate us completely from non-U.S. currency effects and exposes us to counterparty credit risk for non-performance. Such hedging
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activities may be ineffective or may not offset more than a portion of the adverse financial effect resulting from non-U.S. currency variations. The gains or losses associated with hedging activities may harm our results of operations.
In all jurisdictions in which we operate, we are also subject to laws and regulations that govern non-U.S. investment, non-U.S. trade and currency exchange transactions. These laws and regulations may limit our ability to convert non-U.S. currency cash flows into U.S. dollars. If we are unable to convert non-U.S. currency cash flows into U.S. dollars at favorable exchange rates, or at all, it may have a material adverse effect on our business, consolidated financial condition and results of operations.
Fluctuations in raw material pricing, availability and allocation by suppliers as well as energy-related costs may negatively impact our results of operations, including our profit margins and net sales.
We use petrochemical-based raw materials to manufacture many of our products and oil-based materials for our packaging. The prices for these raw materials are cyclical, and increases in market demand or fluctuations in the global trade for petrochemical-based raw materials and energy could increase our costs. In addition, the prices of many of the other key raw materials used in our businesses, such as caustic soda, solvents, waxes, phosphates, surfactants, polymers and resins, chelates and fragrances, are cyclical based on numerous supply and demand factors that are beyond our control. Furthermore, the usage of certain chemical components used in the manufacturing of our products, such as chemicals used in our surfactants, may be limited or restricted by government regulations, which could restrict our sourcing options. If we are unable to minimize the effects of increased raw material costs through sourcing, pricing or other actions, our business, consolidated financial condition or results of operations may be materially adversely affected. We also have some sole-source suppliers, and the lack of availability of supplies could have a materially adverse effect on our business, consolidated financial condition and results of operations.
Natural disasters such as hurricanes, as well as political instability and terrorist activities, may negatively impact the production or delivery capabilities of refineries and natural gas and petrochemical suppliers and suppliers of other raw materials in the future. These factors could lead to increased prices for our raw materials and/or curtailment of supplies and allocation of raw materials by our suppliers, which could reduce our revenues and profit margins and harm relations with our customers, which could have a materially adverse effect on our business, consolidated financial condition and results of operations.
If we are not able to protect our trade secrets or maintain our trademarks, patents and other intellectual property, we may not be able to prevent competitors from developing similar products or from marketing their products in a manner that capitalizes on our intellectual property, and this loss of a competitive advantage could decrease our profitability and liquidity.
Our ability to compete effectively with other companies depends, in part, on our ability to maintain the proprietary nature of our owned and licensed intellectual property. If we were unable to maintain the proprietary nature of our intellectual property and our significant current or proposed products, this loss of a competitive advantage could result in decreased sales or increased operating costs, either of which could have a materially adverse effect on our business, consolidated financial condition or results of operations.
We rely on trade secrets to maintain our competitive position, including protecting the formulation and manufacturing techniques of many of our products. As such, we have not sought U.S. or international patent protection for some of our principal product formulas and manufacturing processes. Accordingly, while we seek to use our protected trade secrets to defend our continued right to sell products against those seeking to assert patents on innovation that is similar to or competitive with our trade secrets, we may not be able to prevent others from developing products that are similar to or competitive with our products.
We own, or have licenses to use a large number of patents and pending patent applications on our products, aspects thereof, methods of use and/or methods of manufacturing. There is a risk that our owned and licensed patents may not provide meaningful protection and patents may never be issued for our pending patent applications.
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We own, or have licenses to use the material trademark and trade name rights used in connection with the packaging, marketing and distribution of our major products where our products are principally sold. Trademark and trade name protection is important to our business. Although most of our trademarks are registered in the countries in which we operate, we may not be successful in asserting trademark or trade name protection. The costs required to protect our trademarks and trade names may be substantial.
We cannot be certain that we will be able to assert our intellectual property rights successfully in the future or that they will not be invalidated, circumvented or challenged. Other parties may infringe on or misappropriate our intellectual property rights and may thereby dilute the value of our intellectual property in the marketplace. In addition, the laws of some non-U.S. countries may not protect our intellectual property rights to the same extent as the laws of the United States. As a result, litigation may be necessary to protect our intellectual property, and such litigation may be time-consuming and costly. We have been, and continue to be, in active intellectual property litigation.
While we take measures to protect our intellectual property and assert our intellectual property rights, we cannot be certain that our competitors will not independently develop similar technology, duplicate our products, obtain information we regard as proprietary, or design around patents issued to us or other intellectual property rights of ours. Any failure by us to protect our trade secrets, patents, trademarks and other intellectual property rights may have a materially adverse effect on our business, consolidated financial condition or results of operations.
We rely on software from third parties, including open source software, and a failure to properly manage our use of third-party software could result in increased costs or loss of revenue.
Certain of our products are designed to include software licensed from third parties. Such third-party software includes software licensed from commercial suppliers and software licensed under public open source licenses. We have internal processes to manage our use of such third-party software. However, if we fail to adequately manage our use of third-party software, then we may be subject to copyright infringement or other third-party claims. In the case of open source software licensed under certain “copyleft” licenses, the license itself, or a court-imposed remedy for non-compliant use of the open source software, may require that parts of our proprietary software code be publicly disclosed or licensed. This could result in a loss of intellectual property rights, increased costs, damage to our reputation, and a loss of revenue.
Cyber risk and the failure to maintain the integrity of our operational or security systems or infrastructure, or those of third parties with which we do business, could have a materially adverse effect on our business, consolidated financial condition and results of operations.
We rely to a large extent upon automation, software and infrastructure, both internally and with third-parties, to operate our business. The size and complexity of our information technology and telecommunications systems make them increasingly vulnerable to breakdown, the effects of natural disasters and public health events, malicious intrusion and random attack, which may pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers could result in the loss of customers and business opportunities, legal liability, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensatory costs, and additional compliance costs, any of which could materially adversely affect our business, consolidated financial condition and results of operations. While we take reasonable measures to mitigate these risks, due to continually evolving threats, our systems, networks, products, solutions and services remain potentially vulnerable to advanced and persistent threats.
Our information technology systems and our third-party providers’ systems, have been, and will likely continue to be, subject to cyber-threats such as computer viruses or other malicious codes, ransomware, unauthorized access attempts, denial of service attacks, phishing, social engineering, hacking and other cyberattacks. To date, the we are not aware that our business or operations have been materially impacted by these attacks. However, our security efforts and the efforts of our third-party providers may not prevent or timely detect attacks and resulting breaches or breakdowns of our, or our third-party service providers’, databases or systems. In addition, if we or our third-party
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providers are unable to effectively resolve such breaches or breakdowns on a timely basis, we may experience interruptions in our ability to manage or conduct business, as well as reputational harm, governmental fines, penalties, regulatory proceedings, and litigation and remediation expenses. Cyber threats are becoming more sophisticated, are constantly evolving and are being made by groups and individuals with a wide range of expertise and motives, and this increases the difficulty of detecting and successfully defending against them.
We utilize various hardware, software and operating systems that may need to be upgraded or replaced in the near future as such systems cease to be supported by third-party service providers, and may be vulnerable to increased risks, including the risk of security breaches, system failures and disruptions. Any such upgrade could take time, oversight and be costly to us. If such systems are not successfully upgraded or replaced in a timely manner, system outages, disruptions or delays, or other issues may arise. If a new system does not function properly, or is not adequately supported by third-party service providers and processes, it could adversely affect our business and operations, which, in turn, adversely impact our business, consolidated financial condition and results of operations.
We also maintain and have access to sensitive, confidential or personal data or information in some of our businesses that is subject to privacy and security laws, regulations and customer controls of the United States, the European Union and other non-U.S. jurisdictions. Despite our efforts to protect such sensitive, confidential or personal data or information, our facilities and systems and those of our customers and third-party service providers may be vulnerable to security breaches, theft, misplaced or lost data, programming and/or human errors that could lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions, which in turn could result in liabilities and penalties and could damage our reputation, cause us to incur substantial costs and adversely affect our business, consolidated financial condition and results of operations. Additionally, we could be subject to litigation and government enforcement actions as a result of any such failure. Furthermore, data privacy is subject to frequently changing rules and regulations. The changes introduced by data privacy and protection regulations increase the complexity of regulations enacted to protect business and personal data and they subject us to additional costs and have required, and may in the future require, costly changes to our security systems, policies, procedures and practices. These laws and regulations also may result in us incurring additional expenses and liabilities in the event of unauthorized access to or disclosure of personal data.
The development of internet of things, or IoT, also presents security, privacy and execution risks. IoT solutions may collect large amounts of data, and our handling of IoT data may not satisfy customers or regulatory requirements. IoT scenarios may increasingly affect personal health and safety. If IoT solutions that include our technologies do not work as intended, violate the law or harm individuals or businesses, we may be subject to legal claims or enforcement actions. These risks, if realized, may increase our costs, damage our reputation or brands, or negatively impact our business, consolidated financial condition and results of operations.
Strategic Risks
If we do not develop new and innovative products or if such products are not accepted by customers in our markets or fail to meet sales or margin expectations, our results could be negatively affected.
Our products must be kept current to meet our customers’ needs, overcome competitive products and meet evolving regulatory requirements. To remain competitive, we therefore must develop new and innovative products on an ongoing basis, and we invest significantly in the research and development of new products. If we do not successfully develop innovative products, it may be difficult to differentiate our products from our competitors’ products and satisfy regulatory requirements, and our sales and results could suffer.
The development and introduction cycle of new products can be lengthy and involve high levels of investment. Our competitive advantage is due in part to our ability to develop and introduce new products in a timely manner at favorable margins. Maintaining this advantage is essential, especially in light of the reduction in barriers for even small competitors to quickly introduce new brands and products directly to consumers that e-commerce permits. New products may not meet sales or margin expectations due to many factors, including our inability to (i)
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accurately predict demand, end-user preferences and evolving industry standards, (ii) resolve technical and technological challenges in a timely and cost-effective manner or (iii) achieve manufacturing efficiencies. If new products that we develop and introduce to the market are not successful, it could have a material adverse effect on our business, consolidated financial condition and results of operations.
Our inability to consummate and effectively incorporate acquisitions into our business operations may adversely affect our results of operations.
We invest time and resources into carefully assessing opportunities for acquisitions, and we continue to evaluate potential acquisition opportunities to support, strengthen and grow our business. Despite diligence and integration planning, acquisitions still present certain risks, including the time and economic costs of integrating an acquisition’s technology, control and financial systems, unforeseen liabilities, and the difficulties in bringing together different work cultures and personnel. There can be no assurance that we will be able to locate suitable acquisition candidates, acquire possible acquisition candidates, acquire such candidates on commercially reasonable terms, or integrate acquired businesses successfully in the future. Under the terms of the Merger Agreement, from its execution until the Merger is consummated or the Merger Agreement is terminated, without the consent of Parent, we may not acquire or dispose of any other assets or business, other than acquisitions or dispositions of immaterial obsolete assets used in the ordinary course of business.
If the Merger is not consummated, we expect to continue to execute our acquisition strategy; however future acquisitions may require us to incur additional debt and contingent liabilities, which may adversely affect our business, consolidated financial condition and results of operations. The obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and those historical financial statements may be based on assumptions that are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations and financial condition. The process of integrating acquired businesses into our existing operations may result in operating, contractual and supply chain difficulties, such as the failure to retain customers or management personnel. Such difficulties may divert significant financial, operational and managerial resources from our existing operations, and make it more difficult to achieve our operating and strategic objectives.
Unfavorable consumer responses to price increases could have a material adverse impact on our sales and earnings.
From time to time, and especially in periods of rising raw material costs, we increase the prices of our products. Significant price increases could impact our earnings depending on, among other factors, the pricing by competitors of similar products and the response by our customers to higher prices. Such price increases may result in lower volume of sales and a subsequent decrease in gross margin and adversely impact earnings, which could have a material adverse effect on our business, consolidated financial condition and results of operations.
Legal, Regulatory and Compliance Risks
We are subject to various government laws and regulations. Compliance with, or changes in such laws and regulations, may cause us to incur significant expenses, which may affect our business, consolidated financial condition and operations.
Our business requires compliance with many laws and regulations, including evolving climate change and environmental standards. The regulatory environment in which we operate is still developing, and the potential exists for future legislation and regulations to be adopted. Increased legislative and regulatory activity and burdens, and a more stringent manner in which they are applied, could significantly impact our business and the economy as a whole. We cannot predict with reasonable certainty the future cost to us of compliance with such laws and regulations.
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Many jurisdictions require us to have operating permits for our production and warehouse facilities and operations. Any failure to obtain, maintain or comply with the terms of these permits could result in fines or penalties, revocation or nonrenewal of our permits, or orders to cease certain operations, and may have a material adverse effect on our business, consolidated financial condition and results of operations.
We are subject to environmental health and safety laws that govern, among other things, the manufacturing of our products, the discharge of pollutants into the air, soil and water and the use handling, transportation, storage and disposal of hazardous materials. We generate, use and dispose of hazardous materials in our manufacturing processes and there is a potential for chemicals to be accidentally spilled, released or discharged, either in liquid or gaseous form, during production, transportation, storage or use. Such a release could result in environmental contamination as well as a human or animal health hazard. In the event our operations result in the release of hazardous materials into the environment, we may become responsible for the costs associated with the investigation and remediation of sites at which we have released pollutants, or sites where we have disposed or arranged for the disposal of hazardous wastes, even if we fully complied with environmental laws at the time of disposal. We have been, and may continue to be, responsible for the cost of remediation at some locations.
Many jurisdictions have laws and regulations that govern the registration, labeling and sale of some of our products. Throughout the world, such regulations continue to increase both in number and in stringency, resulting in, among others, extra charges for single use packaging in Europe, duplicative regulations as a result of Brexit, regulatory-driven and customer-driven ingredient bans requiring reformulation, ingredient disclosure requirements in the U.S., Asia and potentially Europe, and the incurrence of plastic levies under the European Union Multiannual Financial Framework 2021 — 2027 and Recovery Fund, all of which create a risk of increased costs and a need to modify our products.
Failure to comply with these laws and regulations could subject us to lawsuits and other proceedings, and could also lead to damage awards, fines and penalties. We may become involved in a number of legal proceedings and audits, including government and agency investigations, and consumer, employment, tort and other litigation. The outcome of some of these legal proceedings, audits, and other contingencies could require us to take, or refrain from taking, actions that could harm our operations or require us to pay substantial amounts of money, harming our financial condition. Additionally, defending against these lawsuits and proceedings may be necessary, which could result in substantial costs and diversion of management’s attention and resources, harming our financial condition. There can be no assurance that any pending or future legal or regulatory proceedings and audits will not harm our business, consolidated financial condition and results of operations.
Product and other liability claims or regulatory actions could adversely affect our financial results or harm our reputation or the value of our brands.
Claims for losses or injuries purportedly caused by some of our products arise in the ordinary course of our business. In addition to the risk of substantial monetary judgments, product or other liability claims or regulatory actions could result in negative publicity that could harm our reputation in the marketplace or adversely impact the value of our brands or our ability to sell our products in certain jurisdictions. Defending a lawsuit, regardless of its merit, is costly and may divert management's attention and resources. We could also be required to recall possibly defective products, or voluntarily do so which could result in adverse publicity and significant expenses. Although we maintain product liability insurance coverage, potential product liabilities claims could be excluded or exceed coverage limits under the terms of our insurance policies or could result in increased costs for such coverage.
We may be exposed to liabilities under applicable anti-corruption laws and any determination that we violated these laws could have a materially adverse effect on our business.
We are subject to various anti-corruption laws that prohibit companies and their agents from making improper payments or offers of payments for the purpose of obtaining or retaining business. We conduct business in countries and regions that are generally recognized as potentially more corrupt business environments. Activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees or agents that could be in violation of various anti-corruption laws, including the Foreign Corrupt Practices Act, or the FCPA, the
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Proceeds of Crime Act (As Revised) of the Cayman Islands and the Terrorism Act (As Revised) of the Cayman Islands. We have implemented safeguards and policies to discourage these practices by our employees and agents but we cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by employees or agents. If our employees or agents violate our policies or we fail to maintain adequate record keeping and internal accounting practices to accurately record our transactions, we may be subject to regulatory sanctions. Violations of the FCPA, Proceeds of Crime Act, Terrorism Act or other anti-corruption laws, or allegations of such acts, could damage our reputation and subject us to civil or criminal investigations in the United States and in other jurisdictions and related shareholder lawsuits, could lead to substantial civil and criminal, monetary and nonmonetary penalties and could cause us to incur significant legal and investigatory fees which could adversely affect our business, consolidated financial condition and results of operations.
A failure of our internal controls over financial reporting or our regulatory compliance efforts could harm our financial and operating results or could result in fines or penalties.
We have implemented internal controls to help ensure the completeness and accuracy of our financial reporting and to detect and prevent fraudulent actions within our financial and accounting processes. We have also implemented compliance policies and programs to help ensure that our employees comply with applicable laws and regulations. Our internal audit team regularly audits our internal controls and various aspects of our business and compliance program, and we regularly assess the effectiveness of our internal controls. There can be no assurance, however, that our internal or external assessments and audits will identify all fraud, misstatements in our financial reporting, and significant deficiencies or material weaknesses in our internal controls. Material weaknesses could result in a material misstatement of our financial results, requiring us to restate our financial statements.
From time to time, we initiate further investigations into our business operations to further bolster our regulatory compliance efforts or based on the results of our internal and external audits or on complaints, questions or allegations made by employees or other parties regarding our business practices and operations. In addition, our business and operations may be investigated by applicable government authorities. In the event any of these investigations identify material violations of applicable laws by our employees or affiliates, we could be subject to adverse publicity, fines, or penalties.
Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.
Many of our competitors have a substantial amount of intellectual property that we must continually strive to avoid infringing. Third parties, including competitors, may assert intellectual property infringement, misappropriation or invalidity claims against us that could be upheld. Intellectual property litigation, which could result in substantial costs to and a diversion of effort by us may be necessary to protect our intellectual property rights, including trade secrets, proprietary technology or for us to defend against claimed infringement or misappropriation of the rights of others and to determine the scope and validity of our or others’ intellectual property or proprietary rights. We may not prevail in any such litigation, and if we are unsuccessful, we may be subject to monetary liability and injunctive or equitable relief, which may prevent our use of others’ intellectual property or proprietary rights if we are not able to obtain necessary licenses on reasonable terms or at all.
Although it is our policy and intention not to infringe valid patents of which we are aware and we conduct patent clearance analyses to identify patents that our new products and services might infringe as well as make necessary product or process changes to avoid infringement, we cannot provide assurances that our processes and products and other activities do not and will not infringe issued patents (whether present or future) or other intellectual property rights belonging to others. Third parties have, from time to time, asserted intellectual property-related claims against us, including claims for alleged patent infringement, and there is the continued risk that such claims may be made against our products and services or our customers’ use of our products or services. We may also be subject to indemnity claims by our business partners arising out of claims of their alleged infringement of the patents, trademarks and other intellectual property rights of third parties in connection with their use of our products and services. If we were to discover that any of our processes, technologies or products infringe on the valid intellectual property rights of others, we might determine to obtain licenses from the owners of these rights or to modify our processes or technologies or re-engineer our products in order to avoid infringement. We may not be able to obtain
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the necessary licenses on acceptable terms, or be able to modify our processes or technologies or re-engineer our products in a manner that is successful in avoiding infringement. Moreover, if we are sued for infringement and lose, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology. Any of the foregoing could cause us to incur significant costs and prevent us from selling our products and could have an adverse effect on our business, consolidated financial condition and results of operations.
Our insurance policies may not cover all operating risks and a casualty loss beyond the limits of our coverage could adversely impact our business.
Our business is subject to operating hazards and risks relating to handling, storing, transporting and the use of the products we sell. We maintain insurance policies in amounts and with coverage and deductibles that we believe are reasonable and prudent. Nevertheless, our insurance coverage may not be adequate to protect us from all liabilities and expenses that may arise from claims for personal injury, death or property damage arising in the ordinary course of business, and our current levels of insurance may not be maintained or available in the future at economical prices. If a significant liability claim is brought against us that is not adequately covered by insurance, we may have to pay the claim with our own funds, which could have a material adverse effect on our business, consolidated financial condition and results of operations.
Financial Risks
Our substantial indebtedness makes us more sensitive to adverse economic conditions, may limit our ability to plan for or respond to significant changes in our business and requires a significant amount of cash to service our debt payment obligations that we may be unable to generate or obtain.
As of December 31, 2022, we had $1,985.2 million of total debt outstanding and up to $444.6 million of additional borrowing capacity under our Revolving Credit Facility. Our level of indebtedness could have important consequences on our business, including:
•making it more difficult for us to satisfy our obligations with respect to our indebtedness;
•requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;
•limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;
•increasing our vulnerability to general adverse economic and industry conditions;
•exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;
•exposing us to volatility between the U.S. dollar and euro as a portion of our borrowings are euro- denominated;
•limiting our flexibility in planning for and reacting to changes in the industry in which we compete;
•placing us at a disadvantage compared to other, less leveraged competitors; and
•increasing our cost of borrowing.
Our ability to service our indebtedness will depend on our future performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors. Some of these factors are beyond our control. If we cannot service our indebtedness and meet our other obligations and commitments, we might be required to refinance our debt or to dispose of assets to obtain funds for such purposes. We cannot guarantee that refinancing or asset dispositions could be effected on a timely basis or on satisfactory terms, if at all, or would be permitted by the terms of our debt instruments.
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Despite current indebtedness levels and restrictive covenants, we may still be able to incur substantially more indebtedness or make certain restricted payments, which could further exacerbate the risks associated with our substantial indebtedness.
We may be able to incur significant additional indebtedness in the future. Although the financing documents governing our indebtedness contain restrictions on the incurrence of additional indebtedness and liens, these restrictions are subject to a number of important qualifications and exceptions, and the additional indebtedness and liens incurred in compliance with these restrictions could be substantial.
The financing documents governing our indebtedness permit us to incur certain additional indebtedness, including liabilities that do not constitute indebtedness as defined in the financing documents. We may also consider investments in joint ventures or acquisitions, which may increase our indebtedness. In addition, financing documents governing our indebtedness do not restrict Bain Capital from creating new holding companies that may be able to incur indebtedness without regard to the restrictions set forth in the financing documents governing our indebtedness. If new debt is added to our currently anticipated indebtedness levels, the related risks that we face could intensify.
The terms of the financing documents governing our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The financing documents governing our indebtedness contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including restrictions on our ability to:
•incur additional indebtedness;
•pay dividends on or make distributions in respect of capital stock or repurchase or redeem capital stock;
•prepay, redeem or repurchase certain indebtedness;
•sell or otherwise dispose of assets, including capital stock of restricted subsidiaries;
•incur liens;
•enter into transactions with affiliates;
•enter into agreements restricting the ability of our subsidiaries to pay dividends; and
•consolidate, merge or sell all or substantially all of our assets.
You should read the discussion under the heading “Description of Certain Indebtedness” for further information about these covenants.
The restrictive covenants in the financing documents governing our indebtedness require us to maintain a specified financial ratio and our ability to meet that financial ratio can be affected by events beyond our control.
A breach of the covenants or restrictions under the financing documents governing our indebtedness could result in an event of default under such documents. Such a default may allow the creditors to accelerate the related debt, which may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event the holders of our indebtedness accelerate the repayment, we may not have sufficient assets to repay that indebtedness or be able to borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms acceptable to us. As a result of these restrictions, we may be:
•limited in how we conduct our business;
•unable to raise additional debt or equity financing to operate during general economic or business downturns; or
•unable to compete effectively or to take advantage of new business opportunities.
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These restrictions, along with restrictions that may be contained in agreements evidencing or governing other future indebtedness, may affect our ability to grow in accordance with our growth strategy.
We entered into a tax receivable agreement that required us to make payments in relation to certain tax attributes of Constellation and its subsidiaries to persons who were shareholders of Constellation prior to the initial public offering and to certain other members of management, which payments are expected to be substantial.
We indirectly acquired favorable tax attributes in connection with the Reorganization Transactions. These tax attributes would not be available to us in the absence of the consummation of the Reorganization Transactions.
As part of the Reorganization Transactions, we entered into a tax receivable agreement, or the TRA, under which, generally, we are required to pay to persons who were shareholders of Constellation prior to the initial public offering, and to certain other members of management, or the TRA Recipients, as part consideration for their shares in Constellation or as part consideration for a note receivable held by them, as applicable, 85% of the savings, if any, in (x) U.S. federal, state or local income tax, and (y) Dutch income tax, in each case, that we actually realize (or are deemed to realize in certain circumstances, including as a result of certain assumptions) as a result of (i) certain United States tax attributes, including tax credits (including any foreign tax credits allowed under Section 901 or 960 of the Code), deferred interest deductions, net operating losses, or NOLs, and amortization and depreciation deductions (and the reduction of income and gain attributable to any tax basis in any amortizable section 197 intangibles, as defined in Section 197(c) and (d) of the Code), (ii) certain Dutch tax attributes, including deferred interest deductions, NOLs, and tax deductible depreciation and amortization deductions (and the reduction of corporate income and gain attributable to tax basis in any intangible assets, including with respect to trademark intangibles and brand name intangibles), in each case of clause (i) and (ii), generated or owned by or attributable to, as applicable, the issuer and its subsidiaries, collectively, the Company Group, on or prior to the date of our initial public offering, or the IPO Date (calculated by assuming that the taxable year of the relevant member of the Company Group closes at the end of the IPO Date), and (iii) generally, any tax deductions available to the Company Group that relate to the transaction expenses incurred by the Company Group as a result of the consummation of our initial public offering, regardless of when actually paid or deductible, or such tax attributes, collectively, the TRA Tax Attributes. Under the TRA, generally, we retain the benefit of the remaining 15% of the applicable tax savings.
The actual utilization of the TRA Tax Attributes, as well as the timing of any payments under the TRA, will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future and our use of NOLs. Limitations on the use of the NOLs may apply, including limitations under Section 382 of the Code and any analogous provisions of U.S. state, local, or Dutch tax law.
Payments under the TRA are not conditioned on the TRA Recipients’ continuing to own ordinary shares. In addition, the TRA provides for interest, at a rate equal to LIBOR plus 300 basis points (subject to change if LIBOR is no longer a widely recognized benchmark rate), accrued from the due date (without extensions) of the IRS Form 1120 (or any successor form) for the U.S. members of the Company Group for the applicable taxable year until the date of payment specified by the TRA. Payments under the TRA are based on the tax reporting positions that we determine, consistent with the terms of the TRA. No TRA Recipient is required under any circumstances to make a payment or return a payment to the Company Group in respect of any portion of any payments previously made to such TRA Recipient under the TRA; if it is determined that excess payments have been made under the TRA, certain future payments, if any, otherwise to be made will be reduced. As a result, in certain circumstances, including, for example, if a previously claimed deduction is subsequently disallowed, payments could be made under the TRA in excess of the benefits that we actually realize in respect of the attributes to which the TRA relates.
The terms of the TRA, in certain circumstances, including an early termination, certain changes of control or divestitures, or breaches of any material obligations under it, provide for our (or our successor’s) obligations under the TRA to accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on certain assumptions, including that we would have at such time sufficient taxable income to fully utilize the TRA Tax Attributes. Additionally, if we or any of our subsidiaries transfers any asset to a corporation with which we do not file a consolidated tax return for applicable tax purposes, we will be treated as having sold that asset in a taxable transaction for purposes of determining certain amounts payable pursuant to the TRA. As a result of the foregoing, (i) we could be required to make payments under the TRA that are greater than or less than the specified percentage of the actual tax savings we realize in respect of the TRA Tax Attributes and (ii)
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we may be required to make an immediate lump sum payment equal to the present value of the anticipated future tax savings, which payment may be made years in advance of the actual realization of such future benefits, if any such benefits are ever realized. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of adversely affecting our working capital and growth, and of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control.
Because the issuer of the TRA is a holding company with no operations of its own, our ability to make payments under the TRA is dependent on the ability of our subsidiaries to make distributions to us. The TRA restricts our and our subsidiaries’ ability to enter into any agreement or indenture that would restrict or encumber our ability to make payments under the TRA. To the extent that we are unable to make payments under the TRA, and such inability is a result of the terms of debt documents (including our Initial Senior Secured Credit Facilities or the indenture governing the 2021 Senior Notes), such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points (subject to a 50 bps LIBOR floor and subject to change if LIBOR is no longer a widely recognized benchmark rate) until paid. There can be no assurance that we will be able to finance our obligations under the TRA in a manner that does not adversely affect our working capital and growth requirements.
In connection with the Merger, we, Diversey Holdings I (UK) Limited, a private limited company organized in England and Wales, and BCPE Diamond Cayman Holding Limited, a Cayman Islands exempted corporation, entered into a Tax Receivable Termination Agreement (the "TRA Termination Agreement"), pursuant to which, among other things, the parties agreed to terminate the TRA, effective upon consummation of the Merger. From and after the effective date of the TRA Termination Agreement, no payments will be made to any person in respect of, or pursuant to, the TRA.
We have identified material weaknesses in our internal control over financial reporting, and if our remediation of such material weaknesses is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements, or comply with applicable laws and regulations, could be impaired.
In the course of preparing our consolidated financial statements for fiscal year 2022, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. We identified material weaknesses in the design and operation of controls related to inventory existence and revenue recognition. We have concluded that these material weaknesses arose because our controls were not effectively designed, documented and maintained to ensure the existence of inventory at certain locations and to address the timing of revenue recognition and the completeness and accuracy of information used to estimate and accrue customer rebates.
To address the material weaknesses, we are in the process of enhancing the design of certain internal controls over the inventory and revenue processes by:
•enhancing controls to monitor the frequency and accuracy of cycle count procedures globally;
•enhancing documentation associated with management review controls and validation of the completeness and accuracy of key reports used across the inventory process;
•enhancing controls over inventory existence for inventory located at third-party logistics providers;
•enhancing procedures to ensure completeness and accuracy of key financial data utilized in the calculation of accrued customer rebates;
•enhancing controls to monitor revenue cutoff risk based on the shipping terms in contracts with customers; and
•providing additional training related to validating the accuracy of data used in key review controls and the level of documentation required.
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We will not be able to fully remediate the material weaknesses until these steps have been completed and have been operating effectively for a sufficient period of time. See Part II, Item 9A “Controls and Procedures” for additional information about the material weaknesses and our remediation efforts.
If we are unable to further implement and maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our Ordinary Shares could be adversely affected or we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
Furthermore, we cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to the material weaknesses in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods.
Any failure to implement and maintain effective internal control over financial reporting could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports that are filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors and other parties to lose confidence in our reported consolidated financial statements and other information, which could have a negative effect on the trading price of our Ordinary Shares, the Merger, or our business and operations. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on The Nasdaq Global Select Market.
Item 1B. Unresolved Staff Comments
We have no unresolved comments from the staff of the Securities and Exchange Commission.
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Item 2. Properties.
Our corporate headquarters are located at 1300 Altura Road, Suite 125, Fort Mill, South Carolina in a leased office of approximately 140,000 square feet. We own and lease a variety of facilities and properties, principally in Europe and North America. The following chart identifies the number of owned and leased facilities and properties as well as aggregate approximate square footage by type, other than the corporate headquarters listed above, used by us as of December 31, 2022. We believe that these facilities and properties are generally in good operating condition and are adequate to meet anticipated business requirements.
| Type of Facility or Property | Owned | Leased | Approximate Square Footage | ||||||||
| Manufacturing | 14 | 11 | 2,558,425 | ||||||||
| Office | 5 | 88 | 1,363,146 | ||||||||
| Warehouse | 1 | 35 | 1,016,211 | ||||||||
| Land | 5 | 2 | 537,244 | ||||||||
| Storage | — | 48 | 103,292 | ||||||||
| Service Center | 1 | 11 | 67,913 | ||||||||
| Laboratory | 1 | 3 | 63,946 | ||||||||
| Other | 1 | 17 | 44,466 | ||||||||
| Total | 28 | 215 | 5,754,643 | ||||||||
Item 3. Legal Proceedings
We are party to routine legal proceedings that arise in the ordinary course of our businesses. We believe that none of the claims and complaints of which we are currently aware will, individually or in the aggregate, materially affect our businesses, financial position, or future operating results, although no assurance can be given with respect to the ultimate outcome of any such claims or with respect to the occurrence of any future claims.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Ordinary Shares trade on The Nasdaq Global Select Market under the ticker symbol "DSEY".
Holders of Ordinary Shares
On January 31, 2023, we had 141 holders of record of our Ordinary Shares.
Issuer Purchases of Equity Securities
None.
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Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding equity compensation plans, see Item 12 of Part III of this Annual Report on Form 10-K.
Item 6. [Reserved]
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 the Cayman Islands with limited liability on November 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.
On March 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. On April 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 November 15, 2021, we issued and sold 15,000,000 Ordinary Shares at a public offering price of $15.00 per share, receiving $214.4 million in net proceeds.
Bain Capital beneficially owned approximately 72.9% of our outstanding Ordinary Shares as of December 31, 2022. As a result, we are a “controlled company” within the meaning of the corporate governance standards of The 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. On March 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.
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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 $92.0 million. Upon termination of the Merger Agreement by us under other specified conditions, Parent will be required to pay us a termination fee of $125.0 million.
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 our Diversey 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 in Eastern Europe intensified on February 24, 2022 with Russia’s invasion of Ukraine. The war between the two countries continues to evolve as military activity proceeds and additional economic sanctions are imposed on Russia by numerous countries throughout the world. In addition to the human toll and impact of the war locally in Russia, 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.
The Russia-Ukraine war has exacerbated the current inflationary environment both in Russia, 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 in Russia and the neighboring countries, we may be required to assess whether the economies of those countries have become highly inflationary, in which the U.S. dollar would replace the Russian ruble as the functional currency for our subsidiaries in Russia.
Our business in Russia and Ukraine generates an immaterial percentage of our overall net sales.
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
| (in millions except per share amounts) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 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:
| (in millions) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 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 within Europe and North 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.
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Management fee. Pursuant to a management agreement with Bain Capital, we were obligated to pay Bain 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 in March 2021, pursuant to its terms upon the consummation of our IPO, and we recorded a termination fee of $17.5 million during 2021. We paid Bain 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 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 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 ended December 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 at December 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:
| (in millions) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 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:
| (in millions) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 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 the U.S. dollar, which impacts our U.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 $(35.2) million and the recorded income tax benefit of $(16.2) million was primarily attributable to a net $35.9 million increase in the valuation allowance as a result of changes in the assessment of the realizability of deferred tax assets, offset by a net favorable change of $(25.1) million due to changes to unrecognized tax benefits.
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:
| (in millions) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 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 in Europe due to the Russia-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.
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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 $47.1 million in 2020 to $43.4 million in 2021. The reduction was primarily driven by cost reduction initiatives and controlled discretionary spending.
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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, with U.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 under U.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 with U.S. GAAP, nor should they be considered as alternatives to cash flows from operating activities as a measure of liquidity in accordance with U.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.
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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 under U.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 our U.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
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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 other U.S. GAAP results. Adjusted Net Income and Adjusted EPS are not presentations made in accordance with U.S. GAAP and the use of these terms may vary from other companies in our industry. The most directly comparable U.S. GAAP measure to Adjusted Net Income is net loss and the most directly comparable U.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:
| (in millions) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 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, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||||||||||
| (in millions, except per share amounts) | Net Income (Loss) | Basic and diluted EPS(19) | Net Income (Loss) | Basic and diluted EPS(19) | Net Income (Loss) | Basic and diluted EPS(19) | ||||||||||||||
| Reported (GAAP) | $ | (169.3) | $ | (0.53) | $ | (174.8) | $ | (0.60) | $ | (38.5) | $ | (0.16) | ||||||||
| Amortization expense of intangible assets acquired | 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.
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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 to Bain 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 in March 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 the U.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 March 2021 using proceeds from the IPO.
(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.
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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:
| (in millions) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Change | Year Ended December 31, 2020 | Change | ||||||||||||
| Net cash provided by (used in) operating activities | $ | 33.7 | $ | (88.7) | $ | 122.4 | $ | 103.0 | |||||||||