Diversey Holdings, Ltd.
Condensed Consolidated Statements of Stockholders' Equity
Three and Nine Months Ended September 30, 2021
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
(in millions) | Common Stock | Ordinary Shares | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total |
Balance as of June 30, 2021 | $ | — | | $ | — | | $ | 1,419.8 | | $ | (642.3) | | $ | (153.3) | | $ | 624.2 | |
Issuance of ordinary shares sold in IPO, net of offering costs | — | | — | | — | | — | | — | | — | |
Share-based compensation | — | | — | | 13.9 | | — | | — | | 13.9 | |
Cash flow hedging activities, net of tax | — | | — | | — | | — | | (4.1) | | (4.1) | |
Foreign currency translation adjustments | — | | — | | — | | — | | (23.0) | | (23.0) | |
Net loss | — | | | | (42.1) | | | (42.1) | |
Balance as of September 30, 2021 | $ | — | | $ | — | | $ | 1,433.7 | | $ | (684.4) | | $ | (180.4) | | $ | 568.9 | |
| | | | | | |
| | | | | | |
Balance as of December 31, 2020 | $ | 2.2 | | $ | — | | $ | 247.2 | | $ | (545.3) | | $ | (212.7) | | $ | (508.6) | |
Effect of reorganization transactions | (2.2) | | — | | (39.6) | | — | | — | | (41.8) | |
Issuance of ordinary shares sold in IPO, net of offering costs | — | | — | | 725.7 | | — | | — | | 725.7 | |
Exchange of preferred equity certificates for ordinary shares | — | | — | | 620.9 | | — | | — | | 620.9 | |
Conversion of share-based awards | — | | — | | 68.1 | | — | | — | | 68.1 | |
Share-based compensation | — | | — | | 67.1 | | — | | — | | 67.1 | |
Tax receivable agreement | — | | — | | (255.7) | | — | | — | | (255.7) | |
Cash flow hedging activities, net of tax | — | | — | | — | | — | | 1.0 | | 1.0 | |
Foreign currency translation adjustments | — | | — | | — | | — | | 31.3 | | 31.3 | |
Net loss | — | | — | | — | | (139.1) | | — | | (139.1) | |
Balance as of September 30, 2021 | $ | — | | $ | — | | $ | 1,433.7 | | $ | (684.4) | | $ | (180.4) | | $ | 568.9 | |
| | | | | | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
Diversey Holdings, Ltd.
Condensed Consolidated Statements of Cash Flows
(Unaudited) | | | | | | | | | | | | | | | | | | | | |
| | | | | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 |
Operating activities: | | |
| Net loss | $ | (109.8) | | $ | (139.1) | |
| Adjustments to reconcile net loss to cash provided by (used in) operating activities: | | |
| Depreciation and amortization | 138.2 | | 141.6 | |
| Amortization of deferred financing costs and original issue discount | 5.4 | | 21.6 | |
| Loss on extinguishment of debt | — | | 15.6 | |
| (Gain) loss on derivatives | (0.6) | | 2.3 | |
| Deferred taxes | (17.6) | | (15.6) | |
| Unrealized foreign exchange (gain) loss | (8.9) | | 5.2 | |
| Share-based compensation | 45.4 | | 67.1 | |
| Impact of highly inflationary subsidiaries | (3.6) | | (2.7) | |
| Provision for (recovery of) bad debts | 2.8 | | (1.9) | |
| Provision for slow moving inventory | 16.2 | | 4.1 | |
| Non-cash pension benefit | (10.3) | | (12.0) | |
| Non-cash restructuring and exit costs | — | | 16.9 | |
| Non-cash tax receivable agreement adjustments | (16.7) | | 4.1 | |
| Changes in operating assets and liabilities: | | |
| Trade receivables, net | (58.3) | | (96.8) | |
| Inventories, net | (72.4) | | (52.8) | |
| Accounts payable | 95.6 | | 1.9 | |
| Income taxes, net | (11.0) | | (5.8) | |
| Other assets and liabilities, net | 40.0 | | (64.6) | |
Cash provided by (used in) operating activities | 34.4 | | (110.9) | |
Investing activities: | | |
| Business acquired in purchase transactions, net of cash acquired | (41.4) | | (9.4) | |
| Acquisition of intellectual property | — | | (3.0) | |
| Dosing and dispensing equipment | (57.7) | | (47.8) | |
| Capital expenditures | (36.2) | | (22.2) | |
| Collection of deferred factored receivables | — | | 40.1 | |
Cash used in investing activities | (135.3) | | (42.3) | |
Financing activities: | | |
| Contingent consideration payments | — | | (0.3) | |
| Proceeds from (payments on) short-term borrowings | (2.8) | | 16.7 | |
| Proceeds from revolving credit facility | 50.0 | | 109.0 | |
| Payments on revolving credit facility | (50.0) | | (109.0) | |
| Proceeds from long-term borrowings | — | | 2,000.0 | |
| Payments on long-term borrowings | (13.2) | | (2,667.8) | |
| Payment of deferred financing costs | — | | (35.1) | |
| Payment of bond redemption premium | — | | (7.6) | |
| Issuance of ordinary shares sold in IPO, net of offering costs | — | | 725.7 | |
| Proceeds from termination of derivatives | 186.1 | | — | |
Cash provided by financing activities | 170.1 | | 31.6 | |
Exchange rate changes on cash, cash equivalents and restricted cash | (27.7) | | (4.0) | |
| Increase (decrease) in cash, cash equivalents and restricted cash | 41.5 | | (125.6) | |
Cash, cash equivalents and restricted cash at beginning of period(1) | 208.2 | | 201.7 | |
Cash, cash equivalents and restricted cash at end of period(2) | $ | 249.7 | | $ | 76.1 | |
| | |
| | | | | | | | | | | | | | | | | | | | |
Supplemental Cash Flow Information: | | |
| Interest payments | $ | 57.8 | | $ | 99.3 | |
| Income tax payments | $ | 33.5 | | $ | 27.0 | |
| Non-cash conversion of preferred equity certificates to equity | $ | — | | $ | 620.9 | |
| Beneficial interest obtained in exchange for factored receivables | $ | — | | $ | 25.6 | |
Restricted cash (which includes compensating balance deposits) is recorded in Prepaid expenses and other current assets and Other non-current assets on the Condensed Consolidated Balance Sheets.
(1) Restricted cash was $0.6 million and $14.0 million as of December 31, 2021 and December 31, 2020, respectively.
(2) Restricted cash was $0.6 million and $7.3 million as of September 30, 2022 and September 30, 2021, respectively.
The accompanying notes are an integral part of the condensed consolidated financial statements.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Description of Business
Diversey Holdings, Ltd. (hereafter the "Company", “we”, “us”, and “our”) is a leading provider of hygiene, infection prevention and cleaning solutions. We develop mission-critical products, services and technologies that save lives and protect our environment. We were formed as an exempted company incorporated under the laws of the Cayman Islands with limited liability on November 3, 2020 for the purpose of completing a public offering and related transactions and in order to carry on the business of our indirect wholly-owned operating subsidiaries.
Initial Public Offering and Additional Share Offering in 2021
On March 29, 2021, we completed an initial public offering of 46,153,846 Ordinary Shares at a public offering price of $15.00 per Ordinary Share (the "IPO"), receiving $654.3 million in net proceeds, after deducting the underwriting discount and offering expenses. On April 9, 2021, we issued and sold an additional 5,000,000 Ordinary Shares pursuant to the underwriters' partial exercise of their option to purchase additional shares, receiving an incremental $71.4 million in net proceeds, after deducting the underwriting discount and offering expenses. Our Ordinary Shares trade on The Nasdaq Global Select Market under the ticker symbol "DSEY".
On November 15, 2021, we issued and sold 15,000,000 Ordinary Shares at a public offering price of $15.00 per Ordinary Share, receiving $214.4 million in net proceeds, after deducting the underwriting discount and offering expenses.
Reorganization Transactions
Prior to the formation of Diversey Holdings, Ltd., the organizational structure consisted of Constellation (BC) 2 S.à r.l ("Constellation"), which was incorporated on June 30, 2017, and organized under the laws of Luxembourg as a Société à Responsabilité Limitée for an unlimited period under the direction of Bain Capital, LP (“Bain Capital”). Diamond (BC) B.V., an indirect wholly-owned subsidiary of Constellation, was formed on March 15, 2017 for the purpose of consummating the acquisition of the Diversey Care division and the food hygiene and cleaning business of Sealed Air Corporation (“Sealed Air”) (together, the “Diversey Business”), including certain assets and all the capital stock of certain entities engaged in the Diversey Business (the “Diversey Acquisition”), which acquisition closed on September 6, 2017.
Prior to closing of the IPO, we effected a series of transactions (the "Reorganization Transactions") pursuant to which:
(i) Constellation (BC) PoolCo SCA (“Poolco”), an entity incorporated for the purpose of pooling the interests of our employees, directors and officers in Constellation (BC) S.à r.l (“Topco”), a direct subsidiary of Constellation, repurchased shares from certain equity holders in exchange for a note receivable;
(ii) all other equity holders of Poolco contributed their shares of Poolco to Constellation in exchange for new shares of Constellation; and
(iii) the equity holders of Constellation, including Bain Capital and the individuals referred to in the foregoing clause (ii), contributed a portion of their shares of Constellation to the Company, and the equity holders referred to in the foregoing clause (i) contributed a portion of their note receivable to the Company, in each case, in exchange for ordinary shares of the Company (in which the Company withheld a portion of the ordinary shares otherwise issuable solely to the extent necessary to satisfy (y) any outstanding loans owned by such employee equity holders and (z) any tax consequences resulting to the equity holders from the repurchase, and the aggregate fair market value of such withheld ordinary shares will be paid by the Company or a subsidiary thereof to satisfy such tax consequence) and the equity holders of Constellation, including Bain Capital and the individuals referred to in the foregoing clause (ii), contributed the remaining portion of their shares of Constellation to one of our subsidiaries, and the equity holders referred to in the
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
foregoing clause (i) contributed the remaining portion of their note receivable to one of our subsidiaries, in each case, in exchange for payments to be made under the Tax Receivable Agreement entered into in connection with the IPO and certain other consideration.
The Reorganization Transactions resulted in the Company becoming the ultimate parent company of Constellation and its subsidiaries, and Bain Capital and all other equity holders of Constellation and Poolco becoming shareholders of the Company. In order to simplify our corporate structure, we merged or liquidated certain of our wholly-owned subsidiaries, including Constellation, Poolco and Topco, prior to December 31, 2021. The Reorganization Transactions were considered transactions between entities under common control. As a result, the financial statements for periods prior to the IPO and the Reorganization Transactions have been adjusted to combine the previously separate entities for presentation purposes.
Tax Receivable Agreement
As part of the Reorganization Transactions, the Company entered into a tax receivable agreement (the “TRA”) with the pre-IPO owners of Constellation and certain other members of management (the “TRA Recipients”). The TRA requires the Company to make payments to the TRA Recipients as part of the consideration for their shares in Constellation or as part consideration for the note receivable held by them, as applicable, for 85% of the tax benefits realized by the Company when utilizing certain U.S. and Dutch income tax attributes generated, or owned by, or attributable to, the Company on or prior to the date of the IPO, and any tax deductions available to the Company that relate to the transaction expenses incurred by the Company as a result of the consummation of the IPO. The Company expects to utilize a significant portion of these income tax attributes based on current projections of taxable income, and therefore, expects to realize tax benefits. The annual tax benefits are computed by calculating the income taxes due, including such tax benefits, and the income taxes due without such tax benefits. Under the TRA, generally, the Company will retain the benefit of the remaining 15% of the applicable tax savings. The Company's liability under the TRA on an undiscounted basis was $193.7 million and $238.1 million as of September 30, 2022 and December 31, 2021, respectively, of which $1.3 million and zero is presented within Other current liabilities, and $192.4 million and $238.1 million is presented within Other non-current liabilities on the Condensed Consolidated Balance Sheet, as of September 30, 2022 and December 31, 2021, respectively.
Nature of Operations
We are a leading global provider of high performance hygiene, infection prevention, and cleaning solutions for the Institutional and Food & Beverage markets. In addition, we offer a wide range of value added services, including food safety and application training and consulting, as well as auditing of hygiene and water management. Our Institutional business provides solutions serving end-users such as healthcare facilities, food service providers, retail and grocery outlets, educational institutions, hospitality establishments, and building service contractors. Our Food & Beverage business provides solutions serving manufacturers in the brewing, beverage, dairy, processed foods, pharmaceutical, and agricultural markets. Although our cleaning products represent only a small portion of our customers’ total cleaning costs, they are typically viewed as being non discretionary because they can have a meaningful impact on the efficacy of food safety, operational excellence, and sustainability. The COVID-19 pandemic has further reinforced the essential nature of our solutions and increased hygiene, infection prevention, and cleaning standards across all markets.
The product range of Diversey®-branded solutions includes fully integrated lines of products and dispensing systems for hard surface cleaning, disinfecting and sanitizing, hand washing, deodorizing, mechanical and manual ware washing, hard surface and carpeted floor cleaning systems, cleaning tools and utensils, fabric care for professional laundry applications comprising detergents, stain removers, bleaches and a broad range of dispensing equipment for process control and management information systems. Floor care machines are commercialized under the well-established Taski® brand.
We are globally operated with manufacturing facilities, sales centers, administrative offices and warehouses located throughout the world, and we have a global team of approximately 9,000 employees as of September 30, 2022.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
Our Condensed Consolidated Financial Statements include all of the accounts of the Company and our subsidiaries. These Condensed Consolidated Financial Statements reflect our financial position, results of operations, cash flows and changes in stockholders' equity in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany accounts and transactions have been eliminated. All amounts are in US Dollar denominated millions, except per share amounts and unless otherwise noted, and are approximate due to rounding.
The accompanying unaudited financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete annual financial statements. In the opinion of management, the accompanying unaudited financial statements include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Interim results are not necessarily indicative of the results that may be expected for the full year. The accompanying unaudited interim financial statements should be read in conjunction with the annual audited financial statements of the Company and notes thereto for the year ended December 31, 2021 included in the Company's Annual Report on Form 10-K. Certain amounts within Transaction and integration costs (formerly described as "Transition and transformation costs") in the prior year's Condensed Consolidated Statement of Operations have been reclassified into Restructuring and exit costs and Cost of sales to conform to the current year presentation, with no impact on net loss or accumulated deficit.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods. These estimates include, among other items, purchase price accounting, assessing the collectability of receivables, the use and recoverability of inventory, the estimation of the fair value of financial instruments, useful lives and recoverability of tangible and intangible assets and impairment of goodwill, assumptions used in our defined benefit pension plans and other post-employment benefit plans, fair value measurement of assets, rebate costs, costs for incentive compensation, the valuation allowance on deferred tax assets and accruals for commitments and contingencies. Management reviews these estimates and assumptions periodically and reflects the effects of any revisions in the Condensed Consolidated Financial Statements in the period management determines any revisions to be necessary. Actual results could differ materially from these estimates.
New Accounting Guidance
We consider the applicability and impact of all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board ("FASB"). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. The Company can elect to apply the amendments in this update as of March 12, 2020 through December 31, 2022, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Company continues to
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
evaluate this new standard update and the impact of this guidance on the Condensed Consolidated Financial Statements.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which explicitly clarifies which contracts, hedging relationships, and other transactions are within the scope of the optional expedients and exceptions allowed under Topic 848. The Company has not utilized any of the optional expedients or exceptions available under Topic 848. The Company continues to assess whether this ASU is applicable throughout the effective period, in conjunction with our assessment of ASU 2020-4.
In September 2022, the FASB issued ASU No. 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The new guidance is expected to improve the transparency of supplier finance programs by requiring that a buyer in a supplier finance program disclose sufficient qualitative and quantitative information about the program to allow a user of its financial statements to understand the program's nature, activity during the period, changes from period to period and potential magnitude. ASU No. 2022-04 is effective for the Company as of January 1, 2023 on a retrospective basis including interim periods within those fiscal years, except for the requirement to disclose rollforward information which is effective for the Company as of January 1, 2024. Early adoption is permitted. The Company had no supplier finance programs during the nine months ended September 30, 2022. The Company is currently reviewing the provisions of this new pronouncement and does not expect this guidance to have a material impact on the condensed consolidated financial statements.
NOTE 3 - REVENUE RECOGNITION
Description of Revenue Generating Activities
We provide high-performance cleaning, infection prevention and hygiene products for the food safety and service, food and beverage plant operations, healthcare, floor care, housekeeping and room care, laundry and hand care markets. In addition, we offer a wide range of value-added solutions, including food safety and application training and consulting, as well as auditing of hygiene and water management. Many of our products are sold through distributors who then sell the product to end users.
We recognize revenue based on the expected amount of consideration to be received for the provided goods or services, taking into account the expected value of variable consideration. Our variable considerations include, but are not limited to, rebates, prebates, discounts, and returns. The amount of variable consideration is estimated at contract inception by using the most likely amount method depending on the nature of the variable consideration. Such variable consideration is re-evaluated each reporting period, and accruals are booked based on the re-evaluated estimates and variable consideration recognized to date.
Charges for rebates and other allowances are recognized as a deduction from revenue on an accrual basis in the period in which the associated revenue is recorded. When we estimate our rebate accruals, we consider customer-specific contractual commitments including stated rebate rates and history of actual rebates paid. Our rebate accruals are reviewed at each reporting period and adjusted to reflect data available at that time. We adjust the accruals to reflect any differences between estimated and actual amounts. These adjustments impact the amount of net sales recognized by us in the corresponding period of adjustment. Charges for rebates and other allowances were 27.0% and 26.4% of gross sales for the three months ended September 30, 2022 and September 30, 2021, respectively, and 25.9% and 24.9% for the nine months ended September 30, 2022 and September 30, 2021, respectively.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Disaggregated Revenue
Revenues from contracts with customers summarized by region were as follows:
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Europe | $ | 315.2 | | $ | 313.0 | | $ | 929.6 | | $ | 838.9 | |
North America | 152.0 | | 158.0 | | 496.2 | | 549.8 | |
Asia Pacific | 87.1 | | 81.2 | | 254.9 | | 239.4 | |
Middle East and Africa | 72.4 | | 63.0 | | 204.7 | | 170.9 | |
Latin America | 55.9 | | 45.5 | | 161.0 | | 133.6 | |
Revenue from contracts with customers | 682.6 | | 660.7 | | 2,046.4 | | 1,932.6 | |
Other revenue (Leasing: Sales-type and Operating) | 6.4 | | 4.2 | | 17.9 | | 13.9 | |
Total revenue | $ | 689.0 | | $ | 664.9 | | $ | 2,064.3 | | $ | 1,946.5 | |
Assets Recognized For the Costs to Obtain a Contract
In certain instances, we incur incremental direct costs of a transaction, such as prebates, equipment provided free on loan, or other related expenses in the contract negotiation phase. Because these costs are likely incurred to transition to a new relationship or part of a negotiated renewal of a long-term relationship, these costs are considered costs to obtain a contract and are deferred and amortized over the period in which revenue is recognized, provided that unamortized deferred costs are considered recoverable. These amounts are recorded within Other non-current assets on our Condensed Consolidated Balance Sheets.
NOTE 4 - ACQUISITIONS
We make business acquisitions that align with its strategic business objectives. The assets and liabilities of acquired businesses are recorded in the Condensed Consolidated Balance Sheet at fair value as of their acquisition date. The purchase price allocation is based on estimates of the fair value of assets acquired, liabilities assumed and consideration paid. Purchase consideration is reduced by the amount of cash or cash equivalents acquired. Acquisitions during 2022 and 2021 were not significant to our condensed consolidated financial statements; therefore, pro forma financial information is not presented. Costs incurred related to acquisitions are included as part of Transaction and integration costs in the Condensed Consolidated Statements of Operations.
2022 Activity
On January 24, 2022, we acquired Shorrock Trichem Ltd, a distributor of cleaning and hygiene solutions and services in the United Kingdom. In the second quarter of 2022, we recorded purchase accounting adjustments associated with this acquisition, which both decreased acquisition related net assets and increased goodwill by $3.1 million.
In the first quarter of 2022, we recorded purchase accounting adjustments associated with our fourth quarter 2021 acquisition of Birko Corporation. As a result, the acquisition related net assets increased by $1.6 million, goodwill decreased by $1.7 million, and we paid $0.1 million in additional consideration related to a net working capital adjustment.
2021 Activity
On September 20, 2021 we acquired certain assets of Tasman Chemicals Pty. Limited, an Australian manufacturer of professional hygiene and cleaning solutions, and the results of operations for this business are reported within both the Institutional and Food & Beverage business segment.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the fair values of the net assets acquired during 2022 and 2021:
| | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2022 | 2021 |
Cash and cash equivalents | $ | 10.7 | | $ | — | |
Trade receivables | 7.1 | | 1.8 | |
Inventories | 3.9 | | 2.2 | |
Prepaid expenses and other current assets | 1.8 | | — | |
Property, plant and equipment | 6.3 | | 0.1 | |
Intangible assets | 15.6 | | 4.0 | |
Accounts payable | (4.1) | | (1.7) | |
Other current liabilities | (5.0) | | (0.1) | |
Other non-current liabilities | (0.1) | | — | |
Deferred taxes | (4.6) | | (1.2) | |
Net assets acquired before goodwill on acquisition | 31.6 | | 5.1 | |
Goodwill on acquisition | 20.5 | | 4.3 | |
Net cash paid for acquisitions | $ | 52.1 | | $ | 9.4 | |
NOTE 5 - FINANCIAL STATEMENT DETAILS
Inventories
Our net inventory balances were:
| | | | | | | | |
(in millions) | September 30, 2022 | December 31, 2021 |
Raw materials | $ | 75.3 | | $ | 74.2 | |
Work in process | 3.8 | | 2.8 | |
Finished goods | 289.6 | | 260.6 | |
| $ | 368.7 | | $ | 337.6 | |
Factoring of trade receivables
On October 25, 2021, we terminated our Master Agreement with Factofrance, S.A. (“Factofrance”) to sell certain trade receivables, without recourse, of eight Diversey companies located in the United Kingdom, Spain, France, Netherlands, Poland, Germany, Italy and Portugal under individually executed Receivable Purchase Agreements (“RPAs”).
We accounted for transfers of receivables pursuant to the RPAs as a sale and removed them from our Condensed Consolidated Balance Sheets. We maintained a “beneficial interest,” or a right to collect cash, in the sold receivables in which we do not immediately collect cash. Cash receipts from the beneficial interests on sold receivables (which are cash receipts on the underlying trade receivables that have already been sold in these agreements) are classified as investing activities and presented as cash receipts on sold receivables on our Condensed Consolidated Statements of Cash Flows.
We sold $483.1 million of receivables to Factofrance and received cash from Factofrance of $475.4 million during the nine months ended September 30, 2021. We collected from our customers and remitted to Factofrance $486.6 million during the nine months ended September 30, 2021.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Securitization of trade receivables
We sell certain North American and European customer receivables to PNC Bank ("PNC") without recourse on a revolving basis. This arrangement provided for maximum funding of up to $150.0 million for receivables sold, which increased from $100.0 million during the second quarter of 2022. As customers pay their balances, we transfer additional receivables into the program. The transferred receivables are fully guaranteed by a bankruptcy-remote wholly owned subsidiary of the Company, which holds additional receivables in the amount of $137.6 million as of September 30, 2022 that are pledged as collateral under this agreement.
Fees associated with the arrangement were $3.5 million and $1.2 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.
We transferred and derecognized $946.9 million of receivables and collected $885.0 million in connection with our arrangement with PNC during the nine months ended September 30, 2022.
We transferred and derecognized $415.1 million of receivables and collected $420.3 million in connection with our arrangement with PNC during the nine months ended September 30, 2021.
Credit losses
Our allowance for expected credit losses on trade and lease receivables is assessed at the end of each quarter based on an analysis of historical losses and assessment of future expected losses. We continue to monitor the impact that COVID-19 may have on outstanding receivables.
The following represents the activity in our allowance for credit losses for trade and lease receivables:
| | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2022 | 2021 |
Balance, beginning of period | $ | 44.2 | | $ | 35.1 | |
Provision for bad debts | 2.8 | | (1.9) | |
Provision for lease receivables associated with exit activities | — | | 16.5 | |
Write-offs | (10.7) | | (2.6) | |
Balance, end of period | $ | 36.3 | | $ | 47.1 | |
Prepaid expenses and other current assets
The components of prepaid expenses and other current assets were as follows:
| | | | | | | | |
(in millions) | September 30, 2022 | December 31, 2021 |
Derivatives | $ | 60.2 | | $ | 11.3 | |
Prepaid expenses | 32.1 | | 36.1 | |
Income tax receivables | 28.0 | | 20.2 | |
Other current assets | 1.4 | | 1.8 | |
| $ | 121.7 | | $ | 69.4 | |
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other non-current assets
The components of other non-current assets were as follows: | | | | | | | | | | | |
(in millions) | | September 30, 2022 | December 31, 2021 |
Dosing and dispensing equipment | $ | 135.4 | | $ | 142.0 | |
Operating lease right-of-use assets, net | 82.4 | | 94.6 | |
Derivatives | 58.4 | | 25.9 | |
Deferred taxes | 44.4 | | 51.8 | |
Tax indemnification asset | 17.1 | | 17.8 | |
Lease receivables | 13.2 | | 18.0 | |
Finance lease right-of-use assets, net | 9.5 | | 4.3 | |
Customer prebates | 8.9 | | 16.6 | |
Other non-current assets | 11.9 | | 11.3 | |
| $ | 381.2 | | $ | 382.3 | |
Depreciation expense for our dosing and dispensing equipment was $17.0 million and $17.3 million for the three months ended September 30, 2022 and September 30, 2021, respectively. Depreciation expense for our dosing and dispensing equipment was $51.3 million and $52.1 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.
Other Current and Non-current Liabilities
The components of other current liabilities were as follows:
| | | | | | | | |
(in millions) | September 30, 2022 | December 31, 2021 |
Accrued customer volume rebates | $ | 141.9 | | $ | 138.1 | |
Accrued salaries, wages and related costs | 85.9 | | 88.7 | |
Accrued interest payable | 26.9 | | 11.0 | |
Value added, general and sales tax payable | 25.7 | | 25.3 | |
Operating lease liability | 16.7 | | 21.4 | |
Derivatives | 16.3 | | 8.2 | |
Income taxes payable | 4.2 | | 8.4 | |
Accrued share-based compensation | 4.1 | | 5.4 | |
Contingent consideration | 4.6 | | 4.4 | |
Other accrued liabilities | 67.6 | | 73.6 | |
| $ | 393.9 | | $ | 384.5 | |
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of other non-current liabilities were as follows:
| | | | | | | | |
(in millions) | September 30, 2022 | December 31, 2021 |
Tax receivable agreement | $ | 192.4 | | $ | 238.1 | |
Defined benefit pension plan liability | 99.6 | | 129.6 | |
Operating lease liability | 78.2 | | 72.5 | |
Uncertain tax positions | 44.7 | | 44.5 | |
Derivatives | 10.8 | | 4.9 | |
Asset retirement obligations | 5.7 | | 6.4 | |
Accrued share-based compensation | 4.9 | | 6.0 | |
Other post-employment benefit plan liability | 2.1 | | 2.1 | |
Other non-current liabilities | 12.4 | | 15.9 | |
| $ | 450.8 | | $ | 520.0 | |
Other (Income) Expense, net
The following table provides details of our Other (Income) Expense, net:
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Interest income | $ | (1.4) | | $ | (0.8) | | $ | (2.8) | | $ | (2.9) | |
Unrealized foreign exchange (gain) loss | (3.6) | | (2.4) | | (8.9) | | 5.2 | |
Realized foreign exchange (gain) loss | (1.8) | | 5.5 | | (2.1) | | 6.1 | |
Non-cash pension and other post-employment benefit plan | (3.3) | | (4.3) | | (10.3) | | (12.0) | |
Adjustment for tax indemnification asset | 0.3 | | 0.1 | | 0.7 | | 1.4 | |
Factoring and securitization fees | 1.7 | | 1.4 | | 3.9 | | 3.6 | |
Tax receivable agreement adjustments | (3.7) | | — | | (16.7) | | 4.1 | |
Other, net | 0.5 | | 1.2 | | 1.0 | | (0.7) | |
| $ | (11.3) | | $ | 0.7 | | $ | (35.2) | | $ | 4.8 | |
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Our property and equipment and accumulated depreciation balances were as follows:
| | | | | | | | |
(in millions) | September 30, 2022 | December 31, 2021 |
Land and improvements | $ | 38.1 | | $ | 41.3 | |
Buildings | 52.3 | | 55.4 | |
Machinery and equipment | 96.6 | | 95.4 | |
Other property and equipment | 48.7 | | 51.6 | |
Construction-in-progress | 80.6 | | 49.4 | |
Property and equipment, gross | 316.3 | | 293.1 | |
Less: Accumulated depreciation | (89.7) | | (82.4) | |
Property and equipment, net | $ | 226.6 | | $ | 210.7 | |
Depreciation expense was $5.8 million and $6.1 million for the three months ended September 30, 2022 and September 30, 2021, respectively. Depreciation expense was $18.4 million and $16.9 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill
The following table represents a roll forward of our goodwill balances by reportable segments:
| | | | | | | | | | | |
(in millions) | Institutional | Food & Beverage | Total |
Balance at December 31, 2021 | $ | 330.4 | | $ | 141.1 | | $ | 471.5 | |
Acquisitions | 20.5 | | — | | 20.5 | |
Acquisition adjustments(1) | — | | (1.7) | | (1.7) | |
Foreign currency translation | (34.3) | | (14.6) | | (48.9) | |
Balance at September 30, 2022 | $ | 316.6 | | $ | 124.8 | | $ | 441.4 | |
(1) Represents measurement period adjustments related to the acquisition of Birko Corporation.
Identifiable Intangible Assets
The following table summarizes the gross carrying amounts and accumulated amortization of identifiable intangible assets by major class with definite and indefinite lives at September 30, 2022:
| | | | | | | | | | | | | | |
(in millions) | Gross Carrying Value | Accumulated Amortization | Accumulated Impairment | Net Book Value |
Customer relationships | $ | 828.8 | | $ | (189.8) | | $ | — | | $ | 639.0 | |
Brand name | 543.1 | | (137.3) | | — | | 405.8 | |
Capitalized software | 86.6 | | (75.8) | | — | | 10.8 | |
Intellectual property | 44.6 | | (9.8) | | — | | 34.8 | |
Trademarks | 22.1 | | (6.5) | | — | | 15.6 | |
Non-compete agreements | 7.4 | | (6.9) | | — | | 0.5 | |
Favorable leases | 3.9 | | (3.2) | | — | | 0.7 | |
Total intangible assets with definite lives | 1,536.5 | | (429.3) | | — | | 1,107.2 | |
Trade name with indefinite life | 762.5 | | — | | — | | 762.5 | |
Total identifiable intangible assets | $ | 2,299.0 | | $ | (429.3) | | $ | — | | $ | 1,869.7 | |
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the gross carrying amounts and accumulated amortization of identifiable intangible assets by major class with definite and indefinite lives at December 31, 2021:
| | | | | | | | | | | | | | |
(in millions) | Gross Carrying Value | Accumulated Amortization | Accumulated Impairment | Net Book Value |
Customer relationships | $ | 920.6 | | $ | (181.0) | | $ | — | | $ | 739.6 | |
Brand name | 610.4 | | (131.4) | | — | | 479.0 | |
Capitalized software | 84.2 | | (70.1) | | — | | 14.1 | |
Intellectual property | 44.5 | | (6.7) | | — | | 37.8 | |
Trademarks | 27.7 | | (7.5) | | — | | 20.2 | |
Non-compete agreements | 8.8 | | (8.2) | | — | | 0.6 | |
Favorable leases | 4.4 | | (3.1) | | — | | 1.3 | |
Total intangible assets with definite lives | 1,700.6 | | (408.0) | | — | | 1,292.6 | |
Trade name with indefinite life | 854.7 | | — | | — | | 854.7 | |
Total identifiable intangible assets | $ | 2,555.3 | | $ | (408.0) | | $ | — | | $ | 2,147.3 | |
Amortization expense for acquired intangibles was $21.5 million and $24.2 million for three months ended September 30, 2022 and September 30, 2021, respectively. Amortization expense for acquired intangibles was $68.5 million and $72.6 million for nine months ended September 30, 2022 and September 30, 2021, respectively.
NOTE 8 - DEBT AND CREDIT FACILITIES
The components of debt and credit facilities were as follows:
| | | | | | | | | | | |
(in millions) | | September 30, 2022 | December 31, 2021 |
Senior Secured Credit Facilities | | |
2021 U.S. Dollar Term Loan | $ | 1,488.7 | | $ | 1,500.0 | |
Revolving Credit Facility | — | | — | |
2021 Senior Notes | 500.0 | | 500.0 | |
Short-term borrowings | 6.6 | | 10.7 | |
Finance lease obligations | 9.6 | | 4.4 | |
Financing obligations | 21.9 | | 23.1 | |
Unamortized deferred financing costs | (31.4) | | (35.3) | |
Unamortized original issue discount | (7.4) | | (8.3) | |
Total debt | | 1,988.0 | | 1,994.6 | |
Less: Current portion of long-term debt | (11.5) | | (10.9) | |
Short-term borrowings | (6.6) | | (10.7) | |
Long-term debt | $ | 1,969.9 | | $ | 1,973.0 | |
Senior Secured Credit Facilities
On September 29, 2021, the Company entered into an amendment to its Senior Secured Credit Facilities, which provided for a new $1,500.0 million senior secured U.S. dollar denominated term loan (the “2021 U.S. Dollar Term Loan”) in addition to the existing $450.0 million revolving credit facility (the “Revolving Credit Facility", and together with the 2021 U.S. Dollar Term Loan, the “New Senior Secured Credit Facilities”). The 2021 U.S. Dollar Term Loan matures on September 29, 2028, while the Revolving Credit Facility matures on March 28, 2026.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The interest rate under the 2021 U.S. Dollar Term Loan is equal to (i) the Adjusted LIBOR rate (as defined in the New Senior Secured Credit Facilities), with a LIBOR floor of 0.50%, plus 3.00%, or (ii) ABR (as defined in the New Senior Secured Credit Facilities) plus 2.00%; provided that, such percentages per annum shall permanently step-down to 2.75% and 1.75%, respectively, if on the later of (x) the date of delivery of a compliance certificate to the administrative agent for the fiscal quarter ending December 31, 2021 and (y) the first date of delivery of a compliance certificate to the administrative agent, in either case, demonstrating that the Total Net Leverage Ratio (as defined in the New Senior Secured Credit Facilities) as of the last day of a fiscal quarter is less than or equal to 4.50 to 1.00. As of December 31, 2021, our Total Net Leverage Ratio was less than 4.50 to 1.00, and the interest rate step-downs noted above were effective during the first quarter of 2022. As of September 30, 2022, the interest rate for the 2021 U.S. Dollar Term Loan is 5.56%.
As of September 30, 2022, the Company had no borrowings outstanding under the Revolving Credit Facility and $7.1 million of letters of credit outstanding, which reduced the available borrowing capacity thereunder to approximately $442.9 million.
As of December 31, 2021, the Company had no borrowings outstanding under the Revolving Credit Facility and $7.9 million of letters of credit outstanding, which reduced the available borrowing capacity thereunder to approximately $442.1 million.
The New Senior Secured Credit Facilities contain normal and customary affirmative and negative covenants. Some of the more restrictive covenants are (i) limitations on our ability to pay dividends, (ii) limitations on asset sales, and (iii) limitations on our ability to incur additional indebtedness. The New Senior Secured Credit Facilities also contain various events of default, the occurrence of which could result in the acceleration of all obligations. As of September 30, 2022, we were in full compliance with the provisions contained within the covenants.
2021 Senior Notes
On September 29, 2021, the Company completed the sale of $500.0 million in aggregate principal amount of Senior Notes due 2029 (the “2021 Senior Notes”) in a private placement to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons (as defined in Regulation S) pursuant to Regulation S under the Securities Act. The Company used the net proceeds from the issuance of the 2021 Senior Notes, together with borrowings under its New Senior Secured Credit Facilities and cash on hand, to redeem all of the €450.0 million aggregate principal amount of 5.625% Senior Notes due 2025 (the “2017 Senior Notes”), pay fees and/or expenses incurred in connection with the issuance of the 2021 Senior Notes and for general corporate purposes. The 2021 Senior Notes mature on October 1, 2029, bear interest at 4.625%, and interest is payable semi-annually on April 1 and October 1 of each year, beginning on April 1, 2022.
The Company redeemed the 2017 Senior Notes at the redemption price (expressed as percentages of principal amount) of 101.4%, for a total of $536.7 million, which consisted of $529.1 million of principal amount and $7.6 million of redemption premium. The premium cost, in addition to the balance of the unamortized deferred financing costs related to the 2017 Senior Notes of $8.0 million, were charged to Loss on Extinguishment of Debt during the nine months ended September 30, 2021.
The Company may redeem the 2021 Senior Notes, in whole or in part, at any time prior to October 1, 2024, at a price equal to 100% of the principal amount of the 2021 Senior Notes redeemed, plus additional amounts, if any, a make-whole premium and accrued and unpaid interest to, but excluding, the redemption date.
The Company may redeem the 2021 Senior Notes, in whole or in part, on or after October 1, 2024, at the redemption prices (expressed as percentages of principal amount) set forth in the indenture governing the 2021 Senior Notes, together with accrued and unpaid interest and additional amounts, if any, to, but excluding, the applicable redemption date:
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | |
Year | Percentage |
October 1, 2024 to September 30, 2025 | 102.313% |
October 1, 2025 to September 30, 2026 | 101.156% |
On or after October 1, 2026 | 100.000% |
Additionally, at any time on or before October 1, 2024, the Company may elect to redeem up to 40% of the aggregate principal amount of the 2021 Senior Notes at a redemption price equal to 104.625% of the principal amount thereof, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date, with the net cash proceeds received from one or more equity offerings of the Company.
The indenture governing the 2021 Senior Notes contains covenants that limit the Company's ability to, among other things: (i) incur additional indebtedness, issue preferred equity and guarantee indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock; (iii) prepay, redeem or repurchase certain material debt; (iv) make loans and investments; (v) sell or otherwise dispose of assets; (vi) sell stock of the Company’s subsidiaries; (vii) incur liens; (viii) enter into transactions with affiliates; (ix) enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends and (x) consolidate, merge or sell all or substantially all of the Company’s assets.
The 2021 Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by a subsidiary of the Company, BCPE Diamond Netherlands TopCo B.V., a private limited liability company (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands, and the Company's existing and subsequently acquired or organized direct and indirect material wholly owned restricted subsidiaries that guarantee indebtedness under the New Senior Secured Credit Facilities (other than those organized in Italy).
Short-term Borrowings
Our short-term borrowings comprise primarily of bank overdrafts within our notional cash pooling system.
Sale-Leaseback Transactions
During March 2020, the Company completed sale-leaseback transactions under which it sold two properties to an unrelated third-party for a total of $22.9 million. Concurrent with this sale, the Company entered into agreements to lease the properties back from the purchaser over initial lease terms of 15 years. The leases for the two properties include an initial term of 15 years and four, five-year renewal options and provides for the Company to evaluate each property individually upon certain events during the life of the lease, including individual renewal options.
The Company classified the leases as a financing obligation to be paid over 15 years. The current and non-current portions are included in Current portion of long-term debt and Long-term debt, less current portion, respectively, on the Consolidated Balance Sheets.
NOTE 9 - DERIVATIVES AND HEDGING ACTIVITIES
As a large global organization, we face exposure to market risks, such as fluctuations in foreign currency exchange rates and interest rates. To manage the volatility relating to these exposures, we enter into various derivative instruments from time to time under our risk management policies. We designate derivative instruments as hedges on a transactional basis to support hedge accounting. The changes in fair value of these hedging instruments offset in part or in whole corresponding changes in the fair value or cash flows of the underlying exposures being hedged. We assess the initial and ongoing effectiveness of our hedging relationships in accordance with our policy. We do not purchase, hold or sell derivative financial instruments for trading purposes. Our practice is to terminate derivative transactions if the underlying asset or liability matures or is sold or terminated, or if we determine the underlying forecasted transaction is no longer probable of occurring.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Derivative Positions Summary
The following table details the fair value of our derivative instruments, which are included as a part of our Other non-current assets, Other current liabilities and Other non-current liabilities in our Condensed Consolidated Balance Sheets.
| | | | | | | | | |
(in millions) | September 30, 2022 | December 31, 2021 | |
Derivatives designated as hedging instruments: | | | |
Derivative assets | | | |
Foreign currency forward contracts | $ | 2.6 | | $ | 0.6 | | |
Interest rate caps | 35.2 | | 2.9 | | |
Cross currency swaps | 52.9 | | 32.6 | | |
Total derivative assets | $ | 90.7 | | $ | 36.1 | | |
| | | |
Derivative liabilities | | | |
Interest rate caps | $ | — | | $ | (0.7) | | |
Cross currency swaps | — | | — | | |
Total derivative liabilities | $ | — | | $ | (0.7) | | |
| | | |
Derivatives not designated as hedging instruments: | | | |
Derivative assets | | | |
Foreign currency forward contracts | $ | 9.9 | | $ | 1.1 | | |
Interest rate swaps | 18.0 | | — | | |
Total derivative assets | $ | 27.9 | | $ | 1.1 | | |
| | | |
Derivative liabilities | | | |
Foreign currency forward contracts | $ | (3.1) | | $ | (1.1) | | |
Interest rate swaps | (24.0) | | (11.3) | | |
Total derivative liabilities | $ | (27.1) | | $ | (12.4) | | |
Our derivatives consist of the following:
| | | | | | | | | | | |
Derivative Instrument | Hedged Item | Notional Amount (in millions) | Original Maturity in Months |
U.S. dollar floating to Euro fixed interest rate swap | 2021 U.S. Dollar Term Loan | $ | 500.0 | | 49 |
U.S. dollar interest rate caps | 2021 U.S. Dollar Term Loan | $ | 650.0 | | 36 |
U.S. dollar to Euro currency swaps | 2021 Senior Notes | $ | 500.0 | | 49 |
U.S. dollar currency forward contracts | Working Capital | $ | 340.0 | | 1-12 |
Floating to fixed interest rate swap(1) (2) | Not Applicable | $ | 720.0 | | 60 |
Fixed to floating interest rate swap(1) (2) | Not Applicable | $ | 720.0 | | 36 |
| | | |
(1) The notional amount is reduced to $315.0 million in October 2022. |
(2) In connection with our debt refinancing in 2021, we entered into a fixed to floating interest rate swap to offset the existing floating to fixed interest rate swap. |
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest Rate Cap and Cross Currency Contracts Designated as Cash Flow or Fair Value Hedges
In connection with entering into the New Senior Secured Credit Facilities and issuing the 2021 Senior Notes, we also entered into a U.S. dollar floating to Euro fixed interest rate swap, a U.S. dollar interest rate cap, and a U.S. dollar to Euro currency swap, to manage the impacts of fluctuations in interest rates and currency exchange rates on a portion of the Company’s floating-rate and U.S. dollar denominated debt.
In 2022 we terminated several existing U.S. dollar floating to Euro fixed interest rate swaps and U.S. dollar to Euro currency swaps, receiving net proceeds of $186.1 million, and simultaneously entered into new at-market swaps with the same notional amounts and maturity dates as the terminated swaps. We elected to classify the cash flows from the settlements within financing activities on the Condensed Consolidated Statement of Cash Flows to be consistent with the cash flows presentation of the hedged debt instruments.
As a result of these contract terminations, the net unrealized after-tax derivative gains included in accumulated other comprehensive income ("AOCI") at the dates of termination are being amortized against Interest expense, and the net unrealized after-tax derivative losses included in AOCI at the dates of termination are being amortized as Other (income) expense, net, on the Condensed Consolidated Statement of Operations over the remaining lives of the derivative contracts. As of September 30, 2022, the unamortized gains in AOCI are $26.6 million and the unamortized losses in AOCI are $7.6 million.
We record gains and losses on these derivative instruments that qualify as cash flow hedges in other comprehensive income (loss), net of tax to the extent the hedges are effective and until we recognize the underlying transactions in net income (loss), at which time we recognize these gains and losses in Other (income) expense, net on our Condensed Consolidated Statements of Operations.
Net unrealized after-tax gain (loss) related to these contracts that were included in other comprehensive income was $130.6 million and $(14.8) million for the nine months ended September 30, 2022 and September 30, 2021, respectively. The unrealized amounts in other comprehensive income will fluctuate based on changes in the fair value of open contracts during each reporting period.
We estimate that $41.6 million of net unrealized after-tax derivative gain included in AOCI will be reclassified into Other (income) expense, net or Interest expense on the Condensed Consolidated Statement of Operations within the next twelve months.
Interest Rate Swap Contracts Not Designated as Hedges
In connection with entering into the New Senior Secured Credit Facilities and issuing the 2021 Senior Notes, we entered into a fixed to floating interest rate swap to offset the existing floating to fixed interest rate swap, and the existing swap was also then de-designated as a cash flow hedge. As a result of the contract de-designation, the net unrealized after-tax derivative loss included in AOCI at the date of de-designation is being amortized as Interest expense on the Condensed Consolidated Statement of Operations over the remaining life of the derivative contract, and the unamortized loss in AOCI is $6.2 million as of September 30, 2022. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Therefore, changes in the value of these derivatives are recognized immediately in earnings.
Foreign Currency Forward Contracts
The primary purpose of our currency hedging activities is to manage the potential changes in value associated with the amounts receivable or payable on equipment and raw material purchases that are denominated in foreign currencies in order to minimize the impact of changes in foreign currencies. For those contracts that are designated as cash flow hedges, we record gains and losses on other comprehensive income (loss), net of tax to the extent the hedges are effective and until we recognize the underlying transactions in net income (loss), at which time we recognize these gains and losses in Other (income) expense, net on our Condensed Consolidated Statements of Operations. For those contracts that are not designated as cash flow hedges, the changes in the value of these derivatives are recognized immediately in earnings. These contracts generally have original maturities of less than 12 months.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Effect of all Derivative Instruments on Income
The following table details the (income) expense related to our derivative instruments, which are included in Other (income) expense on our Condensed Consolidated Statements of Operations. These amounts reduce the transactional impact of foreign exchange, which is primarily the revaluation of our U.S. dollar denominated debt held at a Euro functional entity, and the net impact is the Unrealized foreign exchange (gain) loss in Note 5 - Financial Statement Details. | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Foreign currency forward contracts | $ | (4.9) | | $ | — | | $ | (8.2) | | $ | — | |
Interest rate swaps | 0.4 | | 2.3 | | (0.1) | | 6.8 | |
Interest rate caps | 0.1 | | — | | (0.1) | | — | |
Cross currency swaps | (116.7) | | — | | (187.5) | | — | |
Total | $ | (121.1) | | $ | 2.3 | | $ | (195.9) | | $ | 6.8 | |
NOTE 10 - FAIR VALUE MEASUREMENTS AND OTHER FINANCIAL INSTRUMENTS
Fair Value Measurements
In determining the fair value of financial instruments, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. We determine the fair value of our financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
•Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
•Level 2 Inputs: Other than quoted prices included in Level 1 Inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
•Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table details the fair value hierarchy of our financial assets and liabilities, which are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 |
(in millions) | | | Total Fair Value | Level 1 | Level 2 | Level 3 |
Cash equivalents | | $ | 140.8 | | $ | 140.8 | | $ | — | | $ | — | |
Restricted cash and compensating balance deposits | $ | 0.6 | | $ | 0.6 | | $ | — | | $ | — | |
Cross currency swap, net asset | $ | 52.9 | | $ | — | | $ | 52.9 | | $ | — | |
Interest rate caps, net asset | $ | 35.2 | | $ | — | | $ | 35.2 | | $ | — | |
Foreign currency forward contracts, net asset | $ | 9.4 | | $ | — | | $ | 9.4 | | $ | — | |
Interest rate swaps, net liability | | $ | (6.0) | | $ | — | | $ | (6.0) | | $ | — | |
Contingent consideration | | $ | (4.6) | | $ | — | | $ | — | | $ | (4.6) | |
| | | | | | | |
| | | | December 31, 2021 |
| | | | Total Fair Value | Level 1 | Level 2 | Level 3 |
Cash equivalents | | $ | 111.6 | | $ | 111.6 | | $ | — | | $ | — | |
Restricted cash and compensating balance deposits | $ | 0.6 | | $ | 0.6 | | $ | — | | $ | — | |
Cross currency swap, net asset | $ | 32.6 | | $ | — | | $ | 32.6 | | $ | — | |
Interest rate caps, net asset | $ | 2.2 | | $ | — | | $ | 2.2 | | $ | — | |
Foreign currency forward contracts, net asset | $ | 0.6 | | $ | — | | $ | 0.6 | | $ | — | |
Interest rate swaps, net liability | | $ | (11.3) | | $ | — | | $ | (11.3) | | $ | — | |
Contingent consideration | | $ | (4.6) | | $ | — | | $ | — | | $ | (4.6) | |
Cash Equivalents
Our cash equivalents consist of bank time deposits (Level 1) and money market funds (Level 1). Since these are short-term highly liquid investments with original maturities of three months or less at the date of purchase, they present negligible risk of changes in fair value due to changes in interest rates.
Derivative Financial Instruments
Our derivatives are recorded at fair value on our Condensed Consolidated Balance Sheets, which incorporates observable market inputs. These market inputs include foreign currency spot and forward rates and LIBOR. These inputs are obtained from pricing data quoted by various banks, third party sources and foreign currency dealers involving identical or comparable instruments (Level 2).
Counterparties to these derivative instruments are investment grade rated by Standard & Poor’s and Moody’s. Credit ratings on some of our counterparties may change during the term of our financial instruments. We closely monitor our counterparties’ credit ratings and, if necessary, will make any appropriate changes to our financial instruments. The fair value generally reflects the estimated amounts that we would receive or pay to terminate the contracts at the reporting date.
Contingent Consideration
We recorded contingent consideration related to earn-out provisions from our previous acquisitions. The fair values of such contingent consideration were derived using a discounted cash flow model based on the projection of performance metrics, which are generally based upon achieving certain revenue targets as outlined in the various provisions within the purchase agreements and the probability of achieving the targets.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We remeasure amounts related to contingent consideration liabilities related to acquisitions that were carried at fair value on a recurring basis in the Condensed Consolidated Financial Statements for which a fair value measurement was required. We recorded $4.6 million in contingent consideration liability as of both September 30, 2022 and December 31, 2021 for various acquisitions that occurred prior to 2017.
Other Financial Instruments
The following financial instruments are recorded at fair value or at amounts that approximate fair value: (i) trade receivables, net, (ii) certain other current assets, (iii) accounts payable and (iv) other current liabilities. The carrying amounts reported on our Condensed Consolidated Balance Sheets for the above financial instruments closely approximate their fair value due to the short-term nature of these assets and liabilities.
Other liabilities that are recorded at carrying value on our Condensed Consolidated Balance Sheets include our debt. We utilize a market approach to calculate the fair value of our 2021 Senior Notes. Due to the limited investor base and the face value of our 2021 Senior Notes, they may not be actively traded on the date we calculate their fair value. Therefore, we may utilize prices and other relevant information generated by market transactions involving similar securities, reflecting U.S. Treasury yields, to calculate the yield to maturity and the price on some of our 2021 Senior Notes. These inputs are provided by an independent third party and are considered to be Level 2 inputs.
We derive our fair value estimates of our various other debt instruments by evaluating the nature and terms of each instrument, considering prevailing economic and market conditions, and examining the cost of similar debt offered at the balance sheet date. We also incorporated our credit default swap rates and currency specific swap rates in the valuation of each debt instrument, as applicable. These inputs are provided by an independent third party and are considered to be Level 2 inputs.
These estimates are subjective and involve uncertainties and matters of significant judgment, and therefore we cannot determine them with precision. Changes in assumptions could significantly affect our estimates.
The table below shows the carrying amounts and estimated fair values of our debt, all of which are based on Level 2 inputs:
| | | | | | | | | | | | | | |
| September 30, 2022 | December 31, 2021 |
(in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value |
2021 U.S. Dollar Term Loan (1) | $ | 1,456.2 | | $ | 1,132.9 | | $ | 1,463.4 | | $ | 1,464.9 | |
2021 Senior Notes (2) | 493.7 | | 469.5 | | 493.0 | | 497.5 | |
Revolving Credit Facility | — | | — | | — | | — | |
| $ | 1,949.9 | | $ | 1,602.4 | | $ | 1,956.4 | | $ | 1,962.4 | |
| | | | |
(1) Carrying amounts are net of deferred financing costs and original issue discount. |
(2) Carrying amount is net of deferred financing costs. | |
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances, such as acquisitions.
Credit and Market Risk
Financial instruments, including derivatives, expose us to counterparty credit risk for nonperformance and to market risk related to changes in interest or currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit standards, establishing credit limits, diversification of counterparties, and procedures to monitor concentrations of credit risk.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
It is our policy to have counterparties to these contracts that are rated at least BBB- or higher by Standard & Poor’s and Baa3 or higher by Moody’s. Nevertheless, there is a risk that our exposure to losses arising out of derivative contracts could be material if the counterparties to these agreements fail to perform their obligations. We will replace counterparties if a credit downgrade is deemed to increase our risk to unacceptable levels.
We regularly monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest and currency exchange rates and restrict the use of derivative financial instruments to hedging activities. We do not use derivative financial instruments for trading or other speculative purposes and do not use leveraged derivative financial instruments.
We continually monitor the creditworthiness of our diverse base of customers to which we grant credit terms in the normal course of business and generally do not require collateral. We consider the concentrations of credit risk associated with our trade accounts receivable to be commercially reasonable and believe that such concentrations do not leave us vulnerable to significant risks of near-term severe adverse impacts. The terms and conditions of our credit sales are designed to mitigate concentrations of credit risk with any single customer. Our sales are not materially dependent on a single customer or a small group of customers.
NOTE 11 - DEFINED BENEFIT PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFIT PLANS
The following table shows the components of our net period benefit income;
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, | Line Item on Condensed Consolidated Statements of Operations |
(in millions) | 2022 | 2021 | 2022 | 2021 | |
Components of net periodic benefit income: | | | | | |
Service cost | $ | 1.4 | | $ | 1.6 | | $ | 4.2 | | $ | 4.9 | | Selling, general and administrative expenses |
Interest cost | 0.8 | | 0.2 | | 2.7 | | 1.6 | | Other income |
Expected return on plan assets | (4.1) | | (4.5) | | (13.0) | | (13.7) | | Other income |
Total benefit income | $ | (1.9) | | $ | (2.7) | | $ | (6.1) | | $ | (7.2) | | |
Our net periodic benefit costs for our other post-employment benefit plans was not material for the three and nine months ended September 30, 2022 and September 30, 2021.
NOTE 12 - INCOME TAXES
We account for income taxes in interim periods in accordance with ASC 740, which generally requires income tax expense or benefit to be calculated using an estimated annual effective tax rate applied to the year-to-date ordinary income or loss. Tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
Ordinarily, our interim provision for income taxes is determined using an estimate of the annual effective tax rate. We record any changes affecting the estimated annual effective tax rate in the interim period in which the change occurs, including discrete tax items. For the first and second quarters of 2022, we concluded that the estimated annual effective tax rate method would not provide a reliable estimate of our overall annual effective tax rate and we computed our interim provision for income taxes for the first and second quarters of 2022 using the discrete effective tax rate method, as allowed by ASC 740-270-30-18, "Income Taxes--Interim Reporting." For the three months ended September 30, 2022, we determined that the estimated pre-tax book loss no longer had a significant distortive impact on our ability to estimate the estimated annual effective tax rate. Accordingly, we calculated our
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
interim provision for income taxes for the nine months ended September 30, 2022 using an estimate of the annual effective tax rate.
Effective Income Tax Rate and Income Tax Provision
For the three months ended September 30, 2022, the difference in the statutory income tax benefit and the recorded income tax provision was primarily attributable to an increase in the valuation allowance related to limitations on the deductibility of interest expense.
For the three months ended September 30, 2021, the difference in the statutory income tax benefit and the recorded income tax provision was primarily attributable to an increase in the valuation allowance related to limitations on the deductibility of interest expense, non-deductible shared-based compensation, estimated withholding taxes, and a change in our mix of earnings by jurisdiction.
For the nine months ended September 30, 2022, the difference in the statutory income tax benefit and the recorded income tax provision was primarily attributable to an increase in the valuation allowance related to limitations on the deductibility of interest expense.
For the nine months ended September 30, 2021, the difference in the statutory income tax benefit and the recorded income tax provision was primarily attributable to non-deductible share-based compensation, an increase in the valuation allowance related to limitations on the deductibility of interest expense, estimated withholding taxes, and a change in our mix of earnings by jurisdiction.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
At times, we are subject to governmental investigations and various legal actions and claims from governmental agencies and other parties. The outcomes of these matters are not within our complete control and may not be known for prolonged periods of time. We record a liability in the Condensed Consolidated Financial Statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from these matters are inherently difficult to predict. Management believes that the ultimate disposition of these matters should not have a material adverse effect on the Company’s consolidated financial position or results of operations or cash flows.
Environmental Matters
We are subject to loss contingencies resulting from environmental laws and regulations, and we accrue for anticipated costs associated with investigatory and remediation efforts when an assessment has indicated that a loss is probable and can be reasonably estimated. These accruals are not reduced by potential insurance recoveries, if any. We do not believe that it is reasonably possible that our liability in excess of the amounts that we have accrued for environmental matters will be material to our consolidated financial condition or results of operations. Environmental liabilities are reassessed whenever circumstances become better defined or remediation efforts and their costs can be better estimated.
We evaluate these liabilities periodically based on available information, including the progress of remedial investigations at each site, the current status of discussions with regulatory authorities regarding the methods and extent of remediation and the apportionment of costs among potentially responsible parties. As some of these issues are decided (the outcomes of which are subject to uncertainties) or new sites are assessed and costs can be reasonably estimated, we adjust the recorded accruals, as necessary. We believe that these exposures are not material to our consolidated financial condition or results of operations. We believe that we have adequately reserved for all probable and estimable environmental exposures.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Guarantees and Indemnification Obligations
We are a party to many contracts containing guarantees and indemnification obligations. These contracts primarily consist of:
•Product and service warranties with respect to certain products sold to customers in the ordinary course of business. These warranties typically provide that products will conform to specifications. We generally do not establish a liability for product warranty based on a percentage of sales or other formulas. We accrue a warranty liability on a transaction-specific basis depending on the individual facts and circumstances related to each sale. Both the liability and annual expense related to product warranties are immaterial to our consolidated financial position and results of operations; and
•Intellectual property warranties by us to third parties in which we have agreed to indemnify the licensee against third party infringement claims.
NOTE 14 - RELATED PARTY TRANSACTIONS
Bain Capital
On September 6, 2017, in conjunction with the Diversey Acquisition, we entered into a management agreement with Bain Capital, our previous sponsor. Pursuant to the management agreement, we paid Bain Capital a fee for advisory, consulting and other services (the "Management Fee"), which was $7.5 million annually plus Bain Capital’s reasonable out-of-pocket expenses. Upon closing of the IPO, the management agreement terminated pursuant to its terms, and we paid Bain Capital a lump sum amount of $17.5 million. During the nine months ended September 30, 2022 and September 30, 2021, we recorded zero and $19.4 million of Management Fee and termination fee expenses, respectively.
In addition to the Management Fee and prior to the termination of the management agreement, we paid consulting fees to Bain Capital for services related to future transactions or in consideration of any additional services. For the nine months ended September 30, 2022, we did not pay Bain Capital any consulting fees. For the nine months ended September 30, 2021, we paid Bain Capital $2.5 million of consulting fees.
There were no fees due to Bain Capital at September 30, 2022 or December 31, 2021.
We may conduct business with other Bain Capital affiliates from time to time in the normal course of business. Although we may have common owners with these affiliates depending upon the Bain Capital fund ownership structure, we believe the terms were comparable to terms available or amounts that would be paid or received, as applicable, in an arm’s-length transaction with a party unrelated to us.
NOTE 15 - SHARE-BASED COMPENSATION
Compensation Expense
Share-based compensation expense related to equity and liability awards is included in the following line items in the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Cost of sales | $ | — | | $ | 0.9 | | $ | (0.3) | | $ | 6.9 | |
Selling, general and administrative expenses | 13.9 | | 15.1 | | 47.0 | | 92.4 | |
Total | $ | 13.9 | | $ | 16.0 | | $ | 46.7 | | $ | 99.3 | |
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Share-based compensation expense by type of award is as follows:
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Management equity incentive plan(1) | $ | — | | $ | — | | $ | — | | $ | 37.5 | |
Restricted shares(1) | 10.4 | | 12.1 | | 33.4 | | 23.3 | |
Restricted share units | 2.1 | | 1.8 | | 8.7 | | 6.3 | |
Performance share units | 0.7 | | — | | 2.5 | | — | |
Share options | 0.2 | | — | | 0.7 | | — | |
Cash-settled long-term incentive plan | 0.4 | | 1.2 | | 1.7 | | 29.7 | |
Cash-settled restricted share units | 0.1 | | 0.9 | | (0.3) | | 2.5 | |
| $ | 13.9 | | $ | 16.0 | | $ | 46.7 | | $ | 99.3 | |
(1) During 2018, Constellation S.à r.l, a subsidiary of the Company, adopted a management equity incentive plan ("MEIP"), consisting of Class B through Class F shares ("MEIP Shares") granted to certain domestic and foreign employees. Prior to the IPO, the value of the MEIP Shares was classified as a liability, and was remeasured at each reporting period. Upon closing of the IPO and following the Reorganization Transactions, the MEIP Shares were converted into (i) vested ordinary shares which correspond to the value of MEIP Shares that were vested as of the consummation of the IPO and (ii) restricted ordinary shares which correspond to the value of MEIP Shares that were unvested as of the consummation of the IPO. The restricted ordinary shares will vest on the same terms and conditions as applied to the MEIP Shares to which they relate, and are not subject to performance conditions.
The table below summarizes the number of shares granted and the weighted-average grant-date fair value per unit during the nine months ended September 30, 2022:
| | | | | | | | |
| Number of Awards | Weighted Average Grant Date Fair Value |
Restricted share units | 981,052 | | $ | 10.30 | |
Performance share units | 911,075 | | $ | 11.37 | |
Share options | 491,555 | | $ | 10.71 | |
| 2,383,682 | | |
NOTE 16 - RESTRUCTURING AND EXIT ACTIVITIES
In 2021, we began a strategic initiative to consolidate certain manufacturing and warehousing facilities within Europe and North America, which also includes opening a new manufacturing and warehousing facility in North America. We anticipate that these actions will both expand our production capacity and allow us to better manage our inventory, supply chain and workforce. We expect to incur approximately $97.0 million of total restructuring and exit costs related to this project, and charged $71.0 million over the life of the project and $63.2 million during the nine months ended September 30, 2022. Our remaining costs for this project are approximately $26.0 million at September 30, 2022.
Cost estimates for these projects have been impacted by an inflationary macro environment with constraints around materials, freight and labor. Extraordinary short-term measures were taken to minimize disruption to customers. These measures include lengthening warehouse leases, temporarily setting up additional warehouses, paying higher freight costs during warehouse transitions and paying carriers to guarantee delivery.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We also exited certain businesses in 2021 that leased equipment to customers under sales-type leases, as we further refine our business model and our strategy of selling solutions to customers.
The following table details our restructuring and exit costs as reflected in the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Provision for lease receivables | $ | (0.6) | | $ | 16.5 | | $ | (2.4) | | $ | 16.5 | |
Facilities | 37.8 | | 7.6 | | 63.2 | | 7.6 | |
Employee termination benefits | 1.0 | | 2.9 | | 4.2 | | 5.5 | |
Other | 1.2 | | (5.4) | | 2.6 | | — | |
Total | $ | 39.4 | | $ | 21.6 | | $ | 67.6 | | $ | 29.6 | |
The following table provides the details for the restructuring and exit cost liabilities:
| | | | | | | | | | | | | | |
(in millions) | Provision for Lease Receivables | Facilities | Employee Termination Benefits and Other | Total |
Balance as of December 31, 2021 | $ | 15.7 | | $ | 0.6 | | $ | 16.7 | | $ | 33.0 | |
Accrual and accrual adjustments | (2.4) | | 63.2 | | 6.8 | | 67.6 | |
Cash payments during period | — | | (63.8) | | (9.5) | | (73.3) | |
Balance as of September 30, 2022 | $ | 13.3 | | $ | — | | $ | 14.0 | | $ | 27.3 | |
The reserve for the lease receivable contracts, net, is included in Other receivables and the liability for employee termination benefits is included in Accrued restructuring costs, respectively, on the Condensed Consolidated Balance Sheet at September 30, 2022. We anticipate paying the employee termination benefits of $14.0 million in the restructuring accrual within the next twelve months.
Restructuring and exit costs by segment were as follows:
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Institutional | $ | 40.9 | | $ | 21.3 | | $ | 69.0 | | $ | 28.0 | |
Food & Beverage | — | | 0.3 | | 0.4 | | 1.2 | |
Corporate | (1.5) | | — | | (1.8) | | 0.4 | |
Total | $ | 39.4 | | $ | 21.6 | | $ | 67.6 | | $ | 29.6 | |
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table provides detail of comprehensive loss:
| | | | | | | | | | | | | | |
(in millions) | Unrecognized Pension Items | Hedging Activities | Cumulative Translation Adjustment | Accumulated Other Comprehensive Loss |
Balance December 31, 2021 | $ | (6.6) | | $ | (2.7) | | $ | (147.7) | | $ | (157.0) | |
Other comprehensive income (loss) before reclassifications | (1.0) | | (46.7) | | (108.0) | | (155.7) | |
Amounts reclassified from AOCI to net income | — | | 100.6 | | — | | 100.6 | |
Net change | (1.0) | | 53.9 | | (108.0) | | (55.1) | |
Balance September 30, 2022 | $ | (7.6) | | $ | 51.2 | | $ | (255.7) | | $ | (212.1) | |
| | | | | | | | | | | | | | |
(in millions) | Unrecognized Pension Items | Hedging Activities | Cumulative Translation Adjustment | Accumulated Other Comprehensive Loss |
Balance December 31, 2020 | $ | (42.6) | | $ | (16.0) | | $ | (154.1) | | $ | (212.7) | |
Other comprehensive income (loss) before reclassifications | — | | 7.8 | | 31.3 | | 39.1 | |
Amounts reclassified from AOCI to net income | — | | (6.8) | | — | | (6.8) | |
Net change | — | | 1.0 | | 31.3 | | 32.3 | |
Balance September 30, 2021 | $ | (42.6) | | $ | (15.0) | | $ | (122.8) | | $ | (180.4) | |
NOTE 18 - SEGMENTS
Our operating segments, which are consistent with our reportable segments, reflect the structure of our internal organization, the method by which our resources are allocated and the manner by which the chief operating decision maker assesses our performance. Our reportable segment structure includes two segments, Institutional and Food & Beverage.
Our segments are described as follows:
•Institutional - Our Institutional products and services are designed to enhance cleanliness, safety, environmental sustainability, and efficiency for our customers. We offer a broad range of products, solutions, equipment and machines including infection prevention and personal care, floor and building care chemicals, kitchen and mechanical warewash chemicals and machines, dosing and dispensing equipment, and floor care machines. We deliver these solutions to customers in the healthcare, education, food service, retail and grocery, hospitality, and building service contractors industries.
•Food & Beverage - Our Food & Beverage products and services are designed to maximize the hygiene, safety, and efficiency of our customers’ production and cleaning processes while minimizing their impact on the natural resources they consume. We offer a broad range of products, solutions, equipment and machines including chemical products, engineering and equipment solutions, knowledge-based services, training through our Diversey Hygiene Academy, and water treatment. We deliver these solutions to enhance food safety, operational excellence, and sustainability for customers in the brewing, beverage, dairy, processed foods, pharmaceutical, and agriculture industries.
No operating segments were aggregated to form our reportable segments. The reportable segments are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. We evaluate performance of the reportable segments based on the results of each segment. The performance metric
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
used by our chief operating decision maker to evaluate performance of our reportable segments is Adjusted EBITDA. Certain amounts within segment Adjusted EBITDA for prior periods have been reclassified to conform with the current presentation, with no impact on consolidated Adjusted EBITDA.
As described in Note 1 - The Company and Basis of Presentation, our net sales are comprised of commercial cleaning, sanitation and hygiene products and solutions for food safety and service, food and beverage plant operations, floor care, housekeeping and room care, laundry and hand care.
Net sales for each of the Company’s reportable segments is as follows:
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Institutional | $ | 479.4 | | $ | 487.2 | | $ | 1,461.2 | | $ | 1,431.5 | |
Food & Beverage | 209.6 | | 177.7 | | 603.1 | | 515.0 | |
Total | $ | 689.0 | | $ | 664.9 | | $ | 2,064.3 | | $ | 1,946.5 | |
Adjusted EBITDA for each of the Company’s reportable segments is as follows:
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Institutional | $ | 68.8 | | $ | 84.3 | | $ | 196.3 | | $ | 233.5 | |
Food & Beverage | 26.9 | | 34.3 | | 72.5 | | 101.3 | |
Total | $ | 95.7 | | $ | 118.6 | | $ | 268.8 | | $ | 334.8 | |
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table shows a reconciliation of Adjusted EBITDA for the Company's reportable segments to consolidated loss before income tax provision:
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Adjusted EBITDA for reportable segments | $ | 95.7 | | $ | 118.6 | | $ | 268.8 | | $ | 334.8 | |
Corporate costs | (7.7) | | (12.0) | | (32.1) | | (34.2) | |
Interest expense | (25.7) | | (25.8) | | (83.0) | | (97.4) | |
Interest income | 1.4 | | 0.8 | | 2.8 | | 2.9 | |
Amortization expense of intangible assets | (21.5) | | (24.2) | | (68.5) | | (72.6) | |
Depreciation expense included in cost of sales | (20.6) | | (20.4) | | (62.1) | | (62.0) | |
Depreciation expense included in selling, general and administrative expenses | (2.2) | | (2.9) | | (7.6) | | (6.9) | |
Transaction and integration costs(1) | (12.5) | | (4.4) | | (26.1) | | (24.6) | |
Restructuring and exit costs(2) | (39.4) | | (21.6) | | (67.6) | | (29.6) | |
Foreign currency gain related to hyperinflationary subsidiaries(3) | 2.0 | | 2.9 | | 3.6 | | 2.7 | |
Adjustment for tax indemnification asset(4) | (0.3) | | (0.1) | | (0.7) | | (1.4) | |
Acquisition accounting adjustments(5) | — | | — | | (1.3) | | — | |
Bain Capital management fee(6) | — | | — | | — | | (19.4) | |
Non-cash pension and other post-employment benefit plan(7) | 3.3 | | 4.3 | | 10.3 | | 12.0 | |
Unrealized foreign currency exchange gain (loss)(8) | 3.6 | | 2.4 | | 8.9 | | (5.2) | |
Factoring and securitization fees(9) | (1.7) | | (1.4) | | (3.9) | | (3.6) | |
Share-based compensation(10) | (13.9) | | (16.0) | | (46.7) | | (99.3) | |
Tax receivable agreement adjustments(11) | 3.7 | | — | | 16.7 | | (4.1) | |
Loss on extinguishment of debt(12) | — | | (15.6) | | — | | (15.6) | |
Realized foreign currency exchange loss on debt refinancing(13) | — | | (4.5) | | — | | (4.5) | |
COVID-19 inventory charges(14) | — | | — | | (17.4) | | — | |
Other items | 0.4 | | (3.0) | | (0.4) | | (4.1) | |
Loss before income tax provision | $ | (35.4) | | $ | (22.9) | | $ | (106.3) | | $ | (132.1) | |
(1) These costs consist primarily of professional and consulting services which are non-operational in nature, costs related to strategic initiatives, acquisition-related costs, and costs incurred in preparing to become a publicly traded company.
(2) Includes costs related to restructuring programs and business exit activities.
(3) Argentina and Turkey were deemed to have highly inflationary economies and the functional currencies for our Argentina and Turkey operations were changed from the Argentine peso and Turkish lira to the United States dollar and remeasurement charges/credits are recorded in our Condensed Consolidated Statements of Operations rather than as a component of Cumulative Translation Adjustment on our Condensed Consolidated Balance Sheets.
(4) In connection with the Diversey Acquisition, the purchase agreement governing the transaction includes indemnification provisions with respect to tax liabilities. The offset to this adjustment is included in income tax provision.
(5) In connection with various acquisitions we recorded fair value increases to our inventory. These amounts represent the amortization of this increase.
(6) Represents fees paid to Bain Capital pursuant a management agreement whereby we have received general business consulting services; financial, managerial and operational advice; advisory and consulting services with respect to selection of advisors; advice in different fields; and financial and strategic planning and analysis. The management agreement was
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
terminated in March 2021 pursuant to its terms upon the consummation of the IPO, and we recorded a termination fee of $17.5 million during the first quarter of 2021.
(7) Represents the net impact of the expected return on plan assets, interest cost, and settlement cost components of net periodic defined benefit income related to our defined benefit pension plans.
(8) Represents the unrealized foreign currency exchange impact on our operations, primarily attributed to the valuation of the U.S. Dollar-denominated debt held by our European entity.
(9) Represents the fees to complete the sale of the receivables without recourse under our accounts receivable factoring and securitization agreements.
(10) Represents compensation expense associated with our share-based equity and liability awards.
(11) Represents the adjustment to our tax receivable agreement liability due to changes in valuation allowances that impact the realizability of the attributes of the tax receivable agreement.
(12) Represents the costs incurred in connection with the redemption of the 2017 Senior Notes on September 29, 2021.
(13) During 2021, the Company incurred a realized foreign currency exchange loss related to the refinancing of the Senior Secured Credit Facilities.
(14) Represents a charge in the second quarter of 2022 for excess inventory and estimated disposal costs related to COVID-19.
Geographic Regions
Net sales(1) by geographic region are as follows:
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | 2021 | 2022 | 2021 |
Europe | $ | 316.4 | | $ | 313.8 | | $ | 933.1 | | $ | 841.8 | |
North America(2) | 154.2 | | 159.7 | | 502.4 | | 554.7 | |
Asia Pacific | 90.1 | | 82.9 | | 263.0 | | 245.5 | |
Middle East & Africa | 72.4 | | 63.0 | | 204.7 | | 170.9 | |
Latin America | 55.9 | | 45.5 | | 161.1 | | 133.6 | |
Total | $ | 689.0 | | $ | 664.9 | | $ | 2,064.3 | | $ | 1,946.5 | |
(1) No non-U.S. country accounted for net sales in excess of 10% of consolidated net sales for the three and nine months ended September 30, 2022 or 2021.
(2) Net sales to external customers within the U.S. were $121.4 million and $120.5 million for the three months ended September 30, 2022 and 2021, respectively, and $389.1 million and $390.4 million for the nine months ended September 30, 2022 and 2021, respectively.
Diversey Holdings, Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 19 - EARNINGS (LOSS) PER SHARE
The following table sets forth the calculation of basic and diluted earnings (loss) per share for the periods ended:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions, except per share amounts) | 2022 | 2021 | 2022 | 2021 |
| Basic | Diluted | Basic | Diluted | Basic | Diluted | Basic | Diluted |
Net loss attributable to common shareholders | $ | (36.5) | | $ | (36.5) | | $ | (42.1) | | $ | (42.1) | | $ | (109.8) | | $ | (109.8) | | $ | (139.1) | | $ | (139.1) | |
| | | | | | | | |
Weighted average shares outstanding(1) | 320.2 | | 320.2 | 301.6 | | 301.6 | | 319.9 | | 319.9 | | 283.4 | | 283.4 |
Dilutive securities(2) | — | | — | | — | | — | | — | | — | | — | | — | |
Denominator for earnings per share - weighted average shares | 320.2 | 320.2 | 301.6 | 301.6 | 319.9 | 319.9 | 283.4 | 283.4 |
| | | | | | | | |
Loss per share | $ | (0.11) | | $ | (0.11) | | $ | (0.14) | | $ | (0.14) | | $ | (0.34) | | $ | (0.34) | | $ | (0.49) | | $ | (0.49) | |
(1) For purposes of calculating earnings (loss) per share the Company has retrospectively presented earnings (loss) per share as if the Reorganization Transactions had occurred at the beginning of the earliest period presented. Such retrospective presentation reflects an increase of approximately 47.4 million shares due to the exchange of shares in Constellation for shares in the Company.
(2) For the three and nine months ended September 30, 2022 and 2021, potentially dilutive securities were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.