UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________
Form 10-K
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ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2018
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-37443
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Univar Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 26-1251958 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3075 Highland Parkway, Suite 200 Downers Grove, Illinois | 60515 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (331) 777-6000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock ($0.01 par value) | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
Aggregate market value of common stock held by non-affiliates of registrant on June 29, 2018: $3.4 billion (see Item 12, under Part III hereof), based on a closing price of registrant’s Common Stock of $26.24 per share.
At February 12, 2019, 141,732,317 shares of the registrant’s common stock, $0.01 par value, were outstanding.
Documents Incorporated by Reference
Certain portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 8, 2019 and to be filed within 120 days after the registrant’s fiscal year ended December 31, 2018 (hereinafter referred to as “Proxy Statement”) are incorporated by reference into Part III.
Univar Inc.
Form 10-K
TABLE OF CONTENTS
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SUPPLEMENTAL INFORMATION
Unless the context otherwise indicates or requires, as used in this Annual Report on Form 10-K, (i) the terms “we,” “our,” “us,” “Univar” and the “Company,” refer to Univar Inc. and its consolidated subsidiaries, and (ii) the term “issuer” refers to Univar Inc. exclusive of its subsidiaries.
Our fiscal year ends on December 31, and references to “fiscal” when used in reference to any twelve month period ended December 31, refer to our fiscal years ended December 31.
The term “GAAP” refers to accounting principles generally accepted in the United States of America.
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Forward-looking statements and information
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Annual Report on Form 10-K and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, capital commitments, macro-economic conditions, liquidity, prospects, business trends, currency trends, competition, markets, growth strategies and the industries in which we operate and including, without limitation, statements relating to our estimated or anticipated financial performance or results. Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Annual Report on Form 10-K. In addition, even if our results of operations, financial condition and liquidity, and the development of the industries in which we operate are consistent with the forward-looking statements contained in this Annual Report on Form 10-K, those results or developments may not be indicative of results, conditions or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements, including those reflected in forward-looking statements relating to our operations and business and the risks and uncertainties discussed in “Risk Factors.” Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:
• | general economic conditions, particularly fluctuations in industrial production and the demands of our customers; |
• | disruptions in the supply of chemicals we distribute or our customers’ or producers’ operations; |
• | termination or change of contracts or relationships with customers or producers on short notice; |
• | the price and availability of chemicals, or a decline in the demand for chemicals; |
• | our ability to pass through cost increases to our customers; |
• | our ability to meet customer demand for a product; |
• | trends in oil and gas prices; |
• | competitive pressures in the chemical distribution industry; |
• | consolidation of our competitors; |
• | our ability to execute strategic investments, including pursuing acquisitions and/or dispositions, and successfully integrating and operating acquired companies; |
• | liabilities associated with acquisitions, dispositions and ventures; |
• | potential impairment of goodwill; |
• | inability to generate sufficient working capital; |
• | our ability to sustain profitability; |
• | our ability to implement and efficiently operate the systems needed to manage our operations; |
• | the risks associated with security threats, including cybersecurity threats; |
• | increases in transportation costs and changes in our relationship with third party carriers; |
• | the risks associated with hazardous materials and related activities; |
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• | accidents, safety failures, environmental damage, product quality issues, major or systemic delivery failures involving our distribution network or the products we carry or adverse health effects or other harm related to the materials we blend, manage, handle, store, sell or transport; |
• | challenges associated with international operations, including securing producers and personnel, import/export requirements, compliance with foreign laws and international business laws and changes in economic or political conditions; |
• | our ability to effectively implement our strategies or achieve our business goals; |
• | exposure to interest rate and currency fluctuations; |
• | evolving laws and regulations relating to hydraulic fracturing and risks associated with chemicals used in hydraulic fracturing; |
• | losses due to potential product liability claims and recalls and asbestos claims; |
• | compliance with extensive environmental, health and safety laws, including laws relating to our environmental services businesses and the investigation and remediation of contamination, that could require material expenditures or changes in our operations; |
• | general regulatory and tax requirements; |
• | operational risks for which we may not be adequately insured; |
• | ongoing litigation and other legal and regulatory actions and risks, including asbestos claims; |
• | loss of key personnel; |
• | labor disruptions and other costs associated with the unionized portion of our workforce; |
• | negative developments affecting our pension plans and multi-employer pensions; |
• | changes in legislation, regulation and government policy; and |
• | our substantial indebtedness and the restrictions imposed by our debt instruments and indenture. |
All forward-looking statements made in this Annual Report on Form 10-K are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this Annual Report on Form 10-K and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise and changes in future operating results over time or otherwise.
Comparisons of results between current and prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
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PART I
ITEM 1. BUSINESS
Our Company
We are a leading global chemical and ingredients distributor and provider of specialty services. We purchase chemicals from thousands of chemical producers worldwide and warehouse, repackage, blend, dilute, transport and sell those chemicals to more than 100,000 customer locations across approximately 130 countries. Our specialized services include e-commerce and digital marketing of chemicals for our producers, chemical waste removal and ancillary services, on-site storage of chemicals for our customers, and support services for the agricultural and pest control industries. We derive competitive advantage from our scale, broad product offering, leading digital solutions, technical expertise, specialized services, long-standing relationships with leading chemical producers and our industry leading safety record.
The global chemical distribution industry is large and fragmented with thousands of distributors but represents a relatively small portion of the total chemical industry. While the total chemical industry is projected to grow at rates about equal to the growth of the gross national product of countries we operate in around the world, the distributed chemicals portion of the market is projected to grow faster as producers and customers increasingly realize the benefits of outsourcing. Chemical producers rely on us to warehouse, repackage, transport and sell their products as a way to expand their market access, enhance their geographic reach, lower their costs and grow their business. Customers who purchase products and services from us benefit from a lower total cost of ownership, as they are able to simplify their chemical sourcing process and outsource functions to us such as just-in-time availability of the right product, packaging, mixing, blending and technical expertise. They also rely on us for safe delivery and off-loading of chemicals that is fully compliant with increasing local and federal regulations.
In the year ended December 31, 2018, we generated $8.6 billion in net sales, net income of $172.3 million and $640.4 million in Adjusted EBITDA. For a reconciliation of Adjusted EBITDA to net income (loss), see “Selected Financial Data” in Item 6 of this Annual Report on Form 10-K.
The following charts illustrate the geographical and end market diversity of our 2018 net sales:
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We maintain strong, long-term relationships with our producers and our customers, many of which span decades. We source materials from thousands of producers worldwide, including premier global leaders. For the year ended December 31, 2018, our 10 largest producers accounted for approximately 27 percent of our total chemical purchases. Similarly, we sell products to thousands of customers globally, ranging from small and medium-sized businesses to large industrial customers. For the year ended December 31, 2018, our top 10 customers accounted for approximately 10 percent of our consolidated net sales. Globally, we service our customers with highly responsive on-time delivery.
Our Segments
Our business is organized and managed in four geographical segments: Univar USA (“USA”), Univar Canada (“Canada”), Univar Europe and the Middle East and Africa (“EMEA”), and Rest of World (“Rest of World”), which is predominantly in Latin America. For additional information on our geographical segments, see “Note 22: Segments” in Item 8 of this Annual Report on Form 10-K for additional information.
USA
We supply a broad offering of commodity and specialty chemicals and ingredients, as well as specialized services to a wide range of end markets, touching a majority of the manufacturing and industrial production sectors in the United States. Our close proximity to customers, combined with our deep product knowledge and end market expertise, serves as a competitive advantage.
We repackage and blend bulk chemicals for shipment by our transportation fleet as well as common carriers. Our highly skilled salesforce is deployed by a geographic sales district as well as by end-use market and industry, e.g., coatings and adhesives, food ingredients and products, pharmaceutical ingredients and products, personal care, and energy.
Canada
Our Canadian operations are regionally focused, with a highly skilled salesforce supplying a broad offering of commodity and specialty chemicals and specialized services to the local customer base. In Eastern Canada, we primarily focus on industrial markets such as food ingredients, pharmaceutical ingredients, coatings and adhesives, and chemical manufacturing. We also service the cleaning and sanitation, personal care, mining, and energy markets. In Western Canada, we focus on forestry, chemical manufacturing, mining, and energy markets (e.g., midstream gas pipeline, oil sands processing and oil refining). Lastly, due to its
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size, we have dedicated resources and expertise serving the agriculture end market. In agriculture, we formulate and distribute crop protection and fertilizer products to independent retailers and specialty applicators servicing the agricultural end markets in both Western Canada and Eastern Canada and we provide support services to agricultural chemical producers throughout the country.
EMEA
We maintain a strong presence in the United Kingdom and Continental Europe with sales offices in 20 countries. We also have four sales offices in the Middle East and Africa.
We execute primarily on a pan-European basis, leveraging centralized or shared information technology systems, raw materials procurement, logistics, route operations and the management of producer relationships where possible to benefit from economies of scale and improve cost efficiency. We have strong end market expertise and key account management capability across Europe to better support sales representatives in each country and for serving our key customer end markets, namely pharmaceutical ingredients and finished products, food ingredients, coating and adhesives, and personal care.
Rest of World
We operate sales offices and distribution sites in Mexico, Brazil and to a lesser extent the Asia-Pacific region. We continue to look for expansion opportunities throughout Latin America and opened a new sales center in Colombia, in 2018.
Our Competitive Strengths
We derive strength and competitive advantage from our scale, broad product offering, leading digital solutions, high levels of service and expertise, long-standing relationships with producers, and our industry leading safety record.
Scale
We operate one of the most extensive chemical distribution networks in the world, comprising more than 600 distribution facilities, approximately 90 million gallons of chemical storage tank capacity and hundreds of tractors, railcars, tankers and trailers operating daily through our facilities. We purchase thousands of different chemicals, some in large quantities, from over thousands of producers. Our purchasing power and global procurement relationships provide us with advantages over local and regional competitors due to economies of scale and our ability to manage our working capital.
Product breadth and market reach
We offer a wide range of chemical products and services across nearly all end-use markets. This enables us to present to customers a “one-stop-shop” approach that simplifies their procurement process and lowers their total cost of ownership, and provides suppliers with the opportunity to achieve growth by accessing new end markets through us.
Leading digital solutions
We offer today’s customers a flexible, omni-channel experience empowered partially by an industry-leading digital commerce platform, MyUnivar.com. Here, customers can - at any time from any device - browse our full catalog, request a quote, and access a wide array of documents necessary to managing their business. This provides unparalleled access to valuable information, allows customers to do business on their own terms, and enhances the customer experience.
In addition, through both Univar and ChemPoint capabilities, we offer suppliers cutting edge digital marketing and sales solutions to extend market reach and improve penetration. Leveraging digital solutions such as CRM, digital marketing, and advanced analytics enables us to effectively create and capture demand on behalf of our supplier partners.
Service and expertise
Globally, we provide our customers with highly responsive on-time delivery from our nearby facilities. This highly responsive service level enables our customers to lower their inventory levels and avoid production interruptions from lack of chemical ingredients.
To complement our extensive product portfolio, we offer to our customers specialized services, such as our chemical waste removal and environmental response services, chemical storage, and specialty product blending and formulation services. These services provide efficiency gains to our customers and deepen our relationships with them.
We also provide, through our highly skilled sales force, in-depth product technical knowledge and end market expertise to our customers, as well as valuable market and customer insights to our producers about how their products are performing in the market.
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Long-standing producer and customer relationships
We have developed strong, long-term relationships, many spanning several decades, with the world's premier global chemical producers and distribute products to more than 100,000 customer locations around the globe, from small and medium sized businesses to global industrial customers. The strength of our relationships has provided opportunities for us to integrate our service and logistics capabilities into our customers’ and producers’ business processes and to promote collaboration on supply chain optimization, marketing and other revenue enhancement strategies.
Safety and regulatory compliance
At Univar we are Serious about Safety. Our safety culture is embedded into our global operations. Safety is foundational in planning for operations, products, processes and facilities. Specific initiatives include:
• | data driven and causality-based accident prevention work; |
• | improved process and facility controls; |
• | mandatory general education and role specific safety training; |
• | joint management-worker Health and Safety Committees; and |
• | safety audits, incident investigation and improvement measures. |
Our efforts have resulted in significant improvements in global safety metrics during the last 7 years. We track worker injuries using the US Occupational Safety & Health Administration (OSHA) standardized methodology of Total Case Incident Rate (TCIR), which is the rate of recordable injuries per 200,000 hours worked. We have reduced our TCIR from 1.69 in 2011 to 0.58 in 2018, an improvement of 66.0%.
We believe that being Serious about Safety results in a competitive advantage by:
• | maintaining and improving relationships with our customers, who view safety performance as a key criterion for vendor selection; |
• | improving employee recruitment and retention; and |
• | reducing the likelihood of incidents and enabling our employees to focus on their contributions. |
While we believe being Serious about Safety improves our service, productivity and financial performance, that is not why safety is important to us. At Univar, we believe it is our responsibility to provide safe working conditions and challenge ourselves to continually improve.
Our Growth Strategy
We believe that we are well positioned to drive profitable growth, increase our market share, and capitalize on industry outsourcing trends by focusing on our key initiatives of Commercial Greatness, Operational Excellence and One Univar.
Drive profitable growth
Commercial Greatness. We seek to increase the value we provide our customers and our producers by improving our customers’ experience and driving additional growth for our producers. We seek to:
• | further develop a highly skilled and well-equipped sales force utilizing a value-based consultative sales approach that is aligned to customer and end market needs by geography, product and service, and industry specialization; |
• | continue to increase our technical and industry-specific product and market expertise; |
• | develop a world-class marketing capability to dynamically identify and align resources with high-growth, high value opportunities; |
• | cultivate and maintain long-term producer relationships through deep market and product knowledge, value-based selling, reduced complexity in distribution channels, and offering complementary products and services as a total solution for our customers; and |
• | offer industry-leading digital solutions that drive customer and supplier preference, enhance supply chain efficiency, empower employees with valuable insights and provide new sources of profitable growth through innovation. |
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Operational Excellence. We are committed to continuously improving our operating performance and lowering our costs per transaction. We seek to:
• | align our business teams with identified growth opportunities in customer end markets, product markets, services, and industries in a way that narrows focus and increases accountability; |
• | increase our use of digital tools to simplify tasks, lower costs and improve customer experience; |
• | continue to use Lean methodologies to deliver project-by-project productivity gains; |
• | increase the cost efficiency of our warehouses, terminals, tank farms and logistics, and improve our net working capital efficiency; |
• | deliver a compelling customer value proposition by providing simplified sourcing, cost effective just-in-time delivery and managed inventory along with value-added services; and |
• | continue to build on our industry leading safety performance as a differentiator with both customers and producers. |
One Univar. We are committed to developing a healthy, high-performance culture through the selection, recognition and development of engaged employees. We aspire to build an environment where the best people want to work and add value for our customers, producers and shareholders. We will strengthen the overall governance and efficiency of our global business operations with integrated, disciplined operating processes and by leveraging best practices.
Expand our market share
We believe our Commercial Greatness, Operational Excellence and One Univar initiatives will allow us to outperform competitors, leading to market share gains. We will continue to streamline and enhance our customer experience in order to be the easiest distributor to do business with and to increase customer preference for Univar. In addition, we believe our industry-focused go-to-market strategy combined with innovative sales and marketing support and strong customer preference will lead to winning additional product authorizations from producers. Finally, we are also pursuing selective acquisitions to increase our presence and develop competitive advantage in attractive end markets and whose products and service capabilities can benefit from our scale advantages. As a result, Univar is positioned well to gain market share.
Capitalize on industry outsourcing trends
We are well positioned to benefit from the growing trend of chemical producers and customers to outsource key tasks to chemical distributors. As a full-line distributor with a strong supply-chain-network across a broad geographic region, we are well suited to help customers and producers consolidate their distributor relationships and lower their total costs of ownership or service. Finally, as a leader in chemical distribution, we believe we can accelerate this trend by increasing the attractiveness of our total value proposition to both customers and our producers.
Through our Commercial Greatness, Operational Excellence and One Univar initiatives and by reinforcing our “one-stop-shop” provider capability, we will build on and increase the economic value we create in the global supply chain.
Accelerate digital transformation
We are positioned well to drive profitable growth and increased operational efficiency by orchestrating a multi-year digital transformation. We will continue to introduce new, innovative digital solutions that enhance our customer experience and drive stronger customer preference and customer loyalty, thereby increasing the lifetime value of customers to Univar. Through MyUnivar.com, we already offer an industry leading digital portal that allows customers to conduct business 24 hours a day, seven days a week, from virtually any device; and customers are increasingly adopting this platform to transact with us. We are committed to expanding our offering of digital solutions and bolstering our leadership position in the industry.
In addition, we will leverage new digital solutions to deliver a truly superior experience to our supplier partners, improving their market reach and penetration and providing valuable market insights through data analytics. Also, we will continue our progress to digitize our distribution network, creating a more agile, transparent supply chain, resulting in improved capabilities and efficiency. Finally, we will leverage digital to empower our employees with valuable, timely insights resulting in better decisions, and we will continue to automate administrative functions in order to enhance employee productivity.
Company History
Our history dates back to 1924 when we were founded as a brokerage business. In 1986, we acquired McKesson Chemical Corporation, then the third largest US chemical distributor, solidifying our presence throughout the United States and making us the largest chemical distributor in North America. In 2001, we continued our expansion into Europe through the acquisition of Ellis & Everard, which specialized in the distribution of chemicals in the United Kingdom and Ireland and had additional facilities
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in Europe and the Eastern United States. In 2007, we acquired ChemCentral, which enabled us to improve our market share and operational efficiencies in North America.
In 2007, we were acquired by investment funds advised by CVC Capital Partners Advisory (US), Inc. (“CVC”) as well as investment funds associated with Goldman, Sachs & Co. and Parcom. In November 2010, investment funds associated with Clayton, Dubilier & Rice, LLC (“CD&R”) acquired a 42.5 percent ownership interest in us. In December 2010, we acquired Basic Chemicals Solutions, a global distributor and trader of commodity chemicals, which strengthened our ability to provide value in the supply chain between chemical producers and end-users and reinforced our global sourcing capabilities. In January 2011, we completed the acquisition of Quaron, a chemical distributor operating in Belgium and the Netherlands, which complemented our strong European foothold in specialty chemicals with expanded product portfolio and increased logistical capability. We continued our expansion into the emerging markets in 2011 through our acquisition of Eral-Protek, a leading chemical distributor in Turkey, and the acquisition of Arinos, a leading chemical distributor of specialty and commodity chemicals and high-value services in Brazil. In December 2012, we acquired Magnablend, whose specialty chemical and manufactured products broadened our energy offerings. In May 2013, we expanded our Mexican presence with the acquisition of Quimicompuestos, making us a leading chemical distributor in the Mexican market. In November 2014, we acquired D’Altomare Quimica Ltda., a Brazilian distributor of specialty chemicals and ingredients, which expanded our geographic footprint and market presence in Brazil. In April 2015, we acquired Key Chemical, Inc., one of the largest distributors of fluoride to municipalities in the United States, which expanded our offerings into the municipal and other industrial markets.
On June 23, 2015, we closed our initial public offering (“IPO”) in which we issued and sold 20.0 million shares of common stock at a public offering price of $22.00 per share. In addition, we completed a concurrent private placement of $350.0 million for shares of common stock (17.6 million shares) to Dahlia Investments Pte. Ltd., an indirect wholly owned subsidiary of Temasek Holdings (Private) Limited (“Temasek”). We received total net proceeds of approximately $760.0 million from the IPO and the private placement after deducting underwriting discounts and commissions and other offering expenses of approximately $30.0 million. These expenses were recorded against the proceeds received from the IPO. Certain selling stockholders sold an additional 25.3 million shares of common stock in the IPO and concurrent private placement. We did not receive any proceeds from the sale of these shares.
In July 2015, we acquired the assets of Chemical Associates, Inc., a marketer, manufacturer, and distributor of oleochemicals, many of which are based on renewable and sustainable resources, thereby enhancing the value Univar brings to a number of our key markets such as personal care, food, cleaning and sanitization, lubricants, and coatings and adhesives. In October 2015, we entered into the agrochemical formulation market and expanded our capabilities in the third-party agriculture logistics market in Canada with the acquisition of the Future Group. In November 2015, we acquired Arrow Chemical, Inc., adding a complementary portfolio of active pharmaceutical ingredients (“APIs”) and other specialty ingredients essential to the formulation of generic and over-the-counter pharmaceuticals. In December 2015, we acquired Weaver Town Oil Services, Inc., and Weavertown Transport Leasing, Inc., operating as the Weavertown Environmental Group, which strengthened our ChemCare waste management service offering with a broad range of complementary services, including industrial cleaning, waste management and transportation, site remediation, and 24/7 emergency response services. In December 2015, we also acquired Polymer Technologies Ltd., a U.K.-based developer and distributor of unique ultraviolet/electron beam curable chemistries used to formulate environmentally responsible paints, inks, and adhesives.
In March 2016, we acquired Bodine Services of the Midwest, further strengthening our ChemCare waste management, environmental maintenance and response service offering in key geographic markets. That same month, we acquired the assets of Nexus Ag Business, Inc., enhancing our existing macronutrient and crop protection inputs through a proprietary line of micronutrients, macronutrients and specialty fertilizers. Together with our leading distribution and services network in the region, this acquisition further strengthens our agriculture group’s ability to provide customers in Canada with a complete product service offering that covers the entire growing cycle from start to finish.
In September 2017, we acquired Tagma Brasil Ltda. (“Tagma”), expanding our agriculture business in one of the world’s fastest-growing agricultural markets. That same month, we acquired the assets of PVS Minibulk, Inc. (“PVS”), strengthening our MiniBulk business in the West Coast market.
In January 2018, we acquired Kemetyl Norge Industri AS (“Kemetyl”) as well as the assets of Kemetyl Aktiebolag, expanding our leading position in the pharmaceutical industry in Norway and Sweden. In May 2018, we acquired Earthoil Plantations Limited (“Earthoil”), expanding and strengthening our existing global natural beauty and personal care product line in EMEA.
In September 2018, we announced the signing of a definitive agreement to acquire Nexeo Solutions, Inc. (“Nexeo”). The transaction (“Nexeo Acquisition”) was unanimously approved by the Boards of Directors of both companies, and is anticipated to close in the first quarter of 2019, subject to the approval of Univar’s shareholders, as well as satisfaction of other customary conditions. On January 29, 2019, Nexeo’s key stockholders, TPG Global and First Pacific, provided consent for the proposed transaction.
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During 2016 and 2017, we engaged in a series of secondary registrations of our stock. As a result, CVC divested its ownership interest in our company and both CD&R and Temasek continued to reduce their ownership stakes in our company. As of January 31, 2018, CD&R and Temasek owned 8.2% and 9.9%, respectively, of our issued and outstanding shares. As a result of Temasek's reduction in ownership below 10% , it is no longer considered a significant stockholder in 2018.
The below chart illustrates the change in our Significant Stockholders since the IPO date.
Products and End Markets
The focus of our marketing approach is to identify attractive end-user markets and provide customers in those markets all of their commodity and specialty chemical or ingredient needs. We also offer value-added services as well as procurement solutions that leverage our chemical, supply chain and logistics expertise, networked inventory sourcing and producer relationships. We provide our customers with a “one-stop shop” for their commodity and specialty chemical needs and offer a reliable and stable source of quality products and services.
We buy and inventory chemicals and ingredients in large quantities such as barge loads, railcars or full truck loads from chemical producers and sell and distribute smaller quantities to our customers. Approximately 40 percent of the chemicals and ingredients we purchase are in bulk form, and we repackage them into various size containers for sale and distribution.
Commodity chemicals and ingredients represent the largest portion of our business by sales and volume. Our commodity portfolio includes acids and bases, surfactants, glycols, inorganic compounds, alcohols and general chemicals used extensively throughout most end markets. Our specialty chemicals and ingredient sales represent an important, high-value, higher-growth portion of the chemical distribution market. We typically sell specialty products in lower volumes but at a higher profit than commodity products and our intent is to increase our presence in the specialty market. While many producers supply specialty products directly to customers, there is an increasing trend toward outsourcing the distribution of these specialized, lower volume products and ingredients. We believe that customers and producers value Univar’s ability to supply both commodity and specialty products, particularly as the markets continue to consolidate.
We focus on sourcing high-volume products that we distribute to our customers. Generally, we sell chemicals and ingredients via our industry-focused salesforce. However, a small proportion of the chemicals that we source are sold directly to certain high-volume customers through a dedicated sales team who handles these unique products and transactions. Our global sourcing capabilities enhance our global market presence, ensure safety of supply and competitive pricing, and provide product expertise across all market segments.
We serve a diverse set of end markets and regions, with no end market accounting for more than 14 percent of our net sales over the past year.
Our key global end markets include:
• | Agricultural and Environmental Sciences. Within the Agriculture industry we are a leading wholesale distributor of crop protection products to independent retailers and specialty applicators in Canada. To support this end market, we distribute herbicides, fungicides, insecticides, seed, micronutrients, macronutrients, horticultural products and |
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fertilizers among other products. In addition, we provide storage, packaging and logistics services for major crop protection companies. The Environmental Sciences group supplies pest control products and equipment to the structural pest control, public health, vegetation management, turf and ornamental, food processing and post-harvest storage, animal health and hay production markets. We operate a network of approximately 70 Univar ProCenter distribution centers in North America to serve this end market.
• | Chemical Manufacturing. We distribute a full suite of chemical products in support of the chemical manufacturing industry (organic, inorganic and polymer chemistries). Our broad warehousing and delivery resources permit us to assure our chemical manufacturing customers efficient inventory management, just-in-time delivery, and custom blends and packages. Our industry expertise also assists our customers in both selecting products that best suit their objectives and addressing chemical waste and wastewater issues. |
• | Cleaning and Sanitization. The cleaning and sanitization industry is made up of thousands of large and small formulators that require a multitude of chemical ingredients to make cleaning products and detergents for home and industrial use. We distribute chemicals manufactured by many of the industry’s leading producers of enzymes, surfactants, solvents, dispersants, thickeners, bleaching aides, builders, sealants, acids, alkalis and other chemicals that are used as ingredients and processing aids in the manufacturing of cleaning products. |
• | Coatings and Adhesives. The coatings and adhesives industry is one of our largest customer end markets. We sell resins, pigments, solvents, thickeners, dispersants and other additives used to make paints, inks, and coatings. We have a large, dedicated team of industry and product specialists with market expertise that enables us to work closely with formulators and producers to offer new technologies, new and improved formulations and to scale-up support. Our product line includes epoxy resins, polyurethanes, titanium dioxide, fumed silica, esters, plasticizers, silicones and specialty amines. |
• | Food Ingredients and Products. For the food and beverage industry, we distribute a diverse portfolio of commodity and specialty products that are sold as food additives or processing aids. We sell food ingredients such as thickeners, emulsifiers, sweeteners, preservatives, leavening agents and humectants, as well as texturizer and fat replacement products that include xanthan gum, locust bean gum, cellulosics and guar gum. We also distribute acidulants such as citric acid, lactic acid and malic acid, as well as alkalis. Additional offerings include supplements and products such as proteins, vitamins and minerals. The major food and beverage markets we serve are meat processing, baked goods, dairy, grain mill products, processed foods, carbonated soft drinks, fruit drinks and alcoholic beverages. We carefully manage our product portfolio to ensure quality standards, security of supply and cost competitiveness. We continuously refresh our product offering with products that meet key trends impacting the food industry. Our industry experts have developed marketing tools that simplify the ingredient selection process for our customers and provide valuable product performance information and technical solutions. |
• | Energy. We provide chemicals and service to midstream pipeline and downstream refinery operators primarily in the US and Canada. We offer an expansive product line with a team of highly skilled and uniquely dedicated specialists to stay on top of the latest trends, technologies and regulations. We also service the upstream oil and gas production market, including the US shale hydraulic-fracturing sector, by providing a variety of bulk chemicals to drill sites, as well as specialty blended products used to fracture rock and stimulate oil and gas production from the well. Other markets served to a lesser extent include Mexico, Europe’s North Sea and parts of Africa. |
• | Personal Care. We are a full-line distributor in the personal care industry providing a wide variety of specialty and basic chemicals and ingredients used in skin care products, shampoos, conditioners, styling products, hair color, body washes, sun care, color cosmetics, and pet care products. The products that we distribute include surfactants, emollients, emulsifiers, rheology modifiers, active ingredients, color, preservatives and processing aids. Our dedicated team of industry experts and technical marketers work with our customers to formulate traditional and cutting-edge products that address key trends in the personal care end markets. |
• | Pharmaceutical Ingredients and Finished Products. We are uniquely positioned in the highly-regulated pharmaceutical ingredients industry due to the combination of our product portfolio, logistics footprint and customized solutions. We represent some of the world’s leading excipient, process, solvent and active pharmaceutical ingredient producers, as well as producers of chemicals used to support water treatment, filtering and purification systems, thus offering our customers a very broad product selection in the pharmaceutical industry. We sell active ingredients such as aspirin, ascorbic acid, caffeine and ibuprofen, and excipients that include phosphates, polyethylene glycols, polysorbates, methylcellulose, stearyl alcohol and stearates. We also make and sell certain finished pharmaceutical products. |
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Services
In addition to selling and distributing chemicals, we use our transportation and warehousing infrastructure, along with our broad knowledge of chemicals and hazardous materials handling to provide important distribution and specialized services for our producers and our customers. This intermediary role Univar plays is increasingly important, in particular due to the recent trend of increased outsourcing of distribution by chemical producers to satisfy their need for supply chain efficiency. These services include:
Distribution and specialized services
• | Inventory Management. We manage our inventory in order to meet customer demands on short notice whenever possible. Our value as channel partners of chemical producers also enables us to obtain access to chemicals in times of short supply, when smaller chemical distributors may not be able to obtain or maintain stock. Further, our global distribution network permits us to stock products locally to enhance “just-in-time” delivery, providing outsourced inventory management to our customers in a variety of end markets. |
• | Product Knowledge and Technical Expertise. We partner with our customers in their production processes. For example, we employ teams of food technologists, chemical engineers and petroleum engineers who have the technical expertise to assist in the formulation of products to meet specific customer performance requirements as well as provide customers with after-market support and consultation. |
• | Mixing, Blending and Repackaging. We provide a full suite of blending and repackaging services for our customers across diverse industries. Additionally, we can fulfill small orders through our repackaging services, enabling customers to maintain smaller inventories. |
• | E-commerce and Digital Marketing. MyUnivar.com is an e-commerce solution offering Univar’s full catalog of products, complete with invoicing, order status and tracking, as well as documentation of prior purchases. Customers of MyUnivar.com are provided with easy, two-click re-ordering and document access 24 hours a day, seven days a week, from any device. ChemPoint is our unique distribution business that provides digital promotion or e-marketing channels for specialty and fine chemicals. ChemPoint operates principally in North America and EMEA and is primarily focused on expanding market share of high-value and highly specialized chemicals for partnered producers. |
• | Chemical Waste Removal and Environmental Response Services. Our ChemCare waste management service collects both hazardous and non-hazardous waste products at customer locations in the United States and Canada, and then works with select vendors in the waste disposal business to safely transport these materials to licensed third party treatment, storage and disposal facilities. ChemCare reviews each waste profile, recommends disposal alternatives to the customer and offers transportation of the waste to the appropriate waste disposal company. Hazardous and non-hazardous waste management technologies provided from our approved treatment storage and disposal facility vendors include recycling, incineration, fuels blending, lab packing, landfill, deep well injection and waste-to-energy. Through our acquisitions of Bodine and Weavertown Environmental Group, we are also able to provide our customers with industrial cleaning, site remediation and emergency environmental response services. |
• | Specialized Formulation and Blending. Leveraging our technical expertise, we are able to utilize our blending and mixing capabilities to create specialty chemical formulations to meet specific customer performance demands for agriculture and energy products through our Future Group, Tagma, and Magnablend blending services. |
Producers
Maintaining strong relationships with producers is important to our overall success, and we source chemicals and ingredients from many of the premier global chemical and ingredient manufacturers. Our relationships with some of the world’s largest commodity and specialty chemical and ingredient producers have been in place for decades. We typically maintain relationships with multiple producers in order to protect against disruption in supply and distribution logistics, as well as to ensure competitive pricing of our supply. Our scale, geographic reach, diversified distribution channels and industry expertise enable us to develop strong, long-term relationships with producers, and integrate our service and logistics capabilities into their business processes. This promotes collaboration on supply chain optimization, marketing and other revenue enhancement strategies. The producers we work with also benefit from the insight we provide into customer buying patterns and trends. More and more, chemical and ingredient producers are depending on the sales forces and infrastructure of large distributors to efficiently market, warehouse and deliver their chemicals and ingredients to end users.
Our supplier community is well diversified, with our largest producer representing approximately 13% of our 2018 chemicals expenditures, and no other chemical producer accounting for more than 5% of the total. Our 10 largest producers accounted for approximately 27% of our total chemical purchases in 2018.
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We typically purchase our chemicals and ingredients through purchase orders rather than long-term contracts, although we have exclusive supply arrangements for certain chemicals and ingredients. We normally enter into framework supply contracts with key producers. These framework agreements generally operate on an annual basis either with pricing items fixed to an index or without fixed pricing terms, although they often include financial incentives if we meet or exceed specified purchase volumes. We also have a limited number of longer term agreements with certain producers of commodity chemicals. For all of these chemicals, once we purchase the products, we ship them either directly to a customer or, more commonly, to one of our distribution centers.
Sales and Marketing
We organize our business to align with our customers and end markets needs by geography, product and service, and industry specialization, including high-focus industries such as coatings and adhesives, food ingredients, pharmaceutical ingredients and products, personal care, agricultural and environmental sciences, and energy. We train our sales personnel so that they develop expertise in the industries that they serve. Our sales force leverages our strong producer relationships to provide superior product insight and expertise supporting the delivery of critical-use specialty, organic and inorganic chemicals and ingredients to customers. Aligning our business to customers and end markets enables our sales force and supply chain to deliver valuable market insights to both our customers and producers.
Distribution Channels
We continue to refine our distribution business model to provide producers and our customers with the highest level of service, reliability and timeliness of deliveries while offering cost competitive products. We have multiple channels to market, including both warehouse delivery, and direct-to-consumer delivery. The principal determinants of the way a customer is serviced include the size, scale and level of customization of a particular order, the nature of the product and the customer, and the location of the product inventories. For the year ended December 31, 2018, warehouse distribution accounted for approximately 80% of our net sales while direct distribution accounted for approximately 18% of our net sales, with the remaining approximate 2% of net sales derived primarily from our waste management services.
Warehouse distribution
Our warehouse distribution channel is the core of our operations. We purchase chemicals and ingredients in truck load or larger quantities from producers based on contracted demands of our customers and our estimates of anticipated customer purchases. Once received, products are stored in one or more of our distribution facilities, for sale and distribution in smaller, less-than-truckload quantities to our customers. Our warehouses have various facilities for services such as repackaging, blending and mixing to create specialized solutions needed by our customers in ready-to-use formulations.
Our warehouse network connects large producers with smaller volume customers whose consumption patterns tend to make them uneconomical to be served directly by producers. Thus, the core customer serviced via our warehouses is a small or medium-volume consumer of chemicals and ingredients. Since chemicals and ingredients comprise only a fraction of the input costs for many of our customers’ products, our warehouse customers typically value quality, reliability of supply and ease of service. Our breadth of product offerings also allows us to provide customers with complete management solutions for their chemical needs as they are able to obtain small volumes of many different products from us more efficiently and economically than if they dealt directly with multiple chemical producers. Our network of warehouses allows us to service most customers from multiple locations and also enables us to move products efficiently and economically throughout our own warehouse system to service customers on a real-time basis. Further, by leveraging our geographic footprint and logistics platform, we are able to combine multiple customer orders along the same distribution routes to reduce delivery costs and facilitate customer inventory management. For example, we combine multiple less-than-truckload deliveries for different customers along the same route to better utilize our delivery assets while at the same time minimizing our customers’ inventories.
Our network of warehouses allows us to offer a delivery system that increases inventory visibility and improves plant safety and productivity. MiniBulk is a safe and efficient handling and use system for customers receiving less than full truckload quantities of chemicals. Our trained specialists deliver products to on-site storage containment systems that minimize employee exposure to hazardous chemicals. In addition, the need for drum storage and disposal are eliminated, thereby saving costs and improving access to product inventory. Our remote telemetry systems used in conjunction with MiniBulk storage solutions permit around-the-clock access to inventory information. The result is better inventory management, elimination of manual measurement and better assurance of timely replenishment.
With the leading market position in North America, our operations are capable of serving customers throughout the United States, including Hawaii and Alaska, and all major provinces and major manufacturing centers within Canada including remote areas such as the oil sands regions of Northern Canada. Our close proximity to major transportation arteries allows us to service customers in the most remote locations throughout the United States, particularly those markets that chemical producers are not
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able to serve profitably. In the USA, we rely on a combination of our own fleet of distribution vehicles and third-party carriers, while we primarily use third parties for the transportation of chemicals and ingredients in Canada, EMEA and Rest of World.
Direct distribution
Our direct distribution channel provides point-to-point logistics for full truckloads or larger quantities of chemicals between producers and customers. In direct distribution, we sell and service large quantity purchases that are shipped directly from producers through our logistics infrastructure, which provides our customers with sourcing and logistics support services for inventory management and delivery, in many cases far more economically than the producer might provide. We believe that producers view us not as competitors, but as providers of a valuable service, supporting these large orders through the utilization of our broad distribution network. We typically do not maintain inventory for direct distribution, but rather use our existing producer relationships and marketing expertise, ordering and logistics infrastructure to serve this demand, resulting in limited working capital investment for these sales. Our direct distribution service is valuable to major chemical producers as it allows them to deliver larger orders to customers utilizing our existing ordering, delivery and payment systems.
Insurance
The nature of our business exposes us to operational risk, including damages to the environment and property, and injury to employees or the general public. Although we focus on operating safely and prudently, we occasionally receive claims, alleging damages, negligence or other wrongdoing in the planning or performance of our services. Our liabilities resulting from these claims can be significant. Accruals for deductibles are based on claims and actuarial estimates of claims development and claims incurred but not recorded.
We maintain policies of insurance that provide coverage for these types of claims (subject to limitations, exclusions, or deductibles) for our worldwide facilities and activities. To mitigate aggregate loss potential above these retentions and deductibles, the company purchases insurance coverage from highly rated insurance companies. The company does not currently operate or participate in any captive insurance companies or other non-traditional risk transfer alternatives.
In the normal course of business, as a financial guarantee of our performance, we also purchase surety bonds or issue letters of credit in connection with municipal contracts, import and export activities, environmental remediation, and environmental permits.
Competition
The chemical and ingredient production, distribution and sales markets are highly competitive. Most of the products that we distribute are made to standard specifications and are either produced by or available from multiple sources.
Chemical and ingredient distribution itself is a fragmented market in which only a small number of competitors have substantial international operations. Our principal large international competitor is Brenntag, which has a particularly strong position in Europe.
Many other chemical distributors operate on a regional, national or local basis and may have a strong relationship with local producers and customers that may give them a competitive advantage in their local market. Some of our competitors are either local or regional distributors with a broad product portfolio, while others are niche players which focus on a specific end market, either industry or product-based.
Chemical and ingredient producers may also sell their products through a direct sales force or through multiple chemical distributors, limit their use of third party distributors, particularly with respect to higher margin products, or to partner with other chemical and ingredient producers for distribution. Each of which could increase our competition.
We compete on the basis of service, on-time delivery, product breadth and availability, product and market knowledge and insights, safety and environmental compliance, global reach, product price, as well as our ability to provide certain additional value-added services.
North America
The independent chemical distribution market in North America is fragmented. Our principal competitors in North America include Brenntag, Helm America, Hydrite Chemical, Prinova and Nexeo Solutions. In September 2018, we announced the signing of a definitive agreement to acquire Nexeo Solutions. The transaction was unanimously approved by the Boards of Directors of both companies, and is anticipated to close in the first quarter of 2019, subject to the approval of Univar's shareholders, as well as satisfaction of other customary conditions. On January 29, 2019, Nexeo’s key stockholders, TPG Global and First Pacific, provided consent for the proposed transaction.
We also compete with a number of smaller companies in certain niche markets.
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EMEA
The independent chemical distribution market in Europe historically has been highly fragmented. Consolidation among chemical distributors has increased, mirroring developments within the chemical sector as a whole.
Brenntag is our leading competitor in Europe due to its strong market position in Germany, which is the largest European chemical distribution market. Other regional competitors in Europe include Azelis, Helm and IMCD. We believe that we are the leading chemical distributor in the United Kingdom and Ireland.
Rest of World
In Rest of World, the markets for chemical distribution are much more fragmented and credible competitive information for smaller companies is not available. Our relative competitive position in the Rest of World markets is smaller than in North America or EMEA.
Regulatory Matters
Our business is subject to a wide range of regulatory requirements in the jurisdictions in which we operate. Among other things, these laws and regulations relate to environmental protection, economic sanctions, product regulation, anti-terrorism concerns, management, storage, transport and disposal of hazardous chemicals and other dangerous goods, and occupational health and safety issues. Changes in and introductions of regulations have in the past caused us to devote significant management and capital resources to compliance programs and measures. New laws, regulations, or changing interpretations of existing laws or regulations, or a failure to comply with current laws, regulations or interpretations, may have a material adverse effect on our business, financial condition and results of operations. The following summary illustrates some of the significant regulatory and legal requirements applicable to our business.
Environmental, health and safety matters
We operate in a number of jurisdictions and are subject to numerous foreign, federal, state and local laws and regulations related to the protection of the environment, human health and safety, including laws regulating discharges of hazardous substances into the soil, air and water, blending, managing, handling, storing, selling, transporting and disposing of hazardous substances, investigation and remediation of contaminated properties and protecting the safety of our employees and others. Some of our operations are required to hold environmental permits and licenses and certain of our services businesses are also impacted by these laws. The cost of complying with these environmental, health and safety laws, permits and licenses has, in some instances, been substantial.
Some of our historic operations, including those of companies we acquired, have resulted in contamination at a number of currently and formerly owned or operated sites. We are required to investigate and remediate at many of such sites. Contamination at these sites generally resulted from releases of chemicals and other hazardous substances. We have spent substantial sums on such investigation and remediation and expect to continue to incur such expenditures, or discover additional sites in need of investigation and remediation, until such investigation and remediation is deemed complete. Information on our environmental reserves is included in “Note 20: Commitments and contingencies” to our consolidated financial statements for the year ended December 31, 2018 which are included in Item 8 of this Annual Report on Form 10-K.
CERCLA. The US Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, also known as Superfund, as well as similar laws in other jurisdictions, governs the remediation of contaminated sites and establishes liability for the release of hazardous substances at such sites. A party that transported waste, or arranged for the shipment of waste, to a waste disposal facility or other third party site that requires remediation can be liable for the cost of cleanup regardless of fault, the lawfulness of the disposal or the actions of other parties. Under CERCLA, the EPA or a delegated state agency can oversee or require remediation of such sites and seek cost recovery from any party whose wastes were disposed at, or who otherwise contributed to the contamination of, such sites. We are party to consent agreements with the EPA and state regulatory authorities with respect to environmental remediation at a number of such sites. We may be identified as a Potentially Responsible Party at additional third party sites or waste disposal facilities.
RCRA. The EPA regulates the generation, transport, treatment, storage and disposal of hazardous waste under the US Resource Conservation and Recovery Act, or RCRA. RCRA also sets forth a framework for managing non-hazardous waste. Most owners and operators of hazardous waste treatment, storage and disposal facilities must obtain a RCRA permit. RCRA also mandates certain operating, recordkeeping and reporting obligations for owners and operators of hazardous waste facilities. Our facilities generate various hazardous and non-hazardous wastes and we are a hazardous waste transporter and temporary storage facility. As a result of such activities, we are required to comply with RCRA requirements, including the maintenance of financial resources and security to address forced closures or accidental releases.
Clean Air Act. The US Clean Air Act and similar laws in other jurisdictions establish a variety of air pollution control measures, including limits for a number of airborne pollutants. These laws also establish controls for emissions from automobiles
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and trucks, regulate hazardous air pollutants emitted from industrial sources and address the production of substances that deplete stratospheric ozone. Under the Clean Air Act, we are required to obtain permits for, and report on emissions of, certain air pollutants, or qualify for and maintain records substantiating that we qualify for an exemption. Owners and operators of facilities that handle certain quantities of flammable and toxic substances must implement and regularly update detailed risk management plans filed with and approved by the EPA. Failure to comply with the Clean Air Act may subject us to fines, penalties and other governmental and private actions.
Clean Water Act. Many of the jurisdictions in which we operate regulate water quality and contamination of water. In the United States, the EPA regulates discharges of pollutants into US waters, sets wastewater standards for industry and establishes water quality standards for surface waters, such as streams, rivers and lakes, under the US Clean Water Act. The discharge of any regulated pollutant from point sources (such as pipes and manmade ditches) into navigable waters requires a permit from the EPA or a delegated state agency. Several of our facilities have obtained permits for discharges of treated process wastewater directly to surface waters. In addition, several of our facilities discharge to municipal wastewater treatment facilities and therefore are required to obtain pretreatment discharge permits from local agencies. A number of our facilities also have storm water discharge permits.
Oil Pollution Prevention Regulations. The Oil Pollution Prevention regulations promulgated by the EPA under the authority of the Clean Water Act require that facilities storing oil in excess of threshold quantities or which have the ability to reach navigable water have a spill prevention, control and countermeasure, or SPCC, plan. Many of our facilities have SPCC plans or similar oil storage plans required in non-US jurisdictions.
Storage Requirements. Our warehouse facilities are required to comply with applicable permits and zoning requirements from local regulatory authorities and pursuant to leases. These requirements, which differ based on type of facility and location, define structural specifications and establish limits on building usage. Regulators typically have the authority to address non-compliance with storage requirements through fines, penalties and other administrative sanctions.
EPCRA. The US Emergency Planning and Community Right-To-Know Act, or EPCRA, establishes reporting rules for facilities that store or manage chemicals and requires such facilities to maintain certain safety data. EPCRA is intended to facilitate state and local planning for chemical emergencies. EPCRA requires state and local emergency planning and emergency response authorities to be informed of the presence of specified quantities of “extremely hazardous substances” at a facility and the release of listed hazardous substances above threshold quantities. Facilities that store or use significant amounts of toxic chemicals must also submit annual toxic chemical release reports containing information about the types and amounts of toxic chemicals that are released into the air, water and soil, as well as information on the quantities of toxic chemicals sent to other facilities. We store and handle a number of chemicals subject to EPCRA reporting and recordkeeping requirements.
TSCA and the Lautenberg Act. The US Toxic Substances Control Act, the recently enacted Lautenberg Act (collectively TSCA) and similar laws in other jurisdictions, are intended to ensure that chemicals do not pose unreasonable risks to human health or the environment. TSCA requires the EPA to maintain the TSCA registry listing chemicals manufactured or processed in the United States. Chemicals not listed on the TSCA registry cannot be imported into or sold in the United States until registered with the EPA. TSCA also sets forth specific reporting, recordkeeping and testing rules for chemicals, including requirements for the import and export of certain chemicals, as well as other restrictions relevant to our business. Pursuant to these laws, the EPA from time to time issues Significant New Use Rules, or SNURs, when it identifies new uses of chemicals that could pose risks to human health or the environment and also requires pre-manufacture notification of new chemical substances that do not appear on the TSCA registry. When we import chemicals into the United States, we must ensure that chemicals appear on the TSCA registry prior to import, participate in the SNUR process when a chemical we import requires testing data and report to the EPA information relating to quantities, identities and uses of imported chemicals.
FIFRA and Other Pesticide and Biocide Regulations. We have a significant operation in the distribution and sale of pesticides and biocides. These products are regulated in many jurisdictions. In the United States, the Federal Insecticide, Fungicide, and Rodenticide Act, or FIFRA, authorizes the EPA to oversee and regulate the manufacture, distribution, sale and use of pesticides and biocides. We are required to register with the EPA and certain state regulatory authorities as a seller and repackager of pesticides and biocides. The EPA may cancel registration of any pesticide or biocide that does not comply with FIFRA, effectively prohibiting the manufacture, sale, distribution or use of such product in the United States.
The EPA has established procedures and standards for the design of pesticide and biocide containers, as well as the removal of pesticides and biocides from such containers prior to disposal. Applicable regulations also prescribe specific labeling requirements and establish standards to prevent leaks and spills of pesticides and biocides from containment structures at bulk storage sites and dispensing operations. These standards apply to dealers who repackage pesticides, commercial applicators and custom blenders.
REACH. In Europe, our business is affected by legislation dealing with the Registration, Evaluation, Authorization and Restriction of Chemicals, or REACH. REACH requires manufacturers and importers of chemical substances to register such substances with the European Chemicals Agency, or the ECHA, and enables European and national authorities to track such
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substances. Depending on the amount of chemical substances to be manufactured or imported, and the specific risks of each substance, REACH requires different sets of data to be included in the registration submitted to the ECHA. Registration of substances with the ECHA imposes significant recordkeeping requirements that can result in significant financial obligations for chemical distributors, such as us, to import products into Europe. REACH is accompanied by legislation regulating the classification, labeling and packaging of chemical substances and mixtures.
GHG Emissions. In the US, various legislative and regulatory measures to address greenhouse gas, or GHG, emissions are in various phases of discussion or implementation. At the federal legislative level, Congress has previously considered legislation requiring a mandatory reduction of GHG emissions. Although Congressional passage of such legislation does not appear likely at this time, it could be adopted at a future date. It is also possible that Congress may pass alternative climate change bills that do not mandate a nationwide cap-and-trade program and instead focus on promoting renewable energy and energy efficiency. In the absence of congressional legislation curbing GHG emissions, the EPA is moving ahead administratively under its Clean Air Act authority.
The implementation of additional EPA regulations and/or the passage of federal or state climate change legislation will likely result in increased costs to operate and maintain our facilities. Increased costs associated with compliance with any future legislation or regulation of GHG emissions, if it occurs, may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
Internationally, many of the countries in which we do business (but not the US) have ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change, or the Kyoto Protocol, and we have been subject to its requirements, particularly in the European Union. Many nations entered into the Copenhagen Accord, which may result in a new international climate change treaty in the future. If so, we may become subject to different and more restrictive regulation on climate change to the extent the countries in which we do business implement such a new treaty.
OSHA. We are subject to workplace safety laws in many jurisdictions, including the United States. The US Occupational Safety and Health Act, or OSHA, which addresses safety and health in workplace environments and establishes maximum workplace chemical exposure levels for indoor air quality. Chemical manufacturers and importers must employ a hazard communication program utilizing labels and other forms of warnings, as well as Material Safety Data Sheets, setting forth safety and hazardous materials information to employees and customers. Employers must provide training to ensure that relevant employees are equipped to properly handle chemicals.
We train employees and visitors who have access to chemical handling areas. OSHA requires the use of personal protective equipment when other controls are not feasible or effective in reducing the risk of exposure to serious workplace injuries or illnesses resulting from contact with hazardous substances or other workplace hazards. Employers must conduct workplace assessments to determine what hazards require personal protective equipment, and must provide appropriate equipment to workers.
OSHA operates a process safety management rule, or PSM Rule, that requires employers to compile written process safety information, operating procedures and facility management plans, conduct hazard analyses, develop written action plans for employee participation in safety management and certify every three years that they have evaluated their compliance with process safety requirements. Employees must have access to safety analyses and related information, and employers must maintain and provide process-specific training to relevant employees. We handle several chemicals that are hazardous and listed under the PSM Rule, which imposes extensive obligations on our handling of these chemicals and results in significant costs on our operations.
OSHA’s Hazardous Waste Operations and Emergency Response rules require employers and employees to comply with certain safety standards when conducting operations involving the exposure or potential exposure to hazardous substances and wastes. These standards require hazardous substances preparedness training for employees and generally apply to individuals engaged in cleanup operations, facility operations entailing the treatment, storage and disposal of hazardous wastes, and emergency responses to uncontrolled releases of hazardous substances.
OSHA regulations require employers to develop and maintain an emergency action plan to direct employer and employee actions in the event of a workplace emergency. Under most circumstances, the plan must be maintained in writing, remain accessible at the workplace and be made available to employees for review.
Chemical Facility Anti-Terrorism Standards. The US Department of Homeland Security, or DHS, regulates certain high-risk chemical facilities through its Chemical Facility Anti-Terrorism Standards. These standards establish a Chemical Security Assessment Tool comprised of four elements, including facility user registration, top-screen evaluation, security vulnerability assessment and site security planning. The site security plan must address any vulnerabilities identified in the security vulnerability assessment, including access control, personnel credentialing, recordkeeping, employee training, emergency response, testing of security equipment, reporting of security incidents and suspicious activity, and deterring, detecting and delaying potential attacks. DHS must approve all security vulnerability assessments and site security plans. We handle a number of chemicals regulated by DHS.
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FDA. The US Food & Drug Administration’s, or FDA’s, Food Safety Modernization Act, or FSMA, directs FDA to build an integrated national food safety system in partnership with state and local authorities. Univar facilities that handle FDA regulated products are required to implement a written preventive controls plan. This involves evaluating the hazards that could affect food safety and specifying what preventive steps, or controls, will be put in place to significantly minimize or prevent the hazards. Also, when we import FDA regulated products into the United States, we have an explicit responsibility to verify that our foreign suppliers have adequate preventive controls in place. Finally, the rule establishes requirements for companies involved in transporting FDA regulated products to use sanitary practices to ensure the safety of those products.
Other regulations
We are subject to other foreign, federal, state and local regulations. For example, many of the products we repackage, blend and distribute are subject to Food and Drug Administration regulations governing the handling of chemicals used in food, food processing or pharmaceutical applications. Compliance with these regulations requires testing, additional policies, procedures and documentation and segregation of products. In addition, we are subject to a variety of state and local regulations, including those relating to the fire protection standards, and local licensing and permitting of various aspects of our operations and facilities.
Legal Proceedings
In the ordinary course of our business, we are subject to periodic lawsuits, investigations and claims. Although we cannot predict with certainty the ultimate resolution of pending or future lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party is likely to have a material adverse effect on our business, results of operations, cash flows or financial condition. See “Note 20: Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K for additional information.
Asbestos claims
In its 1986 purchase of McKesson Chemical Company from McKesson Corporation, or McKesson, our wholly owned subsidiary, Univar USA Inc., entered into an indemnification agreement with McKesson. Univar USA has an obligation to defend and indemnify McKesson for claims alleging injury from exposure to asbestos-containing products sold by McKesson Chemical Company, or the asbestos claims. Univar USA’s obligation to indemnify McKesson for settlements and judgments arising from asbestos claims is the amount which is in excess of applicable insurance coverage, if any, which may be available under McKesson’s historical insurance coverage. In addition, we are currently defending a small number of claims which name Univar USA as a defendant.
As of December 31, 2018, Univar USA has accepted the tender of, and is defending McKesson in, eight pending separate-plaintiff claims in multi-plaintiff lawsuits filed in the State of Mississippi. These lawsuits have multiple plaintiffs, include a large number of defendants, and provide no specific information on the plaintiffs’ injuries and do not connect the plaintiffs’ injuries to any specific sources of asbestos. Additionally, the majority of the plaintiffs in these lawsuits have not put forth evidence that they have been seriously injured from exposure to asbestos. No new claims in Mississippi have been received since 2010. At the peak there were approximately 16,000 such claims pending against McKesson. To date, the costs for defending these cases have not been material, and the cases that have been finalized have either been dismissed or resolved with either minimal or no payments. Although we cannot predict the outcome of pending or future claims or lawsuits with certainty, we believe the future defense and liability costs for the Mississippi cases will not be material. Univar USA has not recorded a reserve related to these lawsuits, as it has determined that losses are neither probable nor estimable.
As of December 31, 2018, Univar USA was defending fewer than 200 single-plaintiff asbestos claims against McKesson (or Univar USA as a successor in interest to McKesson Chemical Company) pending in 12 states. These cases differ from the Mississippi multi-plaintiff cases in that they are single-plaintiff cases with the plaintiff alleging substantial specific injuries from exposure to asbestos-containing products. These cases are similar to the Mississippi cases in that numerous defendants are named and that they provide little specific information connecting the plaintiffs’ injuries to any specific source of asbestos. Although we cannot predict the outcome of pending or future claims or lawsuits with certainty, we believe the liabilities for these cases will not be material. In 2018, there were 56 single-plaintiff lawsuits filed against McKesson and 100 cases against McKesson which were resolved.
Environmental remediation
The Company is subject to various federal, state and local environmental laws and regulations that require environmental assessment or remediation efforts (collectively “environmental remediation work”) at approximately 130 locations, some that are now or were previously Company-owned/occupied and some that were never Company-owned/occupied (“non-owned sites”).
The Company’s environmental remediation work at some sites is being conducted pursuant to governmental proceedings or investigations, while the Company, with appropriate state or federal agency oversight and approval, is conducting the environmental remediation work at other sites voluntarily. The Company is currently undergoing remediation efforts or is in the
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process of active review of the need for potential remediation efforts at approximately 107 current or formerly Company-owned/occupied sites. In addition, the Company may be liable for a share of the cleanup of approximately 23 non-owned sites. These non-owned sites are typically (a) locations of independent waste disposal or recycling operations with alleged or confirmed contaminated soil and/or groundwater to which the Company may have shipped waste products or drums for re-conditioning, or (b) contaminated non-owned sites near historical sites owned or operated by the Company or its predecessors from which contamination is alleged to have arisen.
In determining the appropriate level of environmental reserves, the Company considers several factors such as information obtained from investigatory studies; changes in the scope of remediation; the interpretation, application and enforcement of laws and regulations; changes in the costs of remediation programs; the development of alternative cleanup technologies and methods; and the relative level of the Company’s involvement at various sites for which the Company is allegedly associated. The level of annual expenditures for remedial, monitoring and investigatory activities will change in the future as major components of planned remediation activities are completed and the scope, timing and costs of existing activities are changed. Project lives, and therefore cash flows, range from 2 to 30 years, depending on the specific site and type of remediation project.
Although the Company believes that its reserves are adequate for environmental contingencies, it is possible, due to the uncertainties noted above, that additional reserves could be required in the future that could have a material effect on the overall financial position, results of operations, or cash flows in a particular period. This additional loss or range of losses cannot be recorded at this time, as it is not reasonably estimable.
Customs and international trade laws
In 2015, the US Department of Justice (“DOJ”), on behalf of US Customs and Border Patrol (“CBP”), filed a complaint against Univar USA Inc., (“Univar”) in the Court of the International Trade seeking approximately $84.0 million, plus additional interest and fees, in allegedly unpaid duties that applied to imports of saccharin from China. Univar denies that any such duties were due because Univar contends the saccharin it imported during the time in question was Taiwanese in origin. The case has progressed through the discovery phase and earlier this year Univar filed a motion for summary judgement, which the Court denied. The case is scheduled for trial in April 2019. Univar has not recorded a liability related to this matter. Although the Company believes its position is defensible, it cannot guarantee the outcome of this or other litigation.
Proprietary Rights
We rely primarily on trademarks, copyrights and trade secret laws to establish and maintain our proprietary rights in our intellectual property including technology, creative works and products.
We currently own trademark registrations or pending applications in approximately 86 countries for the Univar name and in approximately 68 countries for the Univar hexagon logo. Each of the issued registrations is current and valid for the maximum available statutory duration and can be renewed prior to expiration of the relevant statutory period. We renew the registrations as they become due for both of these marks. We claim common law rights in the mark “Univar” and other Univar-owned trademarks in those jurisdictions that recognize trademark rights based on use without registration. Additionally, we currently own registrations and pending applications in the United States and various jurisdictions for numerous other trademarks that identify Univar as the source of products and services, including “ChemPoint.com,” “ChemCare,” and “PESTWEB.”
Employees
As of December 31, 2018, we employed more than 8,500 persons on a full-time equivalent basis worldwide.
Available Information
We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, as well as proxy statements and registration statements, with the Securities and Exchange Commission (the “SEC”). The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge on or through our website at www.univar.com as soon as reasonably practicable after we file or furnish them to the SEC. The contents of our website are not, however, a part of this Form 10-K or our other SEC filings.
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Item 1A. RISK FACTORS
Risks Related to Our Business
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 operations and financial results.
We sell chemicals that are used in manufacturing processes and as components of or ingredients in other products. Our sales are correlated with and affected by fluctuations in the levels of industrial production, manufacturing output, and general economic activity. Producers of commodity and specialty chemicals are likely to reduce their output in periods of significant contraction in industrial and consumer demand, while demand for the products we distribute depends largely on trends in demand in the end markets our customers serve. A majority of our sales are in North America and Europe and our business is therefore susceptible to downturns in those economies as well as, to a lesser extent, the economies in the rest of the world. Our profit margins, as well as overall demand for our products and services, could decline as a result of a large number of factors outside our control, including economic recessions, reduced customer demand (whether due to changes in production processes, consumer preferences, laws and regulations affecting the chemicals industry and the manner in which they are enforced, or other factors), inflation, fluctuations in interest and currency exchange rates, and changes in the fiscal or monetary policies of governments in the regions in which we operate.
General economic conditions and macroeconomic trends, as well as the creditworthiness of our customers, could affect overall demand for chemicals. Any overall decline in the demand for chemicals could significantly reduce our sales and profitability. If the creditworthiness of our customers declines, we would face increased credit risk. In addition, volatility and disruption in financial markets could adversely affect our sales and results of operations by limiting our customers’ ability to obtain financing necessary to maintain or expand their own operations.
A historical feature of past economic weakness has been significant destocking of inventories, including inventories of chemicals used in industrial and manufacturing processes. It is possible that an improvement in our net sales in a particular period may be attributable in part to restocking of inventories by our customers and represent a level of sales or sales growth that will not be sustainable over the longer term. Further economic weakness could lead to insolvencies among our customers or producers, as well as among financial institutions that are counterparties on financial instruments or accounts that we hold. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.
Disruptions in the supply of chemicals we distribute or in the operations of our customers could adversely affect our business.
Our business depends on access to adequate supplies of the chemicals our customers purchase from us. From time to time, we may be unable to purchase adequate quantities of certain chemicals at prices that would enable us to earn a profit, if at all due to supply disruptions. Causes of supply disruptions may include natural disasters (including hurricanes and other extreme weather), industrial accidents, scheduled production outages, producer breaches of contract, producer disruptions, high demand leading to difficulties allocating appropriate quantities, port closures and other transportation disruptions and other circumstances beyond our control. 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.
Significant changes in the business strategies of producers could also disrupt our supply. Large chemical manufacturers may elect to sell certain products (or products in certain regions) directly to customers, instead of relying on 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. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.
To the extent we have contracts with producers and our customers, they are generally short term or terminable upon short notice or at will, and termination or renegotiation of our relationships with producers and customers could negatively affect our business.
Our purchases and sales of chemicals are typically made pursuant to purchase orders rather than long-term contracts. Many of our contracts with both producers and our customers are terminable without cause upon 30 days' or less notice to us from the producer or customer. While some of our relationships for the distribution and sale of chemicals have exclusivity or preference provisions, we may not enforce these provisions effectively due to legal or business considerations. Our business relationships and reputation may suffer if we are unable to meet our delivery obligations to our customers which may occur because many producers are not subject to contracts or can terminate contracts on short notice. In addition, renegotiation of purchase or sales
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terms to our disadvantage could reduce our sales margins. Any of these developments could adversely affect our business, financial condition and results of operations.
The prices and costs of the products we purchase may be subject to large and significant price increases. We might not be able to pass such cost increases through to our customers. We could experience financial losses if our inventories of one or more chemicals exceed our sales and the price of those chemicals decreases significantly while in our inventories or if our inventories fall short of our sales and the purchase price of those chemicals increases significantly.
We purchase and sell a wide variety of chemicals, the price and availability of which may fluctuate, and may be subject to large and significant price increases. Many of our contracts with producers include chemical prices that are not fixed or are tied to an index, which allows our producers to change the prices of the chemicals we purchase as the price of the chemicals fluctuates in the market. Our business is exposed to these fluctuations, as well as to fluctuations in our costs for transportation and distribution due to rising fuel prices or increases in charges from common carriers, rail companies and other third party transportation providers, as well as other factors. Changes in chemical prices affect our net sales and cost of goods sold, as well as our working capital requirements, levels of debt and financing costs. We might not always be able to reflect increases in our chemical costs, transportation costs and other costs in our own pricing. Any inability to pass cost increases onto customers may adversely affect our business, financial condition and results of operations.
In order to meet customer demand, we typically maintain significant inventories, and we are therefore subject to a number of risks associated with our inventory levels, including the following:
• | declines in the prices of chemicals that are held by us; |
• | the need to maintain a significant inventory of chemicals that may be in limited supply and therefore difficult to procure; |
• | buying chemicals in bulk for the best pricing and thereby holding excess inventory; |
• | responding to the fluctuating demand for chemicals; |
• | cancellation of customer orders; and |
• | responding to customer requests for rapid delivery. |
In order to manage our inventories successfully, we must estimate demand from our customers and purchase chemicals that substantially correspond to that demand. If we overestimate demand and purchase too much of a particular chemical, we face a risk that the price of that chemical will fall, leaving us with inventory that we cannot sell profitably or have to write down such inventory from its recorded value. If we underestimate demand and purchase insufficient quantities of a particular chemical and prices of that chemical rise, we could be forced to purchase that chemical at a higher price and forego profitability in order to meet customer demand. Our business, financial condition and results of operations could suffer a material adverse effect if either or both of these situations occur frequently or in large volumes.
We could lose our customers and suffer damage to our reputation if we are unable to meet customer demand for a particular product.
It can be difficult to anticipate our customers’ requirements for particular chemicals, particularly in the cases on pronounced cyclicality in our end markets. We could be, and often are, asked to deliver larger-than-expected quantities of a particular chemical on short notice. If for any reason we experience difficulties in filling customer orders, our reputation and customer relationships could be harmed. Customers may discontinue their relationship with us or we may be required to pay a higher price in order to obtain the needed chemical on short notice, thereby adversely affecting our margins.
Trends in oil, gas and mineral prices could adversely affect the level of exploration, development and production activity of certain of our customers and in turn the demand for our products and services.
Demand for our oil, gas and mining products and services is sensitive to the level of exploration, drilling, development and production activity of, and the corresponding capital spending by, oil, gas and mining companies and oilfield service providers. The level of exploration, drilling, development and production activity is directly affected by trends in oil, gas and mineral prices, which historically have been volatile and are likely to continue to be volatile. Many factors may affect these prices, including global market conditions, political conditions and weather. The unpredictability of these factors prevents any reasonable forecast on the movements of such prices.
Any reduction in oil and gas prices, could depress the immediate levels of exploration, drilling, development and production activity by certain of our customers. Even the perception of longer-term lower oil and gas prices by certain of our customers could similarly reduce or delay major expenditures by these customers given the long-term nature of many large-scale development
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projects. If any of these events were to occur, it could have an adverse effect on our business, results of operations and financial condition.
The markets in which we operate are highly competitive.
The chemical distribution market is highly competitive. Chemicals can be purchased from a variety of sources, including traders, brokers, wholesalers and other distributors, as well as directly from producers. Many of the products we distribute or finish are essentially fungible with products offered by our competition, including emerging competitors. The competitive pressure we face is particularly strong in sectors and markets where local competitors have strong positions or where new competitors can easily enter. Increased competition from distributors of products similar to or competitive with ours could result in price reductions, reduced margins and a loss of market share.
We expect to continue to experience significant and increasing levels of competition in the future. We must also compete with smaller companies that have been able to develop strong local or regional customer bases. In certain countries, some of our competitors are more established, benefit from greater name recognition and have greater resources within those countries than we do.
Consolidation of our competitors in the markets in which we operate could place us at a competitive disadvantage and reduce our profitability.
We operate in an industry, which is highly fragmented on a global scale, but in which there has been a trend toward consolidation in recent years. Consolidations of our competitors may jeopardize the strength of our positions in one or more of the markets in which we operate and any advantages we currently enjoy due to the comparative scale of our operations. Losing some of those advantages could adversely affect our business, financial condition and results of operations, as well as our growth potential.
We 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.
We have made and may in the future make acquisitions of, or investments in, businesses or companies (including strategic partnerships with other companies). Acquisitions or investments have involved in the past and will likely involve in the future various risks, such as:
• | integrating the 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 because our current high leverage may make it difficult or impossible for us to secure additional financing for acquisitions.
To the extent that we make acquisitions that result in our recording significant goodwill or other intangible assets, the requirement to review goodwill and other intangible assets for impairment periodically may result in impairments that could have a material adverse effect on our financial condition and results of operations.
In connection with acquisitions, ventures or divestitures, we may become subject to liabilities.
In connection with any acquisitions or ventures, we may acquire liabilities or defects such as legal claims, including but not limited to third party liability and other tort claims; claims for breach of contract; employment-related claims; environmental
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liabilities, conditions or damage; permitting, regulatory or other compliance with law issues; hazardous materials or liability for hazardous materials; or tax liabilities. If we acquire any of these liabilities, and they are not adequately covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty, we may be responsible for significant out-of-pocket expenditures. In connection with any divestitures, we may incur liabilities for breaches of representations and warranties or failure to comply with operating covenants under any agreement for a divestiture. In addition, we may indemnify a counterparty in a divestiture for certain liabilities of the subsidiary or operations subject to the divestiture transaction. These liabilities, if they materialize, could have a material adverse effect on our business, financial condition and results of operations.
Our balance sheet includes significant goodwill and intangible assets, the impairment of which could affect our future operating results.
We carry significant goodwill and intangible assets on our balance sheet. As of December 31, 2018, our goodwill and intangible assets totaled approximately $1.8 billion and $0.2 billion, respectively, including approximately $1.2 billion in goodwill resulting from our 2007 acquisition by investment funds advised by CVC. We may also recognize additional goodwill and intangible assets in connection with future business acquisitions. Goodwill is not amortized for book purposes. We test for impairment annually using a fair value based approach. We also test goodwill for impairment if an event occurs or circumstances change that indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. The identification and measurement of impairment involves the estimation of the fair value of reporting units, which requires judgment and involves the use of significant estimates and assumptions by management. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment and incorporate management assumptions about expected future cash flows and contemplate other valuation techniques. Our estimates of future cash flows may differ from actual cash flows that are subsequently realized due to many factors, including future worldwide economic conditions and the expected benefits of our initiatives, among other things. 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. Although we currently do not expect that our goodwill and intangible assets will be further impaired, we cannot guarantee that a material impairment will not occur, particularly in the event of a substantial deterioration in our future prospects either in total or in a particular reporting unit. See “Note 13: Goodwill and intangible assets” in Item 8 of this Annual Report on Form 10-K for a discussion of our 2018 impairment review. If our goodwill and intangible assets become impaired, it could have a material adverse effect on our financial condition and results of operations.
We require significant working capital, and we expect our working capital needs to increase in the future, which could result in having lower cash available for, among other things, capital expenditures and acquisition financing.
We require significant working capital to purchase chemicals from chemical producers and distributors and sell those chemicals efficiently and profitably to our customers. Our working capital needs may increase if the price of products we purchase and inventory increase. Our working capital needs also increase at certain times of the year, as our customers’ requirements for chemicals increase. For example, our customers in the agricultural sector require significant deliveries of chemicals within a growing season that can be very short and depend on weather patterns in a given year. We need inventory on hand to have product available to ensure timely delivery to our customers. If our working capital requirements increase and we are unable to finance our working capital on terms and conditions acceptable to us, we may not be able to obtain chemicals to respond to customer demand, which could result in a loss of sales.
In addition, the amount of working capital we require to run our business is expected to increase in the future due to expansions in our business activities. If our working capital needs increase, the amount of free cash we have at our disposal to devote to other uses will decrease. A decrease in free cash could, among other things, limit our flexibility, including our ability to make capital expenditures and to acquire suitable acquisition targets that we have identified. If increases in our working capital occur and have the effect of decreasing our free cash, it could have a material adverse effect on our business, financial condition and results of operations.
We have a history of net losses and may not sustain profitability in the future.
Although we achieved profitability in 2018 and 2017, we had a net loss of $68.4 million in 2016 and there can be no assurance that we will sustain profitability. We have incurred net losses in three of the last six fiscal years. Growth of our revenues may slow or revenues may decline for a number of possible reasons, including slowing demand for our products and services, increasing competition or decreasing growth of our overall market. Our cost of goods sold could increase for a number of possible reasons, including increases in chemical prices and increases in chemical handling expenses due to regulatory action or litigation. In addition, our ability to generate profits could be impacted by our substantial indebtedness and the related interest expense. The interest payments on our indebtedness have exceeded operating income in two of our last six fiscal years. All of these factors could contribute to further net losses and, if we are unable to meet these risks and challenges as we encounter them, our business may suffer.
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We rely on our computer and data processing systems, and a large-scale malfunction could disrupt our business or create potential liabilities.
Our ability to keep our business operating effectively depends on the functional and efficient operation of our enterprise resource planning, telecommunications systems, inventory tracking, billing and other information systems and related records and information management policies. We rely on these systems to track transactions, billings, payments and inventory, as well as to make a variety of day-to-day business decisions. Our systems are aging and susceptible to malfunctions, lack of support, interruptions (including due to equipment damage, power outages, computer viruses and a range of other hardware, software and network problems) and we may experience such malfunctions, interruptions or security breaches in the future. Our systems may also be older generations of software which are unable to perform as efficiently as, and fail to communicate well with, newer systems. As the development and implementation of our information technology systems continue, we may elect to modify, replace or discontinue certain technology initiatives, which would result in write-downs.
Although our systems are diversified, including multiple server locations and a range of software applications for different regions and functions, a significant or large-scale malfunction, interruption or security breach of our computer or data processing systems could adversely affect our ability to manage and keep our operations running efficiently and damage our reputation if we are unable to track transactions and receive products from producers or deliver products to our customers. A malfunction that results in a wider or sustained disruption to our business could have a material adverse effect on our business, financial condition and results of operations, as well as on the ability of management to align and optimize technology to implement business strategies. A security breach might also lead to potential claims from third parties or employees.
Data privacy is subject to frequently changing rules and regulations regarding the handling of personal data, such as the General Data Protection Regulation (“GDPR”) which was recently adopted by the European Union. These rules and regulations are frequently changing and are becoming increasingly complex and sometimes conflict among the various jurisdictions and countries in which we operate, which makes compliance challenging and expensive. Any breach in our information technology security systems could result in the disclosure or misuse of confidential or proprietary information, including sensitive customer, supplier, employee or investor information maintained in the ordinary course of our business. Any such event, or any failure to comply with the requirements of GDPR or other laws in this area, could cause damage to our reputation, loss of valuable information or loss of revenue and could result in legal liability, or regulatory or other penalties. In addition, we may incur large expenditures to investigate or remediate, to recover data, to repair or replace networks or information systems, or to protect against similar future events.
Further, a failure to comply with our records and information management and retention policies could lead to potential claims, liabilities or exposures.
Our business could be negatively affected by security threats, including cybersecurity threats to us, and other disruptions.
We face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable, threats to the security of our facilities, and threats from terrorist acts. The potential for such security threats subjects our operations to increased risks that could have a material adverse effect on our business. Under the oversight of our board of directors and the leadership and active participation of our senior management team, we are continuously working to improve our ability to respond to and recover from potential security threats through technological improvements and employee awareness training around cyber risks. In responding to these risks, we continue to implement various procedures and controls to monitor and mitigate security threats and to increase security for our information, facilities and infrastructure which may result in increased capital and operating costs. We may be the recipients of intelligence or other threat information that we are unable to share with investors and other stakeholders. There can be no assurance that such procedures, controls, and intelligence will be sufficient to prevent security breaches from occurring. If any security breaches were to occur, they could lead to losses of sensitive information, critical infrastructure or capabilities essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations or cash flows, and could result in claims being brought against us. Cybersecurity attacks in particular are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data (either directly or through our business partners), and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data. In addition, if any information about our customers and producers retained by us were the subject of a successful cybersecurity attack against us, we could be subject to litigation or other claims by the affected customers and producers. We could also encounter violations of applicable law or reputational damage from the disclosure of confidential information belonging to us or our employees, customers or suppliers. In addition, the disclosure of non-public information could lead to the loss of our intellectual property and/or diminished competitive advantages. Should any of the foregoing events occur, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. In addition, evolving and expanding compliance and operational requirements under the privacy laws of the jurisdictions in which we operate, such as the EU General Data Protection Regulation, or GDPR, which took effect in May 2018, impose significant costs that are likely to
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increase over time. These events could damage our reputation and lead to financial losses from expenses related to remediation actions, loss of business or potential liability.
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 railcars, we also rely on transportation and warehousing provided by third parties (including common carriers and rail companies) to deliver products to our customers. Our access to third party transportation is not guaranteed, and we may be unable to transport chemicals at economically attractive rates in certain circumstances, particularly in cases of adverse market conditions or disruptions to transportation infrastructure. We are also subject to increased costs that we may not always be able to recover from our customers, including fuel prices, as well as charges imposed by common carriers, leasing companies and other third parties involved in transportation. In particular, our US operations rely to a significant extent on rail shipments, and we are therefore required to pay rail companies’ network access fees. We can also experience the availability of trucks and drivers tighten. We are also subject to the risks normally associated with product delivery, including inclement weather, disruptions in the transportation infrastructure, disruptions in our lease arrangements and the availability of fuel, as well as liabilities arising from accidents to the extent we are not adequately covered by insurance or misdelivery of products. Our failure to deliver products in a timely and accurate manner could harm our reputation and brand, which could adversely affect our business, financial condition and results of operations.
Our business exposes us to significant risks associated with hazardous materials and related activities, 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 and environmental risks are significant concerns for us. We maintain substantial reserves relating to remediation activities at our owned sites and third party sites, which are subject to federal and state clean-up requirements, as described below in “—We are subject to extensive general and product-specific environmental, health and safety laws and regulations. Compliance with and changes to these environmental, health and safety laws, including laws relating to the investigation and remediation of contamination, could have a material adverse effect on our business, financial condition and results of operations.” We are exposed to present and future chemical exposure claims by employees, contractors on our premises, other persons located nearby, as well as related workers' compensation claims. In the United States, we are subject to federal legislation enforced by OSHA as well as to state safety and health laws. We carry insurance to protect us against many accident-related risks involved in the conduct of our business and we maintain environmental damage and pollution insurance coverage in accordance with our assessment of the risks involved, the ability to bear those risks and the cost and availability of insurance. Each of these insurance policies is subject to exclusions, deductibles and coverage limits we believe are generally in accordance with industry standards and practices. See “Business—Insurance” in Item 1 of this Annual Report on Form 10-K. We do not insure against all risks and may not be able to insure adequately against certain risks (whether relating to our or a third party’s activities or other matters) and may not have insurance coverage that will pay any particular claim. 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. In particular, more stringent environmental, health or safety regulations may increase our costs for, or impact the availability of, insurance against accident-related risks and the risks of environmental damage or pollution. Our business, financial condition and results of operations could be materially impaired by accidents and other environmental risks that substantially reduce our revenues, increase our costs or subject us to other liabilities in excess of available insurance.
Accidents, safety failures, environmental damage, product quality issues, major or systemic delivery failures involving our distribution network or the products we carry, or adverse health effects or other harm related to hazardous materials we blend, manage, handle, store, sell, transport or dispose of could damage our reputation and result in substantial damages or remedial obligations.
Our business depends to a significant extent on our customers’ and producers’ trust in our reputation for reliability, quality, safety and environmental responsibility. Actual or alleged instances of safety deficiencies, mistaken or incorrect deliveries, inferior product quality, exposure to hazardous materials resulting in illness, injury or other harm to persons, property or natural resources, or of damage caused by us or our products, could damage our reputation and lead to customers and producers curtailing the volume of business they do with us. Also, there may be safety, personal injury or other environmental risks related to our products which are not known today. Any of these events, outcomes or allegations could also subject us to substantial legal claims, and we could incur substantial expenses, including legal fees and other costs, in defending such legal claims, which could materially impact our financial position and results of operations.
Actual or alleged accidents or other incidents at our facilities or that otherwise involve our personnel or operations could also subject us to claims for damages by third parties. Because many of the chemicals that we handle are dangerous, we are subject to the ongoing risk of hazards, including leaks, spills, releases, explosions and fires, which may cause property damage, illness, physical injury or death. We sell products used in hydraulic fracturing, a process that involves injecting water, sand and chemicals
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into subsurface rock formations to release and capture oil and natural gas. The use of such hydraulic fracturing fluids by our customers may result in releases that could impact the environment and third parties. Several of our distribution facilities, including our Los Angeles facility, one of our largest, are located near high-density population centers. If any such events occur, whether through our own fault, through preexisting conditions at our facilities, through the fault of a third party or through a natural disaster, terrorist incident or other event outside our control, our reputation could be damaged significantly. We could also become responsible, as a result of environmental or other laws or by court order, for substantial monetary damages or expensive investigative or remedial obligations related to such events, including but not limited to those resulting from third party lawsuits or environmental investigation and cleanup obligations on and off-site. The amount of any costs, including fines, damages and/or investigative and remedial obligations, that we may become obligated to pay under such circumstances could substantially exceed any insurance we have to cover such losses.
Any of these risks, if they materialize, could significantly harm our reputation, expose us to substantial liabilities and have a material adverse effect on our business, financial condition and results of operations.
International Market Risk
We generate a significant portion of our net sales internationally and intend to continue to expand our international operations. We face particular challenges in emerging markets. Our results of operations could suffer if we are unable to manage our international operations effectively or as a result of various risks related to our international activities.
During the year ended December 31, 2018, approximately 40% of our net sales were generated outside of the United States. We intend to continue to expand our penetration in certain foreign markets and to enter new and emerging foreign markets. Expansion of our international business will require significant management attention and resources. 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, which may differ in certain respects from our experience in North America and Europe; |
• | building our reputation and awareness of our services among foreign producers and customers; and |
• | implementing new financial, management information and operational systems, procedures and controls to monitor our operations in new markets effectively, without causing undue disruptions to our operations and customer and producer relationships. |
In addition, we are subject to risks associated with operating in foreign countries, including:
• | varying and often unclear legal and regulatory requirements that may be subject to inconsistent or disparate enforcement, particularly regarding environmental, health and safety issues and security or other certification requirements, as well as other laws and business practices that favor local competitors, such as exposure to possible expropriation, nationalization, restrictions on investments by foreign companies or other governmental actions; |
• | less stable supply sources; |
• | competition from existing market participants that may have a longer history in and greater familiarity with the foreign markets where we operate; |
• | tariffs, export duties, quotas and other barriers to trade; as well as possible limitations on the conversion of foreign currencies into US dollars or remittance of dividends and other payments by our foreign subsidiaries; |
• | possible future changes to tariffs associated with imports and exports from the US; |
• | divergent labor regulations and cultural expectations regarding employment and agency; |
• | different cultural expectations regarding industrialization, international business and business relationships; |
• | foreign taxes and related regulations, including foreign taxes that we may not be able to offset against taxes imposed upon us in the United States, and foreign tax and other laws limiting our ability to repatriate earnings to the United States; |
• | possible changes in foreign and domestic taxes and related regulations; |
• | 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; |
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• | 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. |
If we fail to address the challenges and risks associated with international expansion, we may encounter difficulties implementing our strategy, thereby impeding our growth and harming our operating results.
Our operations in the Asia-Pacific region, Eastern Europe, Latin America and the Middle East and Africa are still developing. It may prove difficult to achieve our goals and take advantage of growth and acquisition opportunities in these or in other emerging markets due to a lack of comprehensive market knowledge and network and legal restrictions. Our growth in emerging markets may also be limited by other factors such as significant government influence over local economies, foreign investment restrictions, substantial fluctuations in economic growth, high levels of inflation and volatility in currency values, exchange controls or restrictions on expatriation of earnings, high domestic interest rates, wage and price controls, changes in governmental economic or tax policies, imposition of trade barriers, unexpected changes in regulation and overall political social and economic instability. In addition, the heightened exposure to terrorist attacks or acts of war or civil unrest in certain geographies, if they occur, could result in damage to our facilities, substantial financial losses or injuries to our personnel.
Although we exercise what we believe to be an appropriate level of central control and active supervision of our operations around the world, our local subsidiaries retain significant operational flexibility. There is a risk that our operations around the world will experience problems that could damage our reputation, or that could otherwise have a material adverse effect on our business, financial condition and results of operations.
We may be unable to effectively implement our strategies or achieve our business goals.
The breadth and scope of our business poses several challenges, such as:
• | initiating or maintaining effective communication among and across all of our geographic business segments and industry groups; |
• | identifying new products and product lines and integrating them into our distribution network; |
• | allocating financial and other resources efficiently across all of our business segments and industry groups; |
• | aligning organizational structure with management’s vision and direction; |
• | communicating ownership and accounting over business activities and ensuring responsibilities are properly understood throughout the organization; |
• | ensuring cultural and organizational changes are executed smoothly and efficiently and ensuring personnel resources are properly allocated to effect these changes; and |
• | establishing standardized processes across geographic business segments and industry groups. |
As a result of these and other factors such as these, we may be unable to effectively implement our strategies or achieve our business goals. Any failure to effectively implement our strategies may adversely impact our future prospects and our results of operations and financial condition.
Fluctuations in currency exchange rates may adversely affect our results of operations.
We sell products in over 130 countries and we generated approximately 40% of our 2018 net sales outside the United States. The revenues we receive from such foreign sales are often denominated in currencies other than the US dollar. We do not hedge our foreign currency exposure with respect to our investment in and earnings from our foreign businesses. Accordingly, we might suffer considerable losses if there is a significant adverse movement in exchange rates.
In addition, we report our consolidated results in US dollars. 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 for inclusion in our consolidated financial statements, exposing us to currency translation risk. Consequently, any change in exchange rates between our foreign subsidiaries’ functional currencies and the US dollar will affect our consolidated income statement and balance sheet when the results of those operating companies are translated into US dollars for reporting purposes. Decreases in the value of our foreign subsidiaries’ functional currencies against the US dollar will tend to reduce those operating companies’ contributions in dollar terms to our financial condition and results of operations. In 2018, our most significant currency exposures were to the euro, the Canadian dollar and the British pound sterling versus the US dollar. The exchange rates between
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these and other foreign currencies and the US dollar may fluctuate substantially and such fluctuations have had a significant effect on our results in recent periods. 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.
There is uncertainty surrounding the implementation and effect of Brexit, which may cause increased economic volatility and have a material adverse effect on our business, financial condition and results of operations.
On June 23, 2016, voters in the United Kingdom (“UK”) approved an advisory referendum to withdraw membership from the European Union (“EU”). The UK began the formal process for leaving the EU (referred to as “Brexit”) in March 2017 by serving notice to the European Council. Absent action by the UK to the contrary, Brexit is scheduled to take place on March 29, 2019. The long-term nature of the UK’s relationship with the EU is unclear and there is considerable uncertainty when any relationship will be agreed and implemented.
Approximately 2% and 21% of our net sales for the year ended December 31, 2018 were attributable to our operations in the UK and Continental Europe, respectively. Given our significant operations and presence in the UK and Continental Europe, there can be no assurance that Brexit will not have a material adverse effect on our business, financial condition and results of operations.
The political and economic instability created by Brexit has been widely reported in the press and financial media. Brexit may continue to cause volatility in global financial markets and uncertainty regarding the regulation of data protection in the UK. Brexit may also disrupt the free movement of goods, services and people between the UK, the EU and elsewhere. The effects of Brexit will depend on any agreements the UK makes to retain access to EU markets either during a transitional period or more permanently. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate. Further, uncertainty around these and related issues could lead to adverse effects on the economy of the UK, the EU and the other economies in which we operate. All of these effects could cause disruptions and delays in importing products into the UK, uncertainty and potential increases in costs of importation (including duties) and increased credit risk due to adverse impacts on our customers. As a result, Brexit could have an adverse effect upon, and create uncertainty surrounding, our business in the UK and EU, our relationships with our existing and future customers, suppliers and employees and, ultimately, on our future business, financial results and operations.
While we are working with our customers and suppliers to anticipate and mitigate potential impacts of Brexit, we cannot predict whether our anticipation or efforts will prove adequate or that we will effectively execute any mitigation actions.
Litigation, Environmental and Tax Regulation Risk
Evolving environmental laws and regulations on hydraulic fracturing and other oil and gas production activities could have an impact on our financial performance.
Hydraulic fracturing is a common practice that is used to stimulate production of crude oil and/or natural gas from dense subsurface rock formations, and is primarily presently regulated by state agencies. Many states have adopted laws and/or regulations that require disclosure of the chemicals used in hydraulic fracturing, and are considering legal requirements that could impose more stringent permitting, disclosure and well construction requirements on oil and/or natural gas drilling activities as well as regulations relating to waste streams from such activities. The EPA is also moving forward with various related regulatory actions, including regulations requiring, among other matters, “green completions” of hydraulically-fractured wells. Similarly, existing and new regulations in the United States and elsewhere relating to oil and gas production could impact the sale of some of our products into these markets.
Our business exposes us to potential product liability claims and recalls, which could adversely affect our financial condition and performance.
The repackaging, blending, mixing, manufacture, sale and distribution of chemical products by us, including products used in hydraulic fracturing operations and products produced with food ingredients or with pharmaceutical and nutritional supplement applications, involve an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity, including, without limitation, claims for exposure to our products, spills or escape of our products, personal injuries, food related claims and property damage or environmental claims. A product liability claim, judgment or recall against our customers could also result in substantial and unexpected expenditures for us, affect consumer confidence in our products and divert management’s attention from other responsibilities. Although we maintain product liability insurance, there can be no assurance that the type or level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on our business, financial condition and results of operation.
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We are subject to extensive general and product-specific environmental, health and safety laws and regulations. Compliance with and changes to these environmental, health and safety laws, including laws relating to the investigation and remediation of contamination, 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; and the investigation and cleanup of contaminated sites, including any spills or releases that may result from our management, handling, storage, sale, transportation of chemicals and other products. We hold a number of environmental permits and licenses. Compliance with these laws, regulations, permits and licenses 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 and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities.
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 are currently investigating and/or remediating contamination, or contributing to cleanup costs, at approximately 130 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. Based on current estimates, we believe that these ongoing investigation and remediation costs will not materially affect our business. There is no guarantee, however, that our estimates will be accurate, that new contamination will not be discovered or that new environmental laws or regulations will not require us to incur additional costs. Any such inaccuracies, discoveries or new laws or regulations, or the interpretation of existing laws and regulations, could have a material adverse effect on our business, financial condition and results of operations. As of December 31, 2018, we reserved approximately $83.5 million for probable and reasonably estimable losses associated with remediation at currently or formerly owned, operated or used sites or other sites impacted by our operations. We may incur losses in connection with investigation and remediation obligations that exceed our environmental reserve. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates—Environmental Liabilities” in Item 7 of this Annual Report on Form 10-K for additional information. We also may incur substantial costs, including fines, damages, criminal or civil sanctions and investigation and remediation costs, or experience interruptions in our operations, for violations under environmental, health and safety laws or permit requirements.
We could be held liable for the costs to investigate, remediate or otherwise address contamination at any real property we have ever owned, leased, operated or used or other sites impacted by our operations. Some environmental laws could impose on us the entire cost of cleanup of contamination present at a site even though we did not cause all of the contamination. These laws often identify parties who can be strictly and jointly and severally liable for remediation. The discovery of previously unknown contamination at current or former sites or the imposition of other environmental liabilities or obligations in the future, including additional investigation or remediation obligations with respect to contamination that has impacted other properties, could lead to additional costs or the need for additional reserves that have a material adverse effect on our business, financial condition and results of operations. In addition, we may be required to pay damages or civil judgments related to third party claims, including those relating to personal injury (including exposure to hazardous materials or chemicals we blend, handle, store, sell, transport or dispose of), product quality issues, property damage or contribution to remedial obligations.
We have been identified as potentially responsible parties at various third party sites at which we have arranged for the disposal of our hazardous wastes. We may be identified as a potentially responsibility 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. See “Business—Regulatory Matters—Environmental, Health and Safety Matters” in Item 1 of this Annual Report on Form 10-K.
Certain agreements to which we are a party contain contractual provisions pursuant to which we agreed to indemnify other parties for contamination at certain real property. We have been, and may in the future be, subject to environmental indemnity claims asserted by other parties with respect to contamination at sites we have ever owned, leased, operated or used. We could incur significant costs in addressing existing and future environmental indemnification claims.
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 have led to, and could continue to result in, stringent regulatory intervention by governmental authorities. In addition, 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.
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Environmental, health and safety laws and regulations vary significantly from country to country and change frequently. 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 or reducing our profitability or reducing the demand for our products. See “Business—Regulatory Matters—Environmental, Health and Safety Matters” in Item 1 of this Annual Report on Form 10-K.
Current and future laws and regulations addressing greenhouse gas emissions enacted in the United States, Europe and other jurisdictions around the world could also have a material adverse effect on our business, financial condition and results of operation. Increased energy costs due to such laws and regulations, emissions associated with our customers’ products or development of alternative products having lower emissions of greenhouse gases and other pollutants could materially affect demand for our customers’ products and indirectly affect our business. Changes in and introductions of regulations have in the past caused us to devote significant management and capital resources to compliance programs and measures, and future regulations applicable to us would likely further increase these compliance costs and could have a material adverse effect on our business, financial condition and results of operations.
Our business is subject to additional general regulatory requirements and tax requirements, which increase our cost of doing business, could result in regulatory, unclaimed property or tax claims, and could restrict our business in the future.
Our general business operations are subject to a broad spectrum of general regulatory requirements, including antitrust regulations, food and drug regulations, human resources regulations, tax regulations, unclaimed property, banking and treasury regulations, among others. These 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. Future changes could result in additional costs and restrictions to our business activities. We are currently undergoing a multi-state unclaimed property audit, the timing and outcome of which cannot be predicted; we will incur significant professional fees in connection with the audit and if we are found not to be in compliance the auditing states may seek significant remittances and other penalties and interest.
We are subject to asbestos claims.
In connection with our purchase of McKesson Chemical Company in 1986, our wholly-owned subsidiary Univar USA Inc. is obligated to indemnify McKesson for claims alleging injury from exposure to asbestos-containing products by McKesson Chemical Company. As of December 31, 2018, we are defending lawsuits by more than one hundred plaintiffs claiming asbestos related injuries, including a small number of which name us as a defendant. See “Business—Legal Proceedings—Asbestos Claims” in Item 1 of this Annual Report on Form 10-K. As of December 31, 2018, Univar USA has not recorded a liability related to the pending litigation as any potential loss is neither probable nor estimable. Although our costs of defense to date have not been material, we cannot predict the ultimate outcome of these lawsuits, which, if determined adversely to us, may result in liability that would have a material adverse effect on our business, financial condition and results of operations. Furthermore, if the number of asbestos claims for which we are obligated to indemnify McKesson, or the number of asbestos claims naming us, were to increase substantially, particularly if the increase were associated with a significant increase in the average cost per lawsuit, our business, financial condition and results of operations could be materially adversely affected.
Our business is subject to many operational risks for which we might not be adequately insured or prevail in any claim dispute.
We are exposed to risks including, but not limited to, accidents, contamination and environmental damage, safety claims, natural disasters, terrorism, acts of war and civil unrest and other events that could potentially interrupt our business operations and/or result in significant costs. Although we attempt to cover these risks with insurance to the extent that we consider appropriate, we may incur losses that are not covered by insurance or exceed the maximum amounts covered by our insurance policies. Even if our insurance coverage is appropriate, our insurers may contest, and prevail in litigation regarding, and claims. We have incurred environmental risks and losses, often from our historic activities, for which we have no available or remaining insurance.
Damage to a major facility, whether or not insured, could impair our ability to operate our business in a geographic region and cause loss of business and related expenses. From time to time, insurance for chemical risks have not been available on commercially acceptable terms or, in some cases, not available at all. In the future we may not be able to maintain our current coverages. Due to the variable condition of the insurance market, we have experienced and may experience in the future, increased deductible retention levels and increased premiums. As we assume more risk through higher retention levels, we may experience more variability in our insurance reserves and expense. Increased insurance premiums or our incurrence of significant uncovered losses could have a material adverse effect on our business, financial condition and results of operations.
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We are exposed to ongoing litigation and other legal and regulatory actions and risks in the ordinary course of our business, and we could incur significant liabilities and substantial legal fees.
We are subject to the risk of litigation, other legal claims and proceedings, and regulatory enforcement actions in the ordinary course of our business. Also, there may be safety or personal injury risks related to our products which are not known today. The results of legal proceedings cannot be predicted with certainty. We cannot guarantee that the results of current or future legal proceedings against McKesson and a few claims asserted directly against Univar USA Inc. will not materially harm our business, reputation or brand, nor can we guarantee that we will not incur losses in connection with current or future legal proceedings that exceed any provisions we may have set aside in respect of such proceedings or that exceed any applicable insurance coverage. We also cannot guarantee that any tax assessment previously made against us by the Canada Revenue Agency will not result in a material tax liability or that the issues raised by Customs and Border Patrol will not result in a material liability. The occurrence of any of these events could have a material adverse effect on our business, financial condition or results of operations. See “Business—Legal Proceedings” in Item 1 of this Annual Report on Form 10-K.
Many of the products we sell have “long-tail” exposures, giving rise to liabilities many years after their sale and use. Insurance purchased at the time of sale may not be available when costs arise in the future and producers may no longer be available to provide indemnification.
Employee and Benefit Plan Risk
We depend on a limited number of key personnel who would be difficult to replace. If we lose the services of these individuals, or are unable to attract new talent, our business will be adversely affected.
We depend upon the ability and experience of a number of our executive management and other key personnel who have substantial experience with our operations, the chemicals and chemical distribution industries and the selected markets in which we operate. The loss of the services of one or a combination of our senior executives or key employees could have a material adverse effect on our results of operations. We also might suffer an additional impact on our business if one of our senior executives or key employees is hired by a competitor. Our success also depends on our ability to continue to attract, manage and retain other qualified management and technical and clerical personnel as we grow. We may not be able to continue to attract or retain such personnel in the future.
Negative developments affecting our pension plans and multi-employer pension plans in which we participate may occur.
We operate a number of pension plans for our employees and have obligations with respect to several multi-employer pension plans sponsored by labor unions in the United States. The terms of these plans vary from country to country. Generally, our defined benefit pension plans are funded with trust assets invested in a diversified portfolio of debt and equity securities and other investments. Among other factors, changes in interest rates, investment returns, the market value of plan assets and actuarial assumptions can (1) affect the level of plan funding; (2) cause volatility in the net periodic benefit cost; and (3) increase our future contribution requirements. In or following an economic environment characterized by declining investment returns and interest rates, we may be required to make additional cash contributions to our pension plans to satisfy our funding requirements and recognize further increases in our net periodic benefit cost. A significant decrease in investment returns or the market value of plan assets or a significant decrease in interest rates could increase our net periodic benefit costs and adversely affect our results of operations.
Our pension plans in the United States and certain other countries are not fully funded. The funded status of our pension plans is equal to the difference between the value of plan assets and projected benefit obligations. At December 31, 2018, our pension plans had an underfunded status of $212.4 million. This amount could increase or decrease depending on factors such as those mentioned above. Changes to the funded status of our pension plans as a result of updates to actuarial assumptions and actual experience that differs from our estimates will be recognized as gains or losses in the period incurred under our “mark to market” accounting policy, and could result in a requirement for additional funding which would have a direct effect on our cash position. Based on current projections of minimum funding requirements, we expect to make cash contributions of $28.3 million to our defined benefit pension plans in 2019. The timing for any such requirement in future years is uncertain given the implicit uncertainty regarding the future developments of factors mentioned above. The union sponsored multi-employer pension plans in which we participate are also underfunded, including the substantially underfunded New England Teamsters and Trucking Industry Pension Fund and Central States, Southeast and Southwest Areas Pension Plan, which have liabilities at a level twice that of its assets. This requires us to make often substantial withdrawal liability payments when we close a facility covered by one of these plans, which could hinder our ability to make otherwise appropriate management decisions to operate as efficiently as possible. As of December 31, 2018, we had approximately 250 employees in multi-employer pension plans.
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A portion of our workforce is unionized and labor disruptions could decrease our profitability.
As of December 31, 2018, we had approximately 590 employees in the United States subject to various collective bargaining agreements, most of which have a three-year term. In addition, in several of our international facilities, particularly those in Europe, employees are represented by works councils appointed pursuant to local law consisting of employee representatives who have certain rights to negotiate working terms and to receive notice of significant actions. As of December 31, 2018, approximately 26% of our labor force is covered by a collective bargaining agreement, including approximately 14% of our labor force in the United States, approximately 20% of our labor force in Canada and approximately 45% of our labor force in Europe, and approximately 2% of our labor force is covered by a collective bargaining agreement that will expire within one year. These arrangements grant certain protections to employees and subject us to employment terms that are similar to collective bargaining agreements. We cannot guarantee that we will be able to negotiate these or other collective bargaining agreements or arrangements with works councils on the same or more favorable terms as the current agreements or arrangements, or at all, and without interruptions, including labor stoppages at the facility or facilities subject to any particular agreement or arrangement. A prolonged labor dispute, which could include a work stoppage, could have a material adverse effect on our business, financial condition and results of operations.
Changes in legislation, regulation and government policy may have a material adverse effect on our business in the future.
Elections in the United States and other democracies in which we conduct business could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy directly affecting our business or indirectly affecting us because of impacts on our customers and producers. Legislative and regulatory proposals that could have a material direct or indirect impact on us include, but are not limited to, disallowances of income tax deductions, taxes or other restrictions repatriating foreign earnings, restrictions on imports and exports, modifications to international trade policy, including withdrawal from trade agreements, environmental regulation, changes to immigration policy, changes to health insurance legislation and the imposition of tariffs and other taxes on imports. We are currently unable to predict whether such changes will occur and, if so, the ultimate impact on our business. To the extent that such changes have a negative impact on us, our producers or our customers, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition, results of operations and cash flows.
Risks Related to Our Indebtedness
We and our subsidiaries may incur additional debt in the future, which could substantially reduce our profitability, limit our ability to pursue certain business opportunities and reduce the value of your investment.
As of December 31, 2018, we had $1,747.8 million of debt outstanding under our $2,283.5 million US dollar term loan facility (the “New Senior Term Loan Facility”), $134.7 million of debt outstanding under our $1,300.0 million Senior ABL credit facility, $58.5 million of debt outstanding under our €200.0 million senior European ABL facility (the “Euro ABL Facility”) with approximately $620.3 million available for additional borrowing under these facilities and $399.5 million outstanding under Univar USA Inc.’s 6.75% senior notes due 2023 (the “Unsecured Notes”). Subject to certain limitations set forth in the agreements that govern these facilities and notes, we or our subsidiaries may incur additional debt in the future, or other obligations that do not constitute indebtedness, which could increase the risks described below and lead to other risks. The amount of our debt or such other obligations could have important consequences for holders of our common stock, including, but not limited to:
• | our ability to satisfy obligations to lenders or noteholders may be impaired, resulting in possible defaults on and acceleration of our indebtedness; |
• | our ability to obtain additional financing for refinancing of existing indebtedness, working capital, capital expenditures, including costs associated with our international expansion, product and service development, acquisitions, general corporate purposes and other purposes may be impaired; |
• | our assets that currently serve as collateral for our debt may be insufficient, or may not be available, to support future financings; |
• | a substantial portion of our cash flow from operations could be used to repay the principal and interest on our debt; |
• | we may be increasingly vulnerable to economic downturns and increases in interest rates; |
• | our flexibility in planning for and reacting to changes in our business and the markets in which we operate may be limited; and |
• | we may be placed at a competitive disadvantage relative to other companies in our industry with less debt or comparable debt at more favorable interest rates. |
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The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them.
The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior ABL Facility and European ABL Facility include certain financial covenants.
The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility.
Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, the pricing of our products, our success at implementing cost reduction initiatives, our ability to successfully implement our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries, 65% of the capital stock of our foreign subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders.
Increases in interest rates would increase the cost of servicing our debt and could reduce our profitability.
Our debt outstanding under the Senior Term Loan Facility, Senior ABL Facility and European ABL Facility bears interest at variable rates. As a result, increases in interest rates would increase the cost of servicing our debt and could materially reduce our profitability and cash flows. Some or all of the combined company’s variable-rate indebtedness may use the LIBOR as a benchmark for establishing the rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequence of these developments cannot be entirely predicted, but could include an increase in the cost of our variable rate indebtedness. For additional information on our indebtedness, debt service obligations and sensitivity to interest rate fluctuations, see “Qualitative and Quantitative Disclosures About Market Risk” in Item 7A of this Annual Report on Form 10-K.
We may have future capital needs and may not be able to obtain additional financing on acceptable terms, or at all.
We have historically relied on debt financing to fund our operations, capital expenditures and expansion. The market conditions and the macroeconomic conditions that affect the markets in which we operate could have a material adverse effect on our ability to secure financing on acceptable terms, if at all. We may be unable to secure additional financing on favorable terms or at all and our operating cash flow may be insufficient to satisfy our financial obligations under the indebtedness outstanding from time to time. The terms of additional financing may limit our financial and operating flexibility. Our ability to satisfy our financial obligations will depend upon our future operating performance, the availability of credit generally, economic conditions and financial, business and other factors, many of which are beyond our control. Furthermore, if financing is not available when needed, or is not available on acceptable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.
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Risks Related to Our Common Stock
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock may depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of these analysts downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock may decrease, which could cause our stock price or trading volume to decline.
Future sales of shares by existing stockholders could cause our stock price to decline.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. All of the 40,250,000 shares sold pursuant to our IPO in June 2015, the 4,500,000 shares we registered on July 29, 2016, the 20,943,741 shares we registered on August 15, 2016, the 12,500,000 shares we registered on December 12, 2016, the 15,000,000 shares we registered on January 31, 2017 and the 10,000,000 shares we registered on December 14, 2017 are immediately tradable without restriction under the Securities Act of 1933, as amended (the “Securities Act”), unless held by “affiliates”, as that term is defined in Rule 144 under the Securities Act. The remaining shares of outstanding common stock are restricted securities within the meaning of Rule 144 under the Securities Act, but will be eligible for resale subject, in certain cases, to applicable volume, means of sale, holding period and other limitations of Rule 144 or pursuant to an exception from registration under Rule 701 under the Securities Act, subject to the terms of the lock-up agreements entered into by the Significant Stockholders, our directors and certain of our key executive officers. The underwriter may, at any time, release all or any portion of the shares subject to lock-up agreements entered into in connection with this offering.
We have also filed a registration statement under the Securities Act to register the shares of common stock to be issued under our equity compensation plans and, as a result, all shares of common stock acquired upon exercise of stock options granted under our plans are also freely tradable under the Securities Act, unless purchased by our affiliates. In addition, certain of our significant stockholders may distribute the shares that they hold to their investors who themselves may then sell into the public market. Such sales may not be subject to the volume, manner of sale, holding period and other limitations of Rule 144. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. In the future, we may also issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement or employee arrangement or otherwise. Any of these issuances could result in substantial dilution to our existing stockholders and could cause the trading price of our common stock to decline.
Significant stockholders have the right to nominate members of our Board of Directors and may exercise significant control over the direction of our business. To the extent ownership of our common stock continues to be held by stockholders with these rights, it could prevent you and other stockholders from influencing significant corporate decisions.
Investment funds associated with Clayton, Dubilier & Rice, LLC (“CD&R”) beneficially own approximately 8.2% of the outstanding shares of our common stock. CD&R continues to exercise significant influence over all matters requiring stockholder approval for the foreseeable future, including approval of significant corporate transactions, which may reduce the market price of our common stock.
Under the Fourth Amended and Restated Stockholders' Agreement of Univar Inc. (the “Amended and Restated Stockholders’ Agreement”), CD&R is entitled to nominate up to three sponsor directors and three independent directors under certain circumstances related to continued ownership of the shares they hold. CD&R continues to hold 11,561,039 shares, which allows them to continue to nominate members to our board of directors.
These provisions allow CD&R to continue to exercise significant control over our corporate decisions, including over matters which our other stockholders have a right to vote. Our Certificate of Incorporation and our Bylaws also include a number of provisions that may discourage, delay or prevent a change in our management or control for so long as CD&R owns specified percentages of our common stock. See “— Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.” These provisions not only could have a negative impact on the trading price of our common stock, but could also allow the Significant Stockholders to delay or prevent a corporate transaction that the public stockholders might approve.
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Our Certificate of Incorporation provides that we will waive any interest or expectancy in corporate opportunities presented to CD&R.
Our Certificate of Incorporation provides that we, on our behalf and on behalf of our subsidiaries, renounce and waive any interest or expectancy in, or in being offered an opportunity to participate in, corporate opportunities that are from time to time presented to CD&R, or their respective officers, directors, agents, stockholders, members, partners, affiliates or subsidiaries, even if the opportunity is one that we or our subsidiaries might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so. None of CD&R or its respective agents, stockholders, members, partners, affiliates or subsidiaries will generally be liable to us or any of our subsidiaries for breach of any fiduciary or other duty, as a director or otherwise, by reason of the fact that such person pursues, acquires or participates in such corporate opportunity, directs such corporate opportunity to another person or fails to present such corporate opportunity, or information regarding such corporate opportunity, to us or our subsidiaries unless, in the case of any such person who is a director or officer, such corporate opportunity is expressly offered to such director or officer in writing solely in his or her capacity as a director or officer. Stockholders will be deemed to have notice of and consented to this provision of our Certificate of Incorporation. This will allow CD&R to compete with us. Strong competition for investment opportunities could result in fewer such opportunities for us. We likely will not always be able to compete successfully with our competitors and competitive pressures or other factors may also result in significant price competition, particularly during industry downturns, which could have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.
Fulfilling our obligations incident to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act of 2002, is expensive and time-consuming, and any delays or difficulties in satisfying these obligations could have a material adverse effect on our future results of operations and our stock price.
We are subject to the reporting and corporate governance requirements, the listing standards of the NYSE and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which apply to issuers of listed equity, which impose certain compliance costs and obligations upon us. Meeting these standards requires a significant commitment of additional resources and management oversight, which increases our operating costs. These requirements also place additional demands on our finance and accounting staff and on our financial accounting and information systems. Other expenses associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses. As a public company, we are required, among other things, to:
• | prepare and file periodic reports, and distribute other stockholder communications, in compliance with the federal securities laws and the NYSE rules; |
• | define and expand the roles and the duties of our Board of Directors and its committees; and |
• | institute more comprehensive compliance, investor relations and internal audit functions. |
The Sarbanes-Oxley Act requires us to document and test the effectiveness of our internal control over financial reporting in accordance with an established internal control framework, and to report on our conclusions as to the effectiveness of our internal controls. Likewise, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. In addition, we are required under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), to maintain disclosure controls and procedures and internal control over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent auditors are unable to conclude that we have effective internal control over financial reporting, investors could lose confidence in the reliability of our financial statements. This could result in a decrease in the value of our common stock. Failure to comply with the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC, the NYSE or other regulatory authorities, which would require additional financial and management resources.
Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude, and our auditors were to concur, that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. This, in turn, could have an adverse impact on trading prices for our shares of common stock, and could adversely affect our ability to access the capital markets.
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Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.
Our Certificate of Incorporation and By-laws include a number of provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. For example, our Certificate of Incorporation and By-laws currently:
• | authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to thwart a takeover attempt; |
• | limit the ability of stockholders to remove directors; and |
• | establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt or before our Board becomes fully declassified, the existence of these provisions may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts in the future. See “Description of Capital Stock—Anti-Takeover Effects of our Certificate of Incorporation and By-laws.” Our Certificate of Incorporation and By-laws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.
Our Certificate of Incorporation includes provisions limiting the personal liability of our directors for breaches of fiduciary duty under the General Corporation Law of the State of Delaware and we have entered into Indemnification Agreements, which provide further protections to our directors.
Our Certificate of Incorporation contains provisions permitted under the General Corporation Law of the State of Delaware (the “DGCL”) relating to the liability of directors. These provisions eliminate a director’s personal liability to the fullest extent permitted by the DGCL for monetary damages resulting from a breach of fiduciary duty, except in circumstances involving:
• | any breach of the director’s duty of loyalty; |
• | acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; |
• | under Section 174 of the DGCL (unlawful dividends); or |
• | any transaction from which the director derives an improper personal benefit. |
The principal effect of the limitation on liability provision is that a stockholder will be unable to prosecute an action for monetary damages against a director unless the stockholder can demonstrate a basis for liability for which indemnification is not available under the DGCL. These provisions, however, should not limit or eliminate our rights or any stockholder’s rights to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of a director’s fiduciary duty. These provisions will not alter a director’s liability under federal securities laws. The inclusion of this provision in our Certificate of Incorporation may discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise have benefited us and our stockholders.
We have entered into indemnification agreements with each of our directors and certain of our executive officers. The indemnification agreements provide our directors and certain of our executive officers with contractual rights to the indemnification and expense advancement rights provided under our By-laws, as well as contractual rights to additional indemnification as provided in the indemnification agreements.
Our Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our Certificate of Incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers, employees or agents, (iii) any action asserting a claim against us arising under the DGCL, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. By becoming a stockholder in our company, you will be deemed to have notice of and have consented to the provisions of our Certificate of Incorporation related to choice of forum. The choice of forum provision in our Certificate of Incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
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We do not currently intend to pay cash dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We do not currently intend to declare and pay cash dividends on our common stock. We currently intend to invest our future earnings, if any, to fund our growth and repay outstanding indebtedness. Therefore, you are unlikely to receive any dividends on your common stock in 2019 and we have no current plans to pay dividends in future periods. The success of an investment in shares of our common stock will therefore depend entirely upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. See “Dividend Policy.”
Risks Related to the Nexeo Acquisition
The Nexeo Acquisition is subject to the approval of our shareholders as to our share issuance. Failure to obtain this approval would prevent completion of the Nexeo Acquisition.
Before the Nexeo Acquisition can be completed, our shareholders must approve our share issuance. There can be no assurance that this approval will be obtained. Failure to obtain the required approval may result in a material delay in, or the abandonment of, the acquisition. Any delay in completing the acquisition may materially adversely affect the timing and amount of cost savings and other benefits that are expected to be achieved from the acquisition.
Uncertainties associated with the Nexeo Acquisition may cause a loss of management personnel and other key employees which could adversely affect our future business and operations following the Nexeo Acquisition.
We are dependent on the experience and industry knowledge of our officers and other key employees to execute our business plans. Our success after the acquisition will depend in part upon our ability to retain key management personnel and other key employees. Current and prospective employees may experience uncertainty about their roles following the acquisition or other concerns regarding the timing and completion of the acquisition or our operations following the acquisition, any of which may have an adverse effect on our ability to attract or retain key management and other key personnel. Accordingly, no assurance can be given that following the Nexeo Acquisition we will be able to attract or retain key management personnel and other key employees to the same extent that we have previously been able to attract or retain our employees.
The business relationships of Univar and Nexeo may be subject to disruption due to uncertainty associated with the Nexeo Acquisition, which could have a material adverse effect on our results of operations, cash flows and financial position following the acquisition.
Parties with which Univar or Nexeo do business may experience uncertainty associated with the Nexeo Acquisition, including with respect to current or future business relationships with Univar or Nexeo following the acquisition. Univar’s and Nexeo’s business relationships may be subject to disruption as customers, distributors, suppliers, vendors and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than Univar or Nexeo following the acquisition. These disruptions could have an adverse effect on our results of operations, cash flows and financial position, including an adverse effect on our ability to realize the expected cost savings and other benefits of the acquisition. The risk, and adverse effect, of any disruption could be exacerbated by a delay in completion of the acquisition or termination of the Business Combination Agreement.
Failure to complete the Nexeo Acquisition could negatively impact our stock price and have a material adverse effect on our results of operations, cash flows and financial position.
If the Nexeo Acquisition is not completed for any reason, including as a result of Univar or Nexeo stockholders failing to approve the applicable proposals, our ongoing business may be materially adversely affected and, without realizing any of the benefits of having completed the acquisition, we would be subject to a number of risks, including the following:
• | we may experience negative reactions from the financial markets, including negative impacts on our stock price; |
• | we may experience negative reactions from customers, distributors, regulators and employees; |
• | we will still be required to pay certain significant costs relating to the Nexeo Acquisition, such as legal, accounting, financial advisor and printing fees; |
• | we may be required to pay one or more cash termination fees as required by the Business Combination Agreement; |
• | matters relating to the Nexeo Acquisition (including integration planning) require substantial commitments of our time and resources, which could have resulted in the distraction of our management from ongoing business operations and pursuing other opportunities that could have been beneficial to us; and |
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• | litigation related to any failure to complete the Nexeo Acquisition or related to any enforcement proceeding commenced against us to perform our obligations under the Business Combination Agreement. |
If the Nexeo Acquisition is not completed, the risks described above may materialize and they may have a material adverse effect on our results of operations, cash flows, financial position and stock prices.
Our current stockholders will generally have a reduced ownership and voting interest after the Nexeo Acquisition.
We expect to issue to Nexeo stockholders (or reserve for issuance) approximately 37 million shares of our common stock in the acquisition (including shares of our common stock issuable in connection with outstanding Nexeo stock options, restricted stock awards, performance share unit awards and restricted share unit awards and assuming the conversion of all the outstanding Nexeo warrants into shares of Nexeo common stock entitled to receive the consideration). As a result of these issuances, our stockholders will generally have less voting power after the acquisition than they now have.
The exchange ratio is fixed and will not be adjusted in the event of any change in our stock price. Because the market price of our common stock may fluctuate, the value of the consideration we will pay is uncertain.
As consideration for the Nexeo Acquisition, each share of Nexeo common stock (other than dissenters’ shares or treasury shares held by Nexeo and any shares of Nexeo common stock owned by any Nexeo subsidiary, Univar or Univar subsidiary) will be converted into the right to receive and exchanged for (1) 0.305 of a fully paid and non-assessable share of Univar common stock plus (2) $3.29 in cash. The cash consideration is subject to reduction by up to $0.41 per share based on the closing price of Univar common stock on the day prior to the completion of the acquisition. The cash consideration will be reduced on a linear basis from $3.29 to $2.88 per share of Nexeo common stock to the extent that the closing price of Univar common stock is between $25.34 and $22.18. If the closing price of Univar common stock is $22.18 per share or lower, the cash consideration will be $2.88 per share of Nexeo common stock. If the closing price of Univar common stock is $25.34 per share or higher, the cash consideration will be $3.29 per share of Nexeo common stock. Nexeo stockholders will receive cash in lieu of any fractional shares.
The exchange ratio will not be adjusted for changes in the market price of our common stock. Because the exchange ratio is fixed, the value of the stock portion of the consideration will depend on the market price of our common stock at the completion of the acquisition. The value of the stock portion of the consideration has fluctuated since the date of the announcement of the Business Combination Agreement and will continue to fluctuate from the date of this 10-K to the completion of the acquisition and thereafter.
We may be unable to integrate the business of Nexeo successfully or realize the anticipated benefits of the acquisition.
The Nexeo Acquisition involves the combination of two companies that currently operate as independent public companies. We will be required to devote significant management attention and resources to integrating the business practices and operations of Nexeo and Univar. Potential difficulties that we may encounter as part of the integration process include the following:
• | the inability to successfully combine the business of Nexeo in a manner that permits us to achieve, on a timely basis, or at all, the enhanced revenue opportunities and cost savings and other benefits anticipated to result from the Nexeo Acquisition; |
• | complexities associated with managing the combined businesses, including difficulty addressing possible differences in corporate cultures and management philosophies and the challenge of integrating complex systems, technology, networks and other assets of each of the companies in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies; and |
• | potential unknown liabilities, including shareholder lawsuits and other potential legal actions, and unforeseen increased expenses or delays associated with the Nexeo Acquisition. |
Any of these issues could adversely affect our ability to maintain relationships with customers, suppliers, employees and other constituencies or achieve the anticipated benefits of the acquisition, or could reduce our earnings or otherwise adversely affect our business and financial results following the acquisition.
Our future results following the Nexeo Acquisition will suffer if we do not effectively manage our expanded operations.
Following the acquisition, the size of our business will increase significantly beyond its current size. Our future success will depend, in part, upon our ability to manage this expanded business, which will pose substantial challenges for us, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings, revenue enhancements or other benefits currently anticipated from the acquisition.
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In connection with the Nexeo Acquisition, we will incur additional indebtedness and may also assume certain of Nexeo’s outstanding indebtedness. Additional indebtedness would amplify the risks associated with our current indebtedness by increasing our interest expense and potentially reducing our flexibility to respond to changing business and economic conditions, which could have a material adverse effect on our results of operations, cash flows and financial position.
The increased indebtedness would increase our interest expense which could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions. We will also incur various costs and expenses associated with the financing of the Nexeo Acquisition. The amount of cash required to pay interest on our increased indebtedness levels following completion of the Nexeo Acquisition and thus the demands on our cash resources will be greater than the amount of cash flows required to service our indebtedness prior to the Nexeo Acquisition. The increased levels of indebtedness following completion of the Nexeo Acquisition could also reduce funds available for working capital, capital expenditures, acquisitions and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the Nexeo Acquisition, or if the financial performance of the combined company does not meet current expectations, then our ability to service our indebtedness may be adversely impacted. See “Risks Related to Our Indebtedness” above.
We may not successfully divest Nexeo’s plastics distribution business.
On February 8, 2019, Univar and Nexeo announced an agreement for Nexeo to divest its plastics distribution business to an affiliate of One Rock Capital Partners, LLC for an enterprise value of $640.0 million, subject to customary closing adjustments. The Company can provide no assurance this divestiture will occur timely or at all. If the divestiture of the plastics distribution business is delayed or unsuccessful, the Company could experience:
• | a loss of management personnel and other key employees of the plastics business; |
• | disruption in the business relationships of the plastics business; |
• | additional challenges and delays in successfully integrating the business of Nexeo, managing our newly-expanded operations or realizing the anticipated benefits of the Nexeo Acquisition; and |
• | incurring larger amounts of indebtedness than anticipated. |
Any of these risks, alone or in combination, could have a material adverse effect on our stock price and otherwise adversely affect our business and financial results following the acquisition.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES
Our principal executive office is located in Downers Grove, Illinois under a lease expiring in June 2024. As of December 31, 2018, we had 278 locations in the United States in 47 states. Of these locations, approximately 265 are warehouse facilities responsible for storing and shipping of products and 13 are dedicated office space. Our warehouse facilities are nearly equally comprised of owned, leased and third party warehouses and our office space is generally leased. Our facilities focus on the storing, repackaging and blending of chemicals and ingredients for distribution. Such facilities do not require substantial investments in equipment, can be opened fairly quickly and replaced with little disruption. As such, we believe that none of our facilities on an individual basis is principal to the operation of our business. We select locations for our warehouses based on proximity to producers and our customers to maintain efficient distribution networks. We believe that our facilities are adequate and suitable for our current operations. We hold a relatively small number of surplus sites for potential disposition. In some instances, our larger owned sites have been mortgaged under our secured credit facilities.
We have 354 locations outside of the United States in 30 countries. These facilities are focused on storing and shipping of products. Approximately half are owned or leased and half are third party warehouses. The majority of the facilities outside of the United States are found in the following countries:
• | Canada (126 facilities) |
• | China (13 facilities) |
• | France (22 facilities) |
• | Germany (7 facilities) |
• | Italy (8 facilities) |
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• | Mexico (26 facilities) |
• | Netherlands (19 facilities) |
• | Spain (7 facilities) |
• | Sweden (17 facilities) |
• | Turkey ( 9 facilities) |
• | United Kingdom (40 facilities) |
ITEM 3. LEGAL PROCEEDINGS
“Legal Proceedings” in Item 1 of this Annual Report on Form 10-K and Note 20, entitled “Commitments and contingencies” in Item 8 of this Annual Report on Form 10-K, are incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information for Common Stock
Our common stock is listed on the New York Stock Exchange under the symbol “UNVR”.
Holders of Record
As of December 31, 2018, there were 2 stockholders of record of our common stock, and the closing price of our common stock was $17.74 per share as reported on the New York Stock Exchange.
Stock Performance
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the S&P 500 and the S&P 500 Chemical Index for the period beginning on June 17, 2015 through year ended December 31, 2018. The graph assumes $100 was invested in each of the Company's common stock, the S&P 500 and S&P 500 Chemical Index as of the market close on June 17, 2015. Note that historic stock price performance is not necessarily indicative of future stock price performance.
Dividend Policy
We have never declared or paid any cash dividend on our common stock. We currently intend to retain any future earnings and we have no current plans to pay dividends in future periods. In addition, our credit facilities contain restrictions on our ability to pay dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents our summary consolidated financial data as of and for the periods indicated. The selected consolidated financial data as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 have been derived from our audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The selected consolidated financial data as of December 31, 2016, 2015 and 2014 and for the years ended December 31, 2015 and 2014 are derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K. Our historical consolidated financial data may not be indicative of our future performance.
This “Selected Financial Data” should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K and our audited consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K.
Fiscal year ended December 31, | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
(in millions, except per share data) | |||||||||||||||||||
Consolidated Statements of Operations | |||||||||||||||||||
Net sales | $ | 8,632.5 | $ | 8,253.7 | $ | 8,073.7 | $ | 8,981.8 | $ | 10,373.9 | |||||||||
Operating income | 387.4 | 338.0 | 138.4 | 259.3 | 315.7 | ||||||||||||||
Net income (loss) | 172.3 | 119.8 | (68.4 | ) | 16.5 | (20.1 | ) | ||||||||||||
Income (loss) per common share – diluted | 1.21 | 0.85 | (0.50 | ) | 0.14 | (0.20 | ) | ||||||||||||
Consolidated Balance Sheet | |||||||||||||||||||
Cash and cash equivalents | $ | 121.6 | $ | 467.0 | $ | 336.4 | $ | 188.1 | $ | 206.0 | |||||||||
Total assets | 5,272.4 | 5,732.7 | 5,389.9 | 5,612.4 | 6,067.7 | ||||||||||||||
Long-term liabilities | 2,746.1 | 3,223.2 | 3,240.5 | 3,502.2 | 4,300.7 | ||||||||||||||
Stockholders’ equity | 1,191.7 | 1,090.1 | 809.9 | 816.7 | 248.1 | ||||||||||||||
Other Financial Data | |||||||||||||||||||
Cash provided by operating activities | $ | 289.9 | $ | 282.6 | $ | 450.0 | $ | 356.0 | $ | 126.3 | |||||||||
Cash used by investing activities | (99.0 | ) | (79.1 | ) | (136.0 | ) | (294.4 | ) | (148.2 | ) | |||||||||
Cash (used) provided by financing activities | (518.3 | ) | (112.4 | ) | (166.5 | ) | (19.8 | ) | 84.1 | ||||||||||
Capital expenditures | 94.6 | 82.7 | 90.1 | 145.0 | 113.9 | ||||||||||||||
Adjusted EBITDA (1) | 640.4 | 593.8 | 547.4 | 573.3 | 624.8 | ||||||||||||||
Adjusted EBITDA margin (1) | 7.4 | % | 7.2 | % | 6.8 | % | 6.4 | % | 6.0 | % | |||||||||
(1) | For a complete discussion of the method of calculating Adjusted EBITDA and its usefulness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K. We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales. |
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The following is a quantitative reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net income (loss):
Fiscal year ended December 31, | |||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||
Net income (loss) | $ | 172.3 | $ | 119.8 | $ | (68.4 | ) | $ | 16.5 | $ | (20.1 | ) | |||||||
Impairment charges (1) | — | — | 133.9 | — | 0.3 | ||||||||||||||
Pension mark to market loss | 34.2 | 3.8 | 68.6 | 21.1 | 117.8 | ||||||||||||||
Pension curtailment and settlement gains | — | (9.7 | ) | (1.3 | ) | (4.0 | ) | — | |||||||||||
Non-operating retirement benefits | (11.0 | ) | (9.9 | ) | (15.3 | ) | (26.8 | ) | (16.9 | ) | |||||||||
Stock-based compensation expense | 20.7 | 19.7 | 10.4 | 7.5 | 12.1 | ||||||||||||||
Business transformation costs | — | 23.4 | 5.4 | — | — | ||||||||||||||
Restructuring charges | 4.8 | 5.5 | 6.5 | 33.8 | 46.2 | ||||||||||||||
Other employee termination costs | 16.4 | 8.1 | 1.5 | — | — | ||||||||||||||
Loss (gain) on sale of property, plant and equipment and other assets | 2.0 | (11.3 | ) | (0.7 | ) | (2.8 | ) | 3.4 | |||||||||||
Acquisition and integration related expenses | 22.0 | 3.1 | 5.5 | 7.1 | 3.7 | ||||||||||||||
Other operating expenses | 7.6 | 6.9 | 8.6 | 14.4 | 8.0 | ||||||||||||||
Other non-operating items | 3.1 | 3.5 | 0.1 | 4.1 | 2.9 | ||||||||||||||
Foreign currency transactions | 6.7 | 4.6 | 0.6 | 0.8 | 0.6 | ||||||||||||||
Foreign currency denominated loans revaluation | 0.8 | 17.9 | 13.7 | (8.9 | ) | (8.3 | ) | ||||||||||||
Undesignated foreign currency derivative instruments | (1.1 | ) | (0.3 | ) | 1.8 | 4.8 | 3.9 | ||||||||||||
Undesignated interest rate swap contracts | — | 2.2 | (10.1 | ) | (2.0 | ) | — | ||||||||||||
Ineffective portion of cash flow hedges | — | — | — | 0.4 | (0.2 | ) | |||||||||||||
Loss due to discontinuance of cash flow hedges | — | — | — | 7.5 | — | ||||||||||||||
Debt refinancing costs | — | 5.3 | — | 16.5 | — | ||||||||||||||
Loss on extinguishment of debt | 0.1 | 3.8 | — | 12.1 | 1.2 | ||||||||||||||
Advisory fees to CVC and CD&R | — | — | — | 2.8 | 5.9 | ||||||||||||||
Contract termination fee to CVC and CD&R | — | — | — | 26.2 | — | ||||||||||||||
Depreciation and amortization | 179.5 | 200.4 | 237.9 | 225.0 | 229.5 | ||||||||||||||
Interest expense, net | 132.4 | 148.0 | 159.9 | 207.0 | 250.6 | ||||||||||||||
Tax expense (benefit) | 49.9 | 49.0 | (11.2 | ) | 10.2 | (15.8 | ) | ||||||||||||
Adjusted EBITDA | $ | 640.4 | $ | 593.8 | $ | 547.4 | $ | 573.3 | $ | 624.8 | |||||||||
(1) | The 2016 impairment charges primarily related to impairment of intangible assets and property, plant and equipment. See “Note 14: Impairment charges” in Item 8 of this Annual Report on Form 10-K for further information regarding the fiscal year ended December 31, 2018. The 2014 impairment charges primarily related to impairments of idle properties and equipment. The 2013 impairment charges primarily related to the write-off of goodwill related to the Rest of World segment as well as the write-off of capitalized software costs related to a global ERP system. |
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The defined benefit pension and other postretirement benefit plan’s mark to market loss (gain) is measured and recognized in its entirety within the statement of operations annually on December 31. The adjustment primarily includes the difference between the expected return on plan assets and the actual return on plan assets as well as differences resulting from assumption changes and changes in plan experience between the prior pension measurement date and the current pension measurement date. For details of pension expense both within and excluded from Adjusted EBITDA, see the table below:
Fiscal year ended December 31, | |||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||
Service cost included in Adjusted EBITDA | $ | 2.7 | $ | 2.5 | $ | 2.5 | $ | 5.5 | $ | 7.1 | |||||||||
Pension expense included in Adjusted EBITDA | $ | 2.7 | $ | 2.5 | $ | 2.5 | $ | 5.5 | $ | 7.1 | |||||||||
Interest cost | $ | 42.7 | $ | 47.2 | $ | 50.4 | $ | 51.1 | $ | 55.2 | |||||||||
Expected return on plan assets | (56.4 | ) | (56.9 | ) | (61.2 | ) | (66 | ) | (60.2 | ) | |||||||||
Amortization of unrecognized prior service cost (credits) | 2.7 | (0.2 | ) | (4.5 | ) | (11.9 | ) | (11.9 | ) | ||||||||||
Net pension benefit | $ | (11.0 | ) | $ | (9.9 | ) | $ | (15.3 | ) | $ | (26.8 | ) | $ | (16.9 | ) | ||||
Mark to market loss (gain) due to difference in asset returns | $ | 116.0 | $ | (60.5 | ) | $ | (45.2 | ) | $ | 67.3 | $ | (76.3 | ) | ||||||
Mark to market (gain) loss due to assumption changes | (81.2 | ) | 60.8 | 103.9 | (39.3 | ) | 196.5 | ||||||||||||
Mark to market (gain) loss due to plan experience | (0.6 | ) | 3.5 | 9.9 | (6.9 | ) | (2.4 | ) | |||||||||||
Mark to market loss | $ | 34.2 | $ | 3.8 | $ | 68.6 | $ | 21.1 | $ | 117.8 | |||||||||
Settlement | $ | — | $ | (9.7 | ) | $ | — | $ | (1.4 | ) | $ | — | |||||||
Curtailment | — | — | (1.3 | ) | (2.6 | ) | — | ||||||||||||
Pension curtailment and settlement gains | $ | — | $ | (9.7 | ) | $ | (1.3 | ) | $ | (4.0 | ) | $ | — | ||||||
Pension expense (income) excluded from Adjusted EBITDA | $ | 23.2 | $ | (15.8 | ) | $ | 52.0 | $ | (9.7 | ) | $ | 100.9 | |||||||
Total pension expense (income) | $ | 25.9 | $ | (13.3 | ) | $ | 54.5 | $ | (4.2 | ) | $ | 108.0 | |||||||
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We are a leading global chemical and ingredients distributor and provider of specialty services. We purchase chemicals from thousands of chemical producers worldwide and warehouse, repackage, blend, dilute, transport and sell those chemicals to more than 100,000 customer locations across approximately 130 countries. Our specialized services include digital promotion or e-marketing of chemicals for our producers, chemical waste removal and ancillary services, on-site storage of chemicals for our customers, and support services for the agricultural end market. We derive competitive advantage from our scale, broad product offering, technical expertise, specialized services, long-standing relationships with leading chemical producers and our industry leading safety record.
Our operations are structured into four operating segments that represent the geographic areas under which we operate and manage our business. These segments are Univar USA, Univar Canada, Univar Europe and the Middle East and Africa, and Rest of World, which includes developing businesses in Latin America (including Brazil and Mexico) and the Asia-Pacific region.
We monitor the results of our operating segments separately for the purposes of making decisions about resource allocation and performance assessment. We evaluate performance on the basis of gross profit, which we define as net sales less cost of goods sold (exclusive of depreciation), delivered gross profit, which we define as gross profit less outbound freight and handling expense, gross margin, which we define as gross profit divided by external net sales, delivered gross margin, which we define as delivered gross profit divided by external net sales as well as Adjusted EBITDA, which we define as our consolidated net income (loss), plus the sum of interest expense, net of interest income, income tax expense (benefit), depreciation, amortization, loss on
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extinguishment of debt, other operating expenses, net (which primarily consists of acquisition and integration related expenses, employee stock-based compensation expense, restructuring charges, other employee termination costs, business optimization, and other unusual or non-recurring expenses), impairment charges, and other expense, net (which primarily consists of pension mark to market adjustments, gains and losses on foreign currency transactions and undesignated derivative instruments, ineffective portion of cash flow hedges, debt refinancing costs, non-operating retirement benefits, and other non-operating activity). We believe that Adjusted EBITDA is an important indicator of operating performance because:
• | we report Adjusted EBITDA to our lenders as required under the covenants of our credit agreements; |
• | we consider gains (losses) on the acquisition, disposal and impairment of assets as resulting from investing decisions rather than ongoing operations; |
• | Adjusted EBITDA excludes the effects of income taxes, as well as the effects of financing and investing activities by eliminating the effects of interest, depreciation and amortization expenses and therefore more closely measures our operational performance; |
• | we use Adjusted EBITDA in setting performance incentive targets in order to align performance measurement with operational performance; and |
• | other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of our results. |
We set transfer prices between operating segments on an arms-length basis in a similar manner to transactions with third parties. We allocate corporate operating expenses that directly benefit our operating segments on a basis that reasonably approximates our estimates of the use of these services.
Other/Eliminations represents the elimination of inter-segment transactions as well as unallocated corporate costs consisting of costs specifically related to parent company operations that do not directly benefit segments, either individually or collectively. In the analysis of our results of operations, we discuss operating segment results for the current reporting period following our consolidated results of operations period-to-period comparison.
The following is management’s discussion and analysis of the financial condition and results of operations for the years ended December 31, 2018, 2017 and 2016. Information included in this section for reported sales volumes and pricing utilize an average price at the consolidated level and respective reporting segment levels. In certain reporting segments we utilized country and revenue stream information to provide a more accurate representation of changes to the business. This discussion should be read in conjunction with the consolidated financial statements, including the related notes, see Item 8 “Financial Statements” of this Annual Report on Form 10-K.
For reconciliations of Adjusted EBITDA to net income (loss), see “Selected Financial Data Selected” in Item 6 of this Annual Report on Form 10-K.
Key Factors Affecting Operating Results and Financial Condition
Key factors impacting our operating results and financial condition include the following:
• | Economic conditions, industry trends and relationships with customers and suppliers |
• | Chemical availability and prices, including volume-based pricing |
• | Acquisitions, dispositions and strategic investments |
• | Operating efficiencies |
• | Working capital requirements, interest rates and credit risk |
• | Foreign currencies |
For a description of our business and how the above factors impact us, refer to Item 1 “Business” and Item 1A “Risk Factors” of this Annual Report on Form 10-K.
In addition to the factors listed above, seasonal changes may affect our business and results of operations. Our net sales are affected by the level of industrial production, which tends to decline in the fourth quarter of each year. Certain of our end markets experience seasonal fluctuations, which also affect our net sales and results of operations. For example, our sales to the agricultural end market, particularly in Canada, tend to peak in the second quarter in each year, depending in part on weather-related variations in demand for agricultural chemicals. Sales to other end markets such as paints and coatings may also be affected by changing seasonal weather conditions.
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Non-GAAP Financial Measures
We believe that certain financial measures that do not comply with US GAAP provide relevant and meaningful information concerning the ongoing operating results of the Company. These financial measures include gross profit, gross margin, delivered gross profit and delivered gross margin (all exclusive of depreciation) and Adjusted EBITDA. Such non-GAAP financial measures are used from time to time herein but should not be viewed as a substitute for GAAP measures of performance.
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 constant currency information provides valuable supplemental information regarding our results of operations, consistent with how we evaluate our performance. We calculate constant currency percentages by converting our financial results in local currency for a period using the average exchange rate for the prior period to which we are comparing. This calculation may differ from similarly-titled measures used by other companies.
Results of Operations
Executive Summary
During 2018, we strengthened our financial condition through the generation of strong operating cash flow which reduced our leverage. We continued to make progress in the implementation of our key strategic initiatives of Commercial Greatness, Operational Excellence, and One Univar, strengthened our management team and furthered the development of a performance-driven culture. From an operations standpoint, we advanced on each of our priorities which form the framework for our strategy to grow the long-term value of Univar for our equity and debt holders. As a result, in 2018 we:
• | expanded our consolidated Adjusted EBITDA margins; |
• | grew Adjusted EBITDA and Adjusted EBITDA margin in all operating segments, with the exception of Canada, which was impacted by persistent weather challenges in agriculture; |
• | improved USA sales force execution resulted in USA volume growth for the first time since 2014; |
• | acquired Kemetyl and Earthoil, expanding our leading position in the pharmaceutical industry and strengthening our existing global natural beauty and personal care product line; |
• | strengthened our balance sheet and lowered our leverage ratio; and |
• | announced the acquisition of Nexeo Solutions, Inc., accelerating transformation and growth. |
Advances in our business were partially offset by:
• | lower volumes and revenue in the Canada segment as a result of the weather-impacted agriculture market and lower demand from the Canadian energy sector. |
The following tables set forth, for the periods indicated, certain statements of operations data first on the basis of reported data and then as a percentage of total net sales for the relevant period. The financial data set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with our historical consolidated financial statements and accompanying notes included elsewhere herein.
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Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Year Ended | Favorable (unfavorable) | % Change | Impact of currency* | ||||||||||||||||||||
(in millions) | December 31, 2018 | December 31, 2017 | |||||||||||||||||||||
Net sales | $ | 8,632.5 | 100.0 | % | $ | 8,253.7 | 100.0 | % | $ | 378.8 | 4.6 | % | 0.5 | % | |||||||||
Cost of goods sold (exclusive of depreciation) | 6,732.4 | 78.0 | % | 6,448.2 | 78.1 | % | (284.2 | ) | 4.4 | % | (0.4 | )% | |||||||||||
Operating expenses: | |||||||||||||||||||||||
Outbound freight and handling | 328.3 | 3.8 | % | 292.0 | 3.5 | % | (36.3 | ) | 12.4 | % | (0.7 | )% | |||||||||||
Warehousing, selling and administrative | 931.4 | 10.8 | % | 919.7 | 11.1 | % | (11.7 | ) | 1.3 | % | (0.5 | )% | |||||||||||
Other operating expenses, net | 73.5 | 0.9 | % | 55.4 | 0.7 | % | (18.1 | ) | 32.7 | % | (0.2 | )% | |||||||||||
Depreciation | 125.2 | 1.5 | % | 135.0 | 1.6 | % | 9.8 | (7.3 | )% | (0.4 | )% | ||||||||||||
Amortization | 54.3 | 0.6 | % | 65.4 | 0.8 | % | 11.1 | (17.0 | )% | 0.2 | % | ||||||||||||
Total operating expenses | $ | 1,512.7 | 17.5 | % | $ | 1,467.5 | 17.8 | % | $ | (45.2 | ) | 3.1 | % | (0.5 | )% | ||||||||
Operating income | $ | 387.4 | 4.5 | % | $ | 338.0 | 4.1 | % | $ | 49.4 | 14.6 | % | 0.3 | % | |||||||||
Other (expense) income: | |||||||||||||||||||||||
Interest income | 3.2 | — | % | 4.0 | — | % | (0.8 | ) | (20.0 | )% | (5.0 | )% | |||||||||||
Interest expense | (135.6 | ) | (1.6 | )% | (152.0 | ) | (1.8 | )% | 16.4 | (10.8 | )% | 0.1 | % | ||||||||||
Loss on extinguishment of debt | (0.1 | ) | — | % | (3.8 | ) | — | % | 3.7 | (97.4 | )% | — | % | ||||||||||
Other expense, net | (32.7 | ) | (0.4 | )% | (17.4 | ) | (0.2 | )% | (15.3 | ) | 87.9 | % | 2.9 | % | |||||||||
Total other expense | $ | (165.2 | ) | (1.9 | )% | $ | (169.2 | ) | (2.0 | )% | $ | 4.0 | (2.4 | )% | 0.3 | % | |||||||
Income before income taxes | 222.2 | 2.6 | % | 168.8 | 2.0 | % | 53.4 | 31.6 | % | 0.9 | % | ||||||||||||
Income tax expense | 49.9 | 0.6 | % | 49.0 | 0.6 | % | (0.9 | ) | 1.8 | % | 0.9 | % | |||||||||||
Net income | $ | 172.3 | 2.0 | % | $ | 119.8 | 1.5 | % | $ | 52.5 | 43.8 | % | 1.6 | % | |||||||||
* | Foreign currency translation is included in the percentage change. Unfavorable impacts from foreign currency translation are designated with parentheses. |
Net sales
Net sales percentage change due to: | ||
Acquisitions | 0.6 | % |
Reported sales volumes | (2.3 | )% |
Sales pricing and product mix | 5.8 | % |
Foreign currency translation | 0.5 | % |
Total | 4.6 | % |
Net sales were $8,632.5 million in the year ended December 31, 2018, an increase of $378.8 million, or 4.6%, from the year ended December 31, 2017. On a constant currency basis, net sales increased due to sales pricing and product mix improvements in all segments, partially offset by lower reported sales volumes in all segments except the USA for the year ended December 31, 2018 compared to the year ended December 31, 2017. Net sales also increased from the January 2018 Kemetyl and May 2018 Earthoil acquisitions in EMEA and the September 2017 Tagma acquisition in the Rest of World segment. Refer to the “Segment results” for the year ended December 31, 2018 discussion for additional information.
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Gross profit (exclusive of depreciation)
Gross profit percentage change due to: | ||
Acquisitions | 0.7 | % |
Reported sales volumes | (2.3 | )% |
Sales pricing, product costs and other adjustments | 6.4 | % |
Foreign currency translation | 0.4 | % |
Total | 5.2 | % |
Gross profit increased $94.6 million, or 5.2%, to $1,900.1 million for the year ended December 31, 2018. The increase in gross profit is attributable to higher average selling prices resulting from changes in market and product mix and sales force execution. The increase in gross profit from acquisitions was driven by the January 2018 Kemetyl and May 2018 Earthoil acquisitions in EMEA and the September 2017 Tagma acquisition in the Rest of World segment. Gross margin, which we define as gross profit divided by external net sales, increased to 22.0% in the year ended December 31, 2018 from 21.9% in the year ended December 31, 2017, primarily due to favorable product mix and focused margin management efforts. Refer to the “Segment results” for the year ended December 31, 2018 discussion for additional information.
Outbound freight and handling
Outbound freight and handling expenses increased $36.3 million, or 12.4%, to $328.3 million for the year ended December 31, 2018. On a constant currency basis, outbound freight and handling expenses increased $34.2 million, or 11.7%, primarily due to higher delivery costs resulting from market capacity constraints and higher fuel costs, partially offset by lower reported sales volumes. Refer to the “Segment results” for the year ended December 31, 2018 discussion for additional information.
Warehousing, selling and administrative
Warehousing, selling and administrative expenses increased $11.7 million, or 1.3%, to $931.4 million for the year ended December 31, 2018. On a constant currency basis, the $7.2 million increase is primarily due to focused investments in resources and capabilities to meet our sales force and digital initiative objectives and higher salary expense. These costs were partially offset by cost containment efforts across all of our segments, lower variable compensation expense and lower employee health care costs in the current year. Refer to the “Segment results” for the year ended December 31, 2018 discussion for additional information.
Other operating expenses, net
Other operating expenses, net increased $18.1 million, or 32.7%, to $73.5 million for the year ended December 31, 2018. The increase was primarily attributable to higher acquisition and integration related expenses, the absence of gain on sale of property, plant and equipment and higher other employee termination costs. The increase was partially offset by the reduction in costs incurred to support the transformation of the US business and lower restructuring charges. Refer to “Note 4: Other operating expenses, net” in Item 8 of this Annual Report on Form 10-K for additional information.
Depreciation and amortization
Depreciation expense decreased $9.8 million, or 7.3%, to $125.2 million for the year ended December 31, 2018. On a constant currency basis, the decrease of $10.4 million, or 7.7%, was primarily due to assets reaching the end of their useful lives.
Amortization expense decreased $11.1 million, or 17.0%, to $54.3 million for the year ended December 31, 2018. On a constant currency basis, the decrease of $11.0 million, or 16.8%, was primarily attributable to intangibles reaching the end of their useful lives.
Interest expense
Interest expense decreased $16.4 million, or 10.8%, to $135.6 million for the year ended December 31, 2018 primarily due to lower average outstanding borrowings. Refer to “Note 16: Debt” in Item 8 of our Annual Report on Form 10-K for additional information.
Loss on extinguishment of debt
Loss on extinguishment of debt decreased $3.7 million for the year ended December 31, 2018. The $0.1 million loss on extinguishment of debt for the year ended December 31, 2018 related to the amended Euro ABL Credit facility agreement. The $3.8 million loss on extinguishment of debt in the year ended December 31, 2017 related to the write off of unamortized debt
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discount and debt issuance costs related to the January 2017 and November 2017 debt amendments of the Senior Term B loan agreement. Refer to “Note 16: Debt” in Item 8 of our Annual Report on Form 10-K for additional information.
Other expense, net
Other expense, net increased $15.3 million, or 87.9%, to $32.7 million for the year ended December 31, 2018. The increase was primarily related to the increase in pension mark to market loss and the absence of pension curtailment and settlement gains. The increase was partially offset by the reduced exposure to exchange movements on foreign currency denominated loans due to the Euro Term B loan repayment in November 2017. Also contributing to the decrease was the absence of debt amendment fees for the January 2017 and November 2017 amendments of the Senior Term B loan agreement. Refer to “Note 6: Other expense, net” in Item 8 of this Annual Report on Form 10-K for additional information.
Income tax expense
Income tax expense increased $0.9 million, or 1.8%, to $49.9 million in the year ended December 31, 2018. The Company’s effective tax rate for the year ended December 31, 2018 of 22.5% was higher than the recently reduced US federal statutory rate of 21.0%, primarily due to the addition of state taxes and the higher tax rates incurred on the company’s earnings outside the US, including the expected net impact of the 2017 US Tax Cuts and Jobs Act (the “Tax Act”) on foreign net earnings. These increases in the effective tax rate were partially offset by the release of valuation allowances on certain tax attributes. Included in the $49.9 million of tax expense for year ended December 31, 2018 was a $15.3 million benefit related to the release of valuation allowance on foreign tax attributes, a $2.7 million benefit in recognition of previously unrecognized tax benefits due to the statute of limitation expiration, $6.8 million of adjustments to provisional amounts for certain enactment-date effects of the Tax Act, and a $1.6 million net benefit related to prior year estimates of the impact from the 2017 US Tax Cuts and Jobs Act.
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Segment results
Our Adjusted EBITDA and gross profit (exclusive of depreciation) by operating segment and in aggregate is summarized in the following tables:
(in millions) | USA | Canada | EMEA | Rest of World | Other/ Elimin- ations(1) | Consolidated | |||||||||||||||||
Year ended December 31, 2018 | |||||||||||||||||||||||
Net sales: | |||||||||||||||||||||||
External customers | $ | 4,961.0 | $ | 1,302.3 | $ | 1,975.7 | $ | 393.5 | $ | — | $ | 8,632.5 | |||||||||||
Inter-segment | 126.6 | 9.3 | 4.0 | 0.2 | (140.1 | ) | — | ||||||||||||||||
Total net sales | $ | 5,087.6 | $ | 1,311.6 | $ | 1,979.7 | $ | 393.7 | $ | (140.1 | ) | $ | 8,632.5 | ||||||||||
Cost of goods sold (exclusive of depreciation) | 3,959.3 | 1,080.1 | 1,525.6 | 307.5 | (140.1 | ) | 6,732.4 | ||||||||||||||||
Outbound freight and handling | 215.6 | 42.5 | 62.4 | 7.8 | — | 328.3 | |||||||||||||||||
Warehousing, selling and administrative | 536.3 | 84.3 | 240.5 | 45.1 | 25.2 | 931.4 | |||||||||||||||||
Adjusted EBITDA | $ | 376.4 | $ | 104.7 | $ | 151.2 | $ | 33.3 | $ | (25.2 | ) | $ | 640.4 | ||||||||||
Other operating expenses, net | 73.5 | ||||||||||||||||||||||
Depreciation | 125.2 | ||||||||||||||||||||||
Amortization | 54.3 | ||||||||||||||||||||||
Interest expense, net | 132.4 | ||||||||||||||||||||||
Loss on extinguishment of debt | 0.1 | ||||||||||||||||||||||
Other expense, net | 32.7 | ||||||||||||||||||||||
Income tax expense | 49.9 | ||||||||||||||||||||||
Net income | $ | 172.3 | |||||||||||||||||||||
(in millions) | USA | Canada | EMEA | Rest of World | Other/ Elimin-ations(1) | Consolidated | |||||||||||||||||
Year ended December 31, 2018 | |||||||||||||||||||||||
Gross profit: | |||||||||||||||||||||||
Net sales | $ | 5,087.6 | $ | 1,311.6 | $ | 1,979.7 | $ | 393.7 | $ | (140.1 | ) | $ | 8,632.5 | ||||||||||
Cost of goods sold (exclusive of depreciation) | 3,959.3 | 1,080.1 | 1,525.6 | 307.5 | (140.1 | ) | 6,732.4 | ||||||||||||||||
Gross profit (exclusive of depreciation) | $ | 1,128.3 | $ | 231.5 | $ | 454.1 | $ | 86.2 | $ | — | $ | 1,900.1 | |||||||||||
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(in millions) | USA | Canada | EMEA | Rest of World | Other/ Elimin- ations(1) | Consolidated | |||||||||||||||||
Year ended December 31, 2017 | |||||||||||||||||||||||
Net sales: | |||||||||||||||||||||||
External customers | $ | 4,657.1 | $ | 1,371.5 | $ | 1,821.2 | $ | 403.9 | $ | — | $ | 8,253.7 | |||||||||||
Inter-segment | 121.9 | 9.1 | 4.5 | 0.5 | (136.0 | ) | — | ||||||||||||||||
Total net sales | $ | 4,779.0 | $ | 1,380.6 | $ | 1,825.7 | $ | 404.4 | $ | (136.0 | ) | $ | 8,253.7 | ||||||||||
Cost of goods sold (exclusive of depreciation) | 3,706.8 | 1,143.0 | 1,411.7 | 322.7 | (136.0 | ) | 6,448.2 | ||||||||||||||||
Outbound freight and handling | 192.8 | 37.3 | 55.7 | 6.2 | — | 292.0 | |||||||||||||||||
Warehousing, selling and administrative | 529.4 | 86.2 | 229.1 | 46.8 | 28.2 | 919.7 | |||||||||||||||||
Adjusted EBITDA | $ | 350.0 | $ | 114.1 | $ | 129.2 | $ | 28.7 | $ | (28.2 | ) | $ | 593.8 | ||||||||||
Other operating expenses, net | 55.4 | ||||||||||||||||||||||
Depreciation | 135.0 | ||||||||||||||||||||||
Amortization | 65.4 | ||||||||||||||||||||||
Interest expense, net | 148.0 | ||||||||||||||||||||||
Loss on extinguishment of debt | 3.8 | ||||||||||||||||||||||
Other expense, net | 17.4 | ||||||||||||||||||||||
Income tax expense | 49.0 | ||||||||||||||||||||||
Net income | $ | 119.8 | |||||||||||||||||||||
(in millions) | USA | Canada | EMEA | Rest of World | Other/ Elimin-ations(1) | Consolidated | |||||||||||||||||
Year ended December 31, 2017 | |||||||||||||||||||||||
Gross profit: | |||||||||||||||||||||||
Net sales | $ | 4,779.0 | $ | 1,380.6 | $ | 1,825.7 | $ | 404.4 | $ | (136.0 | ) | $ | 8,253.7 | ||||||||||
Cost of goods sold (exclusive of depreciation) | 3,706.8 | 1,143.0 | 1,411.7 | 322.7 | (136.0 | ) | 6,448.2 | ||||||||||||||||
Gross profit (exclusive of depreciation) | $ | 1,072.2 | $ | 237.6 | $ | 414.0 | $ | 81.7 | $ | — | $ | 1,805.5 | |||||||||||
(1) | Other/Eliminations represents the elimination of intersegment transactions as well as unallocated corporate costs consisting of costs specifically related to parent company operations that do not directly benefit segments, either individually or collectively. |
USA.
Net sales percentage change due to: | Gross profit percentage change due to: | |||||
Reported sales volumes | 0.9 | % | Reported sales volumes | 0.9 | % | |
Sales pricing and product mix | 5.6 | % | Sales pricing, product costs and other adjustments | 4.3 | % | |
Total | 6.5 | % | Total | 5.2 | % | |
External sales in the USA segment were $4,961.0 million, an increase of $303.9 million, or 6.5%, in the year ended December 31, 2018, primarily due to higher average selling prices resulting from chemical price inflation on certain products and the Company’s efforts to improve its sales force effectiveness as well as higher reported sales volumes, primarily in bulk commodity chemicals.
Gross profit increased $56.1 million, or 5.2%, to $1,128.3 million in the year ended December 31, 2018. Gross profit increased due to changes in product mix, higher sales volumes and a net benefit from miscellaneous operating items. Gross margin decreased from 23.0% in the year ended December 31, 2017 to 22.7% during the year ended December 31, 2018 due to product mix.
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Outbound freight and handling expenses increased $22.8 million, or 11.8%, to $215.6 million in the year ended December 31, 2018 primarily due to higher delivery costs resulting from market capacity constraints and higher fuel costs.
Operating expenses increased $6.9 million, or 1.3%, to $536.3 million in the year ended December 31, 2018 primarily due to focused investments in resources and capabilities to meet our sales force and digital initiative objectives, higher environmental remediation expense and higher bad debt charges. These costs were partially offset by lower employee health care costs, lower variable compensation expense and strong cost containment. Operating expenses as a percentage of external sales decreased from 11.4% in the year ended December 31, 2017 to 10.8% in the year ended December 31, 2018.
Adjusted EBITDA increased by $26.4 million, or 7.5%, to $376.4 million in the year ended December 31, 2018. Adjusted EBITDA margin increased from 7.5% in the year ended December 31, 2017 to 7.6% in the year ended December 31, 2018 primarily as a result of lower operating expenses as a percentage of sales, partially offset by lower gross margin and higher outbound freight and handling expenses as a percentage of sales.
Canada.
Net sales percentage change due to: | Gross profit percentage change due to: | |||||
Reported sales volumes | (8.9 | )% | Reported sales volumes | (6.4 | )% | |
Sales pricing and product mix | 3.7 | % | Sales pricing, product costs and other adjustments | 3.7 | % | |
Foreign currency translation | 0.2 | % | Foreign currency translation | 0.1 | % | |
Total | (5.0 | )% | Total | (2.6 | )% | |
External sales in the Canada segment were $1,302.3 million, a decrease of $69.2 million, or 5.0%, in the year ended December 31, 2018. On a constant currency basis, external net sales decreased due to lower sales volumes attributable to the weather-impacted agriculture market as well as volume reductions in the industrial chemical business due to lower demand from Canada’s energy sector in the second half of the year. Average selling prices increased as a result of chemical price inflation in certain products, changes in market and product mix and sales force execution for the year ended December 31, 2018 to the year ended December 31, 2017.
Gross profit decreased $6.1 million, or 2.6%, to $231.5 million in the year ended December 31, 2018. On a constant currency basis, gross profit decreased due to lower sales volumes in agriculture and the industrial chemical business. Gross margin increased from 17.3% in the year ended December 31, 2017 to 17.8% in the year ended December 31, 2018 due to the lower contribution from agriculture sales in 2018 and margin management efforts.
Outbound freight and handling expenses increased $5.2 million, or 13.9%, to $42.5 million primarily due to higher delivery costs per ton resulting from tight market conditions.
Operating expenses decreased by $1.9 million, or 2.2%, to $84.3 million in the year ended December 31, 2018 and increased as a percentage of external sales from 6.3% in the year ended December 31, 2017 to 6.5% in the year ended December 31, 2018. On a constant currency basis, operating expenses decreased $2.0 million, or 2.3%, primarily due to lower variable compensation expense and cost containment efforts.
Adjusted EBITDA decreased by $9.4 million, or 8.2%, to $104.7 million in the year ended December 31, 2018. On a constant currency basis, Adjusted EBITDA decreased $9.6 million, or 8.4%, attributable to reduced demand resulting from a weather-impacted agriculture market, partially offset by growth in the industrial chemical business. Adjusted EBITDA margin decreased from 8.3% in the year ended December 31, 2017 to 8.0% in the year ended December 31, 2018, reflecting the lower contribution from agriculture sales in 2018.
53
EMEA.
Net sales percentage change due to: | Gross profit percentage change due to: | |||||
Acquisitions | 2.3 | % | Acquisitions | 2.0 | % | |
Reported sales volumes | (7.1 | )% | Reported sales volumes | (7.1 | )% | |
Sales pricing and product mix | 10.2 | % | Sales pricing, product costs and other adjustments | 11.4 | % | |
Foreign currency translation | 3.1 | % | Foreign currency translation | 3.4 | % | |
Total | 8.5 | % | Total | 9.7 | % | |
External sales in the EMEA segment were $1,975.7 million, an increase of $154.5 million, or 8.5%, in the year ended December 31, 2018. On a constant currency basis, external net sales increased primarily due to higher average selling prices from chemical price inflation, mix improvement and sales force execution. Lower volumes are largely attributable to certain product shortages and a reduction of direct commodity sales. The increase in external net sales from acquisitions was due to the January 2018 Kemetyl and May 2018 Earthoil acquisitions.
Gross profit increased $40.1 million, or 9.7%, to $454.1 million in the year ended December 31, 2018. On a constant currency basis, gross profit increased from higher average selling prices attributable to favorable product mix and margin management initiatives. The increase in gross profit from acquisitions was due to the January 2018 Kemetyl and May 2018 Earthoil acquisitions. Gross margin increased from 22.7% in the year ended December 31, 2017 to 23.0% in the year ended December 31, 2018 primarily due to the change in product mix and price inflation.
Outbound freight and handling expenses increased $6.7 million, or 12.0%, to $62.4 million primarily due to incremental expenses related to our Kemetyl acquisition and overall higher costs to deliver.
Operating expenses increased $11.4 million, or 5.0%, to $240.5 million in the year ended December 31, 2018, and decreased as a percentage of external sales from 12.6% in the year ended December 31, 2017 to 12.2% in the year ended December 31, 2018. On a constant currency basis, operating expenses increased $3.9 million, or 1.7%, which was primarily due to incremental expenses related to our Kemetyl acquisition and higher salary expense, partially offset by lower environmental remediation expenses and lower bad debt charges.
Adjusted EBITDA increased by $22.0 million, or 17.0%, to $151.2 million in the year ended December 31, 2018. On a constant currency basis, Adjusted EBITDA increased $17.9 million, or