ECOLAB INC. (ECL) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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The following management discussion and analysis (“MD&A”) provides information that we believe is useful in understanding our operating results, cash flows and financial condition. We provide quantitative information about the material sales drivers including the impact of changes in volume and pricing and the effect of acquisitions and changes in foreign currency at the corporate and reportable segment level. We also provide quantitative information regarding special (gains) and charges, discrete tax items and other significant factors we believe are useful for understanding our results. Such quantitative drivers are supported by comments meant to be qualitative in nature. Qualitative factors are generally ordered based on estimated significance.

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The discussion should be read in conjunction with the consolidated financial statements and related notes included in this Form 10-K. Our consolidated financial statements are prepared in accordance with U.S. GAAP. This discussion contains various Non-GAAP Financial Measures and also contains various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statements and information set forth in the sections entitled “Non-GAAP Financial Measures” at the end of this MD&A, and “Forward-Looking Statements” and “Risk Factors” within Items 1 and 1A of this Form 10-K. We also refer readers to the tables within the section entitled “Results of Operations” of this MD&A for reconciliation information of Non-GAAP measures to U.S. GAAP.

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Comparability of Results

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Purolite acquisition

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In December 2021, we acquired Purolite for total consideration of $3.7 billion in cash, net of cash acquired. Purolite is a leading and fast-growing global provider of high-end ion exchange resins for the separation and purification of solutions for pharmaceutical and industrial applications. Headquartered in King of Prussia, Pennsylvania, Purolite operates in more than 30 countries. Purolite is reported within our Life Sciences operating segment. Acquisition and integration charges are recorded within special (gains) and charges. The 2021 impacts of the Purolite acquisition including operating results, acquisition-related amortization and interest expense related to the transaction were also excluded from 2021 adjusted results.

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ChampionX Transaction

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In June 2020, we completed the previously announced separation of our Upstream Energy business (the “ChampionX business”) in a Reverse Morris Trust transaction (the “Transaction”) through the split-off of ChampionX Holding Inc. (“ChampionX”), formed by Ecolab as a wholly owned subsidiary to hold the ChampionX Business, followed immediately by the merger of ChampionX (the “Merger”) with a wholly owned subsidiary of ChampionX Corporation (f/k/a Apergy Corporation, “Apergy”).

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The ChampionX business met the criteria to be reported as discontinued operations because the separation of ChampionX was a strategic shift in business that had a major effect on our operations and financial results. Therefore, we reported the historical results of ChampionX, including the results of operations, cash flows, and related assets and liabilities, as discontinued operations for 2020. Unless otherwise noted, the accompanying MD&A has been revised to reflect the ChampionX business as discontinued operations and 2020 balances have been revised accordingly to reflect continuing operations only.

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Comparability of Reportable Segments

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We have also made immaterial changes to our segment reporting, including the movement of certain customers and cost allocations between reportable segments.

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Impact of Acquisitions and Divestitures

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Acquisition adjusted growth rates exclude the results of our acquired businesses from the first twelve months post acquisition, the results of our divested businesses from the twelve months prior to divestiture. Further, we have excluded the results of our Purolite business for all of 2022 to remain comparable to 2021 when Purolite’s results were excluded from adjusted results. As part of the separation of the ChampionX business, we also entered into a Master Cross Supply and Product Transfer agreement with ChampionX to provide, receive or transfer certain products for a period up to 36 months. Sales of product to ChampionX under this agreement are recorded in product and equipment sales in the Corporate segment along with the related cost of sales. These transactions are removed from the consolidated results as part of the calculation of the impact of acquisitions and divestitures.

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Fixed Currency Foreign Exchange Rates

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Management evaluates the sales and operating income performance of our non-U.S. dollar functional currency international operations based on fixed currency exchange rates, which eliminate the impact of exchange rate fluctuations on our international operations. Fixed currency amounts are updated annually at the beginning of each year based on translation into U.S. dollars at foreign currency exchange rates established by management, with all periods presented using such rates. Public currency rate data provided within the “Segment Performance” section of this MD&A reflect amounts translated at actual public average rates of exchange prevailing during the corresponding period and is provided for informational purposes only.

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EXECUTIVE SUMMARY

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In 2022, we delivered double-digit sales growth as we accelerated our pricing and drove volume growth. Our strong pricing increases offset continued significant delivered product cost increases on a dollar basis. Our team generated double-digit sales growth in the Institutional & Specialty, Industrial and Other segments while Healthcare & Life Sciences segment sales were stable. Operating income was stable, as accelerating pricing was offset by higher delivered product costs and investments in the business.

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Sales

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Reported sales increased 11% to $14.2 billion in 2022 from $12.7 billion in 2021. When measured in fixed rates of foreign currency exchange, fixed currency sales increased 16% compared to the prior year. Acquisition adjusted fixed currency sales increased 13% compared to the prior year.

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Gross Margin

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Our reported gross margin was 37.8% of sales for 2022, compared to our 2021 reported gross margin of 40.2%. Excluding the impact of special (gains) and charges and the 2021 impacts from the Purolite transaction included in cost of sales, our adjusted gross margin was 38.2% in 2022 and 40.9% in 2021. Our gross profit increased as our strong pricing exceeded substantial delivered product cost inflation.

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Operating Income

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Reported operating income remained stable at $1.6 billion in 2022, compared to $1.6 billion in 2021. Adjusted operating income, excluding the impact of special (gains) and charges and the 2021 impacts of the Purolite transaction, decreased 1% in 2022, as strong pricing offset substantial delivered product inflation and investments in the business. When measured in fixed rates of foreign currency exchange, adjusted fixed currency operating income increased 4% in 2022.

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Earnings from Continuing Operations Attributable to Ecolab Per Common Share (“EPS”)

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Reported diluted EPS decreased 3% to $3.81 in 2022 compared to $3.91 in 2021. Special (gains) and charges had an impact on both years. Special (gains) and charges in 2022 were driven primarily by restructuring and pension settlement expense and 2021 was driven primarily by COVID-19 related charges, restructuring charges and pension settlement expense. Adjusted diluted EPS, which exclude the impact of special (gains) and charges, the 2021 impacts of the Purolite transaction and discrete tax items decreased 4% to $4.49 in 2022 compared to $4.69 in 2021, as unfavorable foreign currency translation and increases in interest expense further offset our operating income performance.

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Balance Sheet

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We remain committed to maintaining “A” range ratings metrics over the long-term, supported by our current credit ratings of A-/A3/A- by Standard & Poor’s, Moody’s Investor Services and Fitch, respectively. Our strong balance sheet has allowed us continued access to capital at attractive rates.

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Cash Flow

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Cash flow from continuing operations operating activities was $1.8 billion in 2022 compared to $2.1 billion in 2021. We continued to generate strong cash flow from operations, allowing us to fund our ongoing operations, investments in our business, acquisitions, debt repayments, pension obligations and return cash to our shareholders through share repurchases and dividend payments.

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Dividends

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Dividends declared per common share in 2022 was $2.06 per share. In December 2022 we increased our quarterly cash dividend by 4% to $0.53 per share, representing our 31st consecutive annual dividend rate increase. We have paid cash dividends on our common shares for 86 consecutive years. Our outstanding dividend history reflects our long term growth and development, strong cash flows, solid financial position and confidence in our business prospects for the years ahead.

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CRITICAL ACCOUNTING ESTIMATES

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Our consolidated financial statements are prepared in accordance with U.S. GAAP. We have adopted various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 2 of the Notes to the Consolidated Financial Statements (“Notes”).

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Preparation of our consolidated financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions to be made about matters that are highly uncertain at the time the accounting estimate is made, and (2) different estimates that we reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, have a material impact on the presentation of our financial condition or results of operations.

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In March 2020, COVID-19 was declared a pandemic by the World Health Organization. As the impact of the pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require judgment. These estimates and assumptions may change in future periods and will be recognized in the consolidated financial information as new events occur and additional information becomes known. To the extent actual results differ materially from those estimates and assumptions, our future financial statements could be affected.

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Besides estimates that meet the “critical” estimate criteria, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues or expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, even from estimates not deemed critical. Our critical accounting estimates include the following:

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Revenue Recognition

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Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing service. Revenue from product and sold equipment is recognized when obligations under the terms of a contract with the customer are satisfied, which generally occurs with the transfer of the product or delivery of the equipment. Revenue from service and leased equipment is recognized when the services are provided, or the customer receives the benefit from the leased equipment, which is over time. Service revenue is recognized over time utilizing an input method and aligns with when the services are provided. Typically, revenue is recognized over time using costs incurred to date because the effort provided by the field selling and service organization represents services provided, which corresponds with the transfer of control. Revenue for leased equipment is accounted for under Topic 842 Leases and recognized on a straight-line basis over the length of the lease contract.

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Our revenue policies do not provide for general rights of return. We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives based primarily on historical experience and anticipated performance over the contract period. Depending on market conditions, we may increase customer incentive offerings, which could reduce gross profit margins over the term of the incentive. We also record estimated reserves for product returns and credits based on specific circumstances and credit conditions. We record an allowance for uncollectible accounts based on our estimates of expected future credit losses.

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The revenue standard can be applied to a portfolio of contracts with similar characteristics if it is reasonable that the effects of applying the standard at the portfolio would not be significantly different than applying the standard at the individual contract level. We apply the portfolio approach primarily within each operating segment by geographical region. Application of the portfolio approach was focused on those characteristics that have the most significant accounting consequences in terms of their effect on the timing of revenue recognition or the amount of revenue recognized. We determined the key criteria to assess with respect to the portfolio approach, including the related deliverables, the characteristics of the customers and the timing and transfer of goods and services, which most closely aligned within the operating segments. In addition, the accountability for the business operations, as well as the operational decisions on how to go to market and the product offerings, are performed at the operating segment level. For additional information on revenue recognition, refer to Note 18.

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Litigation and Environmental Liabilities

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Our business and operations are subject to extensive environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal and the investigation and remediation of soil and groundwater contamination. Some risk of environmental liability is inherent in our operations.

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We record liabilities related to pending litigation, environmental claims and other contingencies when a loss is probable and can be reasonably estimated. Estimates used to record such liabilities are based on our best estimate of probable future costs. We record the amounts that represent the points in the range of estimates that we believe are most probable or the minimum amount when no amount within the range is a better estimate than any other amount. Potential insurance reimbursements generally are not anticipated in our accruals for environmental liabilities or other insured losses. Expected insurance proceeds are recorded as receivables when recovery is deemed certain. While the final resolution of litigation and environmental contingencies could result in amounts different than current accruals, and therefore have an impact on our consolidated financial results in a future reporting period, we believe the ultimate outcome will not have a significant impact on our consolidated financial position. For additional information on our commitments and contingencies, refer to Note 16.

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Actuarially Determined Liabilities

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Pension and Postretirement Healthcare Benefit Plans

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The measurement of our pension and postretirement benefit obligations are dependent on a variety of assumptions determined by management and used by our actuaries. These assumptions affect the amount and timing of future pension contributions, benefit payments and expense or income recognized.

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The significant assumptions used in developing the required estimates are the discount rates, expected returns on assets, projected salary and health care cost increases and mortality tables.

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The effects of actual results differing from our assumptions, as well as changes in assumptions, are reflected in the unrecognized gains or losses and amortized into earnings in the future. Significant differences in actual experience or significant changes in assumptions may materially affect future pension and other postretirement obligations and income or expense. The unrecognized net losses on our U.S. qualified and non-qualified pension plans increased to $412 million as of December 31, 2022 from $397 million as of December 31, 2021 (both before tax), primarily due to lower actual return on assets partially offset by current year net actuarial gains.

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The effect of a decrease in the discount rate or decrease in the expected return on assets assumption as of December 31, 2022, on the December 31, 2022 defined benefit obligation and 2023 expense is shown below, assuming no changes in benefit levels. Expense amounts reflect the accounting for gains or losses as a component of other comprehensive income or expense and recognition of the impacts into earnings over time:

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Our international pension obligations and underlying plan assets represent approximately one third of our global pension plans, with the majority of the amounts held in the U.K. and Eurozone countries. We use assumptions similar to our U.S. plan assumptions to measure our international pension obligations, however, the assumptions used vary by country based on specific local country requirements and information.

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Refer to Note 17 for further discussion concerning our accounting policies, estimates, funded status, contributions and overall financial positions of our pension and postretirement plan obligations.

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Self-Insurance

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Globally we have insurance policies with varying deductible levels for property and casualty losses. We are insured for losses in excess of these deductibles, subject to policy terms and conditions and have recorded both a liability and an offsetting receivable for amounts in excess of these deductibles. We are self-insured for health care claims for eligible participating employees, subject to certain deductibles and limitations. We determine our liabilities for claims on an actuarial basis.

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Income Taxes

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Judgment is required to determine the annual effective income tax rate, deferred tax assets and liabilities, valuation allowances recorded against net deferred tax assets and uncertain tax positions.

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Effective Income Tax Rate

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Our effective income tax rate is based on annual income, statutory tax rates and tax planning available in the various jurisdictions in which we operate. Our annual effective income tax rate includes the impact of reserve provisions. We recognize the amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority. We adjust these reserves in light of changing facts and circumstances.

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Tax regulations require items to be included in our tax returns at different times than the items are reflected in our financial statements. As a result, the effective income tax rate reflected in our financial statements differs from that reported in our tax returns. Some of these differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as depreciation expense.

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Deferred Tax Assets and Liabilities and Valuation Allowances

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Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of available evidence, both positive and negative, we recognize tax assets, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not. Relevant factors in determining the realizability of deferred tax assets include historical results, sources of future taxable income, the expected timing of the reversal of temporary differences, tax planning strategies and the expiration dates of the various tax attributes.

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Uncertain Tax Positions

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A number of years may elapse before a particular tax matter, for which we have established a liability for uncertain tax position, is audited and finally resolved. The number of tax years with open tax audits varies depending on the tax jurisdiction. The Internal Revenue Service (“IRS”) has completed examinations of our U.S. federal income tax returns through 2016 and the years 2017 through 2020 are currently under audit. In addition to the U.S. federal examinations, we have ongoing audit activity in several U.S. state and foreign jurisdictions.

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The tax positions we take are based on our interpretations of tax laws and regulations in the applicable federal, state and international jurisdictions. We believe our tax returns properly reflect the tax consequences of our operations, and our liabilities for uncertain tax positions are appropriate and sufficient for the positions taken. Because of the uncertainty of the final outcome of these examinations, we have estabilished a liability for potential reductions of tax benefits (including related interest and penalties) for amounts that do not meet the more-likely-than-not thresholds for recognition and measurement as required by authoritative guidance. The liability for uncertain tax positions is reviewed throughout the year, taking into account new legislation, regulations, case law and audit results. Settlement of any particular issue could result in offsets to other balance sheet accounts, cash payments or receipts and/or adjustments to tax expense. Liabilities for uncertain tax positions are presented in the Consolidated Balance Sheets within other non-current liabilities. Our gross liability for uncertain tax positions was $24.9 million and $25.1 million as of December 31, 2022 and 2021, respectively. For additional information on income taxes refer to Note 13.

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Long-Lived Assets, Intangible Assets and Goodwill

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Long-Lived and Amortizable Intangible Assets

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Purchased long-lived and amortizable intangible assets not acquired as part of a business combination are recorded as of their acquisition date at cost, whereas long-lived and amortizable assets acquired as part of a business combination are recorded as of their acquisition date at their fair values based on the fair value requirements defined in U.S. GAAP. This requires us to make significant estimates and assumptions relating to the present value of its future cash flows, such as growth rates, royalty rates or discount rates.

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We review our long-lived and amortizable intangible assets, the net value of which was $6.3 billion and $6.8 billion as of December 31, 2022 and 2021, respectively, for impairment when significant events or changes in business circumstances indicate that the carrying amount of the assets may not be recoverable. Such circumstances may include a significant decrease in the market price of an asset or asset group, a significant adverse change in the manner in which asset or asset groups are being used or history of operating or cash flow losses associated with the use of the asset or asset group. Impairment losses could occur when the carrying amount of an asset or asset group exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated as the excess of the asset’s or assets group’s carrying amount over its estimated fair value.

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We use the straight-line method to recognize amortization expense related to our amortizable intangible assets, including our customer relationships. We consider various factors when determining the appropriate method of amortization for our customer relationships, including projected sales data, customer attrition rates and length of key customer relationships.

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Globally, we have a broad customer base. Our retention rate of significant customers has aligned with our acquisition assumptions, including the customer bases acquired from our Nalco, Anios, CID Lines and Purolite transactions, which make up the majority of our unamortized customer relationships. Our historical retention rates, coupled with our consistent track record of keeping long-term relationships with our customers, supports our expectation of consistent sales generation for the foreseeable future from the acquired customer bases. If our customer retention rates or other post-acquisition operational activities change materially, we would evaluate the financial impacts and significance of the events given rise to the change which could result in impairment of our customer relationship intangible assets, or absent an impairment, an acceleration of amortization expense.

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In addition, we periodically reassess the estimated remaining useful lives of our long-lived and amortizable intangible assets. Changes to estimated useful lives would impact the amount of depreciation and amortization expense recorded in earnings. We have experienced no significant changes in the carrying amount or estimated remaining useful lives of our long-lived or amortizable intangible assets.

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Goodwill and Indefinite Life Intangible Assets

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Goodwill arises from our acquisitions and represents the excess of the fair value of the purchase consideration exchanged over the fair value of net assets acquired. We had total goodwill of $8.0 billion and $8.1 billion as of December 31, 2022 and 2021, respectively. We test our goodwill for impairment at the reporting unit level. Our reporting units are largely our operating segments. Following the acquisition of Purolite on December 1, 2021, our Life Sciences Operating Segment consists of the Purolite and Global Life Sciences Reporting Units. We assess goodwill for impairment on an annual basis during the second quarter. If circumstances change or events occur that demonstrate it is more likely than not that the carrying amount of a reporting unit exceeds its fair value, we complete an interim goodwill impairment assessment of that reporting unit prior to the next annual assessment. If the results of an annual or interim goodwill impairment assessment demonstrate the carrying amount of a reporting unit is greater than its fair value, we will recognize an impairment loss for the amount by which the reporting unit’s carrying amount exceeds its fair value, but not to exceed the carrying amount of goodwill assigned to that reporting unit.

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For our annual 2022 goodwill impairment assessment, we completed our impairment assessment for eleven of our twelve reporting units using discounted cash flow analyses that incorporated assumptions regarding future growth rates, terminal values and discount rates. Our goodwill impairment assessments for 2022 indicated the estimated fair values of each of these eleven reporting units exceeded the carrying amounts of the respective reporting units by a significant margin. Given the recent acquisition of Purolite, our annual goodwill impairment assessment of the Purolite Reporting Unit was qualitative in nature and considered information regarding its operations, financial performance and the macroeconomic environment. After weighting both positive and negative information, it is more likely than not that the fair value of the Purolite Reporting Unit exceeds its carrying amount. We evaluate the need to complete interim goodwill impairment assessments when significant events or changes in business circumstances indicate that it is more likely than not that the carrying amount of a reporting unit may be higher than its fair value. No events were noted during the second half of 2022 that required completion of an interim goodwill impairment assessment in the second half of 2022 for any of our twelve reporting units. There has been no impairment of goodwill in any of the periods presented.

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The Nalco trade name is our only indefinite-lived intangible asset, which is tested for impairment on an annual basis during the second quarter. For our annual 2022 indefinite-lived intangible asset impairment assessment, we completed our impairment assessment of the Nalco trade name using the relief from royalty discounted cash flow method, which incorporates assumptions regarding future sales projections, royalty rates and discount rates. Our Nalco tradename impairment assessment for 2022 indicated the estimated fair value of the Nalco trade name exceeded its $1.2 billion carrying amount by a significant margin. No events were noted during the second half of 2022 that required completion of an interim impairment assessment of our Nalco trade name in the second half of 2022. There has been no impairment of the Nalco trade name intangible since it was acquired.

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RESULTS OF OPERATIONS

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Net Sales

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The percentage components of the year-over-year sales change are shown below:

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Amounts do not necessarily sum due to rounding.

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Cost of Sales (“COS”) and Gross Profit Margin (“Gross Margin”)

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Our COS values and corresponding gross margin are shown above. Our gross margin is defined as sales less cost of sales divided by sales.

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Our reported gross margin was 37.8%, 40.2%, and 41.4% for 2022, 2021 and 2020, respectively. Our 2022, 2021 and 2020 reported gross margins were negatively impacted by special (gains) and charges of $69.9 million, $93.9 million, and $48.2 million, respectively. Special (gains) and charges items impacting COS are shown within the “Special (Gains) and Charges” table below.

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Excluding the impact of special (gains) and charges and the 2021 impacts of the Purolite transaction, our 2022 adjusted gross margin was 38.2% compared against a 2021 adjusted gross margin of 40.9%. The decrease primarily reflected accelerating pricing that was more than offset by higher delivered product cost and unfavorable mix.

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Excluding the impact of special (gains) and charges and the 2021 impacts of the Purolite transaction, our adjusted gross margin was 40.9% and 41.8% for 2021 and 2020, respectively. The decrease primarily reflected increased pricing and higher volumes which were more than offset by significantly higher delivered product costs and supply constraints.

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Selling, General and Administrative Expenses (“SG&A”)

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The decreased SG&A ratio (SG&A expenses as a percentage of reported net sales) comparing 2022 against 2021 was driven primarily by strong productivity including cost savings initiatives, partially offset by higher cost of compensation compared to last year. The decreased SG&A ratio (SG&A expenses as a percentage of reported net sales) comparing 2021 against 2020 was driven primarily by higher net sales, cost savings initiatives and reduction in bad debt, partially offset by higher variable compensation compared to last year.

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Special (Gains) and Charges

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Special (gains) and charges reported on the Consolidated Statements of Income included the following items:

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For segment reporting purposes, special (gains) and charges are not allocated to reportable segments, which is consistent with our internal management reporting.

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Restructuring Activities

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Restructuring activities are primarily related to the Europe Program, Institutional Advancement Program, Accelerate 2020 and other immaterial restructuring programs which are described below. These activities have been included as a component of cost of sales, special (gains) and charges, and other (income) expense on the Consolidated Statements of Income. Restructuring liabilities have been classified as a component of other current and other noncurrent liabilities on the Consolidated Balance Sheets.

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Further details related to our restructuring charges are included in Note 3.

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Europe Program

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In November 2022 we approved a Europe Program (the “Europe Program”) targeting $80 million of annualized pre-tax savings after completion of the program. In connection with these actions, we expect to incur pre-tax charges of $130 million ($110 million after tax) or $0.38 per diluted share. The Europe Program charges are expected to be primarily cash expenditures related to severance and asset disposals. Actual costs may vary from these estimates depending on actions taken.

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In 2022 we recorded total restructuring charges of $67.2 million ($56.0 million after tax) or $0.20 per diluted share primarily related to severance. The liability related to the Europe Program was $62.0 million as of December 31, 2022 and is expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities.

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The Europe Program has delivered $5 million of cumulative cost savings with estimated annual cost savings of $80 million in continuing operations by 2024.

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On February 14, 2023, we expanded our previously announced Europe cost savings program to focus on our Institutional and Healthcare businesses in other regions. In connection with the expanded program, we now expect to incur pre-tax charges of $195 million ($150 million after tax) or $0.52 per diluted share. We expect that these restructuring actions will be completed by 2024. Program actions include headcount reductions from terminations, not filing certain positions and facility closures. The expanded program charges are expected to be primarily cash expenditures related to severance and asset disposals. We now expect an estimated annual total cost savings of $175 million by 2024.

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Institutional Advancement Program

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We approved a restructuring plan in 2020 focused on the Institutional business (“the Institutional Plan”) which is intended to enhance our Institutional sales and service structure and allow the sales team to capture share and penetration while maximizing service effectiveness by leveraging our ongoing investments in digital technology. In February 2021, we expanded the Institutional Plan, and expect that these restructuring charges will be completed in 2023, with total anticipated costs of $70 million ($55 million after tax) or $0.19 per diluted share. The remaining costs are expected to be primarily cash expenditures for severance and non-cash costs related to equipment disposals. Actual costs may vary from these estimates depending on actions taken.

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In 2022 and 2021, we recorded total restructuring charges of $6.3 million ($4.8 million after tax) or $0.02 per diluted share and $12.6 million ($10.2 million after tax) or $0.04 per diluted share, respectively, primarily related to severance, disposals of equipment and office closures. We have recorded $54.1 million ($41.4 million after tax), or $0.14 per diluted share of cumulative restructuring charges under the Institutional Plan. The liability related to the Institutional Plan was $1.9 million as of December 31, 2022 and is expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities.

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The Institutional Plan has delivered $49 million of cumulative cost savings.

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Accelerate 2020

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During 2018, we formally commenced a restructuring plan Accelerate 2020 (“the A2020 Plan”), to leverage technology and system investments and organizational changes. The goals of the Plan are to further simplify and automate processes and tasks, reduce complexity and management layers, consolidated facilities and focus on key long-term growth areas by further leveraging technology and structural improvements. During 2020, we expanded the Plan for additional costs and savings to further leverage the technology and structural improvements. We completed the plan with actual costs of $254 million ($198 million after tax), or $0.69 per diluted share.

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We recorded restructuring charges of $9.9 million ($8.4 million after tax) or $0.03 per diluted share, $5.3 million ($6.2 million after tax) or $0.02 per diluted share and $41.8 million ($33.0 million after tax) or $0.11 per diluted share in 2022, 2021 and 2020, respectively. Of these expenses, $0.3 million ($0.2 million after tax) or less than $0.01 per diluted share during 2020 is recorded in other (income) expense and related to pension settlements and curtailments. The liability related to the Plan was $18.1 million and $32.7 million as of December 31, 2022 and 2021, respectively. We have recorded $254.4 million ($198.4 million after tax), or $0.69 per diluted share, of cumulative restructuring charges under the Plan. The majority of the pretax charges represent net cash expenditures which are expected to be paid over a period of a few months to several quarters which continue to be funded from operating activities.

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The Accelerate 2020 Plan has delivered $315 million of cumulative cost savings.

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Other Restructuring Activities

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During 2022, we incurred restructuring charges of $23.8 million ($17.9 million after tax), or $0.06 per diluted share, related to other immaterial restructuring activity. The charges primarily related to severance and asset write-offs.

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During 2021, we incurred restructuring charges of $18.7 million ($17.0 million after tax), or $0.06 per diluted share, related to other immaterial restructuring activity. The charges primarily related to severance and asset write-offs.

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During 2020, we incurred restructuring charges of $1.8 million ($1.2 million after tax), or less than $0.01 per diluted share, related to other immaterial restructuring plan. The charges are comprised of severance, facility closure costs, including asset disposals, and consulting fees.

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The restructuring liability balance for all other restructuring plans excluding the Europe Program, A2020 Plan and the Institutional Plan were $23.2 million and $4.6 million as of December 31, 2022 and 2021, respectively. The increase in liability was driven primarily by severance expense. The remaining liability is expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities. Cash payments during 2022 related to all other restructuring plans excluding the Europe Program, A2020 and Institutional Plan were $5.2 million.

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Acquisition and integration related costs

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Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income in 2022 include $14.5 million ($11.4 million after tax) or $0.04 per diluted share. Charges are related primarily to the Purolite Corporation (“Purolite”) acquisition and consist of integration related costs and advisory and legal fees. Acquisition and integration related costs reported in product and equipment cost of sales on the Consolidated Statements of Income in 2022 include $25.0 million ($19.6 million after tax) or $0.07 per diluted share. Charges are related primarily to the recognition of fair value step-up in the Purolite inventory and other integration costs.

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Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income in 2021 include $29.9 million ($23.5 million after tax) or $0.08 per diluted share. Charges are primarily related to the Purolite acquisition and consisted of deal costs, integration costs and advisory and legal fees. Acquisition and integration related costs reported in product and equipment cost of sales on the Consolidated Statements of Income in 2021 include $4.2 million ($3.3 million after tax) or $0.01 per diluted share and are related to the recognition of fair value step-up in the Purolite inventory. In conjunction with its acquisitions, we incurred $0.8 million ($0.6 million after tax), or less than $0.01 per diluted share, of special (gains) and charges reported in interest expense in 2021.

​

Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income in 2020 include $8.5 million ($6.9 million after tax) or $0.02 per diluted share. Charges are related to Copal Invest NV, including its primary operating entity CID Lines (collectively, “CID Lines”), Bioquell PLC (“Bioquell”) and the Laboratoires Anios (“Anios”) acquisitions and consist of integration costs and advisory and legal fees. Acquisition and integration related costs reported in product and equipment cost of sales on the Consolidated Statements of Income in 2020 include $3.9 million ($3.2 million after tax) or $0.01 per diluted share and are related to the recognition of fair value step-up in the CID Lines inventory, severance and the closure of a facility. In conjunction with our acquisitions, we incurred $0.7 million ($0.6 million after tax), or less than $0.01 per diluted share, of special (gains) and charges reported in interest expense in 2020.

​

Disposal and impairment charges

​

Disposal and impairment charges reported in special (gains) and charges on the Consolidated Statements of Income include $41.4 million ($41.5 million after tax) or $0.14 per diluted share in the 2020. During 2020, we recorded a $28.6 million ($28.6 million after tax) or $0.10 per diluted share impairment for a minority equity method investment due to the COVID-19 impact on the economic environment and the liquidity of the minority equity method investment. In addition, we recorded charges of $12.8 million ($12.9 million after tax) or $0.04 per diluted share related to the disposal of Holchem Group Limited (“Holchem”) for the loss on sale and related transaction fees during 2020. Further information related to the disposal is included in Note 4.

​

COVID-19 activities

​

We have recorded inventory reserves of $15 million and $60 million during 2022 and 2021, respectively, for excess sanitizer inventory and estimated disposal costs. During 2022, 2021 and 2020, we recorded charges of $2.4 million, $36.8 million and $57.1 million, respectively, to protect the wages of certain employees directly impacted by the COVID-19 pandemic. We also recorded charges of $9.8 million, $16.5 million and $2.4 million related to employee COVID-19 testing and related expenses during 2022, 2021 and 2020, respectively. In addition, we received subsidies and government assistance, which were recorded as a special (gain) of ($0.7) million, ($6.2) million and ($23.4) million during 2022, 2021 and 2020, respectively. COVID-19 pandemic charges are recorded in product and equipment cost of sales, service and lease cost of sales, and special (gains) and charges on the Consolidated Statements of Income. Total after tax net charges related to COVID-19 pandemic were $20.2 million or $0.07 per diluted share, $81.3 million or $0.28 per diluted share and $27.4 million or $0.09 per diluted share during 2022, 2021 and 2020, respectively.

​

Russia/Ukraine

​

In light of Russia’s invasion of Ukraine and the sanctions against Russia by the United States and other countries, we have made the determination that we will limit our Russian business to operations that are essential to life, providing minimal support for our healthcare, life sciences, food and beverage and certain water businesses. We incurred charges of $13.1 million ($12.6 million after tax) or $0.04 per diluted share during 2022, primarily related to recoverability risk of certain assets in both Russia and Ukraine.

​

Other operating activities

​

Other special charges of $24.1 million ($18.2 million after tax) or $0.06 per diluted share in 2022, $18.4 million ($14.1 million after tax) or $0.05 per diluted share in 2021 and $34.7 million ($33.9 million after tax) or $0.12 per diluted share recorded in 2020 relate primarily to certain legal charges, which are recorded in special (gains) and charges on the Consolidated Statements of Income. In 2020, we recorded special charges of $24.4 million ($16.0 million after tax) or $0.06 per diluted share in product and equipment cost of sales on the Consolidated Statements of Income related to a Healthcare product recall in Europe.

​

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We also recorded during 2020 a $7.2 million or $0.02 per diluted share, special charge related to the separation of ChampionX as a tax expense on the Consolidated Statements of Income.

​

Other (income) expense

​

During 2022 and 2021, we incurred settlement expense recorded in other (income) expense on the Consolidated Statements of Income of $50.6 million ($38.2 million after tax) or $0.13 per diluted share and $37.2 million ($28.7 million after tax) or $0.10 per diluted share, respectively, related to U.S. pension plan lump-sum payments to retirees.

​

Interest expense, net

​

During 2021 and 2020, we recorded special charges of $32.3 million ($28.4 million after tax) or $0.10 per diluted share and $83.1 million ($64.0 million after tax) or $0.22 per diluted share, respectively, in interest expense on the Consolidated Statements of Income related to debt issuance and refinancing charges.

​

Operating Income and Operating Income Margin

​

Our operating income and corresponding operating income margin are shown in the previous tables. Operating income margin is defined as operating income divided by sales.

​

Our reported operating income decreased 2% when comparing 2022 to 2021 primarily driven by accelerating pricing covering substantially higher delivered product costs, which was offset by investments in the business. Our reported operating income increased 15% when comparing 2021 to 2020 primarily driven by increased pricing and higher volume which more than offset significantly higher delivered product costs and supply constraints and higher variable compensation compared to last year. Our reported operating income for 2022, 2021 and 2020 was impacted by special (gains) and charges. Excluding the impact of special (gains) and charges and the 2021 impacts of the Purolite transaction, 2022 adjusted operating income decreased 1% when compared to 2021 adjusted operating income and 2021 adjusted operating income increased 11% when compared to 2020 adjusted operating income.

​

Other (Income) Expense

​

​

Our reported other income was $24.5 million, $33.9 million and $55.9 million in 2022, 2021 and 2020, respectively. Other (income) expense decreased when comparing 2022 against 2021 primarily due to increased pension settlement charges in 2022 as a result of a higher volume of pension settlement activity and higher interest costs associated with rising interest rates throughout 2022. Other (income) expense decreased when comparing 2021 against 2020 reflecting lower interest costs associated with future payments of employee pension obligations. Excluding the impact of settlements and curtailments recorded in special (gains) and charges during 2022, 2021 and 2020, our adjusted other income was $75.1 million, $71.1 million and $56.3 million, respectively.

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Interest Expense, Net

​

​

Our reported net interest expense totaled $243.6 million, $218.3 million and $290.2 million during 2022, 2021 and 2020, respectively.

​

We incurred $33.1 million ($29.0 million after tax) or $0.10 per diluted share and $83.8 million ($64.6 million after tax) or $0.22 per diluted share, of interest expense special charges in conjunction with our debt issuances and refinancing activities during 2021 and 2020, respectively.

​

Adjusted for special (gains) and charges, the increase in interest expense when comparing 2022 against 2021 was driven primarily by the interest on debt issued to fund the Purolite acquisition and the impact from higher average interest rates on floating rate debt. Adjusted for special (gains) and charges and the 2021 Purolite transaction, the decrease in interest expense when comparing 2021 against 2020 was driven primarily by a reduction in average debt levels and average interest rates.

​

Provision for Income Taxes

​

The following table provides a summary of our tax rate:

​

​

Our reported tax rate was 17.5%, 19.1%, and 15.2%, for 2022, 2021 and 2020, respectively. The change in our tax rate includes the tax impact of special (gains) and charges and discrete tax items, which have impacted the comparability of our historical reported tax rates, as amounts included in our special (gains) and charges are derived from tax jurisdictions with rates that vary from our tax rate, and discrete tax items are not necessarily consistent across periods. The tax impact of special (gains) and charges and discrete tax items will likely continue to impact comparability of our reported tax rate in the future.

​

We recognized a net tax benefit related to discrete tax items of $11.8 million during 2022. This included a deferred tax benefit of $14.6 million associated with utilization of tax attributes as a result of legal entity rationalization and share-based compensation excess tax benefits of $6.0 million. The amount of the excess tax benefit is subject to variation in stock price and award exercises. The remaining discrete tax expense of $8.8 million was primarily related to the filing of federal, state and foreign tax returns and other income tax adjustments including the impact of changes in tax laws, audit settlements and other changes in estimates.

​

We recognized net tax expense of $5.8 million related to discrete tax items during 2021. This included a non-cash deferred tax expense of $25.1 million associated with transferring certain intangible property between affiliates. Share-based compensation excess tax benefit was $29.1 million. The remaining discrete tax expense of $9.8 million was primarily related to the filing of federal, state, and foreign tax returns and other income tax adjustments including the impact of changes in tax law, audit settlements and other changes in estimates.

​

We recognized a total net benefit related to discrete tax items of $55.8 million during 2020. The tax benefit related to share-based compensation excess tax benefit contributed $57.3 million. We recorded changes in reserves in non-U.S. and U.S. jurisdictions due to audit settlements and expiration of statutes of limitations which resulted in a $9.8 million tax benefit. Additionally, we recognized a net tax expense of $11.3 million primarily related to the filing of the prior year federal, state and foreign tax returns and other income tax adjustments.

​

The change in our adjusted tax rates from 2020 to 2022 was primarily driven by global tax planning projects and geographic income mix. Future comparability of our adjusted tax rate may be impacted by various factors, including but not limited to other changes in global tax rules, further tax planning projects and geographic income mix.

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Net Income from Discontinued Operations, net of tax

​

​

Special charges reported in discontinued operations consist of ChampionX separation charges.

​

Net Income from Continuing Operations Attributable to Ecolab

​

​

Diluted EPS from Continuing Operations

​

​

Per share amounts do not necessarily sum due to rounding.

​

Currency translation had an unfavorable $(0.26) impact on reported and adjusted diluted EPS when comparing 2022 to 2021 and favorable $0.11 impact when comparing 2021 to 2020.

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SEGMENT PERFORMANCE

​

The non-U.S. dollar functional currency international amounts included within our reportable segments are based on translation into U.S. dollars at the fixed currency exchange rates established by management for 2022. The difference between the fixed currency exchange rates and the actual currency exchange rates is reported as “effect of foreign currency translation” in the following tables. All other accounting policies of the reportable segments are consistent with U.S. GAAP and the accounting policies described in Note 2. Additional information about our reportable segments is included in Note 19.

​

Fixed currency net sales and operating income for 2022, 2021 and 2020 for our reportable segments are shown in the following tables.

​

​

The following tables reconcile the impact of acquisitions and divestitures within our reportable segments.

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Global Industrial

​

* Not meaningful

Percentages in the above table do not necessarily sum due to rounding.

​

Net Sales

​

Fixed currency sales for Global Industrial increased in 2022 as strong double-digit growth across all divisions was driven by accelerating pricing and new business wins. The 2021 sales increase was impacted by strong growth in Paper and Water, led by recovering market conditions, strong pricing and new business wins, along with a good growth in Food & Beverage, were offset by a decrease in Downstream sales growth.

​

All operating segments reported double-digit growth, Water fixed currency sales increased 13% in 2022 driven by strong pricing and new business wins. Water fixed currency sales increased 6% in 2021 as strong new business wins and accelerating pricing leveraged recovering markets. Light industry water treatment reported strong sales and had solid growth in 2021. Heavy industry sales also recorded strong sales in 2022 led by double-digit growth in power and chemicals and a strong increase in 2021 driven by primary metals. Food & Beverage fixed currency sales increased 14% in 2022 reflecting accelerating pricing. Fixed currency sales increased 3% in 2021 primarily reflecting accelerating pricing, recovering markets and new business wins. Downstream fixed currency sales increased 14% in 2022 driven by accelerating pricing and new business wins​. Fixed currency sales decreased 3% in 2021 due to lower demand from COVID and impacts from the Texas freeze and Hurricane Ida. Paper fixed currency sales increased 16% in 2022 driven by accelerating pricing, new business wins and continued growth in ecommerce markets​. Fixed currency sales increased 11% in 2021 driven by increased pricing, strong new business wins and growth in ecommerce markets.

Operating Income

Fixed currency operating income and fixed currency operating income margins for Global Industrial decreased in 2022 and 2021 when compared to prior periods.

​

Acquisition adjusted fixed currency operating income margins decreased 2.1 percentage points during 2022 compared to 2021, as the 9.0 percentage point positive impacts of accelerating pricing was more than offset by the 12.7 percentage point negative impacts of higher delivered product costs, unfavorable mix and investments in the business. Acquisition adjusted fixed currency operating income margins decreased in 2021 compared to 2020, as the positive impact from accelerating pricing was more than offset by the negative impact of significantly higher delivered product costs and supply constraints.

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Global Institutional & Specialty

​

* Not meaningful

Percentages in the above table do not necessarily sum due to rounding.

​

Net Sales

​

Fixed currency sales for Global Institutional & Specialty increased in 2022 driven by accelerating pricing and new business wins. The 2021 sales increased driven by strong growth in the Institutional operating segment reflecting recovering markets, new business wins and accelerating pricing.

At an operating segment level, Institutional fixed currency sales increased 18% in 2022, driven by accelerating pricing and new business wins. Fixed currency sales increased 15% in 2021, driven by strong growth in the Institutional operating segment reflecting recovering markets in the U.S. and Europe, new business wins including gains from the Ecolab Science Certified programs and accelerating pricing. Specialty fixed currency sales increased 7% in 2022 driven by strong quick service sales and modest growth in food retail sales. Fixed currency sales decreased 3% in 2021, as modest quickservice sales growth were more than offset by lower food retail sales.

​

Operating Income

​

Fixed currency operating income for our Global Institutional & Specialty segment increased in both 2022 and 2021 when compared to prior periods. Fixed currency operating income margins increased in both 2022 and 2021.

​

Acquisition adjusted fixed currency operating income margins increased 0.2 percentage points during 2022, as the 8.2 percentage point positive impacts from accelerating pricing and volume growth overcame the 7.9 percentage point negative impacts of higher delivered product costs and investments in the business. Acquisition adjusted fixed currency operating income margins increased during 2021, as the positive impact from higher volume, accelerating pricing, and favorable mix more than offset negative impact of the comparison to lower variable compensation last year and higher delivered product costs.

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​

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Global Healthcare & Life Sciences

​

* Not meaningful

Percentages in the above table do not necessarily sum due to rounding.

​

Net Sales

​

Acquisition adjusted fixed currency sales for Global Healthcare & Life Sciences were flat in 2022 compared 2021 as growth in Life Sciences was offset by slightly lower Healthcare sales.

​

At an operating segment level, Healthcare fixed currency sales decreased 1% in 2022 due primarily to lower procedural and hand hygiene volumes, partially offset by increased pricing. Fixed currency sales decreased 5% in 2021 reflecting the comparison against strong 2020 COVID-19 related hand and surface disinfection sales as well as softer elective surgical procedures activity in 2021 due to the rise in COVID variants during the year. Life Sciences fixed currency sales increased 163% (9% acquisition adjusted) in 2022 reflecting the acquisition of Purolite. Excluding the acquisition of Purolite, the Life Sciences business growth was driven by accelerating pricing and growth in consumable pharmaceutical and personal care products, partially offset by normalizing demand for Bioquell’s biocontamination systems. Fixed currency sales decreased 5% in 2021 as accelerating pricing was more than offset by volume declines versus the very strong 2020 driven by extraordinary COVID-19 demand last year.

​

Operating Income

​

Fixed currency operating income for our Global Healthcare & Life Sciences segment increased in 2022 and decreased in 2021 when compared to prior periods. Fixed currency operating income margins decreased in both 2022 and 2021.

​

Acquisition adjusted fixed currency operating income margins decreased 5.0 percentage points in 2022, as the 5.5 percentage point positive impact from accelerating pricing was more than offset by the 10.2 percentage point negative impacts from higher delivered product costs, unfavorable mix, lower Healthcare volumes and targeted investments in the business. Acquisition adjusted fixed currency operating income margins decreased in 2021, as positive impact from accelerating pricing was more than offset by the negative impact of volume declines due to strong comparison against 2020.

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Other

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* Not meaningful

Percentages in the above table do not necessarily sum due to rounding.

​

Net Sales

​

Fixed currency sales for Other increased in 2022 reflecting double-digit growth in Pest Elimination, Textile Care and Colloidal Technologies. Fixed currency sales increased in 2021 led by strong growth in Pest Elimination as it benefited from new business wins and a recovering market.

​

At an operating segment level, Pest Elimination fixed currency sales increased 11% in 2022 reflecting strong growth across food retail, food & beverage, hospitality and restaurants from accelerating pricing and new business wins​. Fixed currency sales increased 11% in 2021 reflecting strong growth in food and beverage plants, restaurants and hospitality markets. Textile Care fixed currency sales increased 19% and 10% in 2022 and 2021, respectively. Colloidal Technologies Group fixed currency sales increased 14% and 16% in 2022 and 2021, respectively.

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Operating Income

​

Fixed currency operating income in Other increased in both 2022 and 2021 as compared to the prior year. Fixed currency operating income margins increased in both 2022 and 2021.

​

Acquisition adjusted fixed currency operating income margins in Other increased 0.4 percentage points in 2022, as the 5.8 percentage point positive impacts from accelerating pricing overcame the 5.2 percentage point negative impacts of higher delivered product costs and investments in business. Acquisition adjusted fixed currency operating income margins increased in 2021, as the positive impacts from higher volume and increased pricing more than offset the negative impact of the comparison to lower variable compensation last year.

​

​

Corporate

​

Consistent with our internal management reporting, Corporate amounts in the table on page 40 include sales to ChampionX in accordance with the long-term supply agreement entered into with the Transaction post-separation, as discussed in Note 5, intangible asset amortization specifically from the Nalco and Purolite transactions and special (gains) and charges that are not allocated to our reportable segments. Items included within special (gains) and charges are shown in the table on page 34.

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FINANCIAL POSITION, CASH FLOW AND LIQUIDITY

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Financial Position

​

Total assets were $21.5 billion as of December 31, 2022, compared to total assets of $21.2 billion as of December 31, 2021.

Total liabilities were $14.2 billion as of December 31, 2022, compared to total liabilities of $14.0 billion as of December 31, 2021. Total debt was $8.6 billion as of December 31, 2022 and $8.8 billion as of December 31, 2021. See further discussion of our debt activity within the “Liquidity and Capital Resources” section of this MD&A.

Our net debt to EBITDA is shown in the following table. EBITDA is a non-GAAP measure discussed further in the “Non-GAAP Financial Measures” section of this MD&A.

​

​

Cash Flows

​

Operating Activities

​

​

We continue to generate cash flow from operations allowing us to fund our ongoing operations, acquisitions, investments in the business and pension obligations along with returning cash to our shareholders through dividend payments and share repurchases.

​

Cash provided by operating activities decreased $274 million in 2022 compared to 2021, driven primarily by $277 million increase in working capital excluding the impact of non-cash special charges. The increase in working capital is primarily driven by past due receivables higher than last year due to pricing and energy surcharge rollout. Additionally, inventory impacted by inflationary environment and higher stock holding to mitigate supply disruption.

​

Cash provided by operating activities increased $320 million in 2021 compared to 2020, driven primarily by $159 million in increased net income, $94 million in higher tax expense accruals associated with higher income, and an increase in accruals for variable compensation, partially offset by $83 million of increased investment in working capital.

​

The impact on operating cash flows of pension and postretirement plan contributions, cash activity related to restructuring, cash paid for income taxes and cash paid for interest, are shown in the following table:

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Investing Activities

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​

Cash used for investing activities is primarily impacted by the timing of business acquisitions and dispositions as well as from capital investments in the business.

​

We continue to make capital investments in the business, including merchandising and customer equipment and manufacturing facilities. Total capital expenditures were $713 million, $643 million and $489 million in 2022, 2021 and 2020, respectively.

​

Total cash paid for acquisitions, net of cash acquired and net of cash received from dispositions, in 2022, 2021 and 2020 was $7 million, $3,924 million and $487 million, respectively. Our acquisitions and divestitures are discussed further in Note 4. We continue to target strategic business acquisitions which complement our growth strategy and expect to continue to make capital investments and acquisitions in the future to support our long-term growth.

Financing Activities

​

​

Our cash flows from financing activities primarily reflect the issuances and repayment of debt, common stock repurchases, proceeds from common stock issuances related to our equity incentive programs and dividend payments.

​

We issued $500 million par value and received $494 million in proceeds of long-term debt. We issued $2,800 million par value and received $2,775 million in proceeds of long-term debt and repaid $900 million of long-term debt in 2021. We issued $1,850 million par value and received $1,856 million in proceeds of long-term debt and repaid $1,570 million of long-term debt in 2020. The proceeds received from the debt issuances were used for the Purolite acquisition, repayment of outstanding debt, repayment of commercial paper and general corporate purposes. In addition, we had net repayments of $404 million and net issuances $394 million of commercial paper and notes payable in 2022 and 2021, respectively, and net repayments of $66 million in 2020.

Shares are repurchased for the purpose of partially offsetting the dilutive effect of our equity compensation plans and stock issued in acquisitions, to manage our capital structure and to efficiently return capital to shareholders. We repurchased a total of $518 million, $107 million, and $146 million of shares in 2022, 2021 and 2020, respectively.

​

The impact on financing cash flows of commercial paper and notes payable repayments, long-term debt borrowings and long-term debt repayments, are shown in the following table:

​

In December 2022, we increased our quarterly dividend rate by 4%. This represents the 31st consecutive year we have increased our dividend. We have paid dividends on our common stock for 86th consecutive years. We paid dividends of $603 million, $566 million and $561 million in 2022, 2021 and 2020, respectively. Cash dividends declared per share of common stock, by quarter, for each of the last three years were as follows:

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Liquidity and Capital Resources

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We currently expect to fund all of our cash requirements which are reasonably foreseeable for the next twelve months, including scheduled debt repayments, new investments in the business, share repurchases, dividend payments, possible business acquisitions and pension and postretirement contributions with cash from operating activities, and as needed, additional short-term and/or long-term borrowings. We continue to expect our operating cash flow to remain strong.

​

As of December 31, 2022, we had $599 million of cash and cash equivalents on hand, of which $122 million was held outside of the U.S. As of December 31, 2021, we had $360 million of cash and cash equivalents on hand, of which $181 million was held outside of the U.S. We will continue to evaluate our cash position in light of future developments.

​

As of December 31, 2022, we had a $2.0 billion multi-year credit facility, which expires in April 2026. The credit facility has been established with a diverse syndicate of banks and supports our U.S. and Euro commercial paper programs. The maximum aggregate amount of commercial paper that may be issued under our U.S. commercial paper program and our Euro commercial paper program may not exceed $2.0 billion. At year end, we had no commercial paper outstanding under our U.S. program or our Euro program. There were no borrowings under our credit facility as of December 31, 2022 or 2021. As of December 31, 2022, both programs were rated A-2 by Standard & Poor’s, P-2 by Moody’s and F-1 by Fitch.

​

Additionally, we have uncommitted credit lines with major international banks and financial institutions. These credit lines support our daily global funding needs, primarily our global cash pooling structures. As of December 31, 2022 we had $144 million of bank supported letters of credit, surety bonds and guarantees outstanding in support of our commercial business transactions. We do not have any other significant unconditional purchase obligations or commercial commitments.

​

As of December 31, 2022, Standard & Poor’s, Fitch and Moody’s rated our long-term credit at A- (negative outlook), A- (stable outlook) and A3 (negative outlook), respectively. A reduction in our credit ratings could limit or preclude our ability to issue commercial paper under our current programs or could also adversely affect our ability to renew existing, or negotiate new, credit facilities in the future and could increase the cost of these facilities.

As of December 31, 2022, we were in compliance with our debt covenants and other requirements of our credit agreements and indentures.

A schedule of our various obligations as of December 31, 2022 are summarized in the following table:

​

​

​

As of December 31, 2022, our gross liability for uncertain tax positions was $25 million. We are not able to reasonably estimate the amount by which the liability will increase or decrease over an extended period of time or whether a cash settlement of the liability will be required. Therefore, these amounts have been excluded from the schedule of contractual obligations.

We do not have required minimum cash contribution obligations for our qualified pension plans in 2022. We are required to fund certain international pension benefit plans in accordance with local legal requirements. We estimate contributions to be made to our international plans will approximate $41 million in 2023. These amounts have been excluded from the schedule of contractual obligations.

We lease certain sales and administrative office facilities, distribution centers, research and manufacturing facilities and other equipment under longer-term operating leases. Vehicle leases are generally shorter in duration. Vehicle leases have residual value requirements that have historically been satisfied primarily by the proceeds on the sale of the vehicles.

Market Risk

​

We enter into contractual arrangements (derivatives) in the ordinary course of business to manage foreign currency exposure and interest rate risks. We do not enter into derivatives for speculative or trading purposes. Our use of derivatives is subject to internal policies that provide guidelines for control, counterparty risk, and ongoing monitoring and reporting, and is designed to reduce the volatility associated with movements in foreign exchange and interest rates on our income statement and cash flows.

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We enter into foreign currency forward contracts to hedge certain intercompany financial arrangements, and to hedge against the effect of exchange rate fluctuations on transactions related to cash flows denominated in currencies other than U.S. dollars. We use net investment hedges as hedging instruments to manage risks associated with our investments in foreign operations. As of December 31, 2022, we had a total of €1,150 million senior notes designated as net investment hedges.

​

We enter into cross-currency swap derivative contracts to hedge certain Euro denominated exposures from our investments in certain of its Euro denominated functional currency subsidiaries. We use net investment hedges as hedging instruments to manage risks associated with our investments in foreign operations. As of December 31, 2022, we had €625 million of cross-currency swap derivative contracts outstanding designated as a net investment hedge.

​

We manage interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, we may enter into interest rate swap agreements. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. As of December 31, 2022, we had $1,500 million of interest rate swaps outstanding.

Refer to Note 9 for further information on our hedging activity.

Based on a sensitivity analysis (assuming a 10% change in market rates) of our foreign exchange and interest rate derivatives and other financial instruments, changes in exchange rates or interest rates would increase/decrease our financial position and liquidity by approximately $220 million. The effect on our results of operations would be substantially offset by the impact of the hedged items.

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​

GLOBAL ECONOMIC AND POLITICAL ENVIRONMENT

​

Coronavirus disease 2019 (COVID-19)

​

In March 2020, the coronavirus disease (COVID-19) was declared a pandemic by the World Health Organization. The COVID-19 pandemic is continuing to affect major economic and financial markets and industries are facing the challenges with the economic conditions resulting from efforts to address the pandemic, including supply shortages, inflation and other challenges, such as those resulting from the introduction of vaccination mandates. While many government restrictions in the U.S. have eased, restrictions on activities continue in many other regions, particularly those where vaccination rates lag, continuing to impact consumer activity in those regions. Concerns remain that our markets could see a resurgence of cases triggering additional government mandated lockdowns or similar restrictions on activity, for example due to the emergence of a variant against which existing vaccines are not as effective or which may be more easily transmitted, particularly to those unvaccinated. These conditions have had and may continue to have a negative impact on market conditions and customer demand throughout the world.

​

Global Economies

​

Approximately half of our sales are outside of the U.S. Our international operations subject us to changes in economic conditions and foreign currency exchange rates as well as political uncertainty in some countries which could impact future operating results. We expect a more challenging macroeconomic environment, especially in Europe, as the war and the energy crisis are having a significant impact on costs and demand. We also assume continued high delivered product costs and unfavorable currency translation and interest rate impacts that persist well into 2023.

​

Argentina is classified as a highly inflationary economy in accordance with U.S. GAAP, and the U.S. dollar is the functional currency for our subsidiaries in Argentina. During 2022, sales in Argentina represented less than 1% of our consolidated net sales. Assets held in Argentina at the end of 2022 represented less than 1% of our consolidated assets. Turkey was also classified as a highly inflationary economy in accordance with U.S. GAAP. During 2022, sales in Turkey represented less than 1% of our consolidated net sales. Assets held in Turkey at the end of 2022 represented less than 1% of our consolidated assets.

​

In light of Russia’s invasion of Ukraine and the sanctions against Russia by the United States and other countries, we have made the determination that we will limit our Russian business to operations that are essential to life, providing minimal support for our healthcare, life sciences, food and beverage and certain water businesses. We may further narrow our presence in Russia depending on future developments. Our Russian and Ukraine operations represented approximately 1% of our 2022 consolidated net sales. We recorded charges of $13.1 million in 2022 primarily related to recoverability risk of certain assets in both Russia and Ukraine.

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​

NEW ACCOUNTING PRONOUNCEMENTS

​

Information regarding new accounting pronouncements is included in Note 2.

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NON-GAAP FINANCIAL MEASURES

​

This MD&A includes financial measures that have not been calculated in accordance with U.S. GAAP. These non-GAAP measures include:

●  Fixed currency sales

●  Adjusted net sales

●  Adjusted fixed currency sales

●  Acquisition adjusted fixed currency sales or organic sales

●  Adjusted cost of sales

●  Adjusted gross margin

●  Fixed currency operating income

●  Fixed currency operating income margin

●    Adjusted operating income

●  Adjusted operating income margin

●  Adjusted fixed currency operating income

●  Adjusted fixed currency operating income margin

●  Acquisition adjusted fixed currency operating income or organic income

●  Acquisition adjusted fixed currency operating income margin or organic margin

●  Adjusted other (income) expense

●  Adjusted interest expense, net

●  EBITDA

●  Adjusted tax rate

●  Adjusted net income from discontinued operations, net of tax

●  Adjusted net income from continuing operations attributable to Ecolab

●  Adjusted diluted EPS from continuing operations

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We provide these measures as additional information regarding our operating results. We use these non-GAAP measures internally to evaluate our performance and in making financial and operational decisions, including with respect to incentive compensation. We believe that our presentation of these measures provides investors with greater transparency with respect to our results of operations and that these measures are useful for period-to-period comparison of results.

Our non-GAAP adjusted financial measure for net sales excludes 2021 Purolite sales. Our non-GAAP adjusted financial measures for cost of sales, gross margin, operating income, other (income) expense and interest expense exclude the impact of special (gains) and charges and (with the exception of other (income) expense) the 2021 impact of the Purolite transaction, and our non-GAAP measures for tax rate, net income from continuing operations attributable to Ecolab and diluted EPS from continuing operations further exclude the impact of discrete tax items. We include items within special (gains) and charges and discrete tax items that we believe can significantly affect the period-over-period assessment of operating results and not necessarily reflect costs and/or income associated with historical trends and future results. After tax special (gains) and charges are derived by applying the applicable local jurisdictional tax rate to the corresponding pre-tax special (gains) and charges.

EBITDA is defined as the sum of net income including non-controlling interest, provision for income taxes, net interest expense, depreciation and amortization. EBITDA is used in our net debt to EBITDA ratio, which we view as important indicators of the operational and financial health of our organization.

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We evaluate the performance of our international operations based on fixed currency rates of foreign exchange. Fixed currency amounts included in this Form 10-K are based on translation into U.S. dollars at the fixed foreign currency exchange rates established by management at the beginning of 2022. We also provide our segment results based on public currency rates for informational purposes.

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Our reportable segments do not include the impact of intangible asset amortization from the Nalco and Purolite transactions or the impact of special (gains) and charges as these are not allocated to our reportable segments.

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Acquisition adjusted fixed currency growth rates, also known as organic growth rates, are at fixed currency and exclude the results of our acquired businesses from the first twelve months post acquisition and the results of our divested businesses from the twelve months prior to divestiture. Further, we have excluded the results of our Purolite business for all of 2022 to remain comparable to 2021 when Purolite’s results were excluded from our adjusted results. In addition, as part of the Transaction, we also entered into a Master Cross Supply and Product Transfer agreement with ChampionX to provide, receive or transfer certain products for a period up to 36 months. Sales of product to ChampionX under this agreement are recorded in product and equipment sales in the Corporate segment along with the related cost of sales. These transactions are removed from the consolidated results as part of the calculation of the impact of acquisitions and divestitures.

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These non-GAAP measures are not in accordance with, or an alternative to U.S. GAAP and may be different from non-GAAP measures used by other companies. Investors should not rely on any single financial measure when evaluating our business. We recommend that investors view these measures in conjunction with the U.S. GAAP measures included in this MD&A and we have provided reconciliations of reported U.S. GAAP amounts to the non-GAAP amounts in this MD&A.

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