Univar Solutions Inc.

UNVRCIK 0001494319 · Every Form 4 filed by insiders at this issuer. See financials →

Annual report (10-K)

Latest 10-K filed Feb 22, 2023. Sentiment + YoY language diff vs prior year. Read sections →

Signal:Neutral

Risk Factors:tone -0.0358Δ+0.001190% similar+43/-44 ¶

MD&A:tone 0.0087Δ+0.004270% similar+112/-145 ¶

Sentiment via Loughran-McDonald lexicon · YoY diff via Jaccard similarity + paragraph set difference.

YoY shift: Lean +

Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.26pp more bullish than last year's.

Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.

Tone shift by section

The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.

Risk Factors

+0.11pp

Flat

Net-tone change vs last year's 10-K.

MD&A

+0.42pp

Lean +

Net-tone change vs last year's 10-K.

Per-snippet highlights

Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.

Language change vs prior 10-K

Risk Factors (Item 1A) - words with the biggest YoY frequency increase

Negative rising

adversely+2
failure+2
expose+2
damage+1
loss+1

Positive rising

achieve+3
positively+1
collaboration+1

Risk Factors (Item 1A)

8,062 words

ITEM 1A. RISK FACTORS

The following are certain risk factors that could affect our business, financial condition and results of operations. These risk factors should be considered along with the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results or financial condition to differ materially from those projected in forward-looking statements. Although the risks are organized by headings, and each risk is discussed separately, many are interrelated. The following discussion is not an all-inclusive listing of risks, although we believe these are the more material risks that we face. If any of the following occur, our business, financial condition and results of operations could be adversely affected.

Business and Economic Risks

We are affected by general economic conditions, particularly fluctuations in industrial production and consumption, and an economic downturn could adversely affect our business, financial condition and results of operations.

We sell chemicals that are used in manufacturing processes and as components of or ingredients in other products. Our sales are correlated with and affected by fluctuations in the levels of industrial production, manufacturing output and general economic activity. Producers of commodity and specialty chemicals are likely to reduce their output in periods of significant contraction in industrial and consumer demand, while demand for the products we distribute depends largely on trends in demand in the end markets our customers serve. A majority of our sales are in North America and Europe and our business is therefore susceptible to downturns in those economies, as well as, to a lesser extent, the economies in the rest of the world.

Our profit margins, as well as overall demand for our products and services, could decline as a result of a large number of factors outside our control, including the impact of pandemics and other public-health emergencies, economic recessions, reduced customer demand (whether due to changes in production processes, consumer preferences, the industries in which the customer operates, laws and regulations affecting the chemicals industry and the manner in which they are enforced, or other factors), inflation, fluctuations in interest and currency exchange rates, and changes in the fiscal or monetary policies of governments in the regions in which we operate. For example, the COVID-19 pandemic caused growth in certain of our end markets, such as in homecare and industrial cleaning and pharmaceuticals, while other end markets, such as the upstream refining market, were materially and adversely affected.

General economic conditions and macroeconomic trends, as well as the creditworthiness of our customers, could affect overall demand for chemicals. Any overall decline in the demand for chemicals could significantly reduce our sales and profitability. If the creditworthiness of our customers declines, we would face increased credit risk. In addition, volatility and disruption in financial markets could adversely affect our sales and results of operations by limiting our customers’ ability to obtain financing necessary to maintain or expand their own operations.

A historical feature of past economic weakness has been significant destocking of inventories, including inventories of chemicals used in industrial and manufacturing processes. It is possible that an improvement in our net sales in a particular period may be attributable in part to restocking of inventories by our customers and represent a level of sales or sales growth that will not be sustainable over the longer term. Further economic weakness could lead to insolvencies among our customers or producers, as well as among financial institutions that are counterparties on financial instruments or accounts that we hold. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.

Significant changes in the business strategies of producers or in the operations of our customers could adversely affect our business, financial condition and results of operations.

Significant changes in the business strategies of producers could disrupt our supply. Large chemical manufacturers may elect to sell certain products (or products in certain regions) directly to customers or utilize digital marketplaces, bypassing distributors such as us. While we do not believe that our results depend materially on access to any individual producer’s products, a reversal of the trend toward more active use of distributors would likely result in increasing margin pressure or products becoming unavailable to us.

In addition, unpredictable events may have a significant impact on the industries in which many of our customers operate, reducing demand for products that we normally distribute in significant volumes. Significant disruptions of supply and disruptions in customer industries could have a material adverse effect on our business, financial condition and results of operations.

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The markets in which we operate are highly competitive and we may not be able to compete successfully.

The chemical and ingredient distribution and services market is highly competitive. Chemicals can be purchased from a variety of sources, including traders, brokers, wholesalers and other distributors, as well as directly from producers. Many of the products we distribute or finish are essentially fungible with products offered by our competitors, including emerging competitors. The competitive pressure we face is particularly strong in sectors and markets where local competitors have strong positions or where new competitors can easily enter. Increased competition from distributors of products similar to or competitive with ours could result in price reductions, reduced margins and a loss of market share.

We expect to continue to experience significant and increasing levels of competition in the future. We must also compete with smaller companies that have been able to develop strong local or regional customer bases. In certain countries, some of our competitors are more established, benefit from greater name recognition and have greater resources within those countries than we do.

Consolidation of our competitors in the markets in which we operate could place us at a competitive disadvantage and reduce our profitability.

We operate in an industry that is highly fragmented on a global scale, but in which there has been a trend toward consolidation in recent years. Consolidation of our competitors may also further enhance their financial position, provide them with the ability to offer more competitive prices to customers for whom we compete and allow them to achieve increased efficiencies in their consolidated operations that enable them to more effectively compete for customers. This may jeopardize the strength of our positions in one or more of the markets in which we operate and any advantages we currently enjoy due to the comparative scale of our operations. Losing some of those advantages could adversely affect our business, financial condition and results of operations, as well as our growth potential.

Disruption of our supply chain due to various acute or severe causes could have an adverse effect on our business, financial condition and results of operations.

In coordination with our suppliers, our ability to move and sell products is critical to our success. Damage or disruption to our collective supply or distribution capabilities resulting directly or indirectly from pandemics and other public-health emergencies, labor shortages, border closures, natural disasters, weather and physical climate change related events, lack of transportation capacity, increased fuel expenses, global trade flow disruption, increased airport and shipping port congestion, climate change, plant downtime (whether our own or others’), power outages, explosions, information technology system and/or network disruptions, terrorism, strikes or other labor unrest, or other reasons could seriously harm our operations, as well as the operations of our customers and suppliers. Failure to take adequate steps to reduce the likelihood or mitigate the potential impact of any of these events, or to effectively manage such events if they occur, could have a negative impact on our business, results of operations, financial condition and cash flows.

Some of the foregoing examples are hypothetical, but others have been or are being experienced by the Company. For example, during 2020 and 2021, the COVID-19 pandemic, weather events and supply constraints impacted, and we expect will continue to impact, our operations. The combination of supplier shut-downs, port congestion, acute pandemic recovery demand and the Russia-Ukraine conflict have resulted in sustained supply chain constraints, product shortages and chemical price inflation. In some instances, we have placed certain of our products on allocation due to limited supplies.

The prices and costs of the products we purchase may be subject to large and significant price increases. We might not be able to pass such cost increases through to our customers. We could experience financial losses if our inventories of one or more chemicals exceed our sales and the price of those chemicals decreases significantly while in our inventories or if our inventories fall short of our sales and the purchase price of those chemicals increases significantly.

We purchase and sell a wide variety of chemicals, the price and availability of which may fluctuate, and may be subject to large and significant price increases. For example, ongoing shortages across a range of chemicals and ingredients have generally led to fluctuations in chemical prices globally. Many of our contracts with producers include chemical prices that are not fixed or are tied to an index, which allows our producers to change the prices of the chemicals we purchase as the price of the chemicals fluctuates in the market. Changes in chemical prices affect our net sales and cost of goods sold, as well as our working capital requirements, levels of debt and financing costs. We might not always be able to reflect increases in our chemical costs, transportation costs and other costs in our own pricing. Any inability to pass cost increases onto customers may adversely affect our business, financial condition and results of operations.

In order to meet customer demand, we typically maintain significant inventories, and we are therefore subject to a number of risks associated with our inventory levels, including the following:

• declines in the prices of chemicals that are held by us;

• the need to maintain a significant inventory of chemicals that may be in limited supply and therefore difficult to procure;

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• buying chemicals in bulk for the best pricing and thereby holding excess inventory;

• responding to the fluctuating demand for chemicals;

• cancellation of customer orders; and

• responding to customer requests for rapid delivery.

In order to manage our inventories successfully, we must estimate demand from our customers and purchase chemicals that substantially correspond to that demand. If we overestimate demand and purchase too much of a particular chemical, we face a risk that the price of that chemical will fall, leaving us with inventory that we cannot sell profitably or have to write down such inventory from its recorded value. If we underestimate demand and purchase insufficient quantities of a particular chemical and prices of that chemical rise, we could be forced to purchase that chemical at a higher price and forego profitability in order to meet customer demand. Our business, financial condition and results of operations could suffer a material adverse effect if either or both of these situations occur frequently or in large volumes.

We require significant working capital, and we expect our working capital needs to increase in the future, which could result in having lower cash available for, among other things, capital expenditures and acquisition financing.

We require significant working capital to purchase chemicals from chemical producers and distributors and sell those chemicals efficiently and profitably to our customers. Our working capital needs may increase if the price of products we purchase and inventory increase. Our working capital needs also increase at certain times of the year, as our customers’ requirements for chemicals increase. We need inventory on hand to have product available to ensure timely delivery to our customers. If our working capital requirements increase and we are unable to finance our working capital on terms and conditions acceptable to us, we may not be able to obtain chemicals to respond to customer demand, which could result in a loss of sales.

In addition, the amount of working capital we require to run our business is expected to increase in the future due to expansions in our business activities. Disruptions in our supply chain could also create the need to invest additional working capital in on-hand inventory than in prior years. If our working capital needs increase, the amount of free cash we have at our disposal to devote to other uses will decrease. A decrease in free cash could, among other things, limit our flexibility, including our ability to make capital expenditures and to acquire suitable acquisition targets that we have identified. If increases in our working capital occur and have the effect of decreasing our free cash, it could have a material adverse effect on our business, financial condition and results of operations.

We depend on transportation assets, some of which we do not own, in order to deliver products to our customers.

Although we maintain a significant portfolio of owned and leased transportation assets, including trucks, trailers and rail cars, we also rely on transportation and warehousing provided by third parties (including common carriers and rail companies) to deliver products to our customers. Our access to third party transportation is not guaranteed, and we may be unable to transport chemicals at economically attractive rates in certain circumstances, particularly in cases of adverse market conditions or disruptions to transportation infrastructure. In addition, we could face a challenge with attracting and retaining qualified drivers primarily due to intense market competition, which may subject us to increased payments for driver compensation. If we are unable to continue to attract and retain a sufficient number of drivers, we could face difficulty meeting customer orders or be forced to forego business that would otherwise be available to us, which could adversely affect our profitability and ability to maintain or grow our business. We are also subject to increased costs that we may not always be able to recover from our customers, including fuel prices, as well as charges imposed by common carriers, leasing companies and other third parties involved in transportation.

Accidents, safety failures, environmental damage, product quality issues, delivery failures or hazards and risks related to our operations and the hazardous materials we blend, manage, handle, store, sell, transport or dispose of could damage our reputation and result in substantial damages or remedial obligations.

Our business depends to a significant extent on our customers’ and producers’ trust in our reputation for reliability, quality, safety and environmental responsibility. Actual or alleged instances of safety deficiencies, mistaken or incorrect deliveries, inferior product quality, exposure to hazardous materials resulting in illness, injury or other harm to persons, property or natural resources, or of damage caused by us or our products, could damage our reputation and lead to customers and producers curtailing the volume of business they do with us. Also, there may be safety, personal injury or other environmental risks related to our products which are not known today. Any of these events, outcomes or allegations could also subject us to substantial legal claims, and we could incur substantial expenses, including legal fees and other costs, in defending such legal claims, which could materially impact our financial position and results of operations.

Actual or alleged accidents or other incidents at our facilities or that otherwise involve our personnel or operations could also subject us to claims for damages by third parties. Because many of the chemicals that we handle are dangerous, we are subject to the ongoing risk of hazards, including leaks, spills, releases, explosions and fires, which may cause property damage, illness, physical injury or death. We sell products used in hydraulic fracturing, a process that involves injecting water, sand and chemicals into subsurface rock formations to release and capture oil and natural gas. The use of such hydraulic fracturing fluids

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by our customers may result in releases that could impact the environment and third parties. Several of our distribution facilities are located near, and our transportation routes could take us through, high-density population centers. If any such events occur, whether through our own fault, through preexisting conditions at our facilities, through the fault of a third party or through a natural disaster, terrorist incident or other event outside our control, our reputation could be damaged significantly. We could also become responsible, as a result of environmental or other laws or by court order, for substantial monetary damages or expensive investigative or remedial obligations related to such events, including but not limited to those resulting from third party lawsuits or environmental investigation and cleanup obligations on and off-site. The amount of any costs, including fines, damages and/or investigative and remedial obligations, that we may become obligated to pay under such circumstances could substantially exceed any insurance we have to cover such losses.

Any of these risks, if they materialize, could have a material adverse effect on our business, financial condition and results of operations.

Our business exposes us to significant risks, not all of which are covered by insurance.

Because we are engaged in the blending, managing, handling, storing, selling, transporting and disposing of chemicals, chemical waste products and other hazardous materials, product liability, health impacts, fire damage, safety, cyber security and environmental risks are significant concerns for us. We are also exposed to present and future chemical exposure claims by employees, contractors on our premises and other persons located nearby, as well as related workers' compensation claims. Although we carry insurance to protect us against many risks involved in the conduct of our business, we do not insure against all such risks and the insurance we carry is subject to limitations, including exclusions, deductibles and coverage limits. Due to the variable condition of the insurance market, we have experienced and may experience in the future, increased deductible retention levels and increased premiums. We also may be unable to obtain at commercially reasonable rates in the future adequate insurance coverage for the risks we currently insure against, and certain risks are or could become completely uninsurable or eligible for coverage only to a reduced extent. Increased insurance premiums or the occurrence of significant uncovered losses could have a material adverse effect on our business, financial condition and results of operations.

Changes in tax laws may materially adversely affect our business, prospects, financial condition and operating results.

New income, sales, use, product or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely affect our business, financial condition and results of operations. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. Recently enacted changes to the US federal tax regime could impact our tax liability and cash tax payments. Most notably, in July 2022 excise taxes were imposed on a number of commodity chemical products impacting our overall costs.

Our businesses are subject to income taxation in the US as well as internationally. The Company’s operations are subject to multiple, and sometimes conflicting tax laws and regulations. Recently, many countries have adopted, or are considering revisions to their existing tax laws based on recommendations issued by the Organization for Economic Co-operation and Development/G20 Base Erosion and Profit Shifting Project. These changes could materially impact our tax liability because of our organizational structure and significant international operations.

We have in the past and may in the future make acquisitions, ventures and strategic investments, some of which may be significant in size and scope, which have involved in the past and will likely involve in the future numerous risks. We may not be able to address these risks without substantial expense, delay or other operational or financial problems.

Acquisitions or investments have involved in the past and will likely involve in the future various risks, such as:

• integrating the technologies, operations and personnel of any acquired business;

• the potential disruption of our ongoing business, including the diversion of management attention;

• the possible inability to obtain the desired financial and strategic benefits from the acquisition or investment;

• customer attrition arising from preferences to maintain redundant sources of supply;

• producer attrition arising from overlapping or competitive products;

• assumption of contingent or unanticipated liabilities or regulatory liabilities;

• dependence on the retention and performance of existing management and work force of acquired businesses for the future performance of these businesses;

• regulatory risks associated with acquired businesses (including the risk that we may be required for regulatory reasons to dispose of a portion of our existing or acquired businesses); and

• the risks inherent in entering geographic or product markets in which we have limited prior experience.

Future acquisitions and investments may need to be financed in part through additional financing from banks, through public offerings or private placements of debt or equity securities or through other arrangements, and could result in substantial cash expenditures. The necessary acquisition financing may not be available to us on acceptable terms if and when required, particularly if our debt leverage levels make it difficult or impossible for us to secure additional financing for acquisitions.

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Our balance sheet includes significant goodwill and intangible assets, the impairment of which could affect our future financial condition and results of operations .

We carry significant goodwill and intangible assets on our balance sheet. As of December 31, 2022, our goodwill and intangible assets totaled $2,288.2 million and $167.0 million, respectively. At least annually, the Company assesses goodwill for impairment. If testing indicates that goodwill is impaired, the carrying value is written down based on fair value with a charge against earnings. Weakened demand for a specific product line or business could result in an impairment. Intangible assets are amortized for book purposes over their respective useful lives and are tested for impairment if any event occurs or circumstances change that indicates that carrying value may not be recoverable. Accordingly, any determination requiring the write-off of a significant portion of goodwill or intangible assets could negatively impact the Company's financial condition and results of operations. See “Note 2: Significant accounting policies” in Item 8 of this Annual Report on Form 10-K for a discussion of our 2022 impairment review.

Risks Related to Technology

Our business could be seriously impacted by cybersecurity incidents, including security breaches.

Cyber-attacks or security breaches could compromise confidential, business critical information, private information including without limitation the personally identifiable information ("PII") of our employees or business partners, cause a disruption in the Company’s operations or harm the Company’s reputation. During the normal course of business, we have experienced and expect to continue to experience attempts to compromise our information technology and control systems, network infrastructure and other assets. To date, no cybersecurity incident or attack has had a material impact on our business or results of operations. Additionally, the increase in remote working as a result of the COVID-19 pandemic has resulted in increased cyber-security and fraud risks. There can be no assurance that the Company's cyber-security programs, procedures, controls and intelligence will be sufficient to prevent security breaches from occurring. Moreover such programs are costly to maintain and it is expected that such costs will increase over time. If any security breaches were to occur, they could lead to losses of sensitive information (including without limitation PII), critical infrastructure or capabilities essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations or cash flows, and could result in claims being brought against us.

Risks Related to Our Indebtedness

Our level of indebtedness may adversely affect our business, financial condition and results of operations.

As of December 31, 2022, we had $2,465.8 million of total debt. Our level of indebtedness, as well as any additional debt or other obligations that we may incur in the future, may have material adverse effects on our business, financial condition and results of operations, and could have important consequences for holders of our common stock. Examples of potential issues associated with our level of indebtedness that could materially and adversely affect our business or financial condition include:

• our ability to satisfy obligations to lenders or noteholders may become impaired by downturns in our business or other factors, resulting in possible defaults on and acceleration of our indebtedness;

• additional financing for refinancing of existing indebtedness, working capital, capital expenditures, product and service development, acquisitions, general corporate purposes and other purposes may not be available when required on acceptable terms or at all;

• our assets that currently serve as collateral for our debt may be insufficient, or may not be available, to support future financings;

• a substantial portion of our cash flow from operations may need to be used to repay the principal and interest on our debt;

• we may be increasingly vulnerable to economic downturns and increases in interest rates;

• our flexibility in planning for and reacting to changes in our business and the markets in which we operate may be limited; and

• we may be placed at a competitive disadvantage relative to other companies in our industry with less debt or comparable debt with more favorable terms.

The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them.

The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior ABL Facility includes a springing financial covenant as set forth in the governing agreement.

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Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, the pricing of our products, our success at implementing cost reduction initiatives, our ability to successfully implement our overall business strategy or changes in general economic conditions, many of which may be beyond our control. The breach of any of these financial and operating covenants could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. This could have serious consequences on our business, financial condition and results of operations and could require us to engage in restructuring activities. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility.

Increases in interest rates would increase the cost of servicing our debt and could reduce our profitability.

Certain of our outstanding debt bears interest at variable rates. As a result, increases in interest rates would increase the cost of servicing our debt and could materially reduce our profitability and cash flows. As of December 31, 2022, approximately 78% of our debt is indexed to the London Inter-Bank Offered Rate ("LIBOR") or the Secured Overnight Financing Rate ("SOFR") as benchmarks for establishing rates and we hold other operational contracts, including leases, that are also indexed to LIBOR or SOFR.

The potential consequences to our current or future debt obligations and hedging instruments from the reform of LIBOR as it converts and is replaced with the SOFR implementation of alternative reference rates, and any interest rate transition process may adversely affect the cost of servicing our debt. For additional information on our indebtedness, debt service obligations and sensitivity to interest rate fluctuations, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of this Annual Report on Form 10-K.

We may have future capital needs and may not be able to obtain additional financing on acceptable terms, or at all.

We have historically relied on debt financing to fund our operations, capital expenditures and expansion. The macroeconomic conditions that affect the markets in which we operate, and our credit ratings, could have a material adverse effect on our ability to secure financing on acceptable terms, if at all. The terms of additional financing may limit our financial and operating flexibility, and if financing is not available when needed, or is not available on acceptable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.

Litigation, Environmental and Regulatory Risk

As a result of our current and past operations, we are subject to extensive environmental, health and safety laws and regulations, which expose us to risks that could have a material adverse effect on our business, financial condition and results of operations.

We are subject to extensive environmental, health and safety laws and regulations in multiple jurisdictions because we blend, manage, handle, store, sell, transport and arrange for the disposal of chemicals, hazardous materials and hazardous waste. These include laws and regulations governing our management, storage, transportation and disposal of chemicals; product regulation; air, water and soil contamination; activities related to climate change; and the investigation and cleanup of contaminated sites, including any spills or releases that may result from our management, handling, storage, sale, or transportation of chemicals and other products. Compliance with these laws and regulations, and with the permits and licenses we hold, requires that we expend significant amounts for ongoing compliance, investigation and remediation. If we fail to comply with such laws, regulations, permits or licenses, we may be subject to fines, damages and other civil, administrative or criminal sanctions and investigations, including the revocation of permits and licenses necessary to continue our business activities. In addition, future changes in laws and regulations, or the interpretation of existing laws and regulations, could have an adverse effect on us by adding restrictions, reducing our ability to do business, increasing our costs of doing business, reducing our profitability or reducing the demand for our products.

Previous operations, including those of acquired companies, have resulted in contamination at a number of current and former sites, which must be investigated and remediated. We have ongoing investigations and remediation activities, or are contributing to cleanup costs, at approximately 128 currently or formerly owned, operated or used sites or other sites impacted by our operations. We have spent substantial sums on such investigation and remediation and we expect to continue to incur such expenditures in the future. We may incur losses in connection with investigation and remediation obligations that exceed our environmental liabilities. There is no guarantee that our estimates will be accurate, that new contamination will not be

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discovered or that new environmental laws or regulations will not require us to incur additional costs. Any such inaccuracies, discoveries or new laws or regulations, or the interpretation of existing laws and regulations, could have a material adverse effect on our business, financial condition and results of operations.

We could be held liable for the costs to investigate, remediate or otherwise address contamination at any real property we have ever owned, leased, operated or used or other sites impacted by our operations. Some environmental laws could impose on us the entire cost of cleanup of contamination present at a site even though we did not cause all of the contamination. These laws often identify parties who can be strictly and jointly and severally liable for remediation. The discovery of previously unknown contamination at current or former sites or the imposition of other environmental liabilities or obligations in the future, including additional investigation or remediation obligations with respect to contamination that has impacted other properties, could lead to additional costs or the need for additional accruals that have a material adverse effect on our business, financial condition and results of operations. In addition, we may be required to pay damages or civil judgments related to third party claims, including those relating to personal injury (including exposure to hazardous materials or chemicals we blend, handle, store, sell, transport or dispose of), product quality issues, property damage or contribution to remedial obligations. We have been identified as a potentially responsible party at certain third party sites at which we have arranged for the disposal of our hazardous wastes. We may be identified as a potentially responsible party at additional sites beyond those for which we currently have financial obligations. Such developments could have a material adverse effect on our business, financial condition and results of operations.

Societal concerns regarding the safety of chemicals in commerce and their potential impact on the environment have resulted in a growing trend towards increasing levels of product safety and environmental protection regulations. These concerns could influence public perceptions, impact the commercial viability of the products we sell and increase the costs to comply with increasingly complex regulations, which could have a negative impact on our business, financial condition and results of operations. Additional findings by government agencies that chemicals pose significant environmental, health or safety risks may lead to their prohibition in some or all of the jurisdictions in which we operate.

Our business exposes us to potential product liability claims and recalls, which could adversely affect our business, financial condition and results of operations.

The repackaging, blending, mixing, manufacturing, sale and distribution of chemical products by us, including products used for food, pharmaceutical and nutritional supplement applications, involve an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity and reputational harm. A product liability claim, judgment or recall against our customers could also result in substantial and unexpected expenditures for us, affect confidence in our products or services and divert management’s attention from other responsibilities. Although we maintain product liability insurance, there can be no assurance that the type or level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on our business, financial condition and results of operations.

Many of the products we sell have “long-tail” exposures, giving rise to liabilities many years after their sale and use. Insurance purchased at the time of sale may not be available when costs arise in the future and producers may no longer be available to provide indemnification.

International Market Risk

Our results of operations could suffer if we are unable to expand into new geographic markets or manage the various risks related to our international activities.

Our profitability and longer-term success may be adversely affected if we fail to continue to expand our penetration in certain foreign markets and to enter new and emerging foreign markets. The profitability of our international operations will largely depend on our continued success in the following areas:

• securing key producer relationships to help establish our presence in international markets;

• hiring and training personnel capable of supporting producers and our customers and managing operations in foreign countries;

• localizing our business processes to meet the specific needs and preferences of foreign producers and customers;

• building our reputation and awareness of our services among foreign producers and customers; and

• implementing new financial, management information and operational systems, procedures and controls to monitor our operations in new markets effectively, without causing undue disruptions to our operations and customer and producer relationships.

In addition, we are subject to risks associated with operating in foreign countries, including:

• varying and often unclear legal and regulatory requirements that may be subject to inconsistent or disparate enforcement, particularly regarding environmental, health and safety issues and security or other certification

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requirements, as well as other laws and business practices that favor local competitors, such as exposure to possible expropriation, nationalization, restrictions on investments by foreign companies or other governmental actions;

• less stable supply sources;

• regional conflicts that may result in supply chain disruptions;

• competition from existing market participants that may have a longer history in and greater familiarity with the foreign markets where we operate;

• tariffs, export duties, quotas and other barriers to trade; as well as possible limitations on the conversion of foreign currencies into US dollars or remittance of dividends and other payments by our foreign subsidiaries;

• divergent labor regulations and cultural expectations regarding employment and agency;

• different cultural expectations regarding industrialization, international business and business relationships;

• foreign taxes and related regulations, including foreign taxes that we may not be able to offset against taxes imposed upon us in the US, and foreign tax and other laws limiting our ability to repatriate earnings to the US;

• extended payment terms and challenges in our ability to collect accounts receivable;

• changes in a specific country’s or region’s political or economic conditions;

• compliance with anti-bribery laws such as the US Foreign Corrupt Practices Act, the UK Bribery Act and similar anti-bribery laws in other jurisdictions, the violation of which could expose us to severe criminal or civil sanctions; and

• compliance with anti-boycott, privacy, economic sanctions, anti-dumping, antitrust, import and export laws and regulations by our employees or intermediaries acting on our behalf, the violation of which could expose us to significant fines, penalties or other sanctions.

Fluctuations in currency exchange rates may adversely affect our results of operations.

We have sizable sales and operations in Canada, Europe, Middle East, Africa, Asia and Latin America. We report our consolidated results in US dollars and the results of operations and the financial position of our local operations are generally reported in the relevant local currencies and then translated into US dollars at the applicable exchange rates. As a result, our financial performance is impacted by currency fluctuations. For additional details on our currency exposure and risk management practices, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of this Annual Report on Form 10-K.

Employee and Benefit Plan Risk

We may be unable to attract or retain a qualified and diverse workforce.

We depend upon the ability and experience of a number of our executive management and other key personnel who have substantial experience with our operations, the chemicals and chemical distribution industries and the selected markets in which we operate. The loss of the services of one or a combination of our senior executives or key employees could have a material adverse effect on our results of operations. We also might suffer an additional impact on our business if one of our senior executives or key employees is hired by a competitor.

In addition, our ability to achieve our operating goals depends upon our ability to recruit, hire, retain and develop qualified and diverse personnel to operate and expand our businesses. We compete with other companies both within and outside of our industry for talented personnel. If we fail to hire, retain and develop a sufficient number of qualified and diverse employees to operate and expand our businesses, our businesses, financial condition, results of operations and cash flows could be harmed. The COVID-19 pandemic and its aftermath contributed to fewer workers participating in the workforce than in February 2020. We expect we will continue to experience labor shortages, which has negatively impacted, and we expect will continue to negatively impact, our businesses, financial condition, results of operations and cash flows.

Negative developments affecting our pension and multi-employer pension plans in which we participate may occur.

We operate a number of pension plans for our employees and have obligations with respect to several multi-employer pension plans sponsored by labor unions in the US. The terms of these plans vary from country to country. The recognition of costs and liabilities associated with the Company's pension plans are affected by assumptions made by management and used by actuaries engaged by us to calculate the benefit obligations and the expenses recognized for these plans. The inputs used in developing the required estimates are calculated using a number of assumptions, which represent management’s best estimate of the future. The assumptions that have the most significant impact on costs and liabilities are the discount rate, the expected long-term return on plan assets for the funded plans, retirement rates and mortality rates. Changes to the funded status of our pension plans as a result of updates to actuarial assumptions and actual experience that differs from our estimates are recognized as gains or losses in the period incurred under our “mark to market” accounting policy, and could result in a requirement for additional funding.

As of December 31, 2022, our pension plans were underfunded by $82.7 million. Rising interest rates have positively impacted the funded status of our pension plans. When interest rates decline, funding requirements for our pension plans may become more significant. If our cash flows and capital resources are insufficient to fund our obligations under these pension plans, we

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could be forced to reduce or delay investments and capital expenditures, seek additional capital, or incur indebtedness. The Central States, Southeast and Southwest Areas Pension Plan ("Central States Pension Fund") union sponsored multi-employer pension plan in which we participated until 2021 is also underfunded. While we have recorded an estimated withdrawal liability associated with leaving this plan, changes to that estimate could force us to reduce or delay investments and capital expenditures, seek additional capital or incur indebtedness.

A portion of our workforce is unionized and labor disruptions could decrease our profitability.

As of December 31, 2022, approximately 24% of our labor force is covered by a collective bargaining agreement, including approximately 12%, 46% and 24% of our labor force in the US, Europe and Canada, respectively. Approximately 1% of our labor force is covered by a collective bargaining agreement that will expire within one year. These arrangements grant certain protections to employees. We cannot guarantee that we will be able to negotiate these or other collective bargaining agreements or arrangements with works councils on the same or more favorable terms as the current agreements or arrangements, or at all, and without interruptions, including labor stoppages at the facility or facilities subject to any particular agreement or arrangement. A prolonged labor dispute, which could include a work stoppage, could have a material adverse effect on our business, financial condition and results of operations.

Environmental, Social, and Governance Risks

Our ability to execute on our initiatives and goals related to environmental, social, and governance (ESG) matters and the increasing legal and regulatory focus on ESG could have a material adverse effect on our business, financial condition and results of operations.

We have announced a number of ESG initiatives and goals, which may require ongoing investment to execute, and there is no assurance that we will achieve any of these goals or that our initiatives will achieve their intended outcomes. In addition, our ability to implement some of our strategies and goals may be dependent on external factors out of our control such as third-party collaboration, scientific and technological developments, and the availability of economically feasible solutions at scale. A failure to achieve our goals could expose our business to reputational damage and have a material adverse effect on our business, financial condition or results of operations.

US and international regulators, investors and other stakeholders are increasingly focused on ESG matters and new domestic and international laws and regulations relating to ESG matters are under consideration. Such laws and regulations could affect the output of producers of commodity and specialty chemicals as well as demand in the end markets our customers serve. Responding to any such laws and regulations could require us to incur additional expenditures to either purchase new, or modify existing, equipment or processes, and the implementation of new practices and reporting processes could introduce additional compliance risk. In addition, any such laws and regulations could expose us to fines, litigation and increased tax responsibilities, and negatively impact our ability to compete with companies situated in geographies not subject to such limitations. A failure to meet the increasing ESG expectations of our investors and customers could also lead to market share loss.

Risks Related to Our Common Stock

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

Our Certificate of Incorporation and Bylaws include a number of provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. For example, our Certificate of Incorporation and By-laws currently:

• authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to thwart a takeover attempt;

• limit the ability of stockholders to act by written consent or call a special meeting; and

• establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts in the future. These provisions may also facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.

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General Risk Factors

Our business is subject to additional general regulatory requirements, which increase our cost of doing business, could result in claims and enforcement actions and could restrict our business in the future.

Our general business operations are subject to a broad spectrum of international, federal, state and local laws and regulations, including, without limitation, those relating to antitrust, environmental, food and drug, labor and human resources, tax, trade compliance, unclaimed property, transportation, anti-bribery, banking and treasury, privacy and data protection (including the European Union's General Data Protection Regulation), among others. These laws and regulations add cost to our conduct of business and could, in some instances, result in claims or enforcement actions or could reduce our ability to pursue business opportunities. Any changes in the laws and regulations applicable to us, the enactment of any additional laws or regulations, or the failure to comply with, or increased enforcement activity of, such laws and regulations, could significantly impact our products and services and have a material adverse effect on our business, financial condition and results of operations. Additionally, governmental agencies may refuse to grant or renew our operating licenses and permits.

We are exposed to litigation and other legal and regulatory actions and risks in the ordinary course of our business, and we could incur significant liabilities and substantial legal fees.

Especially because of the nature of our business, we are subject to the risk of litigation, other legal claims and proceedings, and regulatory enforcement actions in the ordinary course of our business. Also, there may be safety or personal injury risks related to our products which are not known today. The results of legal proceedings cannot be predicted with certainty. We cannot guarantee that the results of current or future legal proceedings will not materially harm our business, reputation or brand, nor can we guarantee that we will not incur losses in connection with current or future legal proceedings that exceed any provisions we may have set aside in respect of such proceedings or that exceed any applicable insurance coverage. The occurrence of any of these events could have a material adverse effect on our business, financial condition or results of operations.

Language change vs prior 10-K

MD&A (Item 7) - words with the biggest YoY frequency increase

Negative rising

restated+2
disrupted+1
concern+1
decline+1
dampen+1

Positive rising

gain+2
opportunities+2
favorable+1
effective+1
strength+1

MD&A (Item 7)

7,814 words

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is based on financial data derived from the financial statements prepared in accordance with US GAAP and certain other financial data that is prepared using non-GAAP measures. For a reconciliation of each non-GAAP financial measure to its most comparable GAAP measure, see the “Analysis of Segment Results” and “Non-GAAP Financial Measures” sections within this Item. Refer to “Non-GAAP Financial Measures” within this Item for more information about our use of Non-GAAP financial measures.

Our MD&A is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. This section of this Annual Report on Form 10-K discusses year-to-year comparisons between 2022 and 2021. For discussions of year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K, please refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022.

Overview

Univar Solutions Inc. is a leading global solutions provider to users of specialty ingredients and chemicals and provider of value-added services to customers across a wide range of diverse industries. We purchase chemicals and ingredients from thousands of producers worldwide and warehouse, repackage, blend, dilute, transport and sell them to nearly 100,000 customer locations across approximately 120 countries.

Our operations are structured into four reportable segments that represent the geographic areas under which we operate and manage our business. As previously defined within Item 1 of this Annual Report on Form 10-K, our segments are USA, EMEA, Canada and LATAM, which includes developing businesses in Latin America and the Asia-Pacific region.

Factors Affecting Comparability of Results

Acquisitions and Divestitures

In July 2022, we acquired Vicom, a leading regional specialty chemicals distributor in Spain and Portugal.

In December 2021, we acquired Sweetmix, a food ingredients and CASE specialty chemical distribution company in Brazil.

In April 2021, we sold the Distrupol business within our EMEA segment. The sale of this business did not meet the criteria to be classified as discontinued operations in our consolidated financial statements.

See "Note 3: Business combinations" and "Note 4: Dispositions" in Item 8 of this Annual Report on Form 10-K for additional information regarding the acquisitions and divestiture noted above.

Constant Currency

We believe providing information on a non-GAAP constant currency basis offers valuable supplemental information regarding our results of operations, consistent with how we evaluate our performance. Currency impacts on consolidated and segment results have been derived by translating current period financial results in local currency using the average exchange rate for the prior period to which the financial information is being compared.

Inflation Reduction Act

On August 16, 2022, the Inflation Reduction Act ("IRA") was enacted into US law. Effective for tax years beginning after December 31, 2022, the IRA imposes a 15% corporate minimum tax, a 1% excise tax on share repurchases, and creates and extends certain tax-related energy incentives. Management does not expect the tax-related provisions of the IRA to have a material impact on the Company's consolidated financial statements.

Market Conditions

We sell commodity and specialty chemicals and ingredients that are used in manufacturing processes and as components in other products. Our sales are correlated with and affected by seasonal fluctuations and cycles in the levels of industrial production, manufacturing output and general economic activity. The current business environment in the markets in which we operate consists of complex dynamics. A combination of factors has impacted and disrupted global trade flows, which has resulted in differing pricing conditions, in different end markets, in different geographies. The duration of these dislocated and imbalanced conditions is unknown.

These market factors have also impacted the transportation market and, coupled with continued energy price pressure, driver shortages and inflation, have resulted in higher operating costs. Additionally, shortages across a range of chemicals and ingredients have generally led to fluctuations in chemical prices globally, with corresponding impacts to sales and profits.

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Investments in working capital to bridge supply disruption and account for higher chemical prices may impact our ability to achieve forecasted cash flows in the short-term.

In such a dynamic environment, we believe remaining connected with our customers to understand demand and supply impacts on their operations is critical to our success. We believe our value as a distributor is heightened in the current environment as we work to meet demand requirements through our extensive network, installed asset base, transportation and digital assets, and supplier partnerships, supported by our network of Solution Centers and technically-trained professionals with deep industry knowledge.

A summary of our sales channel and underlying end market performance as of December 31, 2022, with corresponding impacts from the current environment are as follows (percentages represent 2022 Consolidated Net sales):

Chemicals and Services (66%) - Our Chemicals and Services sales channel saw strong growth over the course of the year with many of the core industries seeing accelerated demand and resilient pricing. Our continued focus on putting the customer at the center of all we do has led to above-market growth in chemical manufacturing, mining and energy. Our complete offering of water treatment chemistries allows us to provide both municipalities and industrial customers with solutions for managing and purifying water. We are beginning to accelerate our offerings into the North American electronics market, with high-purity chemistries necessary for manufacturing microchips. Additionally, we saw growth in agricultural chemistries, pulp and paper and in general manufacturing. Our services business had top-line growth as we improved our service capabilities and we saw a slight rebound in automotive manufacturing. The recent rise in interest rates causes us some concern that global industrial production decline may dampen the demand for our products; however, we anticipate a higher value on increased carrying costs of working capital.

Ingredients and Specialties (34%) - Our Ingredients and Specialties sales channel saw strong growth throughout the year in both our end markets as well as in a number of our differentiated chemistries. We saw particularly strong growth in our Pharmaceuticals business, which has continued to grow since the pandemic on increasing demand for high-purity actives, excipients and other necessary ingredients. Our food ingredients business saw strength throughout the year on security of supply and a partnership with our suppliers and customers to provide solutions that cater to consumer trends. Our beauty and personal care business saw another year of growth on product management and new supplier authorizations. Within our CASE business, we saw product tightness and inflation for much of the year. The slowdown in housing construction resulting from higher interest rates during the back half of the year dampened demand; however, our service performance and product offering allowed for top-line growth. The lubricants and metalworking business finished the year with market share gain as well as margin expansion on good pricing discipline. Finally, the homecare and industrial cleaning business finished the year with sales growth on pricing discipline and further supplier development.

See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for further information on our Business and Economic Risks.

Executive Summary

Driven by agile commercial execution, chemical price inflation and growing customer demand, Univar Solutions delivered strong year-over-year growth despite constrained inventory and supply and transportation challenges. With the Nexeo acquisition integration and system migration completed, we look to continue to leverage our digital investments to drive organic growth through market share capture and margin gains through leverage of our cost structure.

Management is focused on the following financial objectives:

• Growth above consensus GDP;

• Consolidated Adjusted EBITDA growth and corresponding Adjusted EBITDA margin expansion;

• Increased return on invested capital;

• Maintaining targeted leverage levels;

• Growing inorganically through bolt-on acquisitions; and

• Return of capital to stockholders.

Achievement of these objectives is expected through the following operational initiatives:

• Application of a consistent global strategy, while driving local execution;

• Leverage of our global transportation and digital asset footprint;

• Solutions to support suppliers' and customers' ESG objectives;

• Delivery of an effortless experience for customers that drives preference and retention;

• Focus on technical and application development offerings;

• Unlocking our global Solution Centers' value for suppliers and customers;

• Leverage and expansion of our key supplier relationships, with the goal of enhancing service to key global customers;

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• Capitalize on US re-industrialization and near-shoring trends; and

• Execute accretive bolt-on acquisition opportunities in regions and markets where we believe there are synergistic opportunities for growth, cross-selling and cost rationalization.

Results of Operations

Year ended December 31,

Favorable

(unfavorable)

% Change

(in millions)

Dollars

% of Net sales

Dollars

% of Net sales

Net sales

Cost of goods sold (exclusive of depreciation)

Operating expenses:

Outbound freight and handling

Warehousing, selling and administrative

Other operating expenses, net

Depreciation

Amortization

Impairment charges

Total operating expenses

Operating income

Other (expense) income:

Interest income

Interest expense

Gain on sale of business

Other income, net

Total other (expense) income

Income before income taxes

Income tax expense

Net income

Year ended December 31,

Favorable (unfavorable)

% Change

(in millions)

Dollars

% of Net sales

Dollars

% of Net sales

Gross profit (exclusive of depreciation):

Net sales

Cost of goods sold (exclusive of depreciation)

Gross profit (exclusive of depreciation)

Net sales

Net sales increased $1,939.8 million, or 20.3%, for the year ended December 31, 2022. On a constant currency basis, net sales increased by $2,302.2 million, or 24.1%. The increase was primarily due to our pricing discipline in inflationary markets and market share gains. Refer to the “Analysis of Segment Results” for additional information.

Gross profit (exclusive of depreciation)

Gross profit (exclusive of depreciation) increased $378.0 million, or 15.8%, to $2,771.2 million for the year ended December 31, 2022. On a constant currency basis, gross profit (exclusive of depreciation) increased $459.2 million or 19.2%. The increase in gross profit (exclusive of depreciation) was primarily attributable to our pricing discipline in inflationary markets, operational execution and market share gains, partially offset by higher input cost inflation. Gross margin decreased from 25.1% for the year ended December 31, 2021 to 24.1% for the year ended December 31, 2022. Refer to the “Analysis of Segment Results” and “Non-GAAP Financial Measures” for additional information.

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Operating expenses

Outbound freight and handling

Outbound freight and handling expenses increased $73.1 million, or 18.1%, for the year ended December 31, 2022. On a constant currency basis, outbound freight and handling expenses increased $83.1 million, or 20.6%. Refer to the “Analysis of Segment Results” for additional information.

Warehousing, selling and administrative

Warehousing, selling and administrative expenses ("WS&A") increased $56.7 million, or 4.8%, for the year ended December 31, 2022. On a constant currency basis, WS&A increased $94.6 million, or 7.9%. The increase is primarily attributable to higher operating costs and variable compensation, partially offset by an environmental recovery, net synergies and higher environmental remediation costs in the prior year. Refer to the “Analysis of Segment Results” for additional information.

Other operating expenses, net

Other operating expenses, net decreased $74.7 million, or 69.5%, for the year ended December 31, 2022. Refer to “Note 8: Supplemental financial information” in Item 8 of this Annual Report on Form 10-K for additional information.

Depreciation and Amortization

Depreciation expense decreased $19.2 million, or 12.7%, for the year ended December 31, 2022, primarily due to certain assets reaching the end of their depreciable lives. On a constant currency basis, depreciation expense decreased $16.0 million, or 10.6%, for the year ended December 31, 2022, primarily due to certain assets reaching the end of their depreciable lives.

Amortization expense decreased $4.3 million, or 8.2%, for the year ended December 31, 2022, primarily due to certain intangible assets reaching the end of their amortizable lives.

Other (expense) income

Interest expense

Interest expense increased $5.7 million, or 5.6%, for the year ended December 31, 2022, primarily due to higher average interest rates on floating rate debt. Refer to “Note 11: Debt” in Item 8 of this Annual Report on Form 10-K for additional information.

Gain on sale of business

Gain on sale of business was $88.2 million for the year ended December 31, 2021, primarily due to the sale of our Distrupol business and also included adjustments to the sale price of the Canadian Agriculture services business. Refer to “Note 4: Dispositions” in Item 8 of this Annual Report on Form 10-K for additional information.

Other income, net

Other income, net decreased $83.9 million, or 76.0%, for the year ended December 31, 2022, primarily due to a lower pension mark to market gain in the current year and a fair value adjustment on warrants in the prior year. Refer to “Note 8: Supplemental financial information” in Item 8 of this Annual Report on Form 10-K for additional information.

Income tax expense

Income tax expense was $210.9 million for the year ended December 31, 2022, resulting in an effective income tax rate of 27.9%. Our effective income tax rate was higher than the US federal statutory rate of 21.0%, primarily due to higher rates on foreign earnings, US tax on foreign earnings, US state income taxes and non-deductible employee costs.

Income tax expense was $124.6 million for the year ended December 31, 2021, resulting in an effective income tax rate of 21.3%. Our effective income tax rate was higher than the US federal statutory rate of 21.0% primarily due to higher rates on foreign earnings, US tax on foreign earnings, US state income taxes and non-deductible employee costs offset by the favorable impact of the Distrupol divestiture.

Results of Reportable Business Segments

Our operations are structured into four reportable segments that represent the geographic areas under which we operate and manage our business. These segments are USA, EMEA, Canada and LATAM, which includes developing businesses in Latin America and the Asia-Pacific region. Management believes Adjusted EBITDA is an important measure of operating performance, which is used as the primary basis for the chief operating decision maker to evaluate the performance of each of our reportable segments.

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We believe certain other financial measures that are not calculated in accordance with US GAAP provide relevant and meaningful information concerning our ongoing operating results. These financial measures include gross profit (exclusive of depreciation), gross margin and Adjusted EBITDA margin. Such non-GAAP financial measures are referred to from time to time in this report but should not be viewed as a substitute for GAAP measures of performance and should be considered along with the comparable US GAAP measures. See “Note 20: Segments” in Item 8 of this Annual Report on Form 10-K, “Analysis of Segment Results” within this Item and "Non-GAAP Financial Measures" within this Item for additional information.

Analysis of Segment Results

USA

Year ended December 31,

Favorable (unfavorable)

% Change

(in millions)

Net sales:

External customers

Inter-segment

Total net sales

Cost of goods sold (exclusive of depreciation)

Outbound freight and handling

Warehousing, selling and administrative

Adjusted EBITDA

Year ended December 31,

Favorable (unfavorable)

% Change

(in millions)

Gross profit (exclusive of depreciation):

Net sales

Cost of goods sold (exclusive of depreciation)

Gross profit (exclusive of depreciation)

External sales increased $1,509.5 million, or 25.1%, for the year ended December 31, 2022, primarily due to our pricing discipline in inflationary markets and market share gains.

Gross profit (exclusive of depreciation) increased $325.6 million, or 21.2%, for the year ended December 31, 2022, primarily due to pricing discipline in inflationary markets, operational execution and market share gains, partially offset by input cost inflation. Gross margin decreased from 25.5% for the year ended December 31, 2021 to 24.7% for the year ended December 31, 2022, primarily impacted by input cost inflation, partially offset by our pricing discipline in inflationary markets.

Outbound freight and handling expenses increased $68.4 million, or 23.5%, for the year ended December 31, 2022, primarily due to higher delivery costs caused by supply chain constraints.

WS&A increased $46.1 million, or 6.2%, for the year ended December 31, 2022, primarily due to higher operating costs and variable compensation, partially offset by higher environmental remediation costs in the prior year. Net synergies and an environmental recovery also favorably impacted the current year. As a percentage of external sales, WS&A decreased from 12.4% for the year ended December 31, 2021 to 10.5% for the year ended December 31, 2022 primarily due to the increase in sales.

Adjusted EBITDA increased $211.1 million, or 42.4%, for the year ended December 31, 2022, driven by higher gross profit (exclusive of depreciation), partially offset by higher outbound freight and handling expenses as well as higher WS&A. Adjusted EBITDA margin increased from 8.3% for the year ended December 31, 2021 to 9.4% for the year ended December 31, 2022, reflecting the business operating leverage.

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EMEA

Year ended December 31,

Favorable (unfavorable)

% Change

(in millions)

Net sales:

External customers

Inter-segment

Total net sales

Cost of goods sold (exclusive of depreciation)

Outbound freight and handling

Warehousing, selling and administrative

Adjusted EBITDA

Year ended December 31,

Favorable (unfavorable)

% Change

(in millions)

Gross profit (exclusive of depreciation):

Net sales

Cost of goods sold (exclusive of depreciation)

Gross profit (exclusive of depreciation)

External sales increased $93.6 million, or 4.7%, for the year ended December 31, 2022. On a constant currency basis, external sales increased $422.2 million, or 21.4%, primarily due to our pricing discipline in inflationary markets and market share gains, partially offset by the effects of the Distrupol divestiture in the prior year.

Gross profit (exclusive of depreciation) decreased $6.3 million, or 1.3%, for the year ended December 31, 2022. On a constant currency basis, gross profit (exclusive of depreciation) increased $67.6 million, or 13.9%, primarily due to pricing discipline in inflationary markets, operational execution and market share gains, partially offset by the effects of the Distrupol divestiture in the prior year. Gross margin decreased from 24.7% for the year ended December 31, 2021 to 23.3% for the year ended December 31, 2022 primarily due to input cost inflation, partially offset by our pricing discipline in inflationary markets.

Outbound freight and handling expenses increased $1.9 million, or 3.0%, for the year ended December 31, 2022. On a constant currency basis, outbound freight and handling expenses increased $10.7 million, or 16.7%, primarily due to higher delivery costs caused by supply chain constraints.

WS&A decreased $14.2 million, or 5.6%, for the year ended December 31, 2022. On a constant currency basis, WS&A increased $20.9 million, or 8.3%, primarily due to higher variable compensation and operating costs. As a percentage of external sales, WS&A decreased from 12.8% for the year ended December 31, 2021 to 11.5% for the year ended December 31, 2022 due to the impact of fluctuations in foreign currency exchange rates, partially offset by higher variable compensation and operating costs.

Adjusted EBITDA increased $6.0 million, or 3.5%, for the year ended December 31, 2022. On a constant currency basis, Adjusted EBITDA increased $36.0 million, or 21.1%, primarily due to higher gross profit (exclusive of depreciation), partially offset by higher WS&A as well as higher outbound freight and handling expenses. Adjusted EBITDA margin decreased from 8.7% for the year ended December 31, 2021 to 8.6% for the year ended December 31, 2022 primarily due to lower gross margin, partially offset by business operating leverage.

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Canada

Year ended December 31,

Favorable (unfavorable)

% Change

(in millions)

Net sales:

External customers

Inter-segment

Total net sales

Cost of goods sold (exclusive of depreciation)

Outbound freight and handling

Warehousing, selling and administrative

Adjusted EBITDA

Year ended December 31,

Favorable (unfavorable)

% Change

(in millions)

Gross profit (exclusive of depreciation):

Net sales

Cost of goods sold (exclusive of depreciation)

Gross profit (exclusive of depreciation)

External sales increased $190.5 million, or 20.5%, for the year ended December 31, 2022. On a constant currency basis, external sales increased $233.6 million, or 25.1%, primarily due to our pricing discipline in inflationary markets and market share gain.

Gross profit (exclusive of depreciation) increased $33.2 million, or 14.2%, for the year ended December 31, 2022. On a constant currency basis, gross profit (exclusive of depreciation) increased $43.4 million, or 18.6%, primarily due to our pricing discipline in inflationary markets, operational execution and market share gains, partially offset by input cost inflation. Gross margin decreased from 25.1% for the year ended December 31, 2021 to 23.8% for the year ended December 31, 2022, driven by input cost inflation, partially offset by our pricing discipline in inflationary markets.

Outbound freight and handling expenses increased $2.2 million, or 6.1%, for the year ended December 31, 2022. On a constant currency basis, outbound freight and handling expenses increased $3.7 million, or 10.2%, primarily due to higher delivery costs caused by supply chain constraints.

WS&A increased $15.5 million, or 16.7%, for the year ended December 31, 2022. On a constant currency basis, WS&A increased $19.6 million, or 21.1%. The increase was primarily due to higher operating costs and variable compensation. WS&A as a percentage of external sales decreased from 10.0% for the year ended December 31, 2021 to 9.7% for the year ended December 31, 2022 primarily due to the increase in sales.

Adjusted EBITDA increased $15.5 million, or 14.9%, for the year ended December 31, 2022. On a constant currency basis, Adjusted EBITDA increased $20.1 million, or 19.3%, primarily due to higher gross profit (exclusive of depreciation), partially offset by increased WS&A. Adjusted EBITDA margin decreased from 11.2% for the year ended December 31, 2021 to 10.7% for the year ended December 31, 2022 due to lower gross margin, partially offset by business operating leverage.

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LATAM

Year ended December 31,

Favorable (unfavorable)

% Change

(in millions)

Net sales:

External customers

Inter-segment

Total net sales

Cost of goods sold (exclusive of depreciation)

Outbound freight and handling

Warehousing, selling and administrative

Adjusted EBITDA

Year ended December 31,

Favorable (unfavorable)

% Change

(in millions)

Gross profit (exclusive of depreciation):

Net sales

Cost of goods sold (exclusive of depreciation)

Gross profit (exclusive of depreciation)

External sales increased $146.2 million, or 24.0%, for the year ended December 31, 2022. On a constant currency basis, external sales increased $137.0 million, or 22.4%, primarily due to our pricing discipline in inflationary markets and the Sweetmix acquisition, which contributed 9.1% of the increase.

Gross profit (exclusive of depreciation) increased $25.5 million, or 18.8%, for the year ended December 31, 2022. On a constant currency basis, gross profit (exclusive of depreciation) increased $22.6 million, or 16.6%, primarily due to our pricing discipline in inflationary markets and the Sweetmix acquisition, which contributed 7.7% of the increase, partially offset by input cost inflation. G ross margin decreased from 22.2% for the year ended December 31, 2021 to 21.3% for the year ended December 31, 2022, primarily due to input cost inflation.

Outbound freight and handling expenses increased $0.5 million, or 4.0%, for the year ended December 31, 2022. On a constant currency basis, outbound freight and handling expenses increased $0.3 million, or 2.4%.

WS&A increased $18.9 million, or 28.5%, for the year ended December 31, 2022. On constant currency basis, WS&A increased $17.4 million, or 26.2%, primarily due to increased corporate cost allocation as a result of a SAP implementation and higher operating costs. As a percentage of external sales, WS&A increased from 10.9% for the year ended December 31, 2021 to 11.3% for the year ended December 31, 2022, primarily due to increased corporate cost allocation as a result of a SAP implementation and higher operating costs.

Adjusted EBITDA increased $6.1 million, or 10.7%, for the year ended December 31, 2022. On a constant currency basis, Adjusted EBITDA increased $4.8 million, or 8.4%, primarily due to higher gross profit (exclusive of depreciation), partially offset by increased WS&A. Adjusted EBITDA margin decreased from 9.3% for the year ended December 31, 2021 to 8.3% for the year ended December 31, 2022, primarily due to lower gross margin and increased WS&A.

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Liquidity and Capital Resources

The Company's primary sources of liquidity are cash generated from operations and borrowings under its committed Senior ABL Credit Facility. As of December 31, 2022, liquidity for the Company was $1,060.5 million, comprised of $385.3 million of cash and cash equivalents and $675.2 million of available borrowings under our credit facility. The credit facility is guaranteed by certain significant subsidiaries and secured by such parties’ eligible accounts receivable, inventory and cash with a maximum borrowing capacity of $1.6 billion. Significant reductions in our accounts receivable, inventory and cash would reduce our availability to access liquidity under the credit facility. We have no active financial maintenance covenants in our credit agreements; however, there is a springing fixed charge coverage ratio (“FCCR”) under the revolving credit facility of 1.0x, applicable only if availability is less than or equal to 10% of the borrowing capacity. If the FCCR was applicable, the calculation would have been 6.5x as of December 31, 2022.

Our primary short-term liquidity and capital resource needs are to finance operating expenses, working capital, capital expenditures, other liabilities including environmental remediation and interest, possible business acquisitions, share repurchases and general corporate purposes. The majority of our debt obligations mature in 2026 and beyond. To the extent that our cash balances from time to time exceed amounts that are needed to fund our immediate liquidity requirements, we will consider alternative uses of some or all of such excess cash. Such alternatives may include, among others, the redemption or repurchase of debt securities or other borrowings through open market purchases, privately negotiated transactions or otherwise. Refer to “Note 11: Debt” in Item 8 of this Annual Report on Form 10-K for additional information related to our debt obligations. Management continues to balance its focus on sales and earnings growth with continuing efforts in cost control and working capital management.

Access to debt capital markets has historically provided the Company with sources of liquidity beyond normal operating cash flows. We do not anticipate having difficulty in obtaining financing from those markets in the future with our history of favorable results in the debt capital markets and strong relationships with global financial institutions. However, our ability to continue to access the debt capital markets with favorable interest rates and other terms will depend, to a significant degree, on maintaining our current ratings assigned by the credit rating agencies.

We may from time to time refinance or take steps to reduce debt or interest costs. The amount of debt, if any, that may be reduced or refinanced will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. On October 27, 2022, we entered into the Second Amended and Restated ABL Credit Agreement ("Senior ABL Facility"), which provided a five-year senior secured ABL credit facility in an aggregate principal amount of $1.6 billion and a five-year senior secured term loan facility in an aggregate principal amount of $200 million. The Senior ABL Facility amends and restates in full the amended and restated ABL facility entered into by the Company on February 28, 2019. In connection with the entry into the Senior ABL Facility, the Company terminated its existing European ABL Credit Agreement and the Euro ABL Facility thereunder.

Our defined benefit pension plans had an underfunded status of $82.7 million and $122.3 million as of December 31, 2022 and 2021, respectively. Based on current projections and minimum funding requirements, we expect to make cash contributions of $16.0 million to our defined benefit pension plans in 2023. The amount and timing of any such requirement in future years is uncertain given the implicit uncertainty regarding the future developments of factors described in “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

We expect our 2023 capital expenditures to be approximately $150 million to $160 million for maintenance and growth, including safety, cost improvements and ESG investments. Interest payments for 2023 are expected to be $120 million to $130 million. We expect to fund our capital expenditures and interest payments with cash from operations or cash on hand.

We believe funds provided by our primary sources of liquidity will be adequate to meet our liquidity, debt repayment obligation and capital resource needs for at least the next 12 months under current operating conditions.

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Cash Flows

The following table presents a summary of our cash flows:

Year ended December 31,

(in millions)

Net cash provided by operating activities

Net cash (used) provided by investing activities

Net cash used by financing activities

Operating Activities

Cash provided by operating activities increased $256.1 million for the year ended December 31, 2022. The increase was primarily due to higher net income, exclusive of non-cash items, and the timing of changes in trade working capital, partially offset by the other, net cash flow item.

The change in net income, exclusive of non-cash items, increased $274.7 million from $500.4 million for the year ended December 31, 2021 to $775.1 million for the year ended December 31, 2022. Cash used by other, net increased $180.2 million as compared to the prior year, primarily attributable to tax payments, accrued compensation and timing differences related to other assets and liabilities.

Cash used by trade working capital, which includes trade accounts receivable, net, inventories and trade accounts payable, decreased $139.3 million as compared to the prior year. The year-over-year decrease in cash used by trade working capital was due to a favorable change in trade accounts receivable, net related to the timing of sales and cash collections, partially offset by an unfavorable change in trade accounts payable primarily attributable to the timing of inventory purchases and payments.

Investing Activities

Investing cash flows for the year ended December 31, 2022 included capital expenditures of $153.8 million, cash paid for the Vicom acquisition of $12.9 million, cash paid for the Sweetmix acquisition of $3.8 million and proceeds of $7.8 million from the sale of property, plant and equipment. Investing cash flows for the year ended December 31, 2021 included proceeds of $136.7 million from the sale of the Distrupol business, proceeds of $29.0 million from the sale of property, plant and equipment, capital expenditures of $110.9 million and cash paid for the Sweetmix acquisition of $28.7 million (net of cash acquired of $1.2 million).

Financing Activities

Financing cash flows for the year ended December 31, 2022 included share repurchases of $409.1 million, long-term debt repayments of $87.7 million, long-term debt issuances of $199.6 million and net proceeds under revolving credit facilities of $51.8 million. Financing cash flows for the year ended December 31, 2021 included long-term debt repayments of $1,440.5 million, share repurchases of $50.0 million, long-term debt issuances of $995.0 million, net proceeds under revolving credit facilities of $32.4 million and proceeds from the exercise of warrants of $27.1 million.

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Contractual Obligations and Commitments

Our significant contractual obligations and commitments as of December 31, 2022 were as follows:

Payments Due by Period

(in millions)

Total

Thereafter

Finance leases (1)

Long-term debt, including current maturities (2)

Interest (3)

Operating leases (1)

Estimated environmental liability payments (4)

Other (5)

Total (6)

(1) See “Note 19: Leasing” in Item 8 of this Annual Report on Form 10-K for additional information.

(2) See “Note 11: Debt” in Item 8 of this Annual Report on Form 10-K for additional information.

(3) Interest payments on debt are calculated for future periods using projected interest rates and contractual maturities as of December 31, 2022. Projected interest payments include the related effects of interest rate and cross currency swap contracts. Certain of these projected interest payments may differ in the future based on changes in floating interest rates, foreign currency fluctuations or other factors or events.

(4) See "Note 18: Commitments and contingencies" in Item 8 of this Annual Report on Form 10-K for additional information.

(5) Commitments related to multi-employer pension plan withdrawal obligations and acquisitions.

(6) This table excludes our defined benefit pension contributions. Based on current projections and minimum funding requirements, we expect to make cash contributions of $16.0 million to our defined benefit pension plans in the year ended December 31, 2023. The amount and timing of any such requirement in future years is uncertain given the implicit uncertainty regarding the future developments of factors described in “Risk Factors” in Item 1A of this Annual Report on Form 10-K and “Note 12: Employee benefit plans” in Item 8 of this Annual Report on Form 10-K.

We enter into certain unconditional purchase commitments in the normal course of business. These commitments do not exceed our projected operational requirements and generally do not extend past one year.

We expect that we will be able to fund our obligations and commitments with cash flows from operations. To the extent we are unable to fund these obligations and commitments with cash flows from operations, we intend to fund them with proceeds from available borrowing capacity under our credit facility or future financings. With the exception of outstanding letters of credit of $127.7 million, we had no material off-balance sheet arrangements as of December 31, 2022.

Critical Accounting Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Our significant accounting policies are described in “Note 2: Significant accounting policies” in Item 8 of this Annual Report on Form 10-K. We consider an accounting estimate to be critical if that estimate requires that we make assumptions about matters that are highly uncertain at the time we make that estimate and if different estimates that we could reasonably have used or changes in accounting estimates that are reasonably likely to occur could materially affect our consolidated financial statements. The accounting assumptions and estimates discussed below are those that we consider most critical to an understanding of our financial statements because they inherently involve significant judgments and estimates. By their nature, these judgments and estimates are subject to an inherent degree of uncertainty. Actual results could differ from our estimates.

Goodwill

Total goodwill as of December 31, 2022 and 2021 was $2,288.2 million and $2,310.4 million, respectively. We perform an annual goodwill impairment assessment at the reporting unit level each year as of October 1, or more frequently if potential impairment indicators exist. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment. A reporting unit’s carrying value used in an impairment test represents the assignment of various assets and liabilities, including corporate allocations, based on the enterprise approach.

Qualitative factors include industry and market considerations, overall financial performance and other relevant events and factors affecting the reporting units. Additionally, as part of this assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring a reporting unit’s fair value.

Our quantitative impairment test considers both the income approach and the market approach to estimate a reporting unit’s fair value. Significant assumptions include forecasted EBITDA, market segment growth rates and discount rates based on a reporting unit's weighted average cost of capital. The use of different assumptions, estimates or judgments could significantly impact the estimated fair value of a reporting unit, and therefore impact a reporting unit's fair value in excess of carrying value assessment.

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Through qualitative assessments performed on the USA, EMEA, Canada, Latin America and Asia-Pacific reporting units, we concluded that it was more likely than not that each reporting unit’s fair value exceeded its carrying value. As such, a quantitative assessment was not performed for any of our reporting units. No goodwill impairment losses were recorded during the years ended December 31, 2022, 2021, or 2020.

Environmental Liabilities

We recognize environmental liabilities for probable and reasonably estimable losses associated with environmental remediation. The estimated environmental liability includes incremental direct costs of investigations, remediation efforts and post-remediation monitoring. Total environmental liabilities at December 31, 2022 and 2021 were $90.9 million and $88.1 million, respectively. See “Note 18: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K for additional information.

Our environmental liabilities are subject to numerous uncertainties that affect our ability to estimate our costs, or our share of costs if multiple parties are responsible. These uncertainties involve the legal, regulatory and enforcement parameters governing environmental assessment and remediation, the nature and extent of contamination at the sites, the extent and cost of assessment and remediation efforts required, our insurance coverage for the sites and, in the case of sites with multiple responsible parties, the number and financial strength of those parties. In addition, our determination as to whether a loss is probable may change, particularly as new facts emerge as to the causes of contamination. We evaluate each environmental site as new information and facts become available and make adjustments to accruals based upon our assessment of these factors, using technical experts, legal counsel and other specialists.

Defined Benefit Pension Plans

We sponsor defined benefit pension plans in the US and other countries. The valuation for these plans depends on assumptions made by management, which are used by actuaries we engage to calculate the projected and accumulated benefit obligations and the annual expense recognized for the plans. Significant assumptions include discount rates and expected rate of return on plan assets. Changes in assumptions and plan experience result in the recognition of gains and losses in earnings, as our accounting policy is to recognize changes in the fair value of plan assets and projected benefit obligation in the fourth quarter of each year (the “mark to market” adjustment), unless an earlier remeasurement is required. For the years ended December 31, 2022 and 2021, we recorded mark to market gains of $17.2 million and $75.9 million, respectively. See “Note 12: Employee benefit plans” in Item 8 of this Annual Report on Form 10-K for additional information.

Changes in the assumed discount rate and expected rate of return on plan assets would have the following effects:

Increase (decrease) in

(in millions)

Change

2023 Net benefit cost

2022 Projected benefit obligation

Discount rate

100 bps decrease

Discount rate

100 bps increase

Expected rate of return on plan assets

100 bps decrease

Expected rate of return on plan assets

100 bps increase

Income Taxes

We are subject to income taxes in the jurisdictions in which we sell products and earn revenues. We record income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences of temporary differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply in the years in which the temporary differences are expected to reverse. A reduction of the carrying values of deferred tax assets by a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. In evaluating our ability to realize deferred tax assets, in full or in part, we consider all available positive and negative evidence, including past operating results, forecasted and appropriate character of future taxable income, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused and feasible tax strategies. We have a valuation allowance on certain deferred tax assets, primarily related to foreign tax credits and net operating loss carry forwards. We account for unrecognized tax benefits through an assessment of whether a position is more likely than not to be sustained upon examination by taxing authorities based on its technical merits. We record liabilities for uncertain tax positions taken or expected to be taken in a tax return.

Recently Issued Accounting Pronouncements

See “Note 2: Significant accounting policies” in Item 8 of this Annual Report on Form 10-K.

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Non-GAAP Financial Measures

We monitor the results of our reportable segments separately for the purposes of making decisions about resource allocation and performance assessment, and evaluate performance using Adjusted EBITDA. Additionally, the Company uses Adjusted EBITDA in setting performance incentive targets to align management compensation measurement with operational performance.

We define Adjusted EBITDA as the sum of consolidated net income; depreciation; amortization; net interest expense; income tax expense; impairment charges; (gain) loss on sale of business; other operating expenses, net and other income (expense), net (for both, see “Note 8: Supplemental financial information” in Item 8 of this Annual Report on Form 10-K for additional information). For 2020, Adjusted EBITDA also included an adjustment to remove a Brazil VAT charge. See below for a reconciliation of net income, the most comparable measure calculated in accordance with GAAP, to Adjusted EBITDA.

We believe other financial measures, as defined below, that do not comply with US GAAP provide relevant and meaningful information concerning the ongoing and future operating results of the Company.

• Gross profit (exclusive of depreciation): net sales less cost of goods sold (exclusive of depreciation);

• Gross margin: gross profit (exclusive of depreciation) divided by external sales on a segment level and by net sales on a consolidated level; and

• Adjusted EBITDA margin: Adjusted EBITDA divided by external sales on a segment level and by net sales on a consolidated level.

We evaluate our results of operations on both an as reported and a constant currency basis. The constant currency presentation is a non-GAAP financial measure, which excludes the impact of fluctuations in foreign currency exchange rates. We believe providing information on a constant currency basis provides valuable supplemental information regarding our results of operations, consistent with how we evaluate our performance. We calculate constant currency percentages and other information by converting our financial results in local currency for a period using the average exchange rate for the prior period to which we are comparing.

The non-GAAP financial measures noted above are not calculated in accordance with GAAP and should not be considered a substitute for net income or any other measure of financial performance presented in accordance with GAAP. They are included as a complement to results provided in accordance with GAAP because management believes these non-GAAP financial measures help investors’ ability to analyze underlying trends in the Company’s business, evaluate its performance relative to other companies in its industry and provide useful information to both management and investors by excluding certain items that may not be indicative of the Company’s core operating results. Additionally, other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

The following table is a reconciliation of net income to Adjusted EBITDA:

Year ended December 31,

(in millions)

Net income

Depreciation

Amortization

Interest expense, net

Income tax expense

EBITDA

Other operating expenses, net

Other (income) expense, net

Impairment charges

(Gain) loss on sale of business

Brazil VAT charge

Adjusted EBITDA

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The following table is a reconciliation of gross profit (exclusive of depreciation):

Year ended December 31,

(in millions)

Net sales

Cost of goods sold (exclusive of depreciation)

Gross profit (exclusive of depreciation)

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