UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A10-K
(Amendment No. 1)
☒Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 20172019
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☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number
Number: 1-37548
Welbilt, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
2227 Welbilt Boulevard
New Port Richey, FL
(Address of principal executive offices)
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Delaware | | 47-4625716 |
(State or other jurisdiction | | (I.R.S. Employer |
of incorporation or organization) | | Identification No.) |
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2227 Welbilt Boulevard | | |
New Port Richey, FL | | 34655 |
(Address of principal executive offices) | | (Zip Code) |
(727) 47-4625716
(I.R.S. Employer
Identification No.)
34655
(Zip Code)
(727) 375-7010
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
Common Stock, $.01 Par Valuestock, $0.01 par value | | WBT | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YesxNo o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YesoNox
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNoo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNoo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,"company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filerx | ☒ | | Accelerated filero | ☐ |
Non-accelerated filero (Do not check if a smaller reporting company)
| ☐ | | Smaller reporting companyo | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso☐ No x☒
As of June 30, 2017,28, 2019, the last business day of the registrant’s most recently completed second quarter, the aggregate value of the registrant’s common stock held by non-affiliates was approximately $2.6$2.3 billion, based on the number of shares held by non-affiliates and the closing price of the registrant’s common stock on the New York Stock Exchange as of such date.
The number of shares outstanding of the registrant’s Common Stock as of February 22, 201824, 2020 was 139,801,878.141,478,327.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission on March 14, 2018within 120 days after the end of the registrant's fiscal year ended December 31, 2019 are incorporated by reference into Part III of this Annual Report on Form 10-K/A10-K where indicated.
Explanatory Note
This Amendment No. 1 to Form 10-K (this "Amendment" or "Form 10-K/A") amends the Annual Report on Form 10-K for the year ended December 31, 2017 originally filed with the Securities and Exchange Commission ("SEC") on March 1, 2018 (the "Original Filing") by Welbilt, Inc. (the "Company," "Welbilt," "we," "our" or "us").
Restatement and Revision
As previously disclosed, on November 5, 2018, the Audit Committee of the Board of Directors of the Company, after considering the recommendation of management and after consulting with PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm (“PwC”), determined that the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2016 and the related report of PwC as it relates to such period included in the Original Filing should no longer be relied upon because of prior period errors.
The purpose of this Amendment is to restate the Company’s previously issued consolidated financial statements and related disclosures as of and for the year ended December 31, 2016 and revise the Company’s consolidated financial statements as of and for the years ended December 31, 2017 and December 31, 2015, in each case, to reflect the correction of prior period errors relating to the computation of income taxes as well as certain other adjustments, previously determined to be immaterial, individually and in the aggregate. The impact of the restatement and revision to the quarterly periods in 2017 and 2016 have been reflected within the unaudited quarterly information in Part II, Item 8. "Financial Statements and Supplementary Data."
The revision of the Company's previously issued unaudited consolidated financial statements for the three and nine months ended September 30, 2017, the three months ended March 31, 2018 and the three and six months ended June 30, 2018 will be included in the Company's future Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2018, March 31, 2019 and June 30, 2019, respectively. In addition, the impacts on the 2018 and 2017 quarters will be included in the September 30, 2018 Form 10-Q, when filed.
Internal Control Over Financial Reporting
Management has reassessed its evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2017, based on the framework established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of that reassessment, management identified a material weakness and, accordingly, has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2017. For a description of the material weakness in internal control over financial reporting and actions taken, and to be taken, to address the material weakness, see Part II, Item 9A. “Controls and Procedures” of this Annual Report on Form 10-K/A. In addition, the Company's independent registered public accounting firm has restated their report on the Company’s internal control over financial reporting and issued an adverse opinion.
Amendment
For ease of reference, this Amendment amends and restates the Original Filing solely to the extent necessary to reflect the correction of the errors discussed above and make corresponding revisions to our financial data appearing elsewhere in this Amendment. In particular, revisions to the Original Filing have been made to the following sections:
Part I, Item 1A. Risk Factors,
Part II, Item 6. Selected Financial Data,
Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,
Part II, Item 8. Financial Statements and Supplementary Data, and
Part II, Item 9A. Controls and Procedures.
Part IV, Item 15. Schedule II - Valuation and Qualifying Accounts
Except as expressly set forth herein, this Amendment does not reflect events occurring after the date of the Original Filing or modify or update any of the other disclosures contained in the Original Filing.
In addition, as required by applicable rules, new certifications by our principal executive officer and principal financial officer are filed as exhibits to this Amendment.
WELBILT, INC.
Index to Annual Report on Form 10-K/A10-K
For the Year Ended December 31, 20172019
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PRESENTATION OF INFORMATION
On January 29, 2015, our former parent, The Manitowoc Company, Inc. ("MTW"), announced plans to create two independent, public companies to separately operate its two businesses: its crane business and its foodservice business. To effect the separation, MTW first undertook an internal reorganization, following which MTW held the crane business and Manitowoc Foodservice, Inc. ("MFS") held the foodservice business. Then on March 4, 2016, MTW distributed all the MFS common stock to MTW's shareholders on a pro rata basis whereby each MTW stockholder received one share of MFS common stock for every share of MTW common stock held as of the applicable record date (the "Distribution"), and MFS became an independent, publicly-traded company. In this Annual Report on Form 10-K/A, "Spin-Off" refers to both the above described internal reorganization and the Distribution, collectively.
Effective March 6, 2017, we renamed the Company to Welbilt, Inc. and rebranded our logo and brand identity to Welbilt. This change was part of our strategic repositioning after we spun off from MTW and represents a long-standing commitment to put customers’ needs first.
Unless otherwise expressly stated or the context otherwise requires, references to "we," "our," "us," the "Company" or "Welbilt," refer to Welbilt, Inc., a Delaware corporation incorporated in 2015, and its consolidated subsidiaries or, in the case of information as of dates or for periods prior to our separation from MTW, the combined entities of the foodservice business, and certain other assets and liabilities that were historically held at the MTW corporate level, but were specifically identifiable and attributable to the foodservice business.subsidiaries.
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including those that appear in this Annual Report on Form 10-K/A.10-K. These trademarks are registered trademarks or the subject of pending trademark applications in the United States ("U.S.") and other jurisdictions. Solely for convenience, the trademarks, trade names and service marks referred to in this Annual Report on Form 10-K/A10-K are generally listed without the ®, TM and SM symbols, but we will assert, to the fullest extent under applicable law, our rights in such trademarks, service marks and trade names.
CAUTIONARY NOTESTATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K/A,10-K, including matters discussed under the headings “Business,” “Risk Factors”"Business," "Risk Factors" and “Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations,”Operations" constitute “forward-looking statements”"forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical factfacts are forward-looking statements and include, for example,example: descriptions of ourthe Business Transformation Program, including related costs, completion dates and targeted annualized savings; expected impact of restructuring and other plans and objectives for future operations,operations; assumptions on which thoseall such projects, plans or objectives are basedbased; and discussions of growth and demand in the global foodservice market and foodservice equipment industry. Certain of these forward-looking statements can be identified by the use of words such as "anticipates," "believes," "intends," "estimates," "targets," "expects," "endeavors," "could," "will," "may," "plans," "projects," "assumes," “should”"should" or other similar expressions. Such forward-looking statements involve known and unknown risks and uncertainties, and our actual results could differ materially from future results expressed or implied in these forward-looking statements. The forward-looking statements included in this report are based on ourthe current beliefs and expectations and speak onlyof our management as of the date of this report. These statements are not guarantees or indicators of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those risks, uncertainties and factors described below and in more detail under the caption "Risk Factors" in this Annual Report on Form 10-K/A for the year ended December 31, 201710-K and in our other filings with the SEC.U.S. Securities and Exchange Commission (the "SEC"). We do not intend, and, except as required by law, we undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect any future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Important risks, uncertainties and other factors that could affect our future results and could cause actual results to differ materially from those expressed or implied in the forward-looking statements included in this report include, but are not limited to:
risks related to our indebtedness, including our ability to comply with covenants contained in our debt agreements, generate sufficient cash to comply with principal and interest repayment obligations, and refinance such indebtedness on favorable terms;
our ability to timely and efficiently execute on manufacturing strategies, including reducing excess manufacturing capacity, opening or closing plants in a manner consistent with our strategy, executing workforce reductions, and/or consolidating existing facilities and operations;
our ability to realize anticipated or targeted earnings enhancements, cost savings, strategic options and other synergies (through the Business Transformation Program or otherwise), and the anticipated timing to realize those enhancements, savings, synergies, and options;
risks relating to the acquisition and integration of businesses or products, including: our ability to successfully identify, finance, acquire and integrate acquisition targets; our ability to complete divestitures, strategic alliances, joint ventures and other strategic alternatives on favorable terms; and uncertainties and unanticipated costs in completing such strategic transactions;
risks related tothat our substantial levels of indebtedness, includingactual operating performance and cash flows are substantially different from forecasted results impacting our ability to comply with covenants contained in our debt agreements, generate sufficient cash to comply with principal and interest repayment obligations, and refinance such indebtedness on favorable terms;covenants or pursue our strategic objectives, among other things;
our ability to compete against companies that are larger and have greater financial and other resources than we do;
changes in the competitive conditions in the markets and countries in which we operate, including the impact of competitive pricing by our competitors or consolidation of dealers or distributors;
the successful development of innovative products and market acceptance of new and innovative products;
factors affecting demand for foodservice equipment, including: foodservice equipment replacement cycles in the U.S. and other mature markets; unanticipated changes in consumer spending impacting the foodservice industry; and population and income growth in emerging markets;
our ability to source raw materials and commodities on favorable terms and respond to volatility in the price of raw materials and commodities, including through the use of hedging transactions;
risks associated with manufactured products, including issues related to product quality and reliability, our reliance on third-party sourced components and costs associated with product liability and product warranty claims;
unanticipated issues associated with refresh/renovation plans, new product rollouts and/or new equipment by national restaurant accounts and global chains;
natural disasters, acts of war, terrorism, pandemics and other events that may disrupt the supply chain or distribution network in one or more regions of the world or otherwise cause instability of financial markets throughout the world;
general world-wide political and economic risks, uncertainties and adverse events resulting in instability, including financial bailouts and defaults of sovereign nations;
changes in domestic and international economic and industry conditions;
economic and other consequences associated with the United Kingdom’s withdrawal from the European Union;
unanticipated changes in capital and financial markets, including unfavorable changes in the interest rate environment;environment and changes relating to the discontinuation, reform or replacement of LIBOR;
foreign currency fluctuations and their impact on reported results and hedges in place;
issues related to compliance with complex and evolving laws, rules and regulations affecting our business, including increased costs of compliance, potentially conflicting laws among the countries in which we operate and our ability to quickly respond to changes in such laws;
adverse changes in domestic or international tax laws, export and import controls andor trade regulations, including new tariffs imposed by the U.S. or other governments, the adoption of trade restrictions on trade;affecting our products or suppliers, a U.S. withdrawal from, or significant renegotiation of, existing trade agreements without ratification of a replacement trade agreement, or the threat or occurrence of trade wars;
the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to an increase in the volume of product liability lawsuits, unfavorable outcomes in such lawsuits and/or withdrawals of products from the market;
the expense, timing and outcome of legal and regulatory proceedings, arbitrations, investigations, tax audits and other regulatory audits;audits and the outcome of our review of our import practices in order to quantify additional customs duties and related fees we may be assessed;
our ability to comply with evolving and complex accounting rules, many of which involve the use of significant judgment and assumptions;
risks and uncertainties relating to the material weakness in our internal control over financial reporting, which, if not timely remediated, may adversely affect the accuracy and reliability of our financial statements;
our inability to successfully remediate the material weaknessweaknesses in our internal control over financial reporting and the risk that additional information may arise that would require us to make furtheradditional adjustments or revisions to our financial statements or delay the filing of our financial statements;
the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third-party insurance or self-insurance;
unexpected costs incurred in connection with protecting our intellectual property rights and defending against challenges to such rights;
costs of litigation and our ability to defend against lawsuits and other claims, including without limitation those disclosed in Part I, Item 3, "Legal Proceedings" of this Annual Report on Form 10-K;
costs associated with unanticipated environmental liabilities;
our ability to generate cash and manage working capital consistent with our stated goals;
our ability to recruit and retain highly qualified executives and other key personnel;
risks associated with our labor relations, including work stoppages, delays in renewing labor agreements and our inability to renegotiate labor rates on favorable terms, as well as the availability of skilled and temporary labor at our manufacturing facilities and other locations;
risks associated with data security and technology systems, and protections;including our ability to protect information systems against, or effectively respond to, a cybersecurity incident or other disruption;
our ability to adequately prevent or mitigate against increasingly sophisticated methods to engage in illegal or fraudulent activities targeted at large, multi-national companies;
actions of activist shareholders;stockholders;
unexpected issues affecting our current and future effective tax rate, including, but not limited to, tariffs, global tax policies, tax reform, tax legislation, the United Kingdom’s departure from the European Union and tax legislation;Organization for Economic Cooperation and Development ("OECD") initiatives, including the global anti-base erosion ("GloBE") proposal envisaging global minimum taxation;
our ability to effectively transfer cash between foreign entities and/or jurisdictions, including in a manner that is consistent with our strategic goals and priorities;
unanticipated issues associated with the resolution or settlement of uncertainunrecognized tax positionsbenefits or unfavorable resolution of tax audits;
the tax treatment of the Distribution and the restrictions on post-Distribution activities imposed on the Company under the Tax Matters Agreement with MTW in order to preserve the tax-free treatment of the Spin-Off; and
other events outside the Company'sour control.
PART I
ITEM 1. BUSINESS
Our Company
Welbilt, Inc. ("Welbilt", a Delaware corporationthe "Company", "we", "us" "our") was incorporated in Delaware in 2015 and became publicly traded in March 2016 after a spin-off from The Manitowoc Company, Inc. ("MTW"). Welbilt is one of the world's leading commercial foodservice equipment companies. We design, manufacturecompanies leveraging a full suite of equipment capable of storing, cooking, holding, displaying, dispensing and supply best-in-class foodserving in both hot and beverage equipment for the global commercialcold foodservice market, offering customers unparalleled operator and patron insights, collaborative kitchen solutions, culinary expertise and world-class implementation support and service. Throughout this Annual Report on Form 10-K, Welbilt, Inc. and its consolidated subsidiaries, collectively, are referred to as the "Company," "Welbilt," "we," "our" or "us."
On January 29, 2015, our former parent, The Manitowoc Company, Inc. ("MTW"), announced plans to create two independent, public companies to separately operate its two businesses: its crane business and its foodservice business. To effect the separation, MTW first undertook an internal reorganization, following which MTW held the crane business and Manitowoc Foodservice, Inc. ("MFS") held the foodservice business. Then on March 4, 2016, MTW distributed all the MFS common stock to MTW's shareholders on a pro rata basis whereby each MTW stockholder received one share of MFS common stock for every share of MTW common stock held as of the applicable record date (the "Distribution"), and MFS became an independent, publicly-traded company. In this Annual Report on Form 10-K, "Spin-Off" refers to both the above described internal reorganization and the Distribution, collectively. Effective March 6, 2017, we renamed the Company to Welbilt, Inc. and rebranded our logo and brand identity to Welbilt. This change was part of our strategic repositioning after we spun off from MTW and represents a long-standing commitment to put customers’ needs first.
categories. We are headquartered in New Port Richey, Florida, and operate 1720 manufacturing facilities throughoutglobally.
We design, manufacture and supply best-in-class equipment for the Americas, Europe and Asia. We have a long history in the foodservice equipment manufacturing business with certain of our brands originating in the mid-1800's. Over time, we have become an industry-leading manufacturer of a full suite ofglobal commercial foodservice equipment supporting hot-side, cold-side and beverage dispensing capabilities. Our suite of products ismarket which are used by commercial and institutional foodservice operators including full-service restaurants, quick-service restaurant ("QSR") chains, hotels, resorts, cruise ships, caterers, supermarkets, convenience stores, business and industry, hospitals, schools and other institutions.
Today, we We sell our products through a global network of over 3,5005,000 distributors, dealers, buying groups and dealers in over 100 countries. manufacturers' representatives (individually and collectively, "channel partners").
Our portfolio of 12 award-winning brands includes Cleveland™, Convotherm®, Delfield®, fitkitchenCremSM®, Delfield®, Frymaster®, Garland®, Kolpak®, Lincoln™, Manitowoc® Ice, Merco®, Merrychef® and Multiplex®. All of our productsThese product brands are supported by KitchenCare®three service brands: KitchenCare®, our aftermarket parts and repair service business.
Our broadbrand, FitKitchen®, our fully-integrated kitchen systems brand and KitchenConnect®, our cloud-based application brand. Through these brands, we provide our customers with a full portfolio of foodservice equipmentproduct platforms and services provides us with a balanced, diverse revenue base across geographiessolutions that are specific to meet our customers' needs, drive brand loyalty and foodservicemaintain high customer satisfaction. With our in-house culinary staff and skilled engineers, we are able to develop innovative solutions and tailor our product categories. Approximately 40-45% ofofferings to meet our revenues are derived from the sale of cold category products, 35-40% are from hot category productscustomers’ evolving menu choices and approximately 15-20% from aftermarket parts and services. For the year ended December 31, 2017, we generated net sales of $1,445.4 million and earnings from operations of $219.1 million. Based on sales by destination in the fiscal year ended December 31, 2017, the majority ofstrategic plans, which serves to further strengthen our revenue was derived from customers in the Americas at approximately 72%, with 17% from EMEA customers and 11% from APAC customers, after giving effect to the elimination of intersegment sales.relationships.
Our global footprint positions us to capitalize on growth in both developed and emerging markets. Approximately 35% of our net sales are generated outside the U.S. and our full-line of hot and cold products and systems are sold in more than 100 countries globally, across three regional segments, the Americas (includes U.S., Canada and Latin America), EMEA (markets in Europe, including Russia and the Commonwealth of Independent States, Middle East and Africa) and APAC (principally comprised of markets in China, Australia, Japan, Philippines, South Korea, Singapore, Indonesia, Taiwan, Hong Kong, Thailand, Malaysia, and New Zealand).
We intend to achieve sustainable growth globally and drive increased profitability by leveraging our position as a leading commercial foodservice equipment provider, while selectively pursuing strategic acquisitions and partnerships, growing our customer base, expanding the frontiers of foodservice innovation and continuing to attract and grow industry-leading talent.
Global Foodservice Market and Foodservice Equipment Industry
The increasing demand for affordable dining is expected We continue to continue on a global scale. Consumersexplore acquisition opportunities that complement our product lines, allow us to expand our presence in mostinternational markets, are expectedenable us to gravitate towards more informal options, which is a trend seen among both higher income consumers looking to save during a slow economic recovery, as well as lower income consumers looking for accessible entry points for "onleverage our distribution capabilities, provide us with selective technologies and/or otherwise support the go" food consumption. For foodservice equipment operators in emerging markets, this offers enormous opportunity for innovation, particularly in terms of format, as new restaurant consumers look to experiment with a variety of brands and experiences. QSR chains, in particular, have proved successful innovation in these markets.
Global and regional markets for food and foodservice are growing. The global foodservice industry was estimated at $2.6 trillion in 2017 according to Euromonitor, and is expected to increase at a compounded annual growth rate ("CAGR") of approximately 3% to reach $2.9 trillion in 2021. Global expansion and long-term focus on new emerging markets with new equipment is expected to be driven by chain restaurants in India, China, parts of the Middle East and Southeast Asia in general. Increased government spending on infrastructure and investments in tourism are expected to support this change.
The main drivers for steady growth on a global basis are:
Population and income growth, especially in emerging markets and less developed regions: Global population tripled since the 1950s to approximately 7.6 billion and is expected to reach 9.8 billion by 2050 and nearly 11.2 billion by 2100 according to the United Nations Department of Economic and Social Affairs. For the time period 2015-2100 the African continent is expected to nearly quadruple the population and will account for more than 85% of the world’s population growth. Countries outside of Africa with a projected absolute population growth of more than 100 million people include India, Pakistan, Iraq and the United States ("U.S."). Additionally, more hectic lifestyles with a culture changing to eating "on the go" and increasing demand for high-quality food prepared away from home in casual restaurants based on increasing disposable incomes is expected to lead to more and new offerings.
New dining / restaurant concepts and new markets for chain restaurants are increasing: Demand in the restaurant segment, one of our largest end markets,business in a manner that is driven by consumer disposable income, employment, investment in new establishments, and the underlying trend and demand for increased convenience and innovative dining concepts. In large emerging markets with an increasing middle-class like China, Argentina, Brazil and Nigeria, tremendous opportunity exists to broaden the range of new restaurant concepts and chains.
Health and safety issues: Food safety, sanitation and nutritional facts are a top priority for end-consumers. Proper food handling, environmental sustainability and social responsibility, reduction of energy use as well as less waste from unused food and premature food spoilage have become increasingly important. These issues are key drivers for the replacement and upgrade of existing equipmentconsistent with our customers.
strategic goals.
We believe the size of the global foodservice equipment markets, including the hot-side, cold-side, beverage, and aftermarket parts and service total $27 billion. It is expected to expand at a CAGR of 2.7% and is expected to reach over $29 billion in sales by 2020.
Based on Euromonitor studies, the U.S. foodservice market accounted for approximately 21%, or $557 billion, of the 2017 global foodservice market, while the Canadian foodservice market accounted for $44 billion in 2017. The market sizes are influenced by disposable income, increased employment, investment in new establishments and the underlying trend for increased convenience. The foodservice industry in the U.S. is expected to grow at a CAGR of approximately 2.4% during the 2018-2021 period and the Canada market is expected to experience nominal growth during the same period.
The Latin American foodservice industry is expected to experience 3% year over year growth from 2018-2021. This is mainly driven by the growth in the categories of cafés/bars and home delivery according to Euromonitor. Last year, Chile, Argentina, Uruguay and Mexico demonstrated the highest productivity among all Latin American economies, which is based on gross domestic income per hour worked, while other countries like Brazil, Colombia or Venezuela, depending on their political environment, have the potential for significant future development.
The foodservice industry market in Europe, Middle East and Africa ("EMEA") in 2017 was approximately $600 billion and is expected to grow at a CAGR of 2.1% during the 2018-2021 period according to Euromonitor. Growth in the largest and most established EMEA countries such as the United Kingdom, Germany and France will mainly be in replacement equipment and aftermarket parts. In Western Europe, consumers have become much more value-conscious, and increasingly look to modern chains and fine-dining concepts as the best value for their spending. On the other hand, emerging markets show a greater percentage of new equipment purchases in the Middle East (especially the Emirates), Eastern Europe and some African countries.
Industrialization is a significant factor for the growth of the middle class in Asia Pacific ("APAC"), with the consequence of more disposable income for consumption. Foodservice sales were approximately $1.2 trillion in 2017 and are projected to grow at a CAGR of approximately 4%, or $1.3 trillion during the 2018-2021 period based on Euromonitor data. Higher demand for new hotels and resorts and population growth in India and other Asian markets is expected to contribute to the overall market demand for new foodservice products.
Our History and Developments
Our heritage in the commercial foodservice equipment industry stretches back over a century, and our experience and expertise has grown tremendously over the years.century. In 1929, Henry and Alexander Hirsch established the Welbilt Stove Co., which acquired foodservice equipment companies like Garland and Cleveland that had a history dating as far back as the mid-1800's.
Throughmid-1800s. Our business has grown through strategic and transformational acquisitions of brands that have been integrated to become a foodservice equipment company offering an end-to-end product solution for commercial kitchens. We have also grown organically with expansion of these acquired brands through our long-standing customer relationships that have spanned decades. Coupled with our focus on research and development, innovation, and superior customer service, as well as strategic and transformational acquisitions, the Company over time becamewe have become an industry-leading sourceprovider of commercial foodservice equipment.
In October 2008, our former parent, MTW, completed the acquisition of Enodis plc, a global leader in equipment manufacturing for the foodservice equipment. Welbiltindustry, for $2.7 billion. With this acquisition, our portfolio expanded to include refrigeration, ice-making, cooking, food preparation, and beverage-dispensing technologies.
In January 2015, MTW announced plans to create two independent, public companies to separately operate its two businesses: its crane business and its foodservice business. On March 4, 2016, we spun off from MTW and publicly listed on the NYSE in March 2016New York Stock Exchange under the name Manitowoc Foodservice, Inc. Effective March 6, 2017, we renamed the Company to Welbilt, Inc. and rebranded our logo and brand identity to Welbilt. This change wasWelbilt as part of our strategic repositioning after we spun off from MTW on March 4, 2016 and represents a long-standing commitment to put customers’ needs first.
Key milestones include:
2000: AcquisitionsIn April 2018, we acquired 100% of Multiplex Companythe share capital of Avaj International Holding AB, whose wholly owned subsidiary, Crem International Holding AB ("Crem") develops, manufactures and Merrychef,markets a full suite of commercial coffee machines for use in offices, restaurants, cafes and coffee shops, catering and convenience stores, for $220.3 million. This acquisition provided us with an enhanced lineestablished presence in hot beverage equipment, a complementary product category, the potential for operational synergies and cross-selling benefits as well as an increased presence in Europe and Asia.
Key milestones in our history are depicted below.
Our Markets
Our global footprint positions us to capitalize on growth in both developed and emerging markets, as our full-line of beverage dispensinghot and cold foodservice products, systems and services are sold in more than 100 countries. We manage our business in three geographic business segments: Americas, EMEA and APAC. The Americas segment includes the United States ("U.S."), Canada and Latin America. The EMEA segment consists of markets in Europe, including Middle East, Africa, Russia and the Commonwealth of Independent States. The APAC segment consists primarily of markets in China, India, Australia, South Korea, Singapore, Philippines, Japan, Indonesia, Malaysia, Thailand, Hong Kong, Taiwan, New Zealand and Vietnam.
Based on consolidated net sales by destination for the year ended December 31, 2019 of $1,593.9 million, approximately 38% of our consolidated net sales were generated outside the U.S. During such period, the majority of our revenue was derived from customers within the Americas at approximately 69%, 19% from EMEA customers and 12% from APAC customers, after giving effect to the elimination of intersegment sales. As a result of our customer base and distribution network being well balanced, none of our direct customers, which include channel partners as well as large chain accounts, represented 10% or more of Welbilt consolidated net sales for any of the years ended December 31, 2019, 2018 and 2017.
Our broad portfolio of foodservice products, systems and services provides us with a balanced, diverse revenue base. Net sales by product class are as follows:
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| | | | | | | | | | | | |
| (in millions) | | December 31, |
| | 2019 | | 2018 | | 2017 |
| Commercial foodservice equipment | | $ | 1,335.8 |
| | $ | 1,329.0 |
| | $ | 1,173.3 |
|
| Aftermarket parts and support | | 258.1 |
| | 261.1 |
| | 272.1 |
|
| Total | | $ | 1,593.9 |
| | $ | 1,590.1 |
| | $ | 1,445.4 |
|
Commercial foodservice equipment includes revenues generated from both cold and hot category equipment. For each of the years ended December 31, 2019, 2018 and 2017, approximately 40-45% of our total consolidated revenues were generated from the sale of hot category equipment, 35-40% of our total consolidated revenues were generated from the sale of cold category equipment and services, acceleratedapproximately 15-20% of our progress towards becoming a full-service providertotal consolidated revenues were generated from the sale of iceaftermarket parts and beverage equipment, and provided us with leading rapid and accelerated cook speed ovens.services.
2008: Acquisition of Enodis for $2.7 billion, a global leader in equipment manufacturing for the foodservice industry. The former company Berisford changed its name to Enodis in 2000 and had previously acquired Convotherm in 1998 and Welbilt in 1995. Welbilt's leading brands Delfield, Frymaster, Merco, Cleveland, Garland and Lincoln are still a backbone of Welbilt’s business today. With this acquisition, our capabilities expanded to span refrigeration, ice-making, cooking, food-prep, and beverage-dispensing technologies.
2013: Acquisition of Inducs provided us with an extensive line of advanced technology induction cooking products.
2015: Launch of our fitkitchen (“food inspiring technology”) methodology in which we provide customized kitchen solutions enabled by the latest product innovations.
2016: On March 4, 2016, Manitowoc Foodservice publicly listed on the NYSE.
2017: On March 6, 2017, Manitowoc Foodservice changed its name and rebranded to Welbilt.
Strategic Objectives
Based on our vision to become the global leader in professional foodservice equipment, systems and systems,services, we have the following five strategic objectives:
Achieve profitable growth
We intend to grow sales organically with our best-in-class foodservice equipment product portfolio however,and kitchen systems approach. While organic growth across all three of our regions is our first priority, we will selectively pursue strategic acquisitions and partnerships in the market.partnerships. Our industry is fragmented, and we believe there is significant opportunity for consolidation through acquisitions, partnerships and partnershipsother strategic relationships to drive external growth.
Selected current initiatives supporting this strategic objective include:
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| • | Product branding and value proposition: We believe that leveraging our individual brand identities allows us to better differentiate ourselves through customer preference enabling deeper customer relationships and in turn produces a competitive advantage. Our customer insight at the brand level enables us to innovate quickly and bring category leading products to market in order to capture sales in higher growth segments. |
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| • | Breadth and Go-to-Market approach: Our goal is to improve each customer's experience by effectively going to market as a portfolio of brands offering end-to-end foodservice equipment solutions, thus making it easier for customers to do business with us. Our breadth of product line and global scale allows us to pursue multi-product solutions for a given channel which increases our customer loyalty. |
Product branding and value proposition: After the rebranding to Welbilt, we successfully launched our key product line brands with a clear brand positioning and value proposition to our customers and the broader market. Further leveraging brand identity will also allow us to better serve new customer segments and markets. In addition, we are focused on improving profitability primarily through our Simplification and Right-Sizing Initiatives.
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| • | Identify potential targets for acquisitions and strategic partnerships: We seek to identify, analyze and assess potential targets for acquisitions and partnerships to establish a presence in new markets, supplement our current product offerings or acquire technologies that can be leveraged in our existing product portfolio. |
Identify potential targets for acquisitions and strategic partnerships: Structured process in place to identify, analyze and assess potential targets for acquisitions and partnerships.
Create innovative products and solutions
To remain an industry leader and grow our reputation as an innovative company, we continuously create game-changingdevelop dynamic product and system solutions for the entire kitchen. We leverage our suppliers and customers to actively address product competitiveness and life cycle extensions. We co-create innovation and refresh existing products with new, locally relevant food-inspiring technologies, while simultaneously finding new ways to integrate those productstechnologies into global platforms in a cost-effective manner and create cohesive kitchen systems for our customers.
Selected ongoing projectsinitiatives supporting this strategic objective include:
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| • | Digital solutions and KitchenConnect: We are increasingly bringing touch screen and other controls technologies to our products. These technologies have significant operator benefits and web connectivity for our customers, supporting the integration of equipment into KitchenConnect, which is our cloud-based application that provides customers with necessary visibility and insight into the operating efficiency of the kitchen. By extracting the data from Welbilt kitchen equipment and pushing it to our KitchenConnect system, customers may more effectively operate their kitchens resulting in cost savings and improved food quality, among other benefits. We believe our digital connectivity capabilities and KitchenConnect technology strengthens our product offerings and enhances overall value to our customers. |
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| • | FitKitchen: With our FitKitchen methodology, we take a holistic approach to design and develop integrated kitchen solutions to meet each customer’s individual needs, including equipment requirements, size constraints and customer experience goals. We use a multi-phase approach to clearly identify and understand our customers’ goals and objectives, conduct extensive research and analysis, and develop prototypes for testing and further refinement. This customer-focused process leads to new kitchen platforms, product introductions and long-term customer relationships, thereby providing recurring product sales and sustainable growth opportunities. |
fitkitchen: "Food Inspiring Technology" is a whole new way of thinking about the kitchen as a working eco-system. With our fitkitchen methodology, we take a holistic approach to design and develop integrated kitchen solutions that meet each customer’s individual needs, including their equipment requirements, size constraints and customer experience goals.
Digital solutions: Improvement of the connection between food, equipment and people in the kitchen ("KitchenConnect"), as well as better connecting with our customers to satisfy their needs.
Product initiatives and discovery innovation process: Intense collaboration with customers and suppliers to identify innovations that will enhance our customers' ability to better compete in the marketplace; prioritize investments to deliver innovative products that simplify restaurant operations, improve food quality, improve speed and flexibility, reduce the overall energy use and life cycle operating cost thereby delivering the greatest potential to generate high returns on our customer's investment.
GuaranteeEnhance customer satisfaction
We believe our broad product portfolio and the positioning of our industry-leading brands enables us to further grow the number of customers we serve and improve overall customer satisfaction as a trusted provider to the largest companies in the foodservice industry.
Selected ongoing projectsinitiatives supporting this strategic objective include:
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| • | Customer-centric product development and planning: Placing the customer in the center of our new product developments and solutions while improving operations and reducing costs across the entire value chain to better serve our customers. Our longstanding relationships with our customers allow us to work in partnership to develop cooking solutions that meet their menu change, quality, or labor efficiency initiatives. |
Customer centric planning: Putting the customer in the center of our new product developments and solutions while at the same time improving operations and reducing cost across the entire value chain to better serve our customers.
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| • | KitchenCare parts and service: Grow our parts and service business to capture a larger market share and further integrate the full solutions offering to our customers to support reduced operator downtime thereby increasing profitability. |
KitchenCare parts and service: Grow parts and service to a larger proportion of the business and further integrate in the full solutions offering to our customers.
Drive operational excellence
Our SimplificationWe are focused on productivity gains and Right-Sizing Initiatives,cost reductions across our business and plan to continue to leverage our global footprint to drive greater efficiencies across our operations. We are executing these cost reduction initiatives through our Business Transformation Program ("Transformation Program"), which we first introducedwas launched in 2016, remain a key basis to further improving profitability. These initiatives include productthe second quarter of 2019. The Transformation Program is structured in multiple phases extending through 2021 and customer rationalization, product cost take out, lean implementation,is focused on specific areas of opportunity including strategic sourcing, manufacturing capacity reductionfacility workflow redesign, distribution and reduction in workforce. Furthermore, we aim to move assembly closer to end markets, localize productsadministrative process efficiencies and use strategic sourcing to streamlineoptimizing our vendor base. We are committed to further improving our margins by driving lean manufacturing principles throughout the entire organization and by driving operational excellence in our manufacturing facilities.global brand platforms.
Selected ongoing projects to drive increased marginsinitiatives supporting this strategic objective include:
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| • | Global sourcing initiative: Ensure that suppliers are able to provide parts to us at competitive cost and lead times. We have initiated the establishment of a procurement center of excellence that leverages our global scale, manages critical vendors and deploys best practices, while developing stronger brand-based procurement capabilities at each facility. |
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| • | Facility rationalization and lean manufacturing: Reduce excess capacity in our network of global manufacturing facilities, implement lean principles in all operations and incorporate production systems that embed continuous improvement into the culture of our manufacturing processes. |
80/20 portfolio rationalization: Focus the most resources and investments in developing the products that yield the greatest returns ("80% of the sales from 20% of the portfolio").
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| • | Quality excellence: Ensure that we deliver high quality products by prioritizing quality and supply chain excellence in all aspects of production, from new product introduction to global manufacturing. |
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| • | 80/20 portfolio rationalization: Focus the most resources and investments in developing the products that yield the greatest returns ("such that 80% of the sales come from 20% of the portfolio"). |
Facility rationalization and lean manufacturing: Reduce excess capacity in our network of global manufacturing facilities and implement lean principles in all operations.
Global sourcing initiative: Ensure that suppliers are able not only to provide parts at competitive cost and lead times, but also help identify component-level innovations that will create differentiating advantages for us.
Develop great people
We strive to make Welbilt an employer of choice in our industry and weindustry. We believe that we demonstrate a strong commitment to our people by providing a diverse and inclusive culture and environment where employee input, efforts and achievements are recognized and valued.
Selected ongoing projectscurrent initiatives supporting this strategic objective include:
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| • | Talent and succession program: Focused development through tailored programs for our top talent with key succession planning identified through a robust talent assessment process. |
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| • | Rewards strategy: A total rewards program that recognizes outstanding employee achievements and measurable results in leadership, individual and organizational performance, innovation, and positive culture change that support the values and strategic goals of the business and attracts as well as retains talent. |
Leadership: Driving the development of world-class leadership at all levels of our organization.
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| • | Diversity and inclusion: A diversity and inclusion strategy that recognizes and builds awareness of diversity, leading to a work environment in which all individuals are treated fairly and respectfully, have equal access to opportunities and resources and can engage and contribute fully to our organization’s success. |
Talent and succession program: Focused development through tailored programs for our top talent with key succession planning identified through a robust talent assessment process.
Rewards strategy: A total rewards program that recognizes outstanding employee achievements and measurable results in leadership, individual and organizational performance, innovation, and positive culture change that support the values and strategic goals of the business and attracts as well as retains talent.
Diversity and inclusion: A diversity and inclusion strategy that recognizes and builds awareness for diversity, leading to a work environment in which all individuals are treated fairly and respectfully, have equal access to opportunities and resources and can engage and contribute fully to our organization’s success with established Employee Business Resource Groups that drive specific activities.
Key Success Factors
We design, manufacture, and provide parts and services for foodservice equipment, and we have one of the industry’s broadest and most integrated product portfolios. We have a long track record of innovation and our products as well as our aftermarket parts and service support are recognized by our customers and channel partners for their quality, reliability, and durability. Our products promote profitable growth for our end customers by improving their menus, enhancing their operations, and reducing their costs. Welbilt´s high-quality products derive from combining deep industry expertise and understanding of our markets, our history of investment in research and development, our successful product innovation and our long-standing customer relationships. Our success is driven by:
Breadth and complementarity of industry leading brands: Abrands. We offer a complementary portfolio of hot and cold commercial foodservice equipment products integrated under one operating company andthat is supported by growingKitchenCare, our aftermarket parts and service support as well asbrand, FitKitchen, our fitkitchen offering.fully-integrated kitchen systems brand and KitchenConnect, our cloud based-application brand. Our hot and cold commercial foodservice equipment and capabilities span refrigeration / storing, cooking, holding &and displaying food preparation, ice making, and beverage dispensing technologies, which allowand serving technologies. The breadth of our portfolio allows us to equipmeet the needs of entire commercial kitchens and serve the world’s growing demand for food prepared away from home. Our aftermarket offering, KitchenCare, provides support services to our entire product spectrum.
Integration of food, equipment, digital technologies and people: Withpeople. In our research and development capabilities,efforts, we combine our expertise in industrial engineering and culinary sciences to continuously optimize both the functionality and ease of operation of our foodservice equipment products. This leads to the creation of innovative kitchens with optimized work flow,workflow, energy and labor savings and more comfortable work spaces, all of which result in higher customer satisfaction. Our foodservice equipment and design capabilities help customers differentiate their food and adapt to evolving and local tastes, different cooking styles, and aesthetic preferences, both regionally and globally.
workspaces.
Seamless customer experience:experience. We are dedicated to putting the customer experience first. We offer a broad portfolio of products and growing parts and service support coupled with a unified customer service interface. Throughout the life cycle of each product, we strive to provide customers with a consistent and seamless experience. We design custom kitchen environments based on the unique operational needs of each customer. We regularly partner with our customers to further develop the equipment, systems and technologies theythat customers use to serve their specific culinary needs and enable their success by delivering tailored solutions.
Global scale through our network:network. The scale and breadth of our worldwide network, of over 3,500 distributors and dealerswhich includes our channel partners combined with our distribution centers, enables us to consistently deliver our products to our customers as they expand globally, even in fast-growing emerging markets. We have extensive manufacturing, sales, and customer service networks across all our regions with 4647 locations in 1417 countries. We have the scale to serve the largest global customers and the local market expertise to leverage our international presence. Our footprint enables us to buildmanufacture our products as close as possible to intended end markets and apply our developed markets expertise in emerging markets.
Global Education and Technology Centers:Center. The Welbilt Education and Technology CentersCenter ("ETCs"ETC"), which is located in our corporate headquarters in New Port Richey, Florida, and Hangzhou, China containcontains computer-assisted design platforms, a model shop for on-site development of prototypes, a laboratory for product testing, and various display areas for new products. We also use the ETCsETC to provide training for our customers, marketing representatives, service providers, industry consultants, dealers and distributors.
Our Product and Service Portfolio
We serve our customers through the following working platforms and foodservice equipment product groups:
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| • | Storing. We design, manufacture and sell commercial upright and undercounter refrigerators and freezers, blast freezers, blast chillers and cook-chill systems under the Delfield brand name. We manufacture modular and fully assembled walk-in refrigerators, coolers and freezers, and prefabricated cooler and freezer panels for use in the construction of refrigerated storage rooms and environmental systems under the Kolpak brand name. |
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| • | Cooking. We sell traditional ovens, combination ovens, convection ovens, conveyor ovens, rapid-cooking ovens, range and grill products under the Convotherm, Garland, Lincoln, Merrychef and other brand names. We market fryers and frying systems principally under the Frymaster brand name, and our steam equipment under the Cleveland brand. |
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| • | Holding and Displaying. We design, manufacture and sell a range of cafeteria and buffet equipment stations, bins, boxes, warming cabinets, warmers, display and deli cases, and insulated and refrigerated salad and food bars. We market our equipment stations, cases, food bars and food serving lines under the Delfield, Merco and other brand names. |
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| • | Dispensing and Serving. We produce beverage dispensers, blended ice machines, ice/beverage dispensers, beer coolers, post-mix dispensing valves, backroom equipment and support system components and related equipment for use by QSR chains, convenience stores, bottling operations, movie theaters, the soft-drink industry and others. We design, manufacture and sell ice machines under the Manitowoc and other brand names. We sell our coffee equipment under the Crem brand name and other beverage-related products under Multiplex and Manitowoc brand names. |
Our suiteworking platforms and foodservice equipment product groups are augmented through the following cross portfolio service brands:
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| • | KitchenCare. We provide a broad range of services and after-market parts and manage a comprehensive factory-authorized service network, assuring proper installation and start-up, preventative maintenance, after-market parts supply and maximum customer uptime on all Welbilt products. |
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| • | FitKitchen. We produce individually designed kitchens that optimize the use of our customers' kitchen space which helps to reduce the customers' labor costs. The goal of FitKitchen is to provide customized solutions that reduces the kitchen footprint and right-sizes equipment in order to reduce capital costs while producing improvements in speed of service and quality of food. |
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| • | KitchenConnect. Our KitchenConnect enabled products include the option for data output monitoring intended to facilitate menu management by the equipment operators through the interaction of menus and equipment. We believe that these products produce an operator experience that allows for a collaborative and agile service supported by just-in-time maintenance. We believe this reduces downtime, optimizes energy use and improves service response time. |
New products is used by commercial and institutional foodservice operators including full-service restaurants, QSR chains, hotels, caterers, supermarkets, convenience stores, business and industry, hospitals, schools and other institutions.product upgrades that we introduced in 2019 include:
Cooking Products
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| • | Garland Xpress Clamshell Grill - Grill featuring upper and lower plates that cook simultaneously, reducing cook times by up to 50%. This product includes an automated process by which the upper grill plate is automatically raised and lowered by a lift system powered by a quiet actuator based on internal cooking temperature. |
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| • | Lincoln Mobile Kitchen Ovens - Cooking platform designed for mobile kitchens allowing for operators to bring the food cooking process closer to the customer, expand menu offerings and facilitate introduction of automation into the cooking process. |
We have a presence throughout the world’s most significant markets in the following product groups:
Storing. We design, manufacture and sell commercial upright and undercounter refrigerators and freezers, blast freezers, blast chillers and cook-chill systems under the Delfield brand name. We manufacture modular and fully assembled walk-in refrigerators, coolers and freezers, and prefabricated cooler and freezer panels for use in the construction of refrigerated storage rooms and environmental systems under the Kolpak brand name.
Cooking. We design, manufacture and sell a broad array of ranges, griddles, grills, combi ovens, convection ovens, conveyor ovens, induction cookers, broilers, tilt fry pans/kettles/skillets, braising pans, cheese melters/salamanders, cook stations, table top and countertop cooking/frying systems, fryers, steam jacketed kettles, and steamers. We sell traditional ovens, combi ovens, convection ovens, conveyor ovens, rapid-cooking ovens, range and grill products under the Convotherm, Garland, Lincoln, Merrychef and other brand names. Fryers and frying systems are marketed principally under the Frymaster brand name, while steam equipment is manufactured and sold under the Cleveland brand.
Holding and Displaying. We design, manufacture and sell a range of cafeteria and buffet equipment stations, bins, boxes, warming cabinets, warmers, display and deli cases, and insulated and refrigerated salad and food bars. Our equipment stations, cases, food bars and food serving lines are marketed under the Delfield, Frymaster, Merco and other brand names.
Products
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| • | Merco Visual Holding Cabinet TTT - Innovative holding cabinet with radio frequency identification (RFID) enabled tray tracking and integrated touch-screen technologies enabling operators to manage kitchen operations more efficiently and effectively. Our patented tray tracking technology allows seamless tray transition between cabinets, while retaining the remaining hold time regardless of the location in the kitchen, without the need for user input adjustments. |
Dispensing and Serving. We produce beverage dispensers, blended ice machines, ice/beverage dispensers, beer coolers, post-mix dispensing valves, backroom Products
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| • | Multiplex Fresh Blends Frozen Beverage Dispenser - Beverage platform with a stylish and narrow footprint offers an interactive and intuitive touchscreen for customer self-serve of smoothies, shakes and frappes in less than two minutes. |
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| • | Manitowoc Ice D Bin - Improved ice machine storage bin with increased capacity and insulation, improved aesthetics and patented hold-open hinged door design for added convenience. An added built-in side grip also allows a user to lift the bin door from any angle with one hand. |
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| • | Crem Unity - Fully automatic "bean to cup" coffee machine housing dedicated brewing technologies for both filter and espresso coffee combined with a milk foaming system that allows users to have the ability to customize their own drinks and choose from a variety of coffee favorites. This machine also provides an intuitive and customizable user interface allowing operators to control the visual appearance, hardware, cleaning and maintenance of the machine. |
Cross Portfolio Offerings
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| • | KitchenConnect Enabled Products - Our first KitchenConnect enabled products for select brands were officially launched for customers in 2019 presenting a digital solution connecting equipment for operator data visualizations in real-time. Products enabled with this technology provide real-time data, allowing for better equipment insights which enables cost reduction, supports improved workflow and food quality and limits equipment downtime. KitchenConnect enabled products allow for operators to adapt quickly to an ever-changing environment, increase profitability and comply with food and safety standards. |
Engineering, Research and support system components and related equipment for use by QSR chains, convenience stores, bottling operations, movie theaters, and the soft-drink industry. Our ice machines make ice in cube, nugget and flake form. The ice-cube machines are available either as self-contained units, which make and store ice, or as modular units, which make ice, but do not store it. We design, manufacture and sell ice machines under the Manitowoc and other brand names. Our beverage and related products are sold under the Multiplex, Manitowoc and other brand names.
Development
Our KitchenCare business provides a full range of after-market parts and services and manages a comprehensive factory-authorized service network, assuring proper installation and start-up, preventative maintenance, spare parts supply and maximum customer uptime on all Welbilt appliances.
The superior quality and design of our foodservice equipment has long been recognized by third-parties. Welbilt products reflect a history of innovation, as evidenced through numerous awards across our product portfolio. For example, Welbilt has won 33 Kitchen Innovation Awards since 2005 from the National Restaurant Association. In addition, Welbilt was awarded the Hotelex Mirror Design Innovation Award and the Internorga Show Star Award for our new industry leading Merrychef e2s compact speed oven, the Energy Star Partner of the Year Award from the US Department of Energy for our energy efficient products especially for Manitowoc Ice, Delfield and Frymaster, and Welbilt has been awarded in 2017 by the North American Environmental Protection Agency (EPA) for the 8th time in a row with the Energy Star Award as Partner of the Year for Sustained Excellence.
Product Innovation: Our Holistic Approach
We have a staff of in-house engineers and technicians, on three continents, supplemented with external engineering resources, who collectively are responsible for continually improving existing products and developing new products. We incurred total engineering costs of $47.7 million, $46.7 million and $46.1 million during the years ended December 31, 2019, 2018 and 2017, respectively, which included research and development costs of $41.3 million, $37.3 million and $39.4 million, respectively.
Customers and Distribution Channels
Our teamend customer base consists of engineers focus on developing cost effective, innovative, high-performance, low-maintenancea wide variety of foodservice providers, including full-service restaurants, QSRs, hotels, resorts, cruise ships, convenience stores, retail stores, supermarkets, leisure and convention facilities, healthcare facilities, schools and universities and many other foodservice outlets (collectively "end customers"). Our end customers range from large, multinational chain operators to independent, family-owned establishments.
In order to ensure our products reach our broad end customer base and to increase awareness of our product offerings and portfolio of brands, we distribute our products through a variety of distribution channels. Our distribution network includes an expansive network of channel partners that are intended to solve problems forlocated in over 100 countries worldwide. We believe our customersdistribution network has strengthened in differentiated ways and create brand loyalty among customers. They work closelyrecent years as we have developed positive relationships with our culinary, manufacturingchannel partners and marketing staff enabling us to identify changing end-user requirements, implement new technologies and effectively pursue product innovations.
We strive to deliver products and solutions that enabledemonstrated our customers to provide fresh, new food experiences to consumers outside the home globally. Consumer demands are constantly changing, and a more health-conscious public is looking for fresh, natural alternatives to traditional out-of-home eating options. They increasingly care about how food is sourced, handled and prepared. We are focused on providing our customers with the equipment they need to build on the opportunities from these dynamic changes in the foodservice market.
Through innovation, we strive to simplify and improve the speed and flexibility of restaurant operations, improve the quality of the food, improve health and sanitation, and reduce the overall energy consumption and life cycle operating costs of the equipment. We believe that these benefits can also be enhanced by mobile connectivity and monitoring.
Productivity, Speed and Flexibility: Kitchens that occupy less space, have higher output and are easier to operate are key to growth in the foodservice industry, particularly in urban locations. Greater speed and equipment flexibility also allow for higher productivity and a wider range of menu options. Innovative control systems can improve information flow in the kitchen by letting operators know what and when to cook, and how to maintain and clean the equipment. Controls innovations under development include intuitive touch-screen user interfaces with Internet of Things ("IoT") connectivity as a standard feature, and integration with the KitchenConnect system for remote data analytics, proactive repair and maintenance, and equipment optimization.
Health and Sanitation: Manual sanitation of equipment in the restaurant has become a major challenge due to extended operating hours, the increasing pieces and complexity of equipment in kitchens, and competing demands from revenue producing tasks. For the cold product category, our High Efficiency Particulate Air filtration technology brings the cleanroom into the kitchen, controlling airborne contamination of ice machines. Electrically charged particles of water and UV light provide the basis for automated sterilization of food zones and contact surfaces in equipment. Compact steam generators are also being embedded in certain of our equipment, providing a proven technology for cleaning cooking cavities in our ovens.
Energy Efficiency: We are focused on increasing the efficiency of individual components and reducing standby energy losses. An example of reducing standby energy loss is the use of induction heating for holding pans so that energy is only used when a thermal load is present. We are also a leader in the area of high efficiency combustion systems with metal matrix burner technology. This technology reduces gas consumption and allows for variable firing rate. For cooking, natural refrigerants such as propane-based R-290 offer improved thermodynamic performance, and variable speed compressors and fans further increase overall cycle performance under partial load conditions.
Mobile Connectivity and Monitoring: Integration of mobile devices in kitchens is increasing rapidly, and will extend the user interface beyond the traditional boundaries of the equipment. Our KitchenConnect enabled products also include a system for equipment monitoring which collects data to reduce downtime, optimize energy use, and improve service response time. Furthermore, we are investing in a connectivity platform that will connect the kitchen, or "back of the house" to the dining room or the "front of the house". This will be augmented with competency in data analytics to convert data collected on our equipment into meaningful knowledge to maximize business impact.
In 2017, we introduced 22 new products, including significant upgrades (after 23 new product introductions in 2016) comprised of 11 hot-side products and 11 cold-side and beverage products. Some of these new products and upgrades include:
Hot-Side Products
Frymaster Touchscreen Low Oil Volume ("LOV") Fryer - This fryer provides oil savings via a 30lb. low oil volume vat, a solid shortening handling system managed through an intuitive 7” touch screen display.
Garland Clamshell Grill (QSR chains) - This is an extension of our clamshell cooking platform, features our latest clamshell technology, and can be configured in grilling and broiling versions. This platform offers superior cooking performance, better energy efficiency, superior ease of cleaning, and can be customized for different chain customers.
Lincoln 3240 Electric Conveyor Oven - This is a next generation triple-stackable electric conveyor with high reliability and minimal service requirements. The design is intended to respond to the needs of major global pizza chain customers.
Garland INSTINCT Countertop Induction - This line of induction counter units delivers market leading energy savings, greater flexibility in use and application, easy power reduction, quiet operation and proven reliability. Units come with RTCSmp® Technology - the first and only comprehensive control and monitoring system for induction technology.
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��� | Merco Visual Holding (General Market and QSR models) - This hot holding cabinet incorporates visual indication of product holding status for each of the trays and complements. We introduced General Market and QSR versions of this platform.
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Cold-Side and Beverage Products
Delfield Mark-7 Energy Efficiency Upgrades (Department of Energy ("DOE")/Environmental Protection Agency ("EPA")) - This is an upgrade to our customized fabricated refrigeration systems to comply with new U.S. DOE minimum energy efficiency and upcoming EPA refrigerant requirements for these types of products.
Kolpak Energy Efficiency Upgrades (DOE/EPA) - This is an upgrade to our walk-in refrigeration systems utilizing more environmentally friendly alternate refrigerants that comply with the U.S. EPA's Significant New Alternatives Policy ("SNAP") regulations and the new U.S. DOE minimum energy efficiency requirements.
Manitowoc Indigo® NXT Ice Machines & Storage Bins - This is an upgrade to our Manitowoc Indigo commercial ice machine product, which exceeds the new U.S. DOE minimum energy efficiency requirements for these types of products and introduces next generation simplicity, sanitation, energy efficiency, and reliability technology.
Manitowoc Energy Efficiency Upgrades (DOE) - This is an upgrade to our Manitowoc branded undercounter cubers, flake, nugget, countertop nugget, and Koolaire branded modular and undercounter cubers to exceed new U.S. DOE minimum energy efficiency requirements for these types of products.
Manitowoc Indigo Models for the Japan market - This is an extension of our Manitowoc Indigo commercial ice machine range to create new configurations for global chain locations in Japan.
Multiplex ALBI 4 Countertop Beverage Dispenser - This is a product range of flexible countertop beverage dispensing units for low volume locations with throughput of <100 bag in boxes per year.
customer-centric strategy. In addition, we have had many otheran experienced and dedicated sales force to sell direct to certain multinational and national chain customers. We also sell original equipment manufacturer replacement parts through factory authorized service providers.
In the Americas region, we have a broad portfolio of channel partners, covering all major newfoodservice market segments. In the U.S., our direct sales team is supplemented by a network of industry-leading third-party Manufacture Representative Groups, providing national coverage. Direct sales teams, culinary sales teams, sales representatives and distributors jointly serve independent equipment dealers with our full portfolio of food and beverage category brands. In addition, a dedicated strategic account team with culinary support is focused on the major U.S.-based restaurant chains, where we have significant global market share. Our distribution hubs located in the U.S., Mexico and Canada service the needs of our Americas region customers.
In EMEA, our distribution includes hubs in Herborn, Germany, serving countries in central and eastern Europe and the Middle East, in Guildford, England, serving countries in the United Kingdom and northern Europe, and in Barcelona, Spain serving countries in southern and western Europe. Each of these distribution hubs operates a network of third-party dealers and service agents chosen to satisfy the requirements of both chain customers and independent caterers in their respective territories. Outside these countries, Welbilt products and innovations over the past five years including:services are sold through non-exclusive third-party distributors and service companies.
Hot-Side ProductsIn APAC, our distribution includes hubs in Hangzhou and Shanghai, China, servicing China; in Bangkok, Thailand, servicing Thailand; and Singapore, Singapore, servicing the remainder of the Association of Southeast Asian Nations and the Indian sub-continent. Each of these hubs operates a network of third-party distributors and dealers, many having been established in the market for decades and having been Welbilt partners for many years.
Competition
Convotherm4 - Combi oven designed around
We sell all our customers' needs, enabling themproducts in highly competitive markets and compete based on product design, quality, performance, aftermarket support services, as well as maintenance costs and price. Our comprehensive offering of highly innovative and high-quality products and services provide the following competitive advantages:
A complementary portfolio of industry-leading hot and cold food as well as cold beverage and coffee category products, integrated under one operating company and supported by growing aftermarket parts, service and support;
The ability to achieve outstanding cookingintegrate food, equipment, digital technologies and baking results, including an industry-leading flexiblepeople seamlessly through collaborative innovation that enhances our customers’ ability to compete in the marketplace;
The scale and safe cleaning system.
breadth of our distributor and dealer network to consistently deliver our products to our customers as they expand globally, even in fast-growing emerging markets;
Frymaster FilterQuick- FilterQuick replaces the time-consuming manual filtration process with a simple push button automatic filtration process that allows the fryer to resume operation in less than four minutes.
Garland Xpress grill - Our next generation of clamshell grills with industry leading performanceLong-standing brands and reliability.
Merco Max Hot Holding - This hot holding product range includes forced air technology, touch screen controls and optional Wi-Fi tray tracking feature that improves foodinnovative engineering customers can trust for superior quality and simplifies operator interactions.reliability; and
Dedication to always putting the customer experience first.
We believe our primary competitors in each of our product groups are:
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| Product Categories | | Primary Competitors |
| Storing | | Ali Group S.r.l., Alto Shaam, Inc., American Panel Corporation, Arctic Air, a subsidiary of Broich Enterprises, Inc., Bally Refrigerated Boxes, Inc., Cambro Manufacturing Co., Duke Manufacturing, Hatco Corporation, Lancer Corporation, a subsidiary of Hoshizaki Corporation, Everidge, Inc., certain subsidiaries of Illinois Tool Works Inc., The Middleby Corporation, Dover Corporation, subsidiaries of Standex International Corporation, Thermo-Kool / Mid-South Industries, Inc., True Manufacturing Co., Inc., Turbo Air Inc. and The Vollrath Company, LLC |
| Cooking | | Ali Group S.r.l., Alto Shaam, Inc., Dover Corporation, Duke Manufacturing, Electrolux AB, Fujimak Corporation, Henny Penny Corporation, certain subsidiaries of Illinois Tool Works Inc., Marmon Holdings, Inc., The Middleby Corporation, Maschinenfabrik Kurt Neubauer GmbH & Co. KG (MKN), Rational AG, certain subsidiaries of Standex International Corporation and XLT Ovens |
| Holding & Displaying | | Ali Group S.r.l., Alto Shaam, Inc., Cambro Manufacturing, Dover Corporation, Duke Manufacturing, Hatco Corporation, Henny Penny Corporation, Marmon Holdings, Inc., The Middleby Corporation, subsidiaries of Standex International Corporation and The Vollrath Company, LLC |
| Dispensing & Serving | | Ali Group S.r.l., Brema Group S.p.A., Bunn-O-Matic Corporation, Celli S.p.A., Lancer Corporation, a subsidiary of Hoshizaki Corporation, Marmon Holdings, Inc., The Middleby Corporation, Ryoma Mc SRL, Thermoplan AG, Vogt Ice and Vin Service S.R.L. |
Merrychef e2s - This compact speed oven range offers best-in-class: speed, heat up and cool down times, energy efficiency, noise level, cleanability and cavity-to-footprint ratio.
Cold-Side and Beverage Products
Delfield CoolScapes refrigeration - This commercial refrigeration product range includes some of the most energy efficient, environmentally friendly refrigeration equipment on the market including our GreenGenius, R-290 propane-based refrigeration systems.
Koolaire - This new economy line of basic-feature ice machines complements our premium Manitowoc brand, offered in sizes ranging from 170 - 1,700 pounds/day.
Multiplex Blend-In-Cup Smoothie Machine (with or without Integrated Ice Machine) - This is a plug and play fully integrated blended beverage station, blending beverages directly in the serving cups. With its automated portioning and dispense, it reduces waste and labor, and ensures the consistency of the final beverage.
Multiplex Nitro N2 Fusion - Our award-winning craft beverage system provides exceptional quality Nitrogen infused cold-brewed coffee.
Intellectual Property
Intellectual property, including certain patents, trademarks, copyrights, know-how, trade secrets and other proprietary rights, is important to our business. We hold numerous patents pertaining to our products and have presently pending applications for additional patents in the U.S.United States and various foreign countries. In addition, we have various registered and unregistered trademarks and licenses that are of material importance to our business and we believe our ownership of this intellectual property is adequately protected in customary fashions under applicable laws. Although certain proprietary intellectual property rights are important to our success, we do not believe we are materially dependent on any particular patent or license, or any particular group of patents or licenses.
Our worldwide intellectual property portfolio provides:
Global global protection of our research and development efforts and product development investments;
Recognizable recognizable competitive distinctions and proprietary advantages;
Brand brand support and enhancement; and
Leverage leverage for value creation opportunities such as licenses.
We take efforts to protect, enforce and defend our rights to our intellectual property and proprietary rights, as appropriate.
Kitchen Innovation: fitkitchen
Our fitkitchen (“food inspiring technology”) methodology allows us to engage with existing and prospective customers in new, meaningful and strategic ways. Our fitkitchen methodology is unique in the industry and provides customers with access to cutting-edge technology and customized system solutions aimed at "right-sizing" kitchen operations, improving speed of service and food quality, reducing equipment footprint, reducing capital and labor costs and improving the consumer experience. Through fitkitchen, we can offer holistic and integrated system solutions that map across our entire product portfolio, leveraging existing and future products and technologies. Our core fitkitchen team has extensive operational background and experience in the food service industry and strategically leverages the design and innovation of our product suite, integrated research and development team, operational and industrial engineers as well as global culinary experts to
deliver a unique and operationally focused solution for customers. We are able to create systems for our customers’ new sites as well as define clear paths for backward migration to improve performance at existing sites.
As part of our fitkitchen methodology, we use a multi-phase approach to clearly identify and understand our customers’ goals and objectives, conduct extensive research and analysis to gather needed data and insights to develop prototypes for testing and further refinement. This customer-focused process leads to new kitchen platforms, product introductions and long-term customer relationships, leading to recurring product sales and sustainable growth opportunities.
Engineering, Research and Development
We believe our extensive engineering, research and development capabilities are a key driver of our success. We engage in research and development activities at 13 locations in the Americas, EMEA and APAC. We have a staff of in-house engineers and technicians at these locations, supplemented with external engineering resources, who collectively are responsible for improving existing products and developing new products. We incurred total engineering costs of $46.1 million, $48.2 million and $47.9 million during the years ended December 31, 2017, 2016 and 2015, respectively, which included research and development costs of $39.4 million, $35.2 million, and $33.2 million during the years ended December 31, 2017, 2016 and 2015, respectively.
Key projects and initiatives for engineering and product development include the following:
Flexing engineering resources among the 13 research and development centers through engineering leadership for hot and cold category products and supplementing the internal resource pool with a strategic relationship with a major services provider based in India;
Regional technology centers that provide a continuous stream of application-focused new technologies and product concepts and leverage supplier and university relationships;
Internal capability for electronic controls development and applications working hand-in-hand with strategic suppliers, and ensuring continued industry leadership in this increasingly important product dimension; and
Technologies to lead the industry in the delivery of healthy food, equipment sanitation, energy efficiency, menu flexibility, and mobile devices and web connectivity.
Distribution
We sell our foodservice equipment primarily through a worldwide network of over 3,500 distributors and dealers in over 100 countries ("direct customers") who ultimately sell to end customers and we sell spare parts through factory authorized service providers.
In the Americas (U.S., Canada and Latin America), we have a broad portfolio of channel partners, covering all major foodservice market segments, including QSR chains, chained and independent casual and family dining restaurants, education, health care, business and industry, as well as the convenience and retail space. Our direct sales team is supplemented by a network of industry-leading Manufacture Representative Groups, providing national coverage. Direct sales team, sales representatives and distributors jointly serve independent equipment dealers with our full portfolio of food and beverage category brands. A dedicated strategic account team with culinary support is focused on the major U.S.-based restaurant chains, where we have significant global market share. Our teams work closely with our customers’ menu and equipment development teams to support their strategic plans. We also have distribution hubs in the U.S., Canada and Mexico.
In EMEA, our distribution includes hubs in Herborn, Germany, serving countries in central and eastern Europe, in Guildford, England, serving countries in the United Kingdom and northern Europe, and in Barcelona, Spain serving countries in southern and western Europe. Each of these distribution centers operates a network of third-party dealers chosen to satisfy the requirements of both chain customers and independent caterers in their respective territories. Outside these countries, Welbilt products and services are sold through non-exclusive third-party distributors and service companies. In addition, our beverage customers receive specialist support from our beverage systems manufacturing facility in Halesowen, England.
We access the market in APAC through our dedicated distribution and dealer channel partners, most of them being established in the market for decades and having been Welbilt partners for over 15 years.
Customers and Marketing
We serve some of the largest and most widely recognized multinational and regional businesses in the foodservice and hospitality industries. None of our end customers represented 10% or more of Welbilt net sales for the years ended December 31, 2017, 2016 and 2015.
Our end customer base is comprised of a wide variety of foodservice providers, including large multinational and regional full-service restaurants as well as hotels and QSR chains, chained and independent casual and family dining restaurants, caterers; convenience and retail stores, lodging, resort, leisure and convention facilities; healthcare facilities; schools and universities; and many other foodservice outlets (collectively "end customers"). We differentiate ourselves from the competition through the ability to provide not only best-in-class food and
beverage equipment, but also entire and smart digitally enabled kitchen solutions designed to help our customers to improve productivity, quality and profitability. This allows us to provide one face to our customers for all our brands and is supported by world class culinary expertise and experienced key account management for our larger global chain customers. We support our sales efforts with a variety of marketing efforts including digital marketing, presence at foodservice shows, culinary events, trade-specific advertising and cooperative distributor merchandising.
Competition
We sell all our products in highly competitive markets and compete based on product design, quality, performance, aftermarket support services, as well as maintenance costs and price. Our comprehensive offering of highly innovative and high-quality products and services provide the following competitive advantages:
A complementary portfolio of industry-leading hot and cold food as well as beverage category products, integrated under one operating company and supported by growing aftermarket parts, service and support;
The ability to integrate food, equipment, digital technologies and people seamlessly through collaborative innovation that enhances our customers’ ability to compete in the marketplace;
The scale and breadth of our distributor and dealer network to consistently deliver our products to our customers as they expand globally, even in fast-growing emerging markets;
Long-standing brands and innovative engineering customers can trust for superior quality and reliability; and
Dedication to always putting the customer experience first.
We believe our primary competitors in each of our product groups are:
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Product Categories | | Primary Competitors |
Storing | | Ali Group, Alto Shaam, American Panel, Arctic, Bally, Cambro, Duke, Hatco, Hoshizaki, ICS, Illinois Tool Works, Middleby, Randell, Standex, Thermo-Kool, Traulsen, True Foodservice, TurboAir, and Vollrath |
Cooking | | Ali Group, Alto Shaam, Dover Industries, Duke, Electrolux, Fujimak, Henny Penny, Illinois Tool Works, Marmon, Middleby, MKN, Rational, Standex, Taylor, and XLT |
Holding & Displaying | | Ali Group, Alto Shaam, Cambro, Dover Industries, Duke, Hatco, Henny Penny, Marmon, Middleby, Standex, and Vollrath |
Dispensing & Serving | | Ali Group, Automatic Bar Controls, Brema, Follett, Scotsman, Celli, Hoshizaki/Lancer Corporation, Marmon, Taylor, Vogt Beverage Air, and Vin Service |
Regulatory Environment
In the Americas, EMEA and APAC, weWe actively work with U.S. and foreign-based standards organizations, industry associations, certification parties, and regulatory bodies to develop and promote effective and balanced standards, codes, and regulations that provide for the advancement of sustainable customer solutions, with the highest possible levels of energy efficiency, sanitation, environmental standards, safety, and food quality. For example, we are active members of NAFEM,the North American Association of Food Equipment Manufacturers, the Air-Conditioning, Heating and Refrigeration Institute, the ULUnderwriters Laboratories task group, the NSFNational Sanitation Foundation's International Joint Committee, the American Society of Heating, Refrigerating and Air-Conditioning Engineers, various working groups responsible for European safety standards in Europe, the Industrial Association for House, Heating and Kitchen Technology, and other regional standards organizations. We fully engage with the DOEU.S. Department of Energy on new energy standards, the U.S. EPAEnvironmental Protection Agency on EnergySTARENERGY STAR programs and the Significant New Alternatives Policy program related to alternative refrigerant regulations, as well as the European Union's ECO("EU") Ecodesign directive consultant organizations.
Financial Information About Business SegmentsBacklog
Our products are sold in more than 100 countries. We reportDue to our operating results through three reportable segments: Americas, EMEA and APAC. All three reportable segments offer a broad range of hot and cold category foodservicediverse products and solutions for customers in various end markets.
Our broadservices portfolio of foodservice equipment and services provides us with a balanced, diverse revenue base across geographies and foodservice product categories. Approximately 40-45% of our revenues are derived from the sale of cold category products, 35-40% are from hot category products and approximately 15-20% from aftermarket parts and services. For the year ended December 31, 2017, we generated net sales of $1,445.4 million and earnings from operations of $219.1 million. Based on sales by destination in the fiscal year ended December 31, 2017, the majority of our revenue was derived from customers in the Americas at approximately 72%, with 17% from EMEA customers and 11% from APAC customers, after giving effect to the elimination of intersegment sales.
Net sales by product class and the total measurerelatively short period between order and shipment dates on most products, we believe that our backlog is not a meaningful indicator of profit and loss for the last three fiscal years as well as the total assets as of December 31, 2017 and 2016 is disclosed in Note 22, "Business Segments," of the notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K.future business prospects.
The following table presents the relative percentages of net sales attributable to each reportable segment for each of the last three fiscal years:
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| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Americas | 80.7 | % | | 81.5 | % | | 84.3 | % |
| EMEA | 20.5 | % | | 19.7 | % | | 17.9 | % |
| APAC | 13.2 | % | | 13.1 | % | | 12.2 | % |
| Elimination of inter-segment sales | (14.4 | )% | | (14.3 | )% | | (14.4 | )% |
In the Americas, we provide foodservice equipment in over 30 countries and territories throughout North America and Latin America. Our Americas segment contributed net sales including intercompany sales of $1,166.8 million during the year ended December 31, 2017, representing 80.7% of total Welbilt net sales before eliminations.
In EMEA, we provide foodservice equipment in over 50 countries throughout Europe, the Middle East and Africa, including Russia and the Commonwealth of Independent States. Our EMEA segment contributed net sales including intercompany sales of $296.5 million during the year ended December 31, 2017, representing 20.5% of total Welbilt net sales before eliminations.
In APAC, we provide foodservice equipment in over 20 countries throughout Asia, including China, Australia, Japan, Philippines, South Korea, Singapore, Indonesia, Taiwan, Hong Kong, Thailand, Malaysia, and New Zealand. Our APAC segment contributed net sales including intercompany sales of $190.2 million during the year ended December 31, 2017, representing 13.2% of total Welbilt net sales before eliminations.
Seasonality
Typically, the first quarter of our fiscal year represents the least favorable period for our financial results.results while the third quarter of our fiscal year typically is the most favorable. Our customers are primarily located in the northern hemisphere, andwhere the warmer summer weather generally leads to an increase in construction and remodeling within the foodservice industry.
Employees
As of December 31, 2017,2019, we employed approximately 5,4005,100 people worldwide and hadwhich includes workforce resources from seven employee unions in North America, onetwo trade unionunions and a local works council in Europe and onethree trade unionunions in China. Many of our European employees belong to the trade union or a European works council.
Raw Materials
We support our region-of-use production strategy with corresponding region-of-use supplier partners.partners where appropriate. The primary raw materials that we use in the manufacturing of our products are structural and rolled steel, aluminum, and copper.copper, which are generally available in adequate quantities from numerous suppliers. We also purchase electrical equipment and other semi- and fully-processed materials. We maintain inventories of steel and other purchased material. We have been successful in our goalstrive to maintain alternative sources of raw materials and supplies and therefore have not been dependent on a single sourcematerials when possible, but some material parts and key components we use in the manufacturing of our products are obtained from sole sources of supply. We believe that our relationships with our suppliers are good and we consider our current sources of supply to be adequate for any particular raw material or supply.our present and anticipated future requirements.
Available Information
We make available, free of charge aton our website, (http://www.welbilt.com), our Registration Statement on Form 10, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statements and any amendments to those reports, as soon as reasonably practicable after we have electronically filefiled such material with, or furnishfurnished it to, the Securities and Exchange Commission ("SEC"). Our SEC reports can be accessed through the investor relations section of our website. Although some of the documents available on our website are filed with the SEC, the information found on our website is not part of this or any other report we file with or furnish to the SEC.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room located at 100 F Street NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of our reports on itsa website at www.sec.gov.www.sec.gov that contains reports, proxy statements and other information about SEC registrants, including Welbilt, Inc.
The information contained on our website and the SEC website referenced in this report is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS
You should carefully consider the following risks, uncertainties and cautionary statements described below, together with the other disclosures in this Annual Report on Form 10-K/A.10-K and our other public filings with the SEC. Any of the followingthese risks and uncertainties, could materially and adversely affect our business, results of operations or financial condition. Risksas well as risks and uncertainties not currently known to us or that we currently deem to be immaterial, also may materially adversely affect our business, financial condition and operating results.
Risks Relating to Our Business
We have substantial indebtedness, and the degree to which we are leveraged may materially and adversely affect our business, financial condition, results of operations and cash flows.
As of December 31, 2017,2019, our total consolidated indebtedness was $1,267.7$1,424.3 million. Our level of indebtedness could have important consequences to our business, including:
requiring us to dedicate a substantial portion of our cash flow from operations to scheduled interest and principal payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product innovation, and other general corporate purposes;
restricting us from pursuing strategic acquisitions or requiring us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, product development, acquisitions and other general corporate purposes; increasing our vulnerability to general adverse economic and industry conditions;
exposing us to the risk of increased interest rates as certain of our borrowings are atbear variable rates of interest; and
placing us at a competitive disadvantage compared to our competitors that are less leveraged and thereby have greater financial flexibility;flexibility.
impairing our ability to withstand competitive pressures and changes in the foodservice industry; and
increasing our vulnerability to general adverse economic and industry conditions.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the terms and restrictions contained in the agreements governing our indebtedness. If we or our subsidiaries incur additional indebtedness, the related risks that we and they now face could intensify.
Our ability to make scheduled payments on our existing indebtedness as well as any future indebtedness that we may incur and to fund planned capital expenditures and other liquidity needs will depend on our ability to generate cash from operations or asset sales as well as our ability to refinance our indebtedness on favorable terms, all of which are subject to economic, financial, competitive and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, the lenders who hold our debt could accelerate amounts due which could potentially trigger a default or acceleration of the maturity of our other debt.
We may increase our debt or raise additional capital in the future, including to fund acquisitions, or for general corporate purposes, which could adversely affect our financial health and decrease our profitability.
We may need to incur substantial additional indebtedness or raise additional capital in the future, subject to the terms and restrictions contained in the agreements governing our existing indebtedness. In addition, we may issue shares of preferred stock without further action by holders of our common stock. If our cash flow from operations is insufficient to meet our cash requirements, we may require additional financing. However, debt or equity financing may not be available to us on terms we find acceptable, if at all. If we incur additional indebtedness or raise equity through the issuance of preferred stock, the risks described above that we now face could intensify. Further the terms of such indebtedness or preferred stock may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. If we are unable to raise additional capital when needed, our financial condition could be materially and adversely affected.
Uncertainty about the continuing availability of LIBOR may adversely affect our business.
The interest rates under some of our loans, derivative contracts and other financial instruments, including the 2016 Credit Agreement, which governs the Term Loan B Facility and the Revolving Credit Facility, are calculated by reference to LIBOR. On July 27, 2017, the United Kingdom's Financial Conduct Authority, the authority that regulates LIBOR, announced that it intends to stop compelling banks to submit rates required for the calculation of LIBOR after 2021, and it is unclear whether new methods of calculating LIBOR will be established. Various industry groups continue to discuss replacement benchmark rates, the process for amending existing LIBOR-based contracts, and the potential economic impacts of different alternatives. For example, the U.S Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by treasury securities.
If LIBOR ceases to exist after 2021, then we and the administrative agent will endeavor to amend the 2016 Credit Agreement to establish an alternate rate of interest that will apply, giving due consideration to then-prevailing market convention for determining a rate of interest for syndicated loans. It is not possible to predict the effect of these changes, other reforms, tax legislation impacts, or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere, and such changes may result in, among other things, increased volatility and illiquidity in markets for instruments that currently rely on LIBOR, increased borrowing costs, reductions in the value
of certain instruments or the effectiveness of related transactions such as hedges, difficulty and costly processes to amend applicable contracts and instruments and difficulties, complications or delays in connection with future financing and hedging efforts.
Our business and financial results are dependent on our ability to execute our manufacturing strategies, including our ability to scale our manufacturing capacity and resources to the level of our customers’ demand.
Our business and financial results depend upon our ability to timely and efficiently execute our manufacturing strategies without disruption to our business, including reducing excess manufacturing capacity, completing plant acquisitions or closures, consolidating existing facilities and operations and renovating existing plants and facilities as needed. We must make highly efficient use of manufacturing capacity to generate competitive profit margins and achieve our stated financial goals, while also managing the risk of insufficient capacity which may expose us to liabilities related to contract commitments. Adapting or modifying our capacity is difficult, as modifications take substantial time to execute and, in some cases, may require regulatory approval. Additionally, delivering products during process or facility modifications requires special coordination. The cost and resources required to adapt our capacity, such as through facility acquisitions, facility closings, or process moves between facilities, as well as coordinating any related reductions or changes in our workforce, may negate any planned cost reductions or may result in costly delays, product quality issues or material shortages, all of which could adversely affect our financial results and our reputation with our customers.
If we are unable to successfully implement certainour Transformation Program or other cost-reduction initiatives and strategies, or suchthe corresponding cost savings prove to be less than anticipated,insufficient, we may not achieve our earnings targets.
In recent years, we have adopted several cost-saving initiatives and operating strategies intended to drive increased profit margins, including, for example, reducing the complexity of our product offerings, incorporating strategic sourcing and adopting our "80/20" portfolio rationalization wherebyrationalization. During the first quarter of 2019, we intendinitiated a comprehensive operational review to focusvalidate our long-term growth and margin targets and to refine our execution plans, which culminated in launching the majorityTransformation Program in May 2019. The Transformation Program is structured in multiple phases extending through 2021 and is focused on specific areas of opportunity including strategic sourcing, manufacturing facility workflow redesign, distribution and administrative process efficiencies and optimizing our resources and investments on those products that yield the greatest returns. However, theglobal brand platforms.
The success of thesethe Transformation Program or these other initiatives and strategies is not guaranteed, and we may not achieve the full cost savings we expect or such
any anticipated benefits might be realized later than expected. The Transformation Program and the 80/20 initiative in particular involvesinvolve significant cultural shifts, both internally and for our customers, that may inhibit, delay or impair its successful implementation. Any delays in implementing or lower-than-expected benefits from the Transformation Program or our other initiatives and strategies may cause us to miss earnings targets and otherwise negatively affect our results of operations. Additionally, if we devote a disproportionate amount of time, personnel and resources to initiatives that yield slower or less than anticipated results or that are ultimately unsuccessful, we may be distracted from other initiatives and priorities that might have yielded more rapid or better results, and our results of operations may suffer accordingly.suffer.
Price increases, disruption of supply or our inability to successfully manage our exposures to price fluctuations of our raw materials could adversely affect our profitability and harm our business.
We use large amounts of steel, stainless steel, aluminum, copper, natural gas and electronic controls and component parts, among other items,materials, in the manufacturemanufacturing of our products. Occasionally, market prices of some of our key raw materials increase significantly, due to tariffs or otherwise, which could adversely affect our margins. In addition, because we maintain limited raw material and component inventories and, in some instances, rely upon single sources of supply, shortages or even brief unanticipated delays in delivery by suppliers, including those due to capacity constraints, labor disputes, impaired financial condition of suppliers, natural disasters, acts of war or terrorism, pandemics or other events outside our control, may harmincrease our business,production costs, cause delays in the shipment of our products, impair our ability to satisfy customer demand and adversely affect our business and financial performance.
To better manage our exposures to certain commodity price fluctuations, we regularly hedgeWe have historically hedged our commodity exposures through derivative financial instruments. Through this hedging program, weinstruments to fix the future price for a portion of these commodities used in the productionmanufacturing of our products. To the extent that our hedging results in fixing commodity prices thatAs a result, we are unfavorable in comparison to market prices at the time of purchase, we would experience a negative impact on our profit margins comparedexposed to the marginsrisk of default by or failure of counterparty financial institutions. In the event of default or failure of one or more of our counterparties, we would have realized if these price commitments were not in place,could incur significant losses, which may adversely affectcould negatively impact our financial condition, results of operations and cash flows.financial condition.
Because weWe participate in an industry that is highly competitive, which could have a material adverse impact on our net sales and profits could decline as a result.profitability.
We sell our products in a highly competitive industry. We compete based on product design, product quality, performance and reliability, quality and responsiveness of product support services, maintenance costs and price. Some of our competitors may have greater financial, marketing, manufacturing and distribution resources than we do. This competition as well as competitors' pricing decisions could cause our sales to decrease or compel us to reduce our prices to remain competitive, either of which would adversely affect our financial condition, results of operations and cash flows.
Additionally,Demands to reduce our prices by a small number of buying groups, which have significant purchasing power in our industry, could adversely affect our sales and profitability.
A substantial portion of our dealer revenue comes from a small number of buying groups, which gives those buying groups a large degree of leverage and purchasing power with us and our competitors. In recent years, those buying groups have used their leverage to extract larger
rebates, discounts and other price reductions. We must continually balance the added revenue from providing reduced prices to thoseIf, as a result of increased leverage, buying groups against therequire us to further reduce prices, we may experience reduced margins generated by them,or choose not to sell our products to particular buying groups, which could adversely affect our results of operations.result in a decrease in revenues.
We rely on independent dealers and distribution partners to sell our products, and the loss of these dealers and distribution partners could adversely affect our business.
We rely significantly on a global network of independent, regional dealers and distributors to market and distribute our products. Our dealer and distributor arrangements are non-exclusive and allow such parties to represent and promote competing products without any obligation to buythe detriment of our products. The dealersDealers and distributors with which we do business may be unwilling or unable to dedicate the resources necessary to promote our portfolio of product offerings. In addition, our distributors could retain inventory levels that exceed their future anticipated sales, which could thereby affect our future sales to those distributors. The loss of a significant number of distributors or dealers, or an increase in our distributors' or dealers' sales of our competitors' products could materially reduce our sales and profits. Furthermore, failure of our distributors to adhere to our policies designed to promote compliance with global anti-corruption laws, export controls, and local laws, could subject us to criminal or civil penalties and harm our brand and reputation.
If we do not develop new and innovative products, adapt to rapid and significant technological change or respond to introductions of new products by competitors, our results of operations could be negatively affected.
Our strategy of creating innovative products and solutions for our customers requires significant time and investment toward product innovation, design, development and testing, all of which are necessary to meet our customers’ needs, compete with frequent new product introductions and enhancements and comply with evolving regulatory requirements in the numerous geographic markets we serve. Moreover, some of our competitors manufacture a more narrow product offering, allowing them to concentrate their research and development efforts more directly on products and services for those areas than we may be able to do. To remain competitive, we therefore must develop new and innovative products on a rapid and on-going basis. If we do not successfully develop innovative products, it may be difficult to differentiate our products from our competitors' products and satisfy regulatory requirements, and our sales and resultsearnings would suffer. In addition, if we are unable to deliver products, features, and functionality as projected, we may be unable to meet our commitments to customers, which could have a material adverse effect on our reputation. Any development efforts could divert resources from other potential investments in our business, and these efforts may not lead to the development of new technologies or products on a timely basis or meet the needs of our customers as fully as competitive offerings do. Even with rigorous testing prior to release and investment on product quality processes, problems may be found in newly developed or enhanced products after such products are launched and shipped to customers. Resolution of such issues may cause project delays, additional development costs, and deferred or lost revenue.
If we do not meet customers’ product quality and reliability standards and expectations, we may experience increased or unexpected product warranty claims and other adverse consequences to our business.
Product quality and reliability are significant factors influencing customers’ decisions to purchase our products. Inability to maintain the high quality of our products relative to the perceived or actual quality of similar products offered by competitors could result in the loss of market share, loss of revenue, reduced profitability, an increase in warranty costs, and/or damage to our reputation. Similarly, if we fail to provide the samehigh level of quality through our KitchenCare aftermarket parts and service segment as we provide in original equipment manufacturing, it could likewise negatively affect our revenue and our reputation with our customers.customers could be negatively affected.
Product quality and reliability are determined in part by factors that are not entirely withinoutside of our control. We depend on our suppliers for parts and components that meet our standards. If our suppliers fail to meet those standards, we may not be able to deliver the quality products that our customers expect, which may adversely affect our financial condition, results of operations, and cash flows and impair revenue and our reputation and lead to higher warranty costs.
We provide our customers a warranty covering workmanship, and in some cases materials on products we manufacture. Our warranty generally provides that products will be free from defects for periods typically ranging from 12 months to 60 months with certain equipment having longer term warranties. If a product fails to comply with the warranty, we may be obligated, at our expense, to correct any defect by repairing or replacing the defective product. Although we maintain warranty reserves in an amount based primarily on the number of units shipped and on historical and anticipated warranty claims, there can be no assurance that future warranty claims will follow historical patterns or that we can accurately anticipate the level of future warranty claims. An increase in the rate of warranty claims or the occurrence of unexpected warranty claims could adversely affect our financial condition, results of operations and cash flows.
Changing consumer tastes and government regulations affecting the quick-service restaurant ("QSR")QSR industry could negatively affect sales to our largest customers.
A numberSeveral of our largest customers operate in the QSR industry. The QSR industry is frequently affected by changes in consumer tastes and eating habits, often as a result of new information or attitudes regarding diet and health or as a result of government regulations requiring QSRs to disclose the nutritional content of their food. If consumers’ eating habits change significantly, our customers may choose or be required to modify their menu offerings or cooking methods. Such modifications, or the failure to make the modifications to the extent consumers desire, could have an adverse effect on our customers’ business, financial conditions, results of operations or cash flows, which in turn could adversely affect customers' demand for our products.
We have significant manufacturing and sales of our products outside of the United States ("U.S."), which may present additional risks to our business.
For the years ended December 31, 2019, 2018 and 2017, 2016approximately 37.8%, 37.4% and 2015, approximately 34.6%, 35.1% and 32.1%, respectively, of our net sales were attributable to products sold outside of the U.S. We intend to continue to expand our presence in international markets and expect to expend resources in doing so. We are subject to various risks related to conducting business internationally, including:
potential adverse changes or increased uncertainty relating to the political, social, religious and economic stability of the countries in which we do business or such countries' diplomatic relations with the U.S.;
the imposition by U.S. and foreign governments including the U.S., of additional taxes, tariffs, economic sanctions, embargoes or other restrictions on foreign trade;
difficulties in establishing, staffing, and managing foreign operations, including but not limited to our ability to obtain or retain necessary licenses or recruit qualified personnel under local labor market conditions;
our ability to comply with complex international laws and regulations that may change unexpectedly, differ, or conflict with laws in other countries in which we conduct business;
adverse fluctuations in foreign currency exchange rates and interest rates, including risks related to any hedging transactions;
difficulties in enforcing contractual rights;rights, and/or inadequate protection of intellectual property in foreign countries;
inadequate protection of intellectual property in foreign countries; and
unanticipated delays or disruptions in the global supply chain.
Any of these risks or other risks relating to international operations and sales could adversely affect our financial condition, results of operations and cash flows.
Additionally, while the extent of the impact on our business and financial condition is unknown at this time, we may be negatively affected by actions taken to address and limit the spread of the coronavirus, such as travel restrictions and limitations affecting the supply of labor and the movement of raw materials and finished products. Furthermore, any reduction in manufacturing capacity at our three locations in China as a result of the coronavirus could negatively affect the timely delivery of finished products to our customers and therefore our revenue and results of operations.
We have voluntarily disclosed to U.S. Customs and Border Protection certain errors in the declared quantity and classification of specific imported products and other potential violations of U.S. customs regulations. Based on currently known information, we expect to record a charge in our consolidated financial statements at the time it becomes reasonably estimable with respect to the range of potential loss that may result and are unable to determine if any potential liability would be material to our consolidated financial position, results of operations or cash flows.
Recent changes in trade policies, including the imposition of additional tariffs, could continue to adversely impact our business.
The current U.S. administration has signaled support for, and in some instances has taken action with respect to, major changes to certain trade policies, such as the imposition of additional tariffs on imported products and the withdrawal from or renegotiation of certain trade agreements, including the North American Free Trade Agreement ("NAFTA"). Such changes could also result in retaliatory actions by the United States’ trade partners. For example, the U.S. government has threatened to undertake adverse actions relating to trade with Mexico, including the closure of the border and the imposition of escalating tariffs on goods imported into the U.S. from Mexico. If adopted, such actions could adversely impact our business and disrupt our operations. The U.S. government recently negotiated a new trade agreement with the Canadian and Mexican governments to replace the NAFTA with the United States-Mexico-Canada Agreement (“USMCA”), which still needs to be ratified by Canada before going into force. Withdrawal from NAFTA by the U.S. or failure of these countries to ratify USMCA could similarly adversely impact our business and significantly disrupt our operations.
Additionally, the U.S. government has recently increased tariffs on certain imports from China, as well as on steel and aluminum products imported from various countries. In response, China, the EU, and several other countries have imposed or proposed additional tariffs on certain exports from the United States. These actions have resulted in an increased cost of materials for our products and may cause our products to become less competitive due to price increases or less profitable due to lower margins. Our inability to effectively manage the negative impacts of changing U.S. and foreign trade policies could adversely affect our business and financial results.
Our international sales and operations are subject to a variety of domestic and international laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations.
We must comply with all applicable international trade, customs, export controls and economic sanctions laws and regulations of the U.S. and the other countries in which we do business. Changes in trade sanctions laws may restrict our business practices, including cessation of business activities in sanctioned countries or with sanctioned entities, and may result in modifications to compliance programs. We are also subject to the U.S. Foreign Corrupt Practices Act (“FCPA”("FCPA") and other anti-bribery laws that generally bar bribes or unreasonable gifts to foreign governments or officials. InWe operate in many foreign countries, particularlyparts of the world that have experienced governmental corruption to some degree and, in thosecertain circumstances strict compliance with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations, such as the FCPA.anti-bribery laws may conflict with local customs and practices. Although we implement policies and procedures designed to ensure compliance with all such laws and regulations, there can be no assurance that all of our employees, distributors, dealers, and agents will not take actions in violation of our policies or these regulations. Failure by us or our distributors to comply with such laws and regulations may result in civil and criminal enforcement, including monetary fines and possible injunctions against our shipment of product or other activities, of the Company, which could have a material adverse impact on our financial condition, results of operations and cash flows.
Our reputation, ability to do business and results of operations may be impaired by improper conduct by any of our employees, agents, or business partners.
While we strive to maintain high standards, we cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by our employees, agents, or business partners that would violate United States and/or non-United States laws or fail to protect our confidential information, including the laws governing anti-kickback and false claims, competition, fraud, money laundering and data privacy, as well as the improper use of proprietary information or social media. Any such violations of law or improper actions could subject us to civil or criminal investigations in the United States and in other jurisdictions, could lead to substantial civil or criminal, monetary and non-monetary penalties and related stockholder lawsuits, could lead to increased costs of compliance and could damage our reputation, our consolidated results of operations, financial condition and cash flows.
We may not realize expected benefits from acquisitions of or investments in new businesses, products, or technologies, which could harm our business.
As part of our strategy, we intend to grow our company through the acquisition of businesses, products or technologies. Identifying suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions or integrate newly acquired businesses. Risks associated with acquisitions include, among others:
the inability to finance potential acquisitions on satisfactory terms;
the significant amount of management time and attention needed to identify, execute and integrate any businesses to be acquired;
the risk that the acquired businesses will fail to maintain the quality of workmanship that we have historically provided;
the need to implement internal controls and integrate information systems and processes;processes and the impact on our internal controls and compliance with regulatory requirements under the Sarbanes-Oxley Act of 2002;
the potential loss of key employees of the acquired business;
lack of success in assimilating or integrating the operations or technologies of acquired businesses within our operations and technologies;
the impairment of goodwilltechnologies and other intangible assets involved in any acquisitions;
the inability to fully realize some of the expected synergies expected or otherwise achieve anticipated revenues and profits;
the potential assumption of unknown material liabilities; and
the abilityinability to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries.
Our results of operations may be negatively impacted by product liability lawsuits.
Our business exposes usWe are subject to potential product liability risks that are inherent inrelate to the design, manufacture, sale and use of our products. To date, we have not incurred material costs related to these product liability claims. While we believe our current general liability and product liability insurance is adequate to protect us from future product liability claims, there can be no assurance that our coverage will be adequate to cover all claims that may arise. Additionally, we may not be able to maintain insurance coverage in the future at an acceptable cost. Significant losses not covered by insurance or for which third-party indemnification is not available could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, it may be necessary for us to recall products that do not meet approved specifications, which could result in adverse publicity as well as costs connected to the recall and loss of revenue.
If we fail to protect our intellectual property rights or maintain our rights to use licensed intellectual property, our business could be adversely affected.
Our patents, trademarks and licenses are important in the operation of our businesses. Although we protect our intellectual property rights vigorously, we cannot be certain that we will be successful in doing so. Litigation to enforce our intellectual property rights could result in
substantial costs and diversion of our resources. In some cases, including with respect to several of our most important products, there may be no effective legal recourse against duplication by competitors. In the future, we may have to rely on litigation to enforce our intellectual property rights, protect trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources, either of which could adversely affect our business.
Any infringement by us on patent rights of others could result in litigation and adversely affect our ability to continue to provide, or could increase the cost of providing, our products and services.
Third parties may assert or prosecute infringement or validity claims against us in connection with the services and products that we offer, and we may or may not be able to successfully defend these claims. Litigation, either to enforce our intellectual property rights orRegardless of whether these claims have any merit, such claims can be burdensome and costly to defend against claimed infringement of the rights of others, could result in substantial costsor settle and diversion ofcan harm our resources.business and reputation. In addition, if a third-party would prevail in an infringement claim against us, then we would likely need to obtain a license from the third-party on commercial terms, which would likely increase our costs. Our failure to maintain or obtain necessary licenses or an adverse outcome in any litigation relating to patent infringement or other intellectual property matters could have a material adverse effect on our financial condition, results of operations and cash flows.
Sales of our products are sensitive to volatile or variablemay be impacted by economic conditions and other factors. A downturn or weakness in overall economic activity or fluctuations in weather or other factors could adversely affect us.
Historically, sales of products that we manufacture and sell have been subject to variations caused by changes in general economic conditions and other factors. In particular, the strength of the economy generally may affect the rates of expansion, consolidation, renovation and equipment replacement within the restaurant, lodging, convenience storehospitality, retail and healthcare industries, which may affect our sales. Furthermore, anyAny future economic recession may impact leveraged companies like us more than competing companies with less leverage and may adversely affect our financial condition, results of operations and cash flows.
In addition, our business may be negatively impacted by uncertainty and disruptions related to the withdrawal of the United Kingdom and Northern Ireland from the EU, including potential disruptions to our supply chain, increased costs from the re-imposition of tariffs on trade between the United Kingdom and the EU, shipping delays due to new customs inspections and import/export processes and increased volatility in exchange rates and interest rates. The United Kingdom's inability to negotiate a favorable trade agreement with the EU or with other trading partners may result in an adverse impact on labor and trade in addition to creating further short-term uncertainty and currency volatility. Other risks may increase, such as the risk that other countries could come under increasing pressure to leave the EU, the economic and political circumstances of the individual countries in the eurozone, or the long-term stability of the Euro as a single common currency. Persistent disparity with respect to the widely varying economic conditions within the individual countries in the eurozone, and its implications for the euro as well as market perceptions concerning these and related issues, could adversely affect the value of our European operations, have an adverse effect on demand our products and services in the eurozone and have an adverse effect on financial markets in Europe and globally.
Weather conditions can also substantially affect our business, as relatively cool summer weather and cooler-than-normal weather in hot climates tend to decrease sales of ice and beverage dispensers. Our sales depend in part upon our customers’ replacement or repair cycles. Adverse economic conditions may cause customers to forgo or postpone new purchases in favor of repairing existing machinery.
If we are unable to sufficiently adjust to market conditions, among other potential adverse effects on our financial condition, results of operations and cash flows, we could fail to deliver on planned results, fall short of analyst and investor expectations, incur higher fixed costs, and/or fail to benefit from higher than expected customer demand resulting in loss of market share.
Our operations and profitability could suffer if we experience labor relations problems.
As of December 31, 2017,2019, we employed approximately 5,4005,100 people worldwide and hadworldwide. Our employees belong to seven employee unions in North America, onetwo trade unionunions in Europe and onethree trade unionunions in China. Many of our European employees belong to the trade union or a European works council. Our union contracts and labor agreements are renegotiated periodically, and we cannot predict the outcome of these negotiations. If we are unable to reach new agreements or renew existing agreements on a timely basis, we may experience strikes, work stoppages, delays or other issues which could disrupt our business. Any significant labor relations issues, including issues related to the renewal of expiring union contracts, could adversely affect our operations, reputation, financial condition, results of operations and cash flows.
We are exposed to the risk of changes in interest rates orand foreign currency fluctuations.
We have indebtedness that accrues interest at a variable rate. Increases in interest rates will reduce our operating cash flows and could hinder our ability to fund our operations, capital expenditures, acquisitions or dividends. In such cases we may seek to reduce our exposure to fluctuations in interest rates, but hedging our exposure carries the risk that we may forego the benefits we would otherwise experience if interest rates were to change in our favor. Developing an effective strategy for dealing with movements in interest rates is complex, and no strategy is guaranteed to completelyadequately insulate us from the risks associated with such fluctuations.
Additionally, some of our operations are or may be conducted by subsidiaries in foreign countries. The results of operations and the financial position of these subsidiaries will be reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable
exchange rates for inclusion in our consolidated financial statements, which are stated in U.S. dollars. The exchange rates between many of theseforeign currencies and the U.S. dollar have fluctuated significantly in recent years and may continue to fluctuate significantly in the future. Such fluctuations may have a material effect on our results of operations and financial position and may significantly affect the comparability of our results between financial periods. For example, the weakening of the British pound following the United Kingdom’s vote to exit the European Union had a negative foreign currency translation impact on our consolidated statements of operations for the year ended December 31, 2016.
We also incur currency transaction risk whenever one of our operating subsidiaries enters into a transaction using a different currency than its functional currency. We attempt to reduce currency transaction risk whenever one of our operating subsidiaries enters into a material transaction using a different currency than its functional currency by:
matching cash flows and payments in the same currency;
direct foreign currency borrowing; and
entering into foreign exchange contracts for hedging purposes.
However, we may not be able to hedge such a risk completely or at an acceptable cost, which may adversely affect our financial condition, results of operations and cash flows in future periods.
Recent changes to tax laws or exposure to additional tax liabilities may have a negative impact on our operating results.
On December 22, 2017, theThe U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes, which was enacted in 2017, made broad and complex changes to the U.S. tax code that affect 2017 and subsequent years. Future legislative and regulatory guidance under the Tax Act, United Kingdom's departure from the EU and Organization for Economic Cooperation and Development initiatives, including but not limited to, reducing the U.S. federal corporate statutory rate from 35% to 21%; requiring companies to pay a one-time transition tax on certain unrepatriated earnings for foreign subsidiaries; generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of foreign corporations; and creating a new limitation on deductible interest expense. Suchglobal anti-base erosion proposal envisaging global minimum taxation, represent significant changes are expected to have a material effect on our business and the industry in which we operate. This significant change to the U.S. tax system, including changes to the taxation of international income,that could have a material effect upon our results of operationseffective tax rate, future earnings and cash flows.
We regularly undergo tax audits in various jurisdictions in which our products are sold. Although we believe that our tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could materially affect our operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.
Our business and/or reputation could be negatively affected as a result of actions of activist shareholders,stockholders, and such activism could impact the trading value of our securities.
Certain of our stockholders may in the future publicly or privately express views with respect to the operation of our business, our business strategy, corporate governance considerations or other matters that may not be fully alignedalign with our own. Responding to actions by activist shareholdersstockholders can be costly and time-consuming, disrupt our operations and divert the attention of management and our employees. Perceived uncertainties as to our future direction may result in the loss of potential business opportunities, damage to our reputation, and may make it more difficult to attract and retain qualified directors, personnel and business partners. These actions could also cause our stock price to experience periods of volatility.
Activist shareholdersstockholders may in the future make strategic proposals, suggestions, or requests for changes concerning the operation of our business, our business strategy, corporate governance considerations, or other matters. We cannot predict, and no assurances can be given, as to the outcome or timing of any consequences arising from these actions, and any such consequences may impact the value of our securities.
Failure to attract, retain and develop personnel or to provide adequate succession plans for key management members could have an adverse effect on our consolidated results of operations, financial condition and cash flows.
Our growth, profitability and effectiveness in conducting our operations and executing our strategic plans depend in part on our ability to attract, retain and develop qualified personnel and maintain adequate succession plans for key management positions and support for strategic initiatives. If we are unsuccessful in these efforts, our consolidated results of operations, financial condition and cash flows could be adversely affected and we could miss opportunities for growth and efficiencies.
We are involved in litigation that is unpredictable and may have an adverse impact on our financial condition, results of operations and cash flows.
From time to time, we become involved in various lawsuits, claims and proceedings arising out of, or incident to, our ordinary course of business, including lawsuits, claims, investigations or proceedings pertaining to product liability, patent infringement, environmental matters, commercial disputes, warranty claims, trade practices and employment matters. While we cannot predict the outcome of any lawsuit, claim, investigation or proceeding with certainty, we do not believe that the ultimate disposition of any pending matter is likely to have a material adverse effect on our consolidated financial position, liquidity, or results of operations.
On December 13, 2018, a purported securities class action lawsuit was filed in the U.S. District Court for the Middle District of Florida against us and certain of our former executive officers. The lawsuit is captioned Schlimm v. Welbilt, Inc., et al., and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making
material misstatements or omissions in certain of our periodic reports filed with the SEC relating to, among other things, our business operations and the effectiveness of our internal control over financial reporting. The lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On October 17, 2019, the defendants filed a motion to dismiss the lawsuit. On February 6, 2020, the Court issued an order granting defendants motion and dismissed the Schlimm lawsuit without prejudice. The plaintiff was granted leave to file an amended complaint by March 5, 2020. On March 15, 2019, a purported stockholder derivative action was filed in the U.S. District Court for the District of Delaware against certain of our current and former executive officers and directors, and we were named as a nominal defendant. The lawsuit is captioned Quinney v. Muehlhaeuser, et al., and alleges violation of Section 14(a) of the Securities Exchange Act of 1934 and breach of fiduciary duty, among other claims, based upon similar underlying allegations as those in the Schlimm lawsuit. The Quinney lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On June 5, 2019, the Delaware court stayed the Quinney lawsuit, pending further developments in the Schlimm lawsuit. On September 4, 2019, a purported stockholder derivative action was filed in the U.S. District Court for the Middle District of Florida against certain of our current and former executive officers and directors, and we were named as a nominal defendant. The lawsuit is captioned The Lee S. Kosby Trust v. Muehlhaeuser, et al., and alleges violation of Section 14(a) of the Securities Exchange Act of 1934 and breach of fiduciary duty, among other claims, based upon similar underlying allegations as those in the Quinney and Schlimm lawsuits. The Kosby lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On November 4, 2019, the Florida court stayed the Kosby lawsuit, pending further developments in the Schlimm lawsuit.
We believe the above lawsuits are without merit and intend to defend against the above lawsuits vigorously. However, litigation is inherently uncertain, and we are unable to predict the outcome of these lawsuits and are unable to estimate the range of loss, if any, that could result from an unfavorable outcome. We also cannot provide any assurance that the ultimate resolution of each of these lawsuits will not have a material adverse effect on our reputation, business, prospects, results of operations or financial condition.
We have significant pension obligations with respect to our employees and our available cash flow may be adversely affected in the event that payments become due under any pension plans that are unfunded or underfunded.
A portion of our active and retired employees participate in defined benefit pension plans under which we are obligated to provide prescribed levels of benefits regardless of the value of the underlying assets, if any, of the applicable pension plan. If our obligations under a plan are unfunded or underfunded, we will have to use cash flow from operations and other sources to pay our obligations either as they become due or over some shorter funding period. As of December 31, 2019, we had approximately $34.7 million in unfunded or underfunded obligations related to our pension plans.
Environmental liabilities that may arise in the future could be material to us.
Our operations, facilities and properties are subject to extensive and evolving laws and regulations pertaining to air emissions, wastewater discharges, the handling and disposal of solid and hazardous materials and wastes, the remediation of contamination, and otherwise relating to health, safety and the protection of the environment. As a result, we are involved from time to time in administrative or legal proceedings relating to environmental and health and safety matters, and we have in the past and will continue to incur capital and other expenditures relating to such matters. We also cannot be certain that identificationThe possibility of discovering presently unidentified environmental conditions, more vigorous enforcement by regulatory authorities, or other unanticipated events will not arise in the future andmay give rise to additional environmental liabilities, compliance costs and/or penalties that could be material. Further, environmental laws and regulations are constantly evolving and it is impossible to predict accurately the effect any changes may have upon our financial condition, results of operations or cash flows.
Security breaches, cybersecurity attacks and other disruptions could compromise our information and expose us to liability, which would cause our business
and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners, as well as personally identifiable information of our customers and employees, in our internal and external data centers, cloud services, and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. The number and sophistication of attempted attacks and intrusions that companies have experienced from third parties has increased over the past fewseveral years. Despite our security measures, itIt is impossible for us to eliminate this risk.risks of such attacks. Our information technology and infrastructure, and that of our partners, may be vulnerable to malicious attacks or breaches due to employee error, malfeasance or other disruptions, including as a result of roll-outs of new systems. In addition, because techniques used by computer programmers and hackers (many of whom are highly sophisticated and well-funded) to access or sabotage networks and computer systems change frequently and often are not recognized until after they are used, we may be unable to anticipate or immediately detect these techniques. Any
In the event of a data securityor cybersecurity attack, breach or operational failure, could compromise our networks and/or thatand those of our partners may be compromised or experience interruptions in operations and the information stored thereon such networks could be accessed, publicly disclosed, subject to ransom demands, lost or stolen. We may also be required to expend substantial time and resources to modify or enhance our protective measures and to investigate and remediate vulnerabilities. Furthermore, certain breaches or attacks could be repeated or compounded before they are discovered and remediated, all of which would further increase the costs and consequences of such an attack. Though we have insurance against some cyber-risks and attacks, we may face financial losses that exceed our policy limits or are not covered under any of our current insurance policies. Any such access, disclosure or other loss of information could result in legal claims or regulatory penalties, disrupt our operations, damage our reputation, and/or cause a loss of confidence in our products and services, which could adversely affect our business.
Our inability to recover from natural or man-made disasters could adversely affect our business.
OurWe may fail to anticipate or adequately mitigate against increasingly sophisticated methods to engage in illegal or fraudulent activities perpetrated against us.
Despite the defensive measures that we take to manage threats to our business, our risk and financial resultsexposure to potential illegal or fraudulent activities remain heightened because of, among other things, the evolving nature of such threats in light of advances in computer capabilities, new discoveries in the field of cryptography, new and sophisticated methods used by criminals including phishing, vishing, social engineering or other illicit acts, or other events or developments that we may be affected by certain events that we cannotunable to anticipate or fail to adequately mitigate.
On November 14, 2018, we learned of an incident that occurred in early November 2018, which resulted in the diversion of funds from Crem, a subsidiary of the Company. We immediately launched an investigation into the incident and following review, discovered that an employee misappropriated corporate funds due to a telephone scheme occurring in early November 2018, resulting in an aggregate misappropriation of approximately $4.5 million. As of the date of this report, we have recovered approximately $1.1 million and is continuing to pursue the recovery of the remaining funds, although any additional recoveries cannot be assured.
As a result of this incident, we recorded a loss of $3.7 million during the fourth quarter of 2018 relating to the diverted funds, net of amounts recovered, and associated costs. We are beyond our control, such as natural or man-made disasters, national emergencies, significant labor strikes, work stoppages, political unrest, war or terrorist activities that could curtail production at our facilities and cause delayed deliveries and canceled orders. In addition, we purchase components and raw materials and information technology and other services from numerous suppliers, and, even if our facilities were not directly affected by such events, we could be affected by interruptions at such suppliers. Such suppliers may be less likely than our own facilitiescurrently unable to be able to quickly recover from such events and may be subject to additional risks such as financial problems that limit their ability to conduct their operations. We cannot assure you that wepredict the ultimate impact this incident will have insuranceon our business, results of operations or financial condition, as we have borne, and will continue to adequately compensate us for anybear, additional expenses in connection with the remediation of these events.this incident.
Compliance with regulations related to conflict minerals may force us to incur additional expenses and affect the manufacturing and sale of our products.
In recent years, governments in both the U.S. and Europe have implemented or proposed regulations governing the use of certain minerals, including tin, tantalum, tungsten and gold, ("which we collectively refer to as conflict minerals").minerals. In the U.S., SEC rules require disclosures related to conflict minerals that are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by an SEC-reporting company, that are sourced from the Democratic Republic of Congo and other countries in central Africa. In the European Union, proposedE. U., regulations wouldeffective January 1, 2021will require similar disclosures and may encompass other geographic regions outside of central Africa.
These disclosure requirements could affect the sourcing and availability of some of the minerals used in the manufacture of our products. Our supply chain is complex, and if we are not able to conclusively verify the origins for all conflict minerals used in our products or determine that our products are "conflict free," we may face reputational challenges with our customers or investors. Furthermore, we may also encounter challenges to satisfy customers who require that our products be certified as "conflict free," which could place us at a competitive disadvantage if we are unable to do so. Additionally, as there may be only a limited number of suppliers offering "conflict free" metals, we cannot be sure that we will be able to obtain necessary metals from such suppliers in sufficient quantities or at competitive prices. Finally, because European regulations have not yet been finalized, it is difficult for us to determine whether and how we will establish a compliance program. For all of these reasons, we could incur significant costs related to the conflict minerals compliance process and face equally significant costs in satisfying the disclosure requirements.
We may increase our debt or raise additional capital in the future, including to fund acquisitions, or for general corporate purposes, which could affect our financial health and decrease our profitability.
We may increase our debt or raise additional capital in the future, subject to restrictions in our debt agreements. In addition, our Board of Directors ("Board") may issue shares of preferred stock without further action by holders of our common stock. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more financing. However, debt or equity financing may not be available to us on terms we find acceptable, if at all. If we incur additional debt or raise equity through the issuance of our preferred stock, the terms of the debt or our preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. If we are unable to raise additional capital when needed, our financial condition, and thus your investment in us, could be materially and adversely affected.
Our debt instruments havecontain restrictive covenants that could limit our financial flexibility.
The terms of the credit agreement that governs our senior secured credit facilities the agreements that govern the securitization facility and the indenture governing the high yield notes contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our ability to borrow under our senior secured credit facilities and to securitize accounts receivable under the securitization facility is subject to compliance with a maximum consolidated total leverage ratio covenant and a minimum consolidated interest coverage ratio covenant. Our senior secured credit facilities include other restrictions that, among other things, limit our ability to incur new indebtedness; grant liens; engage in mergers, consolidations and liquidations; make asset dispositions, restricted payments including dividends and investments; enter into transactions with affiliates; and amend, modify or prepay certain indebtedness. The indenture governing the high yield notes contains limitations on our ability to effect mergers and change of control events as well as other limitations, including limitations on: the declaration and payment of dividends or other restricted payments; incurring additional indebtedness or issuing preferred stock; the creation or existence of certain liens; incurring restrictions on the ability of certain of our subsidiaries to pay dividends or other payments; transactions with affiliates; and sale of assets.
We report the status of our compliance with these covenants quarterly. Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of substantially all of our funded debt. We do not have sufficient working capital to satisfy our debt, obligations in the event of an acceleration of all or a significant portion of our outstanding indebtedness.
There could be significant liability if the Spin-Off is determined to be a taxable transaction as a result of the Company's breach of related covenants and agreements with MTW, and we could have an indemnification obligation to MTW if the transactions we undertook in the Spin-Off do not qualify for non-recognition treatment as a result of actions by the Company, which could materially adversely affect our business, earnings and financial condition.
In connection withIf we fail to establish and maintain adequate internal control over financial reporting, we may not be able to report our financial results in a timely and reliable manner, which could harm our business and impact the Spin-Off, MTW received an opinion from its legal counsel, substantiallyvalue of our securities.
We are required by the SEC to the effectestablish and maintain adequate internal control over financial reporting that the Spin-Off and certain related transactions will qualify as tax-free to MTW and its shareholders under Sections 355, 368 and related provisions of the Internal Revenue Code of 1986, as amended (the "Code"), except to the extent of any cash received in lieu of fractional shares of MFS’ common stock. Any such opinion is not binding on the U.S. Internal Revenue Service (the "IRS"). Accordingly, the IRS may reach conclusions with respect to the Spin-Off that are different from the conclusions reached in the opinion. The opinion relied on certain facts, assumptions, representations and undertakings from MTW and usprovides reasonable assurance regarding the past and future conduct of the companies’ respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter the conclusions of the party giving such opinion.
If the Spin-Off ultimately is determined to be a taxable event, the Spin-Off could be treated as a taxable dividend to MTW’s shareholders at the time of the Spin-Off for U.S. federal income tax purposes, and MTW’s shareholders could incur significant federal income tax liabilities. In addition, MTW would recognize a taxable gain to the extent that the fair market value of MFS’ common stock exceeds MTW’s tax basis in such stock on the date of the Spin-Off.
Generally, taxes resulting from the failure of the Spin-Off to qualify for non-recognition treatment for U.S. federal income tax purposes would be imposed on MTW or MTW’s shareholders and, under the tax matters agreement dated as of March 4, 2016, between MTW and MFS (the "Tax Matters Agreement"), MTW is generally obligated to indemnify us against such taxes. However, under the Tax Matters Agreement, we could be required, under certain circumstances, to indemnify MTW and its affiliates against all tax-related liabilities caused by those failures, to the extent those liabilities result from an action we or our affiliates take or from any breachreliability of our or our affiliates’ representations, covenants or obligations underfinancial reporting and the Tax Matters Agreement or any other agreementpreparation of financial statements. Accordingly, we entered into in connection withare required to assess the Spin-Off. Events triggering an indemnification obligation under the agreement include events occurring after the Distribution that cause MTW to recognize a gain under Section 355(e)effectiveness of the Code.
We have identified a material weakness in our internal control over financial reporting which, if not timely remediated, may adversely affectannually and the accuracy and reliabilityeffectiveness of our disclosure controls and procedures quarterly. We are also required to disclose any change that has materially affected or is reasonably likely to materially affect our internal controls over financial statements, and our reputation, business and the price of our common stock, as well as lead toreporting on a loss of investor confidence in us.quarterly basis.
As described under Item 9A. "Controls and Procedures” below, management has concluded that a material weaknessWe previously disclosed in our 2018 Form 10-K that we did not maintain effective internal control over financial reporting existed as of December 31, 2017 and, accordingly, internal control over financial reporting and our disclosure controls and procedures were not effective2018 as a result of such date.material weaknesses identified in that filing. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatementmisstatements of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
We intendAs of December 31, 2019, management has concluded that we have remediated the material weaknesses identified in our 2018 Form 10-K filing although we may in the future again experience material weaknesses and potential problems in implementing and maintaining adequate internal controls over financial reporting as required by the SEC. If we fail to remediate this material weakness. While we believe these steps will improveachieve and maintain the effectivenessadequacy of our internal controlcontrols, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting and remediate the identified deficiencies, ifreporting. If we cannot provide reliable financial reports, our remediation efforts are insufficient to address the material weakness or we identify additional material weaknessesbusiness could be harmed, investors could lose confidence in our internal control over financial reporting in the future, our ability to analyze, record and reportreported financial information, accurately, to prepare our financial statements withinand the time periods specified by the rules and forms of the SEC and to otherwise comply with our reporting obligations under the federal securities laws and our long-term debt agreements will likely be adversely affected. The occurrence of, or failure to remediate, this material weakness and any future material weaknesses in our internal control over financial reporting may adversely affect the accuracy and reliability of our financial statements and have other consequences that could materially and adversely affect our business, including an adverse impact on the markettrading price of our common stock potential actions or investigationscould drop significantly. Likewise, if our financial statements are not filed on a timely basis as required by the SEC, or other regulatory authorities, possible defaults underwe could face severe consequences, and our debt agreements, shareholder lawsuits, a lossreputation could be harmed which in turn could affect the value of investor confidence and damage to our reputation.securities.
Risks Relating to Our Common Stock and the Securities Markets
There is not a long historyThe trading price of tradingour common stock has been volatile, and investors in our common stock and our stock price may fluctuate significantly.experience substantial losses.
We cannot predict the prices at which our common stock may trade. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including the factors listed in the following:
our quarterly or annual earnings, or those of other companies in our industry;
announcements by us or our competitors of significant new business awards;
announcements of significant acquisitions, divestitures, strategic alliances, joint ventures or dispositions by us or our competitors;
the failure of securities analysts to cover our common stock;
changes in earnings estimates by securities analysts;
the operating and stock price performance of other comparable companies;
investor perception of our company and the foodservice industry;
overall market fluctuations;
changes in capital gains taxes and taxes on dividends affecting stockholders; and
general economic conditions and other external factors.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could also adversely affect the trading price of our common stock.
We cannot assure you that we will be able to pay dividends in the future on our common stock based on our indebtedness or any other limiting factors.
The timing, declaration, amount and payment of any future dividends to stockholders will fall within the discretion of our Board and will depend on many factors, including our financial condition, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our existing debt or debt that we may incur in the future may limit or prohibit the payment of dividends. For more information, see "Dividend Policy" as part of Item 5.—"Market of Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The following table outlines the principal facilities the Companywe owned or leased as of December 31, 2017.2019.
|
| | | | | | |
| Facility Location | | Type of Facility | | Approximate
Square Footage
| | Owned/Leased |
| Americas | | | | | | |
New Port Richey, Florida (1) (2) | | Corporate Headquarters | | 50,000 | | Owned/Leased |
Manitowoc, Wisconsin Covington, Tennessee (1) (2)
| | Manufacturing/Office | | 391,000 | | Owned/Leased |
Parsons, Tennessee (1)
| | Manufacturing/Office/Warehouse | | 465,000 | | Owned/Leased |
Sellersburg, IndianaParsons, Tennessee (2)
| | Office | | 32,000 | | Leased |
Tijuana, Mexico | | Manufacturing/Warehouse | | 111,000 | | Leased |
Shreveport, Louisiana (1) (2)
| | Manufacturing/Office/Warehouse | | 569,000 | | Owned/Leased |
Mt. Pleasant, MichiganManitowoc, Wisconsin (2)
| | Manufacturing/Office | | 345,000 | | Owned |
Baltimore, Maryland | | Manufacturing/Office | | 16,000 | | Leased |
Cleveland, Ohio (2)
| | Office | | 30,000 | | Leased |
Covington, Tennessee Shreveport, Louisiana (1) (2)
| | Manufacturing/Office/Warehouse | | 489,000Owned |
Mt. Pleasant, Michigan(1) (2) | | Manufacturing/Office/Warehouse | | Owned/Leased |
| Concord, Ontario, Canada | | Manufacturing/Office | | 116,000 | | Leased |
Mississauga, Ontario, Canada (1) (2) | | Manufacturing/Office/Warehouse | | 186,000 | | Leased |
| Monterrey, Mexico | | Manufacturing/OfficeOffice/Warehouse | | 303,750Leased |
| Tijuana, Mexico | | Manufacturing/Office/Warehouse | | Leased |
| EMEA | | | | | | |
Guildford, United Kingdom (2)
| | Office | | 35,000 | | Leased |
Eglfing, Germany (2) | | Manufacturing/Office/Warehouse | | 140,000Leased |
| Herborn, Germany | | Office/Warehouse | | Leased |
Herisau, Switzerland (2) | | Manufacturing/Office | | 26,974Office/Warehouse | | Leased |
Halesowen, United Kingdom (2) | | Manufacturing/Office | | 86,000Office/Warehouse | | Leased |
| Sheffield, United Kingdom | | Manufacturing/Office | | 100,000Leased |
Gandia, Spain (1)(2) | | Manufacturing/Office | | Leased |
Amotfors, Sweden (1) | | Manufacturing/Office/Warehouse | | Owned/Leased |
| APAC | | | | | | |
Foshan, China (1) | | Manufacturing/Office/Warehouse | | 125,000Owned/Leased |
Hangzhou, China (2) | | Manufacturing/Office/Warehouse | | Owned |
Hangzhou,Shanghai, China (2)
| | Manufacturing | | 226,000 | | Owned |
Prachinburi, Thailand (1)
| | Manufacturing/WarehouseOffice | | 130,000Leased |
Prachinburi, Thailand (1) | | Manufacturing/Office | | Owned |
| Kwong Min, Singapore | | Office/Warehouse | | 34,300 | | Leased |
(1) There are multiple separate facilities within these locations.
(2) Serves also as a research and development center.
In addition, we lease other office and/orand warehouse space in Odessa, Florida; Fort Waynewithin various locations throughout the regions noted above which is used for sales and Jeffersonville, Indiana; Herborn, Germany; Moscow, Russia; Shanghai, China; Bang Na, Thailand; Kuala Lumpurmarketing as well as limited operations support, among other general and Selangor, Malaysia; Aljunied, Singapore; Barcelona, Spain; Naucalpan de Juarez, Mexico; Gurgaon, Mumbai and Bangalore, India; and Dubai, United Arab Emirates.administrative purposes.
SeeRefer to Note 21,18, "Leases," of the notesNotes to consolidated financial statementsthe Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we become involved in various lawsuits, claims and proceedings arising out of, or incident to, our ordinary course of business, including lawsuits, claims, investigations or proceedings pertaining to product liability, patent infringement, environmental matters, commercial disputes, warranty claims, trade practices and employment matters. While we cannot predict the outcome of any lawsuit, claim, investigation or proceeding with certainty, our management doeswe do not believe that the ultimate disposition of any pending matter is likely to have a material adverse effect on our consolidated financial position, liquidity, or results of operations.
On December 13, 2018, a purported securities class action lawsuit was filed in the United States ("U.S.") District Court for the Middle District of Florida against us and certain of our former executive officers. The lawsuit is captioned Schlimm v. Welbilt, Inc., et al., and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making material misstatements or omissions in certain of our periodic reports filed with the Securities and Exchange Commission relating to, among other things, our business operations and the effectiveness of our internal control over financial reporting. The lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On October 17, 2019, the defendants filed a motion to dismiss the lawsuit. On February 6, 2020, the Court issued an order granting defendants motion and dismissed the Schlimm lawsuit without prejudice. The plaintiff was granted leave to file an amended complaint by March 5, 2020. On March 15, 2019, a purported stockholder derivative action was filed in the U.S. District Court for the District of Delaware against certain of our current and former executive officers and directors, and we were named as a nominal defendant. The lawsuit is captioned Quinney v. Muehlhaeuser, et al., and alleges violation of Section 14(a) of the Securities Exchange Act of 1934 and breach of fiduciary duty, among other claims, based upon similar underlying allegations as those in the Schlimm lawsuit. The Quinney lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On June 5, 2019, the Delaware court stayed the Quinney lawsuit, pending further developments in the Schlimm lawsuit. On September 4, 2019, a purported stockholder derivative action was filed in the U.S. District Court for the Middle District of Florida against certain of our current and former executive officers and directors, and we were named as a nominal defendant. The lawsuit is captioned The Lee S. Kosby Trust v. Muehlhaeuser, et al., and alleges violation of Section 14(a) of the Securities Exchange Act of 1934 and breach of fiduciary duty, among other claims, based upon similar underlying allegations as those in the Quinney and Schlimm lawsuits. The Kosby lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On November 4, 2019, the Florida court stayed the Kosby lawsuit, pending further developments in the Schlimm lawsuit.
We intend to defend vigorously against the above pending lawsuits. However, litigation is inherently uncertain, and we are unable to predict the outcome of these lawsuits and are unable to estimate the range of loss, if any, that could result from an unfavorable outcome. We also cannot provide any assurance that the ultimate resolution of each of these lawsuits will not have a material adverse effect on our reputation, business, prospects, results of operations or financial condition.
On June 3, 2019, f’real Foods, LLC ("f’real") filed a patent infringement lawsuit against Welbilt, Inc. in the U.S. District Court for the District of Delaware, captioned f’real Foods LLC v. Welbilt, Inc. The lawsuit alleges that we have willfully infringed U.S. Patent No. 7,144,150 and U.S. Patent No. 7,520,662 by manufacturing and selling three blenders: the Multiplex FreshBlender®, the Multiplex Blend In Cup® Workstation, and the MAM9904 Blend-In-Cup® - Manual Fill. On June 6, 2019, f’real filed a nearly identical patent infringement lawsuit against Fresh Blends North America, Inc. ("Fresh Blends") in the U.S. District Court for the Southern District of Florida, captioned f’real Foods LLC v. Fresh Blends North America, Inc. Welbilt intervened in that case in September 2019. In each of the Delaware and Florida actions, f’real requested that Welbilt and certain affiliates be enjoined from the allegedly infringing activity, among other requested relief, and sought monetary damages including royalties and attorneys’ fees. On December 3, 2019, the parties reached a settlement of all claims and counterclaims, which was subsequently finalized by the parties. On December 6, 2019, the Florida Court dismissed the Florida action without prejudice.
For additional information concerning other contingencies and uncertainties, see Note 17,13, "Contingencies and Significant Estimates," of the Notes to the consolidated financial statementsConsolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Shares of our common stock began trading on the New York Stock Exchange ("NYSE") under the ticker symbol "MFS" on March 4, 2016. Prior to that date, there was no public trading market for shares of our common stock. On March 6, 2017, our shares commenced trading under the Company's new name, Welbilt, Inc., and a new New York Stock ExchangeNYSE ticker symbol, “WBT.”"WBT."
The following table shows the highest and lowest prices paid per share for our common stock during the calendar quarter indicated below since the Spin-Off on March 4, 2016.
|
| | | | | | | | | | | | | | | |
| | Common Stock Market Price |
| | 2017 | | 2016 |
| | Highest | | Lowest | | Highest | | Lowest |
| First Quarter* | $ | 19.86 |
| | $ | 17.60 |
| | $ | 15.50 |
| | $ | 12.20 |
|
| Second Quarter | 21.10 |
| | 18.52 |
| | 17.62 |
| | 13.76 |
|
| Third Quarter | 23.45 |
| | 18.53 |
| | 18.94 |
| | 15.44 |
|
| Fourth Quarter | 23.64 |
| | 20.66 |
| | 19.65 |
| | 14.93 |
|
*First Quarter 2016 is from March 4, 2016 through March 31, 2016.
Holders
As of February 22, 2018,24, 2020, there were 1,6421,388 holders of record of our common stock.
Dividend Policy
The amount and timing of dividends, if any, will be determined by our Board of Directors. OurDirectors (the "Board"). The Board of Directors has not authorized or paid a dividend since we became an independent public company on March 4, 2016 and does not currently plan on paying a dividenddividends in 20182020 as our focus continues to be the reduction of outstanding debt.debt obligations. The timing, declaration, amount and payment of any future dividends is within the discretion of ourthe Board of Directors and will depend upon many factors, including our financial condition, earnings, corporate strategy, capital requirements of our operating subsidiaries, contractual restrictions, including covenants contained in our senior secured credit facilities and our senior notes indenture, debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets and other factors deemed relevant by our Board of Directors.the Board.
Securities Authorized for Issuance Under Equity Compensation Plans
Refer to Item 12 in Part III in this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
There were no unregistered offerings nor any repurchases of our common stock by us or an "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act)Act of 1934, as amended (the "Exchange Act") during the year ended December 31, 2017.2019.
Performance Graph
The following graph and table depict the total return to stockholders from March 4, 2016 (the date our common stock began trading on the NYSE) through December 31, 2017,2019, relative to the performance of the S&P 500 Index and the S&P 400 Midcap Index. The graph and table assume $100 invested at the closing price of $13.80 on March 4, 2016 and that all dividends were reinvested.2016.
The performance graph and table are not intended to be indicative of future performance. The performance graph and table shall not be deemed "soliciting material" or to be "filed" with the SECSecurities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act, of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of the Company’sour filings under the Securities Act of 1933, as amended, (the "Securities Act"), or the Exchange Act.
| | | | March 4, 2016 | | December 31, 2016 | | December 31, 2017 | | March 4, 2016 | | December 31, 2016 | | December 31, 2017 | | December 31, 2018 | | December 31, 2019 |
| WBT | $ | 100.00 |
| | $ | 140.07 |
| | $ | 167.61 |
| | $ | 100.00 |
| | $ | 140.07 |
| | $ | 167.61 |
| | $ | 80.51 |
| | $ | 113.12 |
|
| S&P 500 | 100.00 |
| | 111.94 |
| | 139.31 |
| | $ | 100.00 |
| | $ | 111.94 |
| | $ | 139.31 |
| | $ | 125.34 |
| | $ | 161.54 |
|
| S&P 400 Midcap | 100.00 |
| | 118.68 |
| | 140.51 |
| | $ | 100.00 |
| | $ | 118.68 |
| | $ | 140.51 |
| | $ | 118.86 |
| | $ | 147.44 |
|
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected financial data as of and for each of the periods indicated. We derived the selected consolidated financial data for each of the fiscal years ended December 31, 2017, 20162019, 2018 and 20152017 and as of December 31, 20172019 and 2016,2018 from our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K/A. Such10-K. We derived the selected consolidated financial data reflectsfor the correctionyear ended December 31, 2016 and as of certain errors discussed in the Explanatory Note to this Form 10-K/ADecember 31, 2017 and in Note 1, "Business and Organization" associated with the restatement and revisions of the2016 from our audited consolidated financial statements. Westatements and derived the selected combined financial data from our audited combined financial statements as of and for the fiscal yearsyear ended December 31, 2014 and 2013 and as of December 31, 2015, 2014 and 2013 from our combined financial statements thatwhich are not included in this Annual Report on Form 10-K/A,10-K.
On March 4, 2016, we spun off from The Manitowoc Company, Inc. ("MTW") and which reflectpublicly listed on the impactNew York Stock Exchange under the name Manitowoc Foodservice, Inc. (the "Spin-Off"). Prior to the Spin-Off, we functioned as part of the revisions to our previously issued combined financial statements for prior period income tax errors.
larger group of companies controlled by MTW. During the periods presented prior to and through the date of the Spin-Off, on March 4, 2016, the Company’sour financial statements were prepared on a combined stand-alone basis derived from the consolidated financial statements and accounting records of MTW. We functioned as part of the larger group of companies controlled by MTW. Accordingly,MTW and accordingly, MTW performed certain corporate overhead functions for us. Therefore, certain costsus and allocated the related to us have been allocated from MTW for the period from January 1, 2016 up to the Spin-Off on March 4, 2016 and for the entirety of the prior periods presented.costs. These allocated costs were primarily related to: 1) corporate officers, 2) employee benefits and compensation, 3) stock-based compensation and 4) certain corporate functions, which were not provided at the business level including, but not limited to, finance, treasury, tax, audit, legal, information technology, human resources, and investor relations. Where possible, these costs were allocated based on direct usage, with the remainder allocated on a basis of revenue, headcount, or other measures the Companywe determined as reasonable.
We believe the assumptions underlying the combined financial statements, including the assumptions regarding the allocated expenses, reasonably reflect the utilization of services provided to, or the benefit received by, us during the applicable periods presented. Nevertheless, thethese financial statements may not be indicative of our future performance, and do not necessarily include all of the actual expenses that would have been incurred by us and may not reflect the financial position, results of operations and cash flows had we been a stand-alone company during the entirety ofperiods presented prior to the periods presented.Spin-Off. No cash dividends were declared or paid during the periods presented.
The selected historical consolidated financial data presented below should be read in conjunction with our audited consolidated financial statements and notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K/A10-K and Item 7.—"Management’s "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
| |
| | Year Ended December 31, | |
| | | 2017 | | 2016 | | 2015 | | 2014 (4) | | 2013 (4) | | | | | | | | | | | |
| (in millions, except per share data) | | | | (As Restated) | | | | | | | | December 31, |
| Statements of Operations Data: | | | | | | | | | | | |
| (in millions, except per share data) | | | 2019(4) | | 2018(5) | | 2017 | | 2016 | | 2015(6) |
| | | | | | | | | | |
| Net sales | | $ | 1,445.4 |
| | $ | 1,456.1 |
| | $ | 1,570.1 |
| | $ | 1,581.3 |
| | $ | 1,541.8 |
| | $ | 1,593.9 |
| | $ | 1,590.1 |
| | $ | 1,445.4 |
| | $ | 1,456.1 |
| | $ | 1,570.1 |
|
| Depreciation and amortization | | 47.9 |
| | 48.5 |
| | 51.0 |
| | 53.0 |
| | 51.4 |
| | $ | 61.1 |
| | $ | 55.0 |
| | $ | 47.9 |
| | $ | 48.5 |
| | $ | 51.0 |
|
| Earnings before income taxes | | 121.4 |
| | 102.2 |
| | 196.4 |
| | 185.7 |
| | 204.6 |
| | $ | 75.7 |
| | $ | 89.0 |
| | $ | 121.4 |
| | $ | 102.2 |
| | $ | 196.4 |
|
| Net earnings | | 132.9 |
| | 71.5 |
| | 156.1 |
| | 159.4 |
| | 145.6 |
| | $ | 55.9 |
| | $ | 78.2 |
| | $ | 132.9 |
| | $ | 71.5 |
| | $ | 156.1 |
|
Earnings per share — Basic (1) | | $ | 0.96 |
| | $ | 0.52 |
| | $ | 1.14 |
| | $ | 1.16 |
| | $ | 1.06 |
| | $ | 0.40 |
| | $ | 0.56 |
| | $ | 0.96 |
| | $ | 0.52 |
| | $ | 1.14 |
|
Earnings per share — Diluted (1) | | $ | 0.94 |
| | $ | 0.51 |
| | $ | 1.14 |
| | $ | 1.16 |
| | $ | 1.06 |
| | $ | 0.39 |
| | $ | 0.55 |
| | $ | 0.94 |
| | $ | 0.51 |
| | $ | 1.14 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Balance Sheets Data (at end of year): | | | | | | | | | | | |
| Balance Sheets Data (as of end of year): | | | | | | | | | | | |
Adjusted working capital (2) | | $ | 132.4 |
| | $ | 118.9 |
| | $ | 88.0 |
| | $ | 72.7 |
| | $ | 74.0 |
| | $ | 265.6 |
| | $ | 152.1 |
| | $ | 132.4 |
| | $ | 118.9 |
| | $ | 88.0 |
|
| Total assets | | 1,840.4 |
| | 1,769.1 |
| | 1,754.0 |
| | 1,898.3 |
| | 1,918.2 |
| | $ | 2,165.3 |
| | $ | 2,075.0 |
| | $ | 1,840.4 |
| | $ | 1,769.1 |
| | $ | 1,754.0 |
|
Long-term obligations (3) | | 1,232.2 |
| | 1,281.3 |
| | 2.3 |
| | 3.6 |
| | 1.7 |
| | $ | 1,432.2 |
| | $ | 1,321.8 |
| | $ | 1,232.2 |
| | $ | 1,281.3 |
| | $ | 2.3 |
|
| Capital expenditures | | 20.7 |
| | 16.0 |
| | 13.2 |
| | 25.3 |
| | 33.6 |
| | $ | 33.9 |
| | $ | 21.4 |
| | $ | 20.7 |
| | $ | 16.0 |
| | $ | 13.2 |
|
(1) On March 4, 2016, MTW distributed 137.0 million shares of our common stock to MTW shareholders, thereby completing the Spin-Off. Basic and diluted earnings per share and the weighted average number of common shares outstanding were retrospectively restated for the number of shares outstanding immediately following this transaction.the Spin-Off. The same number of shares was used to calculate basic and diluted earnings per share, for the prior periods presented, since no equity awards were outstanding prior to the Spin-Off.
(2) WorkingAdjusted working capital is defined as net receivables and inventory less trade accounts payable.
(3) Long-term The long-term obligations includeas of December 31, 2019 includes long-term capitaldebt and both long-term operating and finance lease obligations.obligations resulting from the adoption of Accounting Standards Update No. 2016-02—Leases as of January 1, 2019, for which the impact is not included in years prior to 2019. See Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
(4) Revised for $0.4 million In May 2019, we launched our Business Transformation Program and $0.5 million of additional income tax expense forincurred consulting costs, restructuring charges and other transformation-related expenses during the yearsyear ended December 31, 20142019. See Note 16, "Business Transformation Program and 2013, respectively.Restructuring," of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
(5) On April 19, 2018, we, through a wholly-owned subsidiary, acquired 100% of the share capital of Avaj International Holding AB ("Crem"). Crem's operations have been included in our consolidated results of operations beginning on the acquisition date. See Note 3, "Acquisition," of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
(6) On December 7, 2015, we completed the sale of Kysor Panel Systems ("Kysor"). Kysor has been removed from our consolidated results of operations as of the sale date.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes of Welbilt, Inc. and its consolidated subsidiaries included in Part II, Item 8 of this Annual Report on Form 10-K/A10-K for the fiscal year ended December 31, 2017.2019. The results of operations and other information included herein are not necessarily indicative of the financial condition, results of operations and cash flows that may be expected in future periods or what our financial condition, results of operation and cash flows would have been had Welbilt, Inc. been an independent, publicly-traded company prior to March 4, 2016.periods. This Annual Report on Form 10-K/A,10-K, including matters discussed under thein this Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements relating to our plans, estimates and beliefs that involve important risks and uncertainties. See "Cautionary NotesStatements Regarding Forward-Looking Information" and Item 1A.—"Risk "Risk Factors" for a discussion of uncertainties risks and assumptions that may cause actual results to differ materially from those contained in any forward-looking statements.
RESTATEMENT AND REVISION OF THE CONSOLIDATED FINANCIAL STATEMENTS
As discussedexpressed or implied in the Explanatory Note,forward-looking statements. Additionally, we use certain non-GAAP financial measures to evaluate our results of operations, financial condition and liquidity. For important information regarding the use of such non-GAAP measures, including reconciliations to the most comparable GAAP measure, see the section titled "Non-GAAP Financial Measures" below.
This section of this Amendment No. 1 toAnnual Report on Form 10-K (this "Amendment" or "Form 10-K/A"), amendsgenerally discusses 2019 and restates our consolidated financial statements2018 items and related disclosuresyear-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Annual Report on Form 10-K can be found in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 8. "Financial Statements and Supplementary Data" as7 of andour Annual Report on Form 10-K for the fiscal year ended December 31, 20162018.
The financial condition and revises our consolidated financial statements asresults of and for the years ended December 31, 2017 and 2015, to reflect the correction of certain errorsoperations discussed in the Explanatory Note to this Form 10-K/A and in Note 1, "Business and Organization." Accordingly, this Management's Discussion and Analysis of Financial Condition and Results of Operations reflectsare those of Welbilt, Inc. and its consolidated subsidiaries, collectively, the effects of the restatements and revisions."Company," "Welbilt," "we," "our" or "us."
Overview
Business Overview
On January 29, 2015, our former parent, The Manitowoc Company, Inc. ("MTW"), announced plans to create two independent, public companies to separately operate its two businesses: its crane business and its foodservice business. To effect the separation, MTW first undertook an internal reorganization, following which MTW held the crane business and Manitowoc Foodservice, Inc. ("MFS") held the foodservice business. Then on March 4, 2016, MTW distributed all the MFS common stock to MTW's shareholders on a pro rata basis, and MFS became an independent, publicly-traded company (the "Distribution"). In this Annual Report on Form 10-K, "Spin-Off" refers to both the above described internal reorganization and the Distribution, collectively.
Effective March 6, 2017, we renamed the Company to Welbilt, Inc. and rebranded our logo and brand identity to Welbilt. This change was part of our strategic repositioning after we spun off from MTW and represents a long-standing commitment to put customers’ needs first. The financial condition and results of operations discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are those of Welbilt, Inc. and its consolidated subsidiaries, collectively, the "Company," "Welbilt," "we," "our" or "us."
We are one ofdesign, manufacture and supply best-in-class equipment for the world’s leadingglobal commercial foodservice equipment companies. We designmarket with our suite of products capable of storing, cooking, holding, displaying, dispensing and manufacture a complementary portfolio ofserving in both hot and cold foodservice equipment products integrated under one operating company and supported by a growing aftermarket parts and repair service business.categories. Our capabilities span refrigeration, ice-making, cooking, holding, food-preparation and beverage-dispensing technologies, which allow us to equip entire commercial kitchens and serve the world’s growing demand for food prepared away from home. Our suiteportfolio of products is used by commercial and institutional foodservice operators including full-service restaurants, quick-service restaurant ("QSR") chains, hotels, resorts, cruise ships, caterers, supermarkets, convenience stores, business and industry, hospitals, schools and other institutions. Our products, product-based services and aftermarket parts and service support are recognized by our customers and channel partners for their quality, reliability and durability that enablewhich support our end customers profitable growth by improving their menus, enhancing operations and reducing costs.
Our products are soldWe manage our business in over 100 countries globally, acrossthree geographic business segments: Americas, EMEA and APAC. The Americas segment includes the Americas;United States ("U.S."), Canada and Latin America. The EMEA segment consists of markets in Europe, including Middle East, Africa, Russia and Africathe Commonwealth of Independent States. The APAC segment consists primarily of markets in China, India, Australia, South Korea, Singapore, Philippines, Japan, Indonesia, Malaysia, Thailand, Hong Kong, Taiwan, New Zealand and Vietnam. We are required to prepare and present our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. ("EMEA"); and Asia Pacific ("APAC"U.S. GAAP" or "GAAP"). Our products, servicesThese geographic business segments represent the level at which separate financial information is available and solutions are marketed through a worldwide networkwhich is used by management to assess operating performance and allocate resources. We evaluate our segment performance based upon Adjusted Operating EBITDA (a non-GAAP measure). See the definition of 3,500 distributorsAdjusted Operating EBITDA and dealersother non-GAAP measures used by management within the section titled "Non-GAAP Financial Measures" of this Management's Discussion and distributors under our portfolioAnalysis of 12 award-winning brands, including Cleveland, Convotherm, Delfield, fitkitchen,Frymaster, Garland, Kolpak, Lincoln, Manitowoc Ice, Merco, MerrychefFinancial Condition and Multiplex. AllResults of Operations. In addition, see Note 22, "Business Segments," of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion of our products are supported by KitchenCare,geographic business segments.
Executive Summary
Financial Results Highlights
Highlights of our aftermarket partsfinancial results as of and repair service business. Our scale and expertise enable us to serve a global customer base acrossfor the world in continually evolving foodservice markets. For the yearsyear ended December 31, 2017, 2016 and 2015, we generated revenue2019 as compared to the same period of $1,445.4the prior year include the following:
| |
| • | Net sales were$1,593.9 million, an increase of 0.2%. |
Organic net sales (a non-GAAP measure) increased 0.1%.
Earnings from operations were $173.9 million,, $1,456.1 a decrease of 19.8%.
| |
| • | Adjusted Operating EBITDA (a non-GAAP measure) was $286.2 million, a decrease of 1.4%, resulting in an Adjusted Operating EBITDA margin of 18.0%, a decrease of 30 basis points. |
Net earnings were $55.9 million, and $1,570.1a decrease of 28.5%.
Adjusted Net Earnings (a non-GAAP measure) were $96.3 million, respectively.a decrease of 12.9%.
Diluted net earnings per share were $0.39, a decrease of 29.1%.
Adjusted Diluted Net Earnings Per Share (a non-GAAP measure) were $0.68, a decrease of 12.8%.
As of December 31, 2019, our total liquidity was $384.8 million, consisting of $130.7 million of cash and cash equivalents and $254.1 million available for additional borrowing under the senior secured revolving credit facility, compared to liquidity of $389.2 million as of December 31, 2018. Our customers include manytotal outstanding long-term debt, excluding finance leases, as of December 31, 2019 was $1,421.8 million.
The following is a summary of factors that impacted our operating results and liquidity during the year ended December 31, 2019 and other notable actions we have taken during the year:
Business Transformation Program Launch - During the first quarter of 2019, we initiated a comprehensive operational review to validate our long-term growth and margin targets and to refine our execution plans, which culminated in the launch of our Business Transformation Program ("Transformation Program") in May 2019. We are currently in the midst of our Transformation Program which is structured in multiple phases extending through 2021 and is focused on specific areas of opportunity including strategic sourcing, manufacturing facility workflow redesign, distribution and administrative process efficiencies and optimizing our global brand platforms. We anticipate incurring consulting costs, restructuring charges, and other related transformation expenses of $75 to $85 million through 2021. In connection with the operational review and execution of the fastest-growingTransformation Program, we have incurred $35.3 million of expenses for the year ended December 31, 2019. We expect the remaining costs associated with the Transformation Program to be incurred mainly in 2020 with a lesser portion extending into 2021. We expect to settle these costs primarily in cash. We intend to continuously evaluate the total investment in, and most-innovative foodservice companiesfinancial benefits of, the various initiatives associated with the Transformation Program and are currently targeting annualized savings, including the realization of benefits from pricing optimization developed in conjunction with this program, in excess of $75 million by the second half of 2021. We realized actual annualized savings of approximately $3 million for the year ended December 31, 2019. The actual timing of future costs and realized savings of the program may differ materially from our current expectations and estimates.
Restructuring - During 2019, we completed certain workforce reductions, limited management restructuring actions and plant closures and consolidations throughout our regions and corporate division as part of ongoing efforts to optimize and enhance operational efficiencies. As a result of these actions, we incurred costs of $9.8 million of which $9.4 million is recognized in "Restructuring expense" and $0.4 million is recognized in "Cost of sales" in the world. We serve customers aroundConsolidated Statements of Operations for the globeyear ended December 31, 2019.
Industry and we intend to support our customers as they grow. Our integrated manufacturing operations, service sites and sales offices work together to assist customers worldwide, whether these customers are local businesses or global companies.Business Conditions
Global and regional markets for food and foodservice are growing. On a global scale, the demand for affordable dining is expected to continue increasing. Market growth is expected to be driven by, among other factors, disposable income, increased employment, investment in new establishments and the underlying trend for increased convenience.
Overall, we believe that continuedlonger-term growth in demand for foodservice equipment will result from the development of new restaurant concepts in the U.S., the expansion of U.S. and foreign chains into additional international markets, the replacement and upgradeupgrades of existing equipment, and new equipment requirements resulting from menu changes, as well as waste reduction and footprint reduction. We expect to benefit from these trends and grow market penetration alongside our customers as they expand into new service categories and geographies. We believe we are well-positioned to take
advantage of worldwide growth opportunities with global and regional new product introductions, improvement in operational performance and other strategic initiatives.
We intend to achieve sustainable growth globally and drive increased profitability by leveraging our position as a leading commercial foodservice equipment provider, while selectively pursuing strategic acquisitions and partnerships, growing our customer base, expanding the frontiers of foodservice innovation and continuing to attract and grow industry-leading talent.
In 2017,the Americas, we focused on achieving profitable growth, developing new product and system solutions to support future revenues, reducing long-term debt obligations and developing our acquisition pipeline. Conditions in the generalbelieve market during the second half of 2017 were soft, and as part of our 80/20 customer line simplification, we focused on pursuing sales that supported our margin objectives and elected not to participate in selected margin-dilutive sales. We expect these trends to continue through the first half of 2018 and stabilizeconditions softened in the second half of 2018.2019 and that modest declines in demand will continue into 2020. We also expect that increased demand from large chain customers, improvedgeneral market conditions new product rolloutsin APAC to be favorable while the market in EMEA is expected to experience a general economic slowdown as well as the withdrawal of the United Kingdom from the European Union and Organization for Economic Cooperation and Development global tax initiatives. In 2020, we expect our operating results to be impacted by general market conditions, the initial rolloutsbenefits of our fitkitchen systems will helppricing actions and our continued focus on driving our Transformation Program initiatives. Although we anticipate incurring short-term operating inefficiencies in certain of our manufacturing plants, we expect overall savings from our Transformation Program initiatives to offset these trendsinflationary pressures in labor and drive increased sales in 2018.material costs as well as tariffs as a result of the execution of our Transformation Program.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to asAs a result of the Tax Cuts and Jobs Act (the “Tax Act”). The ("Tax Act makes broad and complex changes to the U.S. tax code that does affect 2017, including, but not limited to, (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years, and (2) bonus depreciation that will allow for full expensing of qualified property. Effective in 2018, the Tax Act reduces the U.S. federal corporate statutory tax rate to 21%Act"), and introduces a new provision designed to tax global intangible low-taxed income (“GILTI”). As a result of the Tax Act, additional legislative and regulatory guidance has been and may continue to be issued, whichincluding final regulations that could impact our effective tax rate in future periods. Refer to additional discussion of the impact of the Tax Act on the consolidated financial statements in the Results of Operations section of this Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
On February 23, 2018, we entered into a Share Sale and Purchase Agreement to acquire 100% of the share capital of Avaj International Holding AB ("Crem") for total consideration of approximately 1,800.0 million Swedish Krona or $224.0 million. Crem develops, manufactures and markets a full suite of coffee machines under three brands: Coffee Queen®, Expobar® and Spengler for use in offices, restaurants, cafes and coffee shops, catering and convenience stores. Following completion of the acquisition, we will have an established presence in hot beverage equipment, a complementary product category, and expect to realize operational synergies and cross-selling benefits. In addition, the acquisition supports our strategic objective of increasing our Europe and Asia presence. The acquisition will be funded through cash on hand and additional borrowings under existing credit lines and is expected to close in the second quarter of 2018, subject to certain closing conditions.
Business Strategies
We are exploring additionalcontinue to focus on developing new product and system solutions to support future revenues, reducing long-term debt obligations and developing our acquisition opportunities that complement our product lines, allow us to expand our presence in international markets, enable us to leverage our distribution capabilities, provide us with selective technologies and/or otherwise support the expansion of our business in a manner that is consistent with our strategic goals.
pipeline. Our 2018specific strategic objectives which include continued execution of our Simplification and Right-Sizing initiatives in order to further realize margin improvements and the reduction of debt, are the following:include:
Achieve profitable growth;
Create innovative products and solutions;
GuaranteeEnhance customer satisfaction;
Drive operational excellence; and
Develop great people.
Reportable Segments
We manageintend to achieve sustainable growth globally and drive increased profitability by leveraging our businessposition as a leading commercial foodservice equipment provider, investing in three geographic reportable segments: Americas, EMEAproduct innovation including our digital controllers and APAC. connectivity initiatives, and pursuing customer-specific product solutions, while selectively pursuing strategic acquisitions and partnerships, continuing to attract and grow industry-leading talent and successfully executing our Transformation Program.
Results of Operations for the Years Ended December 31, 2019 and 2018
The Americas segment includes the United States ("U.S."), Canada and Latin America. The EMEA segment is made up of markets in Europe, including Russia and the Commonwealth of Independent States, Middle East and Africa. The APAC segment is principally comprised of markets in China, Australia, Japan, Philippines, South Korea, Singapore, Indonesia, Taiwan, Hong Kong,Thailand, Malaysia, and New Zealand.
These segments represent the level at which separate financial information is available and which is used by management to assess performance and allocate resources. We evaluate segment performance based upon earnings before interest, taxes, other (income) expense - net, depreciation and amortization expense and is adjusted for certain other non-cash or non-recurring items, including gain or loss from impairment or disposal of assets, restructuring, separation charges and loss on early extinguishment of debt ("Adjusted Operating EBITDA"). Adjusted Operating EBITDA is a non-GAAP measure, and our presentation of Adjusted Operating EBITDA may not be comparable to similar measures used by other companies. Beginning in January 2017, we updated our performance measure and definition of Adjusted Operating EBITDA (previously titled "Operating EBITA") to additionally exclude at the segment level depreciation expense, gain or loss from impairment or disposal of assets, restructuring, separation charges and loss on early extinguishment of debt. All prior segment information has been recast to reflect these changes for consistency of presentation. See "-Non-GAAP Financial Measures" below for
important information regarding the use of non-GAAP financial measures. See Note 22, "Business Segments" of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K/A for further discussion on our reportable segments.
Accounting Basis of Presentation
During the periods presented prior to the Spin-Off on March 4, 2016,following table sets forth our consolidated financial statements were prepared on a combined stand-alone basis derived from the consolidated financial statements and accounting records of MTW. We functioned as part of the larger group of companies controlled by MTW. Accordingly, MTW performed certain corporate overhead functions for us and certain costs related to us have been allocated from MTWresults for the period of January 1, 2016 up to the Spin-Off on March 4, 2016 and for the entirety of the year ended December 31, 2015.periods presented:
The financial information included herein may not necessarily reflect our financial condition, results of operations and cash flows in the future or what our financial condition, results of operation and cash flows would have been had Welbilt been an independent, publicly-traded company prior to the Spin-Off.
Results of Operations
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
Our consolidated results comprised the following for the years ended December 31, 2017 and 2016:
| | | | | 2017 | | 2016 | | $ Change | | % Change | |
| (in millions) | | | | (As Restated) | | | | | |
| (in millions, except percentage data) | | | Years Ended December 31, | | Change |
| | 2019 | | 2018 | | $ | | % |
| Net sales | | $ | 1,445.4 |
| | $ | 1,456.1 |
| | $ | (10.7 | ) | | (0.7 | )% | | $ | 1,593.9 |
| | $ | 1,590.1 |
| | $ | 3.8 |
| | 0.2 | % |
| Cost of sales | | 908.5 |
| | 922.3 |
| | (13.8 | ) | | (1.5 | )% | | 1,027.0 |
| | 1,020.9 |
| | 6.1 |
| | 0.6 | % |
| Gross profit | | 536.9 |
| | 533.8 |
| | 3.1 |
| | 0.6 | % | | 566.9 |
| | 569.2 |
| | (2.3 | ) | | (0.4 | )% |
| Gross profit margin | | 37.1 | % | | 36.7 | % | |
|
| |
|
| |
| Gross margin (% of Net sales) | | | 35.6 | % | | 35.8 | % | | | | |
| Selling, general and administrative expenses | | 278.2 |
| | 291.1 |
| | (12.9 | ) | | (4.4 | )% | | 344.2 |
| | 309.8 |
| | 34.4 |
| | 11.1 | % |
| Amortization expense | | 31.2 |
| | 31.2 |
| | — |
| | — | % | | 38.7 |
| | 37.0 |
| | 1.7 |
| | 4.6 | % |
| Separation expense | | 1.6 |
| | 6.5 |
| | (4.9 | ) | | (75.4 | )% | |
| Restructuring expense | | 10.8 |
| | 2.5 |
| | 8.3 |
| | 332.0 | % | | 9.4 |
| | 6.0 |
| | 3.4 |
| | 56.7 | % |
| (Gain) loss from impairment or disposal of assets — net | | (4.0 | ) | | 3.3 |
| | (7.3 | ) | | (221.2 | )% | |
| Loss (gain) from disposal of assets — net | | | 0.7 |
| | (0.4 | ) | | 1.1 |
| | 275.0 | % |
| Earnings from operations | | 219.1 |
| | 199.2 |
| | 19.9 |
| | 10.0 | % | | 173.9 |
| | 216.8 |
| | (42.9 | ) | | (19.8 | )% |
| Interest expense | | 86.9 |
| | 85.2 |
| | 1.7 |
| | 2.0 | % | | 92.6 |
| | 89.0 |
| | 3.6 |
| | 4.0 | % |
| Interest expense on notes with MTW — net | | — |
| | 0.1 |
| | (0.1 | ) | | (100.0 | )% | |
| Loss on early extinguishment of debt | | 1.7 |
| | 2.7 |
| | (1.0 | ) | | (37.0 | )% | |
| Loss on modification or extinguishment of debt | | | — |
| | 9.0 |
| | (9.0 | ) | | (100.0 | )% |
| Other expense — net | | 9.1 |
| | 9.0 |
| | 0.1 |
| | 1.1 | % | | 5.6 |
| | 29.8 |
| | (24.2 | ) | | (81.2 | )% |
| Earnings before income taxes | | 121.4 |
| | 102.2 |
| | 19.2 |
| | 18.8 | % | | 75.7 |
| | 89.0 |
| | (13.3 | ) | | (14.9 | )% |
| Income taxes | | (11.5 | ) | | 30.7 |
| | (42.2 | ) | | (137.5 | )% | | 19.8 |
| | 10.8 |
| | 9.0 |
| | 83.3 | % |
| Net earnings | | $ | 132.9 |
| | $ | 71.5 |
| | $ | 61.4 |
| | 85.9 | % | | $ | 55.9 |
| | $ | 78.2 |
| | $ | (22.3 | ) | | (28.5 | )% |
Analysis of Net Sales
"Net salessales" for our reportablegeographic business segments comprisedconsist of the following for the years ended December 31, 2017 and 2016:periods presented:
| | | | | 2017 | | 2016 | | $ Change | | % Change | |
| (in millions) | | | | (As Restated) | | | | | |
| Net sales: | | |
| | |
| |
|
| |
|
| |
| (in millions, except percentage data) | | | Years Ended December 31, | | Change |
| | 2019 | | 2018 | | $ | | % |
| Americas | | $ | 1,166.8 |
| | $ | 1,186.1 |
| | $ | (19.3 | ) | | (1.6 | )% | | $ | 1,208.4 |
| | $ | 1,228.4 |
| | $ | (20.0 | ) | | (1.6 | )% |
| EMEA | | 296.5 |
| | 287.6 |
| | 8.9 |
| | 3.1 | % | | 392.7 |
| | 385.1 |
| | 7.6 |
| | 2.0 | % |
| APAC | | 190.2 |
| | 190.9 |
| | (0.7 | ) | | (0.4 | )% | | 252.3 |
| | 229.1 |
| | 23.2 |
| | 10.1 | % |
| Elimination of intersegment sales | | (208.1 | ) | | (208.5 | ) | | 0.4 |
| | (0.2 | )% | | (259.5 | ) | | (252.5 | ) | | (7.0 | ) | | 2.8 | % |
| Total net sales | | $ | 1,445.4 |
| | $ | 1,456.1 |
| | $ | (10.7 | ) | | (0.7 | )% | | $ | 1,593.9 |
| | $ | 1,590.1 |
| | $ | 3.8 |
| | 0.2 | % |
Consolidated netNet sales totaled $1,445.4$1,593.9 million for the year ended December 31, 2017,2019 representing a $10.7an increase of $3.8 million, or 0.7%0.2%, decrease compared to the same period of the prior year. This decreaseThe increase in net sales was primarily driven by lower volumes$24.0 million of $33.7 million in part due to 80/20 customer line simplificationincremental net sales from Crem products and higher net pricing. These increases were partially offset by positive net pricingreduced volumes of $24.0 million,hot-side products primarily resulting from new product rollouts with large chain customers in 2018 which includes $14.4 million of pricing realization from our Simplification and Right-Sizing Initiatives. Prior year net sales for this period included $14.5 million from operationsdid not recur in Latin America and China that were divested in 2016. In addition, foreign2019. Foreign currency translation negatively impacted net sales for the year ended December 31, 20172019 by $1.4$24.3 million, or 1.5%. Organic sales (a non-GAAP measure) increased 0.1%. for the year ended December 31, 2019 compared to the same period of the prior year.
Net sales in the Americas segment for the year ended December 31, 20172019 decreased $19.3$20.0 million, or 1.6%, which consistedcompared to the same period of the prior year. The decrease was primarily driven by lower third-party net sales of $15.6 million and a $4.4 million decrease in intersegment sales. The decrease in third-party net sales of $15.5 million and lower intersegment net sales of $3.8 million. The third-party net sales decrease was primarily driven by lower salesvolumes of both hot-side products associated with new product rollouts by large chain customers in 2018 which did not recur in 2019 and cold-side products duea decrease in part to 80/20 customer line simplification.KitchenCare aftermarket sales. These decreases were partially offset by increased net pricing. Foreign currency translation had a positive impact of $2.0 million onnegatively impacted third-party net sales for the year ended December 31, 2017.2019 by $2.8 million. Organic sales (a non-GAAP measure) decreased 1.2% for the year ended December 31, 2019 compared to the same period of the prior year.
Net sales in the EMEA segment for the year ended December 31, 20172019 increased $8.9$7.6 million, or 3.1%2.0%, compared to the same period of the prior year. The increase was primarily driven by an increase inhigher third-party net sales of $1.5$5.8 million and highera $1.8 million increase in intersegment net sales of $7.4 million.sales. Third-party net sales increased primarily due to stronger$19.0 million of incremental net sales of cold-sidefrom Crem products and KitchenCare sales in the region, partially offset by lost sales from our 80/20 product line simplification.increased net pricing. Foreign currency translation had a $3.4 million negative impact onnegatively impacted third-party net sales for the year ended December 31, 2017.2019 by $17.8 million. Organic sales (a non-GAAP measure) increased 0.8% for the year ended December 31, 2019 compared to the same period of the prior year.
Net sales in the APAC segment for the year ended December 31, 2017 decreased $0.72019 increased $23.2 million, or 0.4%10.1%, which consistedcompared to the same period of anthe prior year. The increase in net sales is primarily the result of a $13.6 million increase in third-party net sales of $3.3and a $9.6 million offset by lowerincrease in intersegment sales of $4.0 million.sales. Third-party net sales increased primarily due to $5.0 million of incremental net sales from Crem products, increased volumes in the general market and higher sales of hot-side and cold-side products and improved KitchenCare sales partially offset by the divestiture of a parts and field service business in China in January 2017.aftermarket part sales. Foreign currency translation had a minimal impact onnegatively impacted third-party net sales for the year ended December 31, 2017.2019 by $3.7 million. Organic sales (a non-GAAP measure) increased 6.3% for the year ended December 31, 2019 compared to the same period of the prior year.
Analysis of Earnings from Operations
Consolidated earnings from operationsGross profit
"Gross profit" for the year ended December 31, 20172019 totaled $219.1$566.9 million, a decrease of $2.3 million, or 0.4%, compared to the same period of the prior year. This decrease was primarily driven by: (i) a negative foreign currency translation impact of $10.6 million, (ii) a $10.2 million increase in other manufacturing and warranty costs, (iii) $7.4 million of higher material costs, including tariffs and (iv) $5.3 million of unfavorable impact from product mix and volumes. These unfavorable impacts were largely offset by a $25.7 million favorable impact from increased net pricing and $7.3 million of incremental gross profit from the Crem operations.
Selling, general and administrative expenses
"Selling, general and administrative expenses" for the year ended December 31, 2019 were $344.2 million, an increase of $19.9$34.4 million, or 10.0%11.1%, compared to the same period of the prior year, which was principally driven by increases from: (i) savings from Simplification and Right-Sizing Initiatives of $45.7 million, (ii) a decreaseyear. The increase in selling, general and administrative expenses (iii) increased net pricingis primarily the result of $9.8higher professional fees and concluded litigation of $39.8 million, (iv) a decrease in separationconsisting mainly of $33.3 million of third-party consulting costs incurred in connection with the Spin-Offour Transformation Program and higher marketing and sales commission costs of $4.9 million and (v) a gain of $3.8 million recognized for the sale of our Singapore building in July 2017. The Simplification and Right-Sizing initiatives include product and customer rationalization, product cost take out, lean implementation, strategic sourcing, manufacturing capacity reduction and reduction in workforce.$3.0 million. These increases were partially offset by: (i) the negativeby a positive foreign currency translation impact of lower volumes and product mix of $30.4 million, (ii) material cost inflation of $10.8$4.9 million and (iii) incremental restructuring chargeslower acquisition-related costs attributable to the 2018 acquisition of $8.3Crem of $4.4 million primarily associated with executive retirements and company-wide workforce reductions.which did not recur in 2019.
Total selling, general and administrative expenses were $278.2 millionRestructuring expense
"Restructuring expense" for the year ended December 31, 2017,2019 was $9.4 million consisting primarily of global workforce reduction actions supporting cost rationalization efforts, including the Transformation Program, as well as a decreaselimited executive management restructuring action. Restructuring expense for the year ended December 31, 2018 was $6.0 million resulting primarily from restructuring actions in each of $12.9 million, or 4.4%, comparedour geographic business segments and a limited management restructuring in our corporate division as part of our continued efforts to the prior year. The decrease was principally driven by: (i) lower incentive compensation of $5.6 million, (ii) lower employee benefit related expenses of $4.2 million associated with group health insuranceoptimize and pension benefit expenses, (iii) lower concessions and bad debt expense of $3.1 million and (iv) $2.5 million of reduced costs associated with company-wide reductions in force completed in 2017. These decreases were partially offset by a $2.4 million increase in stock-based compensation expense.enhance our operational efficiency.
Analysis of Segment Adjusted Operating EBITDA
We evaluate segment performance based upon "Adjusted Operating EBITDA which is defined as earnings before interest, taxes, other (income) expense - net, depreciation and amortization expense and is adjusted for certain other non-cash or non-recurring items, including (gain) loss from impairment or disposal of assets, restructuring, separation charges and loss on early extinguishment of debt.
Adjusted Operating EBITDAEBITDA" (a non-GAAP measure) for our reportablegeographic business segments comprisedconsists of the following for the years ended December 31, 2017 and 2016:periods presented:
| | | (in millions) | | 2017 | | 2016 | | $ Change | | % Change | |
| Segment Adjusted Operating EBITDA: | | |
| | |
| |
|
| |
|
| |
| (in millions, except percentage data) | | | Years Ended December 31, | | Change |
| | 2019 | | 2018 | | $ | | % |
| Americas | | $ | 240.7 |
| | $ | 233.6 |
| | $ | 7.1 |
| | 3.0 | % | | $ | 222.9 |
| | $ | 233.1 |
| | $ | (10.2 | ) | | (4.4 | )% |
| EMEA | | 55.2 |
| | 44.3 |
| | 10.9 |
| | 24.6 | % | | 71.0 |
| | 78.4 |
| | (7.4 | ) | | (9.4 | )% |
| APAC | | 22.7 |
| | 24.7 |
| | (2.0 | ) | | (8.1 | )% | | 41.0 |
| | 31.2 |
| | 9.8 |
| | 31.4 | % |
| Total Segment Adjusted Operating EBITDA | | $ | 318.6 |
| | $ | 302.6 |
| | $ | 16.0 |
| | 5.3 | % | | 334.9 |
| | 342.7 |
| | (7.8 | ) | | (2.3 | )% |
| Less: Corporate and unallocated expenses | | | (48.7 | ) | | (52.5 | ) | | 3.8 |
| | (7.2 | )% |
| Total Adjusted Operating EBITDA | | | $ | 286.2 |
| | $ | 290.2 |
| | $ | (4.0 | ) | | (1.4 | )% |
| | | | | | | | | | |
Adjusted Operating EBITDA margin (1) | | | 18.0 | % | | 18.3 | % | | | | (0.3 | )% |
(1) Adjusted Operating EBITDA margin is calculated by dividing the dollar amount of Adjusted Operating EBITDA by net sales.
Adjusted Operating EBITDA in the Americas segment for the year ended December 31, 2017 increased2019 decreased by $7.1$10.2 million, or 3.0%, despite the4.4%. This decrease in net sales. The increase was primarily driven by our Simplificationby: (i) $17.7 million of decreased product mix and Right-Sizing initiativesvolumes, (ii) $5.7 million of $36.6higher material and other manufacturing costs, (iii) $3.8 million positive impacts from net pricing, lower incentive compensationof higher marketing and a reduction in controllable costs.commissions costs and (iv) increased professional fees totaling $2.7 million. These increases were partially offset by lower volumes and product mix, increased material costs, lower fixed cost absorption and the negativea favorable impact from foreign currency translation.net pricing of $19.4 million.
Adjusted Operating EBITDA in the EMEA segment for the year ended December 31, 2017 increased2019 decreased by $10.9$7.4 million, or 24.6%9.4%, which was primarily driven by improved intersegment pricing, cost savings from the Simplificationby: (i) higher material and Right-Sizing Initiativesother manufacturing costs of $5.0$8.2 million, (ii) an unfavorable foreign currency translation impact of $3.3 million and a positive(iii) increased research and development costs totaling $2.8 million. This unfavorable impact of foreign currency translation. These increases werewas partially offset by unfavorable sales mixby: (i) a $6.3 million favorable impact from net pricing and material cost inflation.(ii) $1.1 million of lower net employee-related costs mainly resulting from reduced incentive compensation attributable to the segment's operating results.
Adjusted Operating EBITDA in the APAC segment for the year ended December 31, 2017 decreased2019 increased by $2.0$9.8 million, or 8.1%31.4%. The decreaseThis increase was primarily driven by unfavorable intersegmentby: (i) $8.7 million of increased product volumes and mix, (ii) a $3.0 million decrease in research and development costs, (iii) $1.2 million of incremental earnings from Crem operations and (iv) a favorable impact from net pricing and material cost inflation.of $1.1 million. These decreasesincreases were partially offset by increased volumes and product mix, improved freight costsby: (i) unfavorable material and other controllablemanufacturing costs of $2.0 million, (ii) a $1.3 million unfavorable impact of foreign currency translation and (iii) $1.2 million of higher employee-related costs.
Corporate and unallocated expenses reflect certain corporate-level expenses and savingseliminations, which are not allocated to the segments. For the year ended December 31, 2019, corporate and unallocated costs decreased by $3.8 million, or 7.2%, compared to the same period of the prior year as a result of lower employee-related costs from reduced incentive compensation attributable to our consolidated operating results and a decrease in the Simplification and Right-Sizing Initiativeselimination of $3.0 million.profit in inventory attributable to lower intercompany inventory on hand as of December 31, 2019 compared to December 31, 2018.
Analysis of Non-Operating Income Statement Items
For the year ended December 31, 2017, interest expense2019, "Interest expense" was $86.9$92.6 million, a $1.7$3.6 million increase fromas compared to the same period of the prior year, which was primarily due todriven by higher average borrowings outstanding partially offset by an overall decrease in weighted average interest expense being recorded for only a portion of 2016 as we issued $1,400.0 million of long-term debt as a result of the Spin-Off in the first quarter of 2016. The loss on earlyrates.
There were no modifications or extinguishment of debt during the year ended December 31, 2019. The "Loss on modification or extinguishment of $1.7debt" of $9.0 million recognized during the year ended December 31, 2017 includes both2018 was related to the Sixth Amendment to our 2016 Credit Agreement and extinguishment losses associated with two debt repricing events in 2017.prepayments of the amended Term Loan B Facility during the fourth quarter of 2018.
For the year ended December 31, 2019, "Other expense — net" was $5.6 million, a decrease of $24.2 million as compared to the same period of the prior year. The loss on early extinguishmentdecrease is primarily the result of debt of $2.7 million recordedtransactions that occurred during the year ended December 31, 2016 relates to prepayments2018 which did not recur during the current year including a $10.0 million loss on our Term Loan B facility.a foreign currency hedge for the Crem acquisition purchase price, a $9.1 million foreign currency transaction loss on debt and a $2.4 million loss on a pension settlement.
Analysis of Income Taxes
"Income taxestaxes" for the year ended December 31, 20172019 were a benefit of $11.5$19.8 million, which was a decreasean increase of $42.2$9.0 million compared to the prior year. This decreaseThe increase was primarily due todriven by a $45.5$10.0 million tax benefit from the revaluation of the U.S. deferred tax assets and liabilities at the reduced enacted rate and resulted in a reduction in our effective tax rate from 30.0%recorded for the year ended December 31, 2016 to (9.5)%2018 for the update of the transition tax liability of the Tax Act which did not recur for the year ended December 31, 2017. In addition, a valuation allowance of $8.6 million was released during2019.
Our effective tax rate for the year ended December 31, 2017 that2019, was recorded against the deferred tax assets for certain entities in the United Kingdom. A $3.5 million net state tax benefit was recorded in 2017 primarily due26.2%, compared to revised estimates of our state tax liabilities. These benefits were partially offset by the Deemed Repatriation Transition Tax ("Transition Tax") of $13.5 million on previously untaxed accumulated and current earnings and profits of certain foreign subsidiaries.
Ouran effective tax rate varies fromof 12.1% for the 35.0% U.S. federal statutoryyear ended December 31, 2018. The increase in the effective tax rate duefor the year ended December 31, 2019 compared to the relative weightingsame period of foreign earnings beforethe prior year is primarily the result of a 11.2% income taxes and foreign taxes that are generally lower thantax benefit recorded for the U.S. federal statutory rate in additionyear ended December 31, 2018 to the adjustments related toincorporate the impact of the Tax Act enacted in 2017.
Domestic earnings before income taxes in 2017 represent 26.8% of total earningswithin the measurement period and a 1.9% decrease in the tax benefit from manufacturing and research incentives. These increases were partially offset by 2.1% of tax benefits for favorable 3.5% effectiveaudit settlements and the expiration of the statute of limitations of unrecognized tax rate impact for net lower taxes on foreign income due in part to changes in foreign tax laws, whereas 2016 domestic earnings represent 30.8% of total earningsbenefits and a favorable 4.8% effective1.9% increase in tax rate impact for net lower taxes on foreign income. The 2017 and 2016 effective tax rates were favorably impacted by income earned in jurisdictions, primarily in Canada and China, where the statutory rates are approximately 25.0%.
Deferred income taxes are provided for the effects of temporary differences between the assets and liabilities recognized for financial reporting and tax reporting. These temporary differences result in taxable or deductible amounts in future years.
Management’s intent has been to reinvest the earnings of foreign subsidiaries indefinitely outside the U.S. The Tax Act includes the Transition Tax provision that imposes a tax on foreign earnings whether or not such earnings are repatriated to the U.S. As a result of this new tax, management is reviewing the prior position on the reinvestment of the earnings of foreign subsidiaries outside of the U.S. This review may be impacted by a number of additional considerations, including but not limited to the issuance of additional regulations, ongoing analysis of the Tax Act and gathering additional information to make a more informed decision for our intent to reinvest earnings of foreign subsidiaries indefinitely outside the U.S.
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
Our consolidated results comprised the following for the years endedDecember 31, 2016and 2015:
|
| | | | | | | | | | | | | | | |
| | | 2016 |
| 2015 | | $ Change | | % Change |
| (in millions) | | (As Restated) | | | | | | |
| Net sales | | $ | 1,456.1 |
| | $ | 1,570.1 |
| | $ | (114.0 | ) | | (7.3 | )% |
| Cost of sales | | 922.3 |
| | 1,068.4 |
| | (146.1 | ) | | (13.7 | )% |
| Gross profit | | 533.8 |
| | 501.7 |
| | 32.1 |
| | 6.4 | % |
| Gross profit margin | | 36.7 | % | | 32.0 | % | | | | |
| Selling, general and administrative expenses | | 291.1 |
| | 291.6 |
| | (0.5 | ) | | (0.2 | )% |
| Amortization expense | | 31.2 |
| | 31.4 |
| | (0.2 | ) | | (0.6 | )% |
| Separation expense | | 6.5 |
| | 4.3 |
| | 2.2 |
| | 51.2 | % |
| Restructuring expense | | 2.5 |
| | 4.6 |
| | (2.1 | ) | | (45.7 | )% |
| Loss from impairment or disposal of assets - net | | 3.3 |
| | 9.9 |
| | (6.6 | ) | | (66.7 | )% |
| Earnings from operations | | 199.2 |
| | 159.9 |
| | 39.3 |
| | 24.6 | % |
| Interest expense | | 85.2 |
| | 1.4 |
| | 83.8 |
| | 5,985.7 | % |
| Interest expense (income) on notes with MTW — net | | 0.1 |
| | (15.8 | ) | | 15.9 |
| | (100.6 | )% |
| Loss on early extinguishment of debt | | 2.7 |
| | — |
| | 2.7 |
| | N/M |
|
| Other expense (income) — net | | 9.0 |
| | (22.1 | ) | | 31.1 |
| | (140.7 | )% |
| Earnings before income taxes | | 102.2 |
| | 196.4 |
| | (94.2 | ) | | (48.0 | )% |
| Income taxes | | 30.7 |
| | 40.3 |
| | (9.6 | ) | | (23.8 | )% |
| Net earnings | | $ | 71.5 |
| | $ | 156.1 |
| | $ | (84.6 | ) | | (54.2 | )% |
N/M = Not Meaningful
Analysis of Net sales
Net sales for our reportable segments comprised the following for the years ended December 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | |
| | | 2016 |
| 2015 | | $ Change | | % Change |
| (in millions) | | (As Restated) | | | | | | |
| Net sales: | | |
| | |
| | | | |
| Americas | | $ | 1,186.1 |
| | $ | 1,323.7 |
| | $ | (137.6 | ) | | (10.4 | )% |
| EMEA | | 287.6 |
| | 281.6 |
| | 6.0 |
| | 2.1 | % |
| APAC | | 190.9 |
| | 191.1 |
| | (0.2 | ) | | (0.1 | )% |
| Elimination of intersegment sales | | (208.5 | ) | | (226.3 | ) | | 17.8 |
| | (7.9 | )% |
| Total net sales | | $ | 1,456.1 |
| | $ | 1,570.1 |
| | $ | (114.0 | ) | | (7.3 | )% |
Consolidated net sales totaled $1,456.1 millionbenefits resulting from valuation allowance adjustments for the year ended December 31, 2016, representing a $114.0 million, or 7.3%, decrease2019 as compared to the prior year, which was primarily driven by a 10.4% decrease in the Americas segment. Prior year net sales included $122.1 million from Kysor Panel Systems ("KPS"), which was sold in December 2015. In addition, foreign currency translation negatively impacted net sales for the year ended December 31, 2016 by $26.4 million, or 1.8%.
Net sales in the Americas segment for the year ended December 31, 2016 decreased $137.6 million, or 10.4%, primarily due to the divestituresame period of KPS in December 2015, which caused a decrease of approximately $122.1 million. Adjusted for the divestiture of KPS, net sales decreased $15.5 million from the prior year, which is a non-GAAP measure that consisted of a decrease in third-party net sales of $12.5 million and lower intersegment net sales of $3.0 million. The $12.5 million third-party net sales decrease year-over-year was due to softness in sales of hot-side products and a reduction in KitchenCare sales of $2.9 million, partially offset by an increase of $28.7 million in pricing realization from our Simplification and Right-Sizing Initiatives. Foreign currency translation had an $8.1 million negative impact on third-party net sales for the year ended December 31, 2016.
Net sales in the EMEA segment for the year ended December 31, 2016 increased by $6.0 million, or 2.1%, primarily driven by an increase in third-party net sales of $16.1 million, partially offset by lower intersegment net sales of $10.1 million. Third-party net sales increased due to stronger sales of hot-side products, including Merrychef high-speed ovens, stronger sales of beverage products, an increase of $6.8 million in pricing realization from the Simplification and Right-Sizing Initiatives and an increase of $1.0 million from improvement in KitchenCare sales in the region. Foreign currency translation had a $14.6 million negative impact on third-party net sales for the year ended December 31, 2016.
Net sales in the APAC segment for the year ended December 31, 2016 decreased $0.2 million, or 0.1%. Current year net sales included $11.2 million from the Welbilt Thailand acquisition in October 2015. Adjusted for the acquisition of Welbilt Thailand, which is a non-GAAP measure, net sales decreased $7.1 million and consisted of a decrease in third-party net sales of $2.4 million and lower intersegment sales of $4.7 million. Foreign currency translation has a $3.7 million negative impact on third-party net sales for the year ended December 31, 2016.
Analysis of Earnings from Operations
Consolidated earnings from operations for the year ended December 31, 2016 totaled $199.2 million, an increase of $39.3 million, or 24.6%, compared to the prior year, which was principally driven by savings from Simplification and Right-Sizing Initiatives of approximately $56.8 million, partially offset by higher incentive compensation and the sale of KPS in December 2015.
Total selling, general and administrative expenses amounted to $291.1 million for the year ended December 31, 2016, a decrease of $0.5 million, or 0.2%, compared to the prior year. The decrease was principally driven byTaxes on foreign income unfavorably impacted the impact from the divestiture of KPS of approximately $9.7 million, cost containment savings of $7.8 million and savings from the Simplification and Right-Sizing Initiatives of approximately $6.9 million. These decreases were partially offset by a $9.4 million increase in incentive compensation expense, a $5.8 million increase from the impact of foreign currency translation, $6.4 million of costs allocated to Welbilt in connection with the Spin-Off and the impact from the acquisition of Welbilt Thailand of $1.3 million.
Analysis of Segment Adjusted Operating EBITDA
Adjusted Operating EBITDAeffective tax rate for our reportable segments comprised the following forboth the years ended December 31, 20162019 and 2015:2018 primarily as a result of earnings in high tax jurisdictions, including Germany, China and Canada, where the statutory rates range from 25% to 30%.
|
| | | | | | | | | | | | | | | |
| (in millions) | | 2016 | | 2015 | | $ Change | | % Change |
| Segment Adjusted Operating EBITDA: | | |
| | |
| | | | |
| Americas | | $ | 233.6 |
| | $ | 215.6 |
| | $ | 18.0 |
| | 8.3 | % |
| EMEA | | 44.3 |
| | 27.0 |
| | 17.3 |
| | 64.1 | % |
| APAC | | 24.7 |
| | 25.3 |
| | (0.6 | ) | | (2.4 | )% |
| Total Segment Adjusted Operating EBITDA | | $ | 302.6 |
| | $ | 267.9 |
| | $ | 34.7 |
| | 13.0 | % |
Adjusted Operating EBITDA in the Americas segment for the year ended December 31, 2016 increased $18.0 million, or 8.3%, despite the decrease in net sales. Adjusted for the impact of the divestiture of KPS of $12.8 million, Adjusted Operating EBITDA increased from the prior year by $30.8 million. The increase was primarily driven by $42.6 million of savings from the Simplification and Right-Sizing Initiatives, a $15.9 million improvement in KitchenCare operations and operating efficiency improvements. These increases were partially offset by the negative impact from lower sales volume, higher incentive compensation and lower fixed cost absorption.
Adjusted Operating EBITDA in the EMEA segment for the year ended December 31, 2016 increased by $17.3 million, or 64.1%, which was primarily driven by cost savings of approximately $10.8 million from Simplification and Right-Sizing Initiatives, a $4.0 million improvement in KitchenCare operations in the region and better product mix from new product introductions. These increases were partially offset by the negative impact from foreign currency translation, higher incentive compensation and lower fixed cost absorption.
Adjusted Operating EBITDA in the APAC segment for the year ended December 31, 2016 decreased $0.6 million, or 2.4%. The decrease was primarily driven by the negative impact of lower volumes and fixed cost absorption, partially offset by savings from the Simplification and Right-Sizing Initiatives of $3.4 million and a $1.9 million improvement in KitchenCare operations in the region.
Analysis of Non-Operating Income Statement Items
For the year ended December 31, 2016, interest expense was $85.2 million, an $83.8 million increase2019, the effective tax rate varied from the prior year, which was21.0% statutory rate primarily due to the issuanceimpact of $1,400.0 milliontaxes on income earned in foreign jurisdictions of long-term debt as8.4% and the global intangible low tax income rate of 2.0%, which were partially offset by a result2.1% benefit of the Spin-Off in the first quarteradjustments for valuation allowances, a 1.9% benefit related to unrecognized tax benefits and manufacturing and research incentives of 2016. Interest expense (income) on notes with MTW—net reflects net interest income on funding provided by us to MTW via intercompany debt settled immediately prior to the Spin-Off. Other expense (income)—net reflects primarily amortization of deferred financing fees on the aforementioned long-term debt, gains and losses on the disposal of businesses and foreign currency gains and losses. The loss on early extinguishment of debt of $2.7 million recorded during1.2%. For the year ended December 31, 2016 relates to prepayments on our Term Loan B facility. The decrease in other (income) expense, net of $31.1 million was due primarily to a $9.9 million gain on2018, the sale of KPS in December 2015, the $5.4 million gain on sale of a certain investment property in 2015, a $4.9 million gain on the acquisition of Welbilt Thailand in October 2015 and $4.8 million of deferred financing costs recognized during the year ended December 31, 2016 in connection with the aforementioned debt issuance.
Analysis of Income Taxes
Income taxes for the year ended December 31, 2016 was $30.7 million, a decrease of $9.6 million, or 23.8%,effective tax rate varied from the prior year, which was21.0% statutory rate primarily due to a decrease in earnings before11.2% tax benefit related to the repatriation of foreign income, taxes of $94.2 million. The effective income tax rate was 30.0% and 20.5% for the years ended December 31, 2016 and 2015, respectively. The change was due to nonrecurring 2015 items and a change in3.1% benefit from manufacturing and research incentives, which were partially offset by the miximpact of earnings in jurisdictions without a valuation allowance.
Domestic earnings before income taxes in 2016 represent 30.8% of total earnings and a favorable 4.8% effective tax rate impact for net lower taxes on foreign income, whereas 2015 domestic earnings represent 61.8% of total earnings and a 9.6% effective tax rate benefit for net lower taxes on foreign income. The 2016 and 2015 effective tax rates were favorably impacted by income earned in foreign jurisdictions primarily in Canadaof 7.6% and China, where the statutory rates are approximately 25.0%global intangible low taxed income of 1.5%.
The 2015As of December 31, 2019, we have determined that a valuation allowance is not required for the deferred tax provision benefited by $17.8 millionasset for U.S. interest expense as the future reversals of existing taxable temporary differences are sufficient to realize the deferred tax asset. We will continue to record a deferred tax asset related to the divestitureU.S. interest expense limitation until future reversals of KPS resulting in a favorable impactexisting taxable temporary differences or projected future taxable income are not sufficient to utilize the effective tax rate. The benefit was primarily due to the write-off of $13.8 million of an unamortizedU.S. deferred tax liability recordedasset. We expect these two sources of income will not be sufficient to realize the interest deferred tax asset beginning in purchase accounting2020 and usewe expect to record a valuation allowance to reduce the deferred tax asset to an amount that does not exceed such sources of income at that time. Such changes in the deferred tax asset valuation allowances will be reflected in the current operations through our income tax provision and could have a capital loss carryforward.material effect on our results of operations and cash flows.
Liquidity and Capital Resources
Overview of Factors Affecting our Liquidity
Cash is managedWe manage cash centrally, withreinvest net earnings reinvested locally and meet working capital requirements met from cash and cash equivalents, cash flows from operations and capacity under our existing credit facilities. AtAs of December 31, 2017, we had $128.42019, our total liquidity was $384.8 million, consisting of $130.7 million of cash and cash equivalents 94%and $254.1 million available for additional borrowings under our senior secured revolving credit facility, discussed further below, compared to total liquidity of which was$389.2 million as of December 31, 2018. At December 31, 2019, we held 91% of our cash and cash equivalents outside of the U.S. Given debt service requirementsThe majority of the cash generated in the U.S. is used to fund current and our internationalexpected future working capital requirements and to fund debt service obligations. We maintain significant operations outside of the U.S., and as a result, a significant portion of our cash is denominated in foreign currencies. We manage our worldwide cash requirements by reviewing available funds among the manyour subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. Management’sWhere local restrictions prevent an efficient intercompany transfer of funds, our intent is to reinvest the earnings of foreign subsidiaries indefinitely outside the U.S., irrespective of the Tax Act. The Tax Act includes the Transition Tax provision that imposes a tax on foreign earnings whether or not such earnings are repatriated to the U.S. As a result of the Transition Tax, management is reviewing the current position on the reinvestment of the earnings of foreign subsidiarieskeep cash balances outside of the U.S. This review may be impacted by a number of additional considerations, including but not limitedand to the issuance of additional regulations,meet liquidity needs through ongoing analysiscash flows, external borrowings, or both. We plan to continue reinvesting foreign earnings indefinitely outside of the Tax Act and gathering additional information to make a more informed decision for our intent to reinvest earnings of foreign subsidiaries indefinitely outside the U.S.
Our primaryWe currently expect our future cash needs are currently expected to be centered onprimarily related to operating activities, inclusive of Transformation Program costs, working capital, debt service, and capital investments including investments for announced and future acquisitions. We estimate that our capital expenditures will be approximately $40.0$40 million in 2018.for the year ending December 31, 2020. The amount of actual capital expenditures may be affectedimpacted by general economic, financial or operational changes, competitive, legislative and regulatory factors, among other things. Our ability to fund our cash needs depends on our ongoing ability to generate and raise cash. We believe that our future cash generated from operations, together with our capacity under our existing senior secured revolving credit facility and our access to capital markets, will provide adequate resources to fundmeet our operatingworking capital needs and financing needs; however, ourcash requirements for at least the next 12 months. Our access to, and the availability of financing on acceptable terms in the future will be affected by many factors including: (i)including overall liquidity in the liquidity of the overall capital markets, (ii) the then-current state of the economy and (iii) our credit rating. There can be noWe cannot provide assurances that we will have future access to the capital markets on acceptable terms.
Sources and Uses of Cash
Cash, cash equivalents and restricted cash as of December 31, 2019 totaled $130.7 million, an increase of $57.5 million from the December 31, 2018 balance of $73.2 million.
The table below shows a summary ofsummarizes our cash flows for the periods indicated:
| | | | | Years Ended December 31, | |
| | | 2017 | | 2016 | | 2015 | | | | | |
| (in millions) | | | | (As Restated) | | | | Year Ended December 31, |
| Net cash provided by (used in): | | | | | | | |
| (in millions) | | | 2019 | | 2018 |
| | | | |
| Operating activities | | $ | 137.8 |
| | $ | 124.3 |
| | $ | 143.0 |
| | $ | (269.7 | ) | | $ | (448.5 | ) |
| Investing activities | | (3.4 | ) | | (20.4 | ) | | 59.1 |
| | 279.9 |
| | 313.5 |
|
| Financing activities | | (51.7 | ) | | (81.2 | ) | | (183.1 | ) | | 46.6 |
| | 102.3 |
|
| Effect of exchange rate changes on cash | | (8.1 | ) | | (0.9 | ) | | (3.5 | ) | | 0.7 |
| | (2.9 | ) |
| Net change in cash and cash equivalents | | $ | 74.6 |
| | $ | 21.8 |
| | $ | 15.5 |
| |
| Net increase (decrease) in cash and cash equivalents and restricted cash | | | $ | 57.5 |
| | $ | (35.6 | ) |
Operating Activities
Cash and cash equivalents on-hand at December 31, 2017 amounted to $128.4 million, compared to $53.8 million at December 31, 2016. Cash flows fromused in operating activities for the year ended December 31, 20172019 was $137.8 million, an increase of $13.5$269.7 million compared to $448.5 million of cash used in operating activities for the prior year.year ended December 31, 2018. The increase$178.8 million decrease in cash flows fromused in operating activities was primarily due todriven by a year over year increase in earningsdecrease of $239.0 million from operations totaling $19.9 millionthe timing of collections on accounts receivable combined with the termination of our accounts receivable securitization program during 2019 and a provisionlower inventory build of cash from accounts receivables totaling $10.8 million$30.5 million. This decrease in 2017 compared to a usage of cash totaling $8.3was partially offset by a decrease of $50.9 million in 2016 duenet earnings adjusted for non-cash items including the loss on remeasurement of debt and other realized foreign currency derivative transactions and a $39.8 million net impact of timing of payables, other assets and current and long-term liabilities.
Investing Activities
Cash provided by investing activities of $279.9 million for the year ended December 31, 2019 consisted primarily of $280.7 million of cash receipts on beneficial interests in sold receivables including collections received subsequent to the timingtermination of collections.the accounts receivable securitization program through June 2019 and proceeds from the maturity of a short-term investment of $32.0 million. These increasescash inflows were partially offset by additionalcapital expenditures of $33.9 million, largely related to improvements of machinery and equipment within our manufacturing plants in conjunction with our Transformation Program.
Cash provided by investing activities was $313.5 million for the year ended December 31, 2018 and consisted primarily of proceeds from cash paidreceipts on beneficial interest in sold receivables of $576.4 million which was partially offset by net cash used for interestthe Crem Acquisition of $25.1$215.6 million, during 2017 duea $14.3 million net usage related to a full-year of long-term debt outstanding that was issued as a result of the Spin-Offour short-term investments in the first quarter of 2016.
Cash flows from operating activities during 2016 were $124.32018, a $10.0 million a decrease of $18.7 million compared toloss on the prior year. The decrease in cash flow from operating activities was primarily due to cash paid for interest of $69.6 million during the year ended December 31, 2016 on $1,400.0 million of long-term debt issued as a resultsettlement of the Spin-Off. This was partially offset byforeign exchange currency contract entered into to mitigate the timing of cash paymentscurrency price fluctuations on trade accounts payable of $14.5 million.
Investing Activities
Cash flows used in investing activities of $3.4 million in 2017 consisted primarily ofthe contracted Crem acquisition price and capital expenditures of $20.7$21.4 million, with the majority of capital expenditures related to continuous improvements of machinery and equipment and investments in machinery, equipment and information technology fixed assets offset by proceeds from the sale of property, plant and equipment totaling $12.3 million and a decrease in restricted cash totaling $6.2 million.assets.
Cash flows used in investing activities of $20.4 million in 2016 consisted primarily of capital expenditures of $16.0 million, with the majority of capital expenditures related to fixed asset equipment purchases.
Cash flows provided by investing activities of $59.1 million in 2015 related mainly to $78.2 million of proceeds from the sale of KPS partially offset by capital expenditures of $13.2 million for fixed asset equipment purchases.
Financing Activities
Cash flows used inprovided by financing activities for the year ended December 31, 20172019 was $51.7$46.6 million primarily due to theconsisting of net repayment ofborrowings on long-term debt and capitalfinance leases of $49.1 million.$61.6 million primarily associated with termination of the accounts receivable securitization program and conversion of financing into our Revolving Credit Facility for working capital requirements, partially offset by $15.0 million of repayments on our short-term debt obligations.
Cash flows used inprovided by financing activities for the year ended December 31, 20162018 was $81.2$102.3 million, consisting primarily due to the dividend payment of $1,362.0 million to MTW, the repayment ofnet borrowings on long-term debt of $186.8$92.3 million, and cash paidas a result of $41.3the borrowings associated with the Crem Acquisition, net short-term borrowings on the secured revolving loan facility of $15.0 million for costs incurred in connection with the issuance of debt,working capital partially offset by $6.8 million of debt issuance proceeds of $1,501.1 million.
Cash flows used in financing activitiescosts incurred for the year ended December 31, 2015 was $183.1 million primarily related to financing transactions with MTW.restructuring of our 2016 Credit Agreement in the fourth quarter of 2018.
Financing Resources
Our primary financing resources have historically consisted of our 2016 Credit Agreement and our 9.50% Senior Notes due 2024. Collectively, these arrangements represent the majority of our financing resources, which combined with cash generated by our business operations, are used to meet our financial obligations and liquidity requirements. The general terms of our financing arrangements as of December 31, 2019 are set forth below.
2016 Credit Agreement
Our 2016 Credit Agreement currently provides for a $1,300.0 million Senior Secured Credit Facilities
On March 3, 2016, we entered into a credit agreement (the "2016 Credit Agreement") for a new senior secured revolving credit facility in an aggregate principal amountFacility consisting of $225.0 million (the "Revolving Facility") and(i) a senior secured Term Loan B facility in anFacility for $900.0 million and (ii) a Senior Secured Revolving Credit Facility with aggregate principal amountcommitments of $975.0 million (the "Term Loan B Facility" and, together with the Revolving Facility, the "Senior Secured$400.0 million. The 2016 Credit Facilities") with JPMorgan Chase Bank, N.A, as administrative agent and collateral agent, J.P. Morgan Securities LLC, Goldman Sachs Bank USA, HSBC Securities (USA) Inc., and Citigroup Global Markets Inc., on behalf of certain of its affiliates, as joint lead arrangers and joint bookrunners, and certain lenders, as lenders. The Term Loan B Facility matures in March 2023. The Revolving Facility includesAgreement also currently provides for a (i) a $20.0 million sublimit for the issuance of letters of credit on customary terms,under the revolving commitments up to $30.0 million and (ii) a $40.0aggregate principal amount of allowed incremental revolving or term loan facilities thereunder in an amount not to exceed the sum of (a) $275.0 million sublimit for swingline loans on customary terms. The Revolving Facility matures in March 2021. We entered into security and other agreements relatingplus (b) an additional amount, so long as, after giving effect to the 2016 Credit Agreement.
On March 6, 2017, we entered into an amendment to its 2016 Credit Agreement to repriceincurrence of such additional amount, the outstandingpro-forma secured leverage ratio does not exceed 3.75:1.00. The maturities of the Term Loan B Facility providing for a decrease to the maximum applicable margin for London interbank offered rate (“LIBOR”) and alternate base rate (“ABR”) loans by 1.75% (the “Second Amendment”).Senior Secured Revolving Credit Facility are October 2025 and October 2023, respectively.
Subsequent to the Second Amendment, borrowingsBorrowings under the Senior Secured2016 Credit FacilitiesAgreement bore interest at a rate per annum equal to, at our option, either (i) LIBORLondon Inter-bank Offered Rate ("LIBOR") plus an applicable margin of, 3.00%2.50% for term loans subject to a 1.00% LIBOR floor and LIBOR plus 1.50% - 2.75% for revolving loans, based on consolidated total leverage, or (ii) an ABR plus the applicable margin, which will be 1.00% lower than for LIBOR loans.
On September 7, 2017, we entered into an additional amendment to its 2016 Credit Agreement to reprice the then outstanding Term Loan B Facility providingand a range from 1.50% to 2.50% for a further decrease to the maximumRevolving Credit Facility (depending on our consolidated total leverage ratio) or (ii) an alternate base rate, plus applicable marginmargins of 1.00% less than LIBOR-based borrowings. Beginning in the third quarter of 2019, the spreads for LIBOR and ABR loansalternate base rate borrowings are 2.25% and 1.25%, respectively.
Senior Notes
On February 18, 2016, we issued 9.50% Senior Notes due 2024 (the "Senior Notes") in an aggregate principal amount of $425.0 million, all of which was outstanding as of December 31, 2019. The Senior Notes were issued under an indenture with Wells Fargo Bank, National Association, as trustee, and are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by an additional 0.25% (the “Third Amendment”).each of our domestic restricted subsidiaries who are a borrower or guarantor under the 2016 Credit Agreement.
Revolving Loan Facility
Subsequent
Our short-term secured revolving loan facility provided for borrowings of up to $30.0 million. During the Third Amendment, borrowings underfirst quarter of 2019, we repaid the outstanding balance on this facility, which matured on April 18, 2019.
Covenant Compliance
The 2016 Credit Agreement and indenture governing the Senior Secured Credit Facilities bore interest at a rate per annum equalFacility contains limitations on our ability to ateffect mergers and change of control events as well as certain other limitations, including limitations on: (i) the declaration and payment of dividends or other restricted payments, (ii) incurrence of additional indebtedness or issuing preferred stock, (iii) the creation or existence of certain liens, (iv) incurrence of restrictions on the ability of certain of our option, (i) LIBOR plus an applicable marginsubsidiaries to pay dividends or other payments, (v) transactions with affiliates and (vi) sales of 2.75% for term loans subject to a 1.00% LIBOR floor and LIBOR plus 1.50% - 2.75% for revolving loans, based on consolidated total leverage, or (ii) an ABR plus the applicable margin, which will be 1.00% lower than for LIBOR loans.assets.
TheOur 2016 Credit Agreement also currently contains financial covenants including, but not limited to (a) a Consolidated Interest Coverage Ratio, which measures the ratio of (i) Consolidated EBITDA as defined in the 2016 Credit Agreement, to (ii) Consolidated Cash Interest Expense, and (b) a Consolidated Total Leverage Ratio, which measures the ratio of (i) Consolidated Indebtedness to (ii) Consolidated EBITDA for the most recent four fiscal quarters. The current levels of the financial ratio covenants under the Senior Secured Credit Facilities and our actual ratios forquarters, in each quarter ended during 2017 are set forth below:
|
| | | | | | | | |
Fiscal Quarter Ending | | Consolidated Total Leverage Ratio Level (less than) | | Actual Consolidated Total Leverage Ratio | | Consolidated Interest Coverage Ratio Level (greater than) | | Actual Consolidated Interest Coverage Ratio |
March 31, 2017 | | 5.50:1.00 | | 5.20:1.00 | | 2.50:1.00 | | 2.71:1.00 |
June 30, 2017 | | 5.25:1.00 | | 5.06:1.00 | | 2.50:1.00 | | 2.87:1.00 |
September 30, 2017 | | 5.00:1.00 | | 4.82:1.00 | | 2.75:1.00 | | 3.06:1.00 |
December 31, 2017 (1)
| | 4.75:1.00 | | 4.53:1.00 | | 3.00:1.00 | | 3.25:1.00 |
(1) Consolidated Total Leverage Ratio level shown does not incorporate the increase to 5.25:1.00case, as discussed below for the amendment todefined in the 2016 Credit Agreement entered into subsequent to December 31, 2017.Agreement.
The 2016 Credit Agreement also includes negative covenants that, among other things, limit our ability to incur indebtedness; grant liens; engage in mergers, consolidations and liquidations; make asset dispositions, restricted payments including dividends and investments; enter into transactions with affiliates; and amend, modify or prepay certain indebtedness.
As of December 31, 2017, borrowings under the 2016 Credit Agreement consisted of a Term Loan B balance of $815.0 million2019, we were in compliance with a weighted average interest rate of 4.90%all affirmative and a Revolving Facility balance of $25.0 million with a weighted average interest rate of 4.41%. Under the Revolving Facility, there were outstanding standby letters of credit totaling $3.6 million and $196.4 million available for future borrowings.negative covenants, including any financial covenants, pertaining to our financing arrangements.
On February 2, 2018, we entered into an amendment to the 2016 Credit Agreement (the "Fourth Amendment"), which increases the Consolidated Total Leverage Ratio for each of the fiscal quarters ended December 31, 2017, March 31, 2018 and June 30, 2018 to 5.25:1.00. The required ratio level will then reduce 0.25 each subsequent fiscal quarter until the ratio reaches 4.00:1.00 in the fiscal quarter ending September 30, 2019.
Our obligations under the Senior Secured Credit Facilities are jointly and severally guaranteed by certainA summary of our existing and future direct and indirectly wholly-owned U.S. subsidiaries (butoutstanding financing obligations, excluding (i) unrestricted subsidiaries, (ii) immaterial subsidiaries, and (iii) special purpose securitization vehicles).finance leases, is as follows:
There is a first priority perfected lien on substantially all of our assets and property and guarantors and proceeds therefrom excluding certain excluded assets. The liens securing our obligations under the Revolving Facility and the Term Loan B Facility are pari passu.
Based upon management's current plans and outlook as well as the covenant changes in the Fourth Amendment, management believes we will be able to comply with these covenants during the subsequent 12 months.
Senior Notes
On February 18, 2016, we issued 9.50% Senior Notes due 2024 in an aggregate principal amount of $425.0 million (the "Senior Notes") under an indenture with Wells Fargo Bank, National Association, as trustee (the "Trustee"). The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of our domestic restricted subsidiaries that is a borrower or guarantor under the Senior Secured Credit Facilities. The Senior Notes and the subsidiary guarantees are unsecured, senior obligations.
The Senior Notes were initially sold to qualified institutional buyers pursuant to Rule 144A (and outside the United States in reliance on Regulation S) under the Securities Act. In September 2016, we completed an exchange offer pursuant to which all of the initial Senior Notes were exchanged for new Senior Notes, the issuance of which was registered under the Securities Act.
As of December 31, 2017, borrowings under the Senior Notes totaled $425.0 million with a weighted average interest rate of 9.72%.
The Senior Notes are redeemable, at our option, in whole or in part from time to time, at any time prior to February 15, 2019, at a price equal to 100.00% of the principal amount thereof plus a "make-whole" premium and accrued but unpaid interest to the date of redemption. In addition, we may redeem the Senior Notes at our option, in whole or in part, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the 12-month period commencing on February 15 of the years set forth below:
|
| | | |
| Year | | Percentage |
| 2019 | | 107.125 | % |
| 2020 | | 104.750 | % |
| 2021 | | 102.375 | % |
| 2022 and thereafter | | 100.000 | % |
|
| | | | | | | | |
| (in millions) | | December 31, |
| | 2019 | | 2018 |
| Revolving loan facility | | $ | — |
| | $ | 15.0 |
|
| Revolving Credit Facility | | 141.8 |
| | 78.0 |
|
| Term Loan B Facility | | 855.0 |
| | 855.0 |
|
| 9.50% Senior Notes due 2024 | | 425.0 |
| | 425.0 |
|
| Total debt | | $ | 1,421.8 |
| | $ | 1,373.0 |
|
We have entered into interest rate swaps to manage interest rate risk on certain financing arrangements and may also enter into such interest rate swaps in the future. Further information regarding our financing arrangements and related hedging activity can be found in Note 10, "Debt," and Note 11, "Derivative Financial Instruments," of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
At any time, or from time to time, on or prior to February 15, 2019, we may, at our option, use the net cash proceeds of one or more underwritten public equity offerings of qualified capital stock to redeem up to 35%Leasing Arrangements
We lease various assets under leasing arrangements. The future estimated payments under these arrangements are disclosed in Note 18, "Leases," of the principal amount of the Senior Notes at a redemption price of 109.500% of the principal amount thereof plus accrued and unpaid interest, if any, to the dateConsolidated Financial Statements included in Part II, Item 8 of redemption, upon the terms and subject to the conditions set forth in the indenture governing the Senior Notes.this Annual Report on Form 10-K.
We must generally offer to repurchase all of the outstanding Senior Notes upon the occurrence of certain specific change of control events at a purchase price equal to 101.0% of the principal amount of Senior Notes purchased plus accrued and unpaid interest to the date of purchase. The indenture provides for customary events of default. Generally, if an event of default occurs (subject to certain exceptions), the Trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding Senior Notes may declare all the Senior Notes to be due and payable immediately.
The indenture governing the Senior Notes contains limitations on our ability to effect mergers and change of control events as well as other limitations, including limitations on: the declaration and payment of dividends or other restricted payments; incurring additional indebtedness or issuing preferred stock; the creation or existence of certain liens; incurring restrictions on the ability of certain of our subsidiaries to pay dividends or other payments; transactions with affiliates; and sale of assets.
The Senior Notes are subject to the same financial covenants as those contained in the 2016 Credit Agreement discussed above.
Off-Balance Sheet Arrangements
The Company's disclosures concerning transactions,As of December 31, 2019, we had no off-balance sheet arrangements, and other relationships with uncombined entities or other persons that are reasonably likely to materially affect liquidity or the availabilityas defined in Item 303(a)(4)(ii) of or requirements for capital resources are as follows:SEC Regulation S-K.
The Company disclosed its accounts receivable securitization arrangement in Note 11, "Accounts Receivable Securitization," of the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K/A.
The Company leases various assets under operating leases. The future estimated payments under these arrangements are disclosed in Note 21, "Leases," of the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K/A.
On March 3, 2016, the Company entered into a new $110.0 million accounts receivable securitization program (as amended, restated, supplemented or otherwise modified from time to time the "2016 Securitization Facility") with Wells Fargo Bank, National Association, as purchaser and agent, whereby the Company sold certain of its domestic trade accounts receivable and certain of its non-U.S. trade accounts receivable to a wholly-owned, bankruptcy-remote, foreign special purpose entity, which entity, in turn, will sell, convey, transfer and assign to a third-party financial institution (a "Purchaser"), all of the right, title and interest in and to its pool of receivables to the Purchaser. The Purchaser receives ownership of the pools of receivables. The Company along with certain of its subsidiaries act as servicers of the receivables and as such administer, collect and otherwise enforce the receivables. The servicers will be compensated for doing so on terms that are generally consistent with what would be charged by an unrelated servicer. As servicers, they initially receive payments made by obligors on the receivables but are required to remit those payments in accordance with a receivables purchase agreement. The Purchaser has no recourse for uncollectible receivables. The 2016 Securitization Facility also contains customary affirmative and negative covenants. Among other restrictions, these covenants require the Company to meet specified financial tests, which include a Consolidated Interest Coverage Ratio and a Consolidated Total Leverage Ratio that are the same as those required under the 2016 Credit Agreement.
The 2016 Securitization Facility was amended on February 2, 2018 in conjunction with the Fourth Amendment to provide for certain conforming changes including amending the Consolidated Total Leverage Ratio required thereunder.
Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2017:2019:
| | | (in millions) | | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
| Long-term debt | | $ | 1,265.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 25.0 |
| | $ | — |
| | $ | 1,240.0 |
| | $ | 1,421.8 |
| | $ | — |
| | $ | 3.3 |
| | $ | 3.3 |
| | $ | 145.1 |
| | $ | 428.3 |
| | $ | 841.8 |
|
| Interest obligations | | 447.2 |
| | 76.2 |
| | 76.1 |
| | 76.1 |
| | 76.1 |
| | 76.1 |
| | 66.6 |
| | 396.9 |
| | 77.8 |
| | 77.6 |
| | 77.4 |
| | 77.3 |
| | 57.1 |
| | 29.7 |
|
| Capital leases | | 2.7 |
| | 0.7 |
| | 0.7 |
| | 0.6 |
| | 0.5 |
| | 0.2 |
| | — |
| |
| Operating leases | | 43.5 |
| | 13.3 |
| | 11.2 |
| | 7.6 |
| | 5.1 |
| | 3.4 |
| | 2.9 |
| |
| Finance leases | | | 2.5 |
| | 1.2 |
| | 0.8 |
| | 0.5 |
| | — |
| | — |
| | — |
|
| Operating lease liabilities | | | 39.1 |
| | 10.0 |
| | 6.5 |
| | 4.0 |
| | 3.0 |
| | 2.4 |
| | 13.2 |
|
| Income tax payable | | 26.4 |
| | 13.9 |
| | 1.1 |
| | 1.1 |
| | 1.1 |
| | 2.0 |
| | 7.2 |
| | 11.8 |
| | 11.2 |
| | — |
| | — |
| | — |
| | — |
| | 0.6 |
|
| Purchase obligations | | 99.6 |
| | 86.1 |
| | 4.9 |
| | 3.9 |
| | 2.3 |
| | 2.4 |
| | — |
| | 69.7 |
| | 69.2 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Total contractual obligations | | $ | 1,884.4 |
| | $ | 190.2 |
| | $ | 94.0 |
| | $ | 89.3 |
| | $ | 110.1 |
| | $ | 84.1 |
| | $ | 1,316.7 |
| | $ | 1,941.8 |
| | $ | 169.4 |
| | $ | 88.3 |
| | $ | 85.3 |
| | $ | 225.5 |
| | $ | 487.9 |
| | $ | 885.4 |
|
Unrecognized tax benefits totaling $12.3$2.9 million as of December 31, 2017,2019 excluding related interests and penalties, are not included in the table above because the timing of their resolution cannot be estimated. See Note 13,9, "Income Taxes, (As Restated)," of the consolidated financial statementsNotes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K/A10-K for disclosures surrounding uncertain income tax positions.
We maintain defined benefit pension plans for somecertain of our operations in the U.S.,Americas and EMEA and APAC.regions. In 2017,2019, cash contributions by us to all pension plans were $5.4$8.3 million, and we estimate that our pension plan contributions will be approximately $8.4$9.6 million in 2018.2020. See Note 20,"Employee15, "Employee Benefit Plans"Plans," of the notesNotes to consolidated financial statementsthe Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K/A10-K for further discussion.
Please refer toSee Note 17,13, "Contingencies and Significant Estimates," of the consolidated financial statementsNotes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K/A. where we have disclosed10-K for disclosures regarding our environmental, health, safety, contingencies and other matters.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures discussed below to evaluate our results of operations, financial condition and liquidity. We believe that the presentation of these non-GAAP financial measures, when viewed as a supplement to our results prepared in accordance with U.S. GAAP, provides useful information to investors in evaluating the ongoing performance of our operating businesses, provides greater transparency into our results of operations and is consistent with how management evaluates the Company’sour operating performance and liquidity. In addition, these non-GAAP measures address questions the Companywe routinely receivesreceive from analysts and investors and, in order to assureensure that all investors have access to similar data, the Company has determined that it is appropriate towe make this data available to all investors.the public. None of the non-GAAP measures presented should be considered as an alternative to net earnings, earnings from operations, net cash provided byused in operating activities, net sales or any other measures derived in accordance with U.S. GAAP. These non-GAAP measures have important limitations as analytical tools and should not be considered in isolation or as substitutes for financial measures presented in accordance with U.S. GAAP. OurThe presentation of our non-GAAP financial measures may change from time to time, including as a result of changed business conditions, new accounting rules or otherwise. Further, our use of these terms may vary from the use of similarly-titled measures by other companies due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation.
Free Cash Flow
The Company refersWe refer to Free"Free Cash Flow, which representsFlow", a non-GAAP measure, as our net cash provided by or used in operating activities less capital expenditures. The Company believesexpenditures plus cash receipts on our beneficial interest in sold receivables and the related impact of terminating our accounts receivable securitization program during the first quarter of 2019. We believe this non-GAAP financial measure is useful to investors in measuring the Company'sour ability to generate cash internally to fund initiatives such asour debt repayment,repayments, acquisitions, dividends and share repurchases.repurchases, if any. Free Cash Flow reconciles to net cash provided byused in operating activities included in our Consolidated Statements of Cash Flows presented in accordance with U.S. GAAP, as follows:
| | | | | Years Ended December 31, | |
| | | 2017 | | 2016 | | 2015 | | | | | | | |
| (in millions) | | | | (As Restated) | | | | Year Ended December 31, |
| Free Cash Flow: | | | | | | | |
| Net cash provided by operating activities | | $ | 137.8 |
| | $ | 124.3 |
| | $ | 143.0 |
| |
| (in millions) | | | 2019 | | 2018 | | 2017 |
| | $ | (269.7 | ) | | $ | (448.5 | ) | | $ | (431.3 | ) |
| Capital expenditures | | (20.7 | ) | | (16.0 | ) | | (13.2 | ) | | (33.9 | ) | | (21.4 | ) | | (20.7 | ) |
| Cash receipts on beneficial interest in sold receivables | | | 280.7 |
| | 576.4 |
| | 552.1 |
|
Termination of accounts receivable securitization program (1) | | | 96.9 |
| | — |
| | — |
|
| Free Cash Flow | | $ | 117.1 |
| | $ | 108.3 |
| | $ | 129.8 |
| | $ | 74.0 |
| | $ | 106.5 |
| | $ | 100.1 |
|
(1) Represents the increase in accounts receivable resulting from the termination of the accounts receivable securitization program during the first quarter of 2019, which is reflected in "Cash Flows from Operating Activities" in the Consolidated Statements of Cash Flows.
Adjusted Operating EBITDA
In addition to analyzing itsour operating results on a U.S. GAAP basis, management also reviews itsour results on an “Adjusted"Adjusted Operating EBITDA”EBITDA" basis. Adjusted Operating EBITDA is defined as net earnings before interest, income taxes, other income or expense, (income) - net, depreciation and amortization plus certain items such asloss on modification or extinguishment of debt, interest, gain or loss from impairment or disposal of assets, restructuring activities, separation chargesexpense, amortization and loss on early extinguishment of debt.depreciation expense, Transformation Program expense, acquisition-related transaction and integration costs and certain other items. Management uses Adjusted Operating EBITDA as the basis on which it evaluates itswe evaluate our financial performance and makesmake resource allocationallocations and other operating decisions. Management considers it important that investors review the same operating information that it uses. During the first quarter of 2017, we updated our definition of Adjusted Operating EBITDA (previously titled “Adjusted Operating EBITA”) to exclude depreciation expense and loss on early extinguishment of debt. The prior periods have been revised as necessary to reflect these changes for consistency of presentation.used by management. Our Adjusted Operating EBITDA reconciles to net earnings as presented in the Consolidated Statements of Operations in accordance with U.S. GAAP as follows:
| | | | | Years Ended December 31, | |
| | | 2017 | | 2016 | | 2015 | | | | | | | |
| (in millions, except percentage data) | | | | (As Restated) | | | | Year Ended December 31, |
| Adjusted Operating EBITDA: | | | | | | | |
| (in millions, except percentage data) | | | 2019 | | 2018 | | 2017 |
| | $ | 132.9 |
| | $ | 71.5 |
| | $ | 156.1 |
| | $ | 55.9 |
| | $ | 78.2 |
| | $ | 132.9 |
|
| Income taxes | | (11.5 | ) | | 30.7 |
| | 40.3 |
| | 19.8 |
| | 10.8 |
| | (11.5 | ) |
| Other expense (income) — net | | 9.1 |
| | 9.0 |
| | (22.1 | ) | |
| Loss on early extinguishment of debt | | 1.7 |
| | 2.7 |
| | — |
| |
| Interest expense (income) on notes with MTW — net | | — |
| | 0.1 |
| | (15.8 | ) | |
| Other expense — net | | | 5.6 |
| | 29.8 |
| | 10.6 |
|
| Loss on modification or extinguishment of debt | | | — |
| | 9.0 |
| | 1.7 |
|
| Interest expense | | 86.9 |
| | 85.2 |
| | 1.4 |
| | 92.6 |
| | 89.0 |
| | 86.9 |
|
| Earnings from operations | | 219.1 |
| | 199.2 |
| | 159.9 |
| | 173.9 |
| | 216.8 |
| | 220.6 |
|
| (Gain) loss from impairment or disposal of assets — net | | (4.0 | ) | | 3.3 |
| | 9.9 |
| |
| Restructuring expense | | 10.8 |
| | 2.5 |
| | 4.6 |
| |
| Loss (gain) from disposal of assets — net | | | 0.7 |
| | (0.4 | ) | | (4.0 | ) |
Restructuring activities (1) | | | 9.8 |
| | 6.0 |
| | 10.8 |
|
| Separation expense | | 1.6 |
| | 6.5 |
| | 4.3 |
| | — |
| | 0.1 |
| | 1.6 |
|
| Amortization expense | | 31.2 |
| | 31.2 |
| | 31.4 |
| | 39.8 |
| | 37.0 |
| | 31.2 |
|
| Depreciation | | 16.7 |
| | 17.3 |
| | 19.6 |
| |
| Depreciation expense | | | 21.1 |
| | 18.0 |
| | 16.7 |
|
Transformation Program expense (2) | | | 35.3 |
| | — |
| | — |
|
Transaction costs (3) | | | 1.1 |
| | 7.1 |
| | — |
|
Other items (4) | | | 4.5 |
| | 5.6 |
| | — |
|
| Total Adjusted Operating EBITDA | | $ | 275.4 |
| | $ | 260.0 |
| | $ | 229.7 |
| | $ | 286.2 |
| | $ | 290.2 |
| | $ | 276.9 |
|
| | | | | | | | | | | | | |
Adjusted Operating EBITDA margin (1)(5) | | 19.1 | % | | 17.9 | % | | 14.6 | % | | 18.0 | % | | 18.3 | % | | 19.2 | % |
(1) Restructuring activities include costs associated with actions to improve operating efficiencies and rationalization of our cost structure. Refer to Note 16, "Business Transformation Program and Restructuring" for discussion of the impact to the Consolidated Statements of Operations.
(2) Transformation Program expense includes consulting and other costs associated with executing our Transformation Program initiatives. Refer to Note 16, "Business Transformation Program and Restructuring" for discussion of the impact to the Consolidated Statements of Operations.
(3) Transaction costs are associated with acquisition-related transaction and integration activities. Transaction costs recorded in "Cost of sales" include $0.1 million and $1.9 million related to inventory fair value purchase accounting adjustments for the years ended December 31, 2019 and 2018, respectively. Professional services and other direct acquisition and integration costs recorded in "Selling, general and administrative expenses" were $1.0 million and $5.2 million for the years ended December 31, 2019 and 2018, respectively.
(4) Other items are costs which are not representative of our operational performance. For the year ended December 31, 2019, the amount includes certain costs related to concluded litigation and other professional fees. For the year ended December 31, 2018, these costs include a $3.7 million loss on misappropriation of funds within our Crem business, $1.3 million related to the costs associated with the restatement of previously issued consolidated financial statements in our Form 10-K/A for the year ended December 31, 2017 and $0.6 million of other professional fees. All such amounts are included within "Selling, general and administrative expenses" in the Consolidated Statements of Operations.
(5)Adjusted Operating EBITDA margin in the section above is calculated by dividing the dollar amount of Adjusted Operating EBITDA by net sales.
Adjusted Net Earnings and Adjusted Diluted Net Earnings Per Share
The Company refers to Adjusted Net Earnings and Adjusted Diluted Net Earnings Per Share. We define Adjusted Net Earnings as net earnings before the impact of certain items, includingsuch as loss on modification or extinguishment of debt, gain or loss from impairment or disposal of assets, restructuring activities, separation charges,expense, Transformation Program expense, acquisition-related transaction and integration costs, certain other items, expenses associated with pension settlements, foreign currency transaction gain or loss, on early extinguishment of debtthe Tax Act and the Tax Cuts and Jobs Act, nettax effect of taxes.the aforementioned adjustments, as applicable. Adjusted Diluted Net Earnings Per Share for each period represents Adjusted Net Earnings while giving effect to all potentially dilutive shares of common sharesstock that were outstanding during the respective period. We believe these measures are helpfuluseful to investors in assessing the Company's ongoing performance of itsour underlying businesses before the impact of certain items. During the first quarter of 2017, we updated our definition of Adjusted Net Earnings and Adjusted Diluted Net Earnings per Share to exclude loss on early extinguishment of debt and loss on early extinguishment of debt per share, respectively. The prior periods have been revised as necessary to reflect these changes for consistency of presentation.following table presents Adjusted Net Earnings and Adjusted Diluted Net Earnings Per Share reconcilereconciled to net earnings and diluted net earnings per share, respectively, presented in accordance with U.S. GAAP as follows:GAAP:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| (in millions, except per share data) | | | | (As Restated) | | |
| Adjusted Net Earnings: | | | | | | |
| Net earnings | | $ | 132.9 |
| | $ | 71.5 |
| | $ | 156.1 |
|
| (Gain) loss from impairment or disposal of assets — net | | (4.0 | ) | | 3.3 |
| | 9.9 |
|
| Restructuring expense | | 10.8 |
| | 2.5 |
| | 4.6 |
|
| Separation expense | | 1.6 |
| | 6.5 |
| | 4.3 |
|
| Loss on early extinguishment of debt | | 1.7 |
| | 2.7 |
| | — |
|
| Tax Cuts and Jobs Act | | (32.0 | ) | | — |
| | — |
|
Tax effect of adjustments (1) | | (4.9 | ) | | (5.8 | ) | | (7.0 | ) |
| Total Adjusted Net Earnings | | $ | 106.1 |
| | $ | 80.7 |
| | $ | 167.9 |
|
| | | | | | | |
Adjusted Diluted Net Earnings Per Share(2): | | | | | | |
| Diluted net earnings per share | | $ | 0.94 |
| | $ | 0.51 |
| | $ | 1.14 |
|
| (Gain) loss from impairment or disposal of assets — net per share | | (0.03 | ) | | 0.02 |
| | 0.07 |
|
| Restructuring expense per share | | 0.08 |
| | 0.02 |
| | 0.03 |
|
| Separation expense per share | | 0.01 |
| | 0.05 |
| | 0.03 |
|
| Loss on early extinguishment of debt per share | | 0.01 |
| | 0.02 |
| | — |
|
| Tax Cuts and Jobs Act per share | | (0.23 | ) | | — |
| | — |
|
Tax effect of adjustments per share (1) | | (0.03 | ) | | (0.04 | ) | | (0.05 | ) |
| Total Adjusted Diluted Net Earnings Per Share | | $ | 0.75 |
| | $ | 0.58 |
| | $ | 1.22 |
|
|
| | | | | | | | | | | | |
| (in millions, except per share data) | | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net earnings | | $ | 55.9 |
| | $ | 78.2 |
| | $ | 132.9 |
|
| Loss on modification or extinguishment of debt | | — |
| | 9.0 |
| | 1.7 |
|
| Loss (gain) from disposal of assets — net | | 0.7 |
| | (0.4 | ) | | (4.0 | ) |
Restructuring activities (1) | | 9.8 |
| | 6.0 |
| | 10.8 |
|
| Separation expense | | — |
| | 0.1 |
| | 1.6 |
|
Transformation Program expense (2) | | 35.3 |
| | — |
| | — |
|
Transaction costs (3) | | 1.1 |
| | 17.1 |
| | — |
|
Other items (4) | | 4.5 |
| | 5.6 |
| | — |
|
Pension settlement (5) | | 1.2 |
| | 2.4 |
| | — |
|
Foreign currency transaction loss (6) | | 0.7 |
| | 10.1 |
| | 6.5 |
|
| Tax Act | | — |
| | (10.0 | ) | | (32.0 | ) |
Tax effect of adjustments (7) | | (12.9 | ) | | (7.6 | ) | | (6.6 | ) |
| Total Adjusted Net Earnings | | $ | 96.3 |
| | $ | 110.5 |
| | $ | 110.9 |
|
| | | | | | | |
| Per Share Basis | | | | | | |
| Diluted net earnings | | $ | 0.39 |
| | $ | 0.55 |
| | $ | 0.94 |
|
| Loss on modification or extinguishment of debt | | — |
| | 0.06 |
| | 0.01 |
|
| Loss (gain) from disposal of assets — net | | 0.01 |
| | — |
| | (0.03 | ) |
Restructuring activities (1) | | 0.07 |
| | 0.04 |
| | 0.08 |
|
| Separation expense | | — |
| | — |
| | 0.01 |
|
Transformation Program expense (2) | | 0.25 |
| | — |
| | — |
|
Transaction costs (3) | | 0.01 |
| | 0.12 |
| | — |
|
Other items (4) | | 0.03 |
| | 0.04 |
| | — |
|
Pension settlement (5) | | 0.01 |
| | 0.02 |
| | — |
|
Foreign currency transaction loss (6) | | — |
| | 0.07 |
| | 0.05 |
|
| Tax Act | | — |
| | (0.07 | ) | | (0.23 | ) |
Tax effect of adjustments (7) | | (0.09 | ) | | (0.05 | ) | | (0.04 | ) |
| Total Adjusted Diluted Net Earnings | | $ | 0.68 |
| | $ | 0.78 |
| | $ | 0.79 |
|
(1) Restructuring activities include costs associated with actions to improve operating efficiencies and rationalization of our cost structure. Refer to Note 16, "Business Transformation Program and Restructuring" for discussion of the impact to the Consolidated Statements of Operations.
(2) Transformation Program expense includes consulting and other costs associated with executing our Transformation Program initiatives. Refer to Note 16, "Business Transformation Program and Restructuring" for discussion of the impact to the Consolidated Statements of Operations.
(3) Transaction costs are associated with acquisition-related transaction and integration activities. These costs include $0.1 million and $1.9 million related to inventory fair value purchase accounting adjustments recorded in "Cost of sales" for the years ended December 31, 2019 and 2018, respectively. Professional services and other direct acquisition and integration costs recorded in "Selling, general and administrative expenses" were $1.0 million and $5.2 million for the years ended December 31, 2019 and 2018, respectively. Transaction costs also included losses of $10.0 million related to a foreign currency hedge of the acquisition purchase price for Crem recorded in "Other expense-net" for the year ended December 31, 2018.
(4) Other items are costs which are not representative of our operational performance. For the year ended December 31, 2019, the amount includes certain costs related to concluded litigation and other professional fees. For the year ended December 31, 2018, these costs include a $3.7 million loss on misappropriation of funds within our Crem business, $1.3 million related to the costs associated with the restatement of previously issued consolidated financial statements in our Form 10-K/A for the year ended December 31, 2017 and $0.6 million of other professional fees. All such amounts are included within "Selling, general and administrative expenses" in the Consolidated Statements of Operations.
(5) Pension settlement represents non-cash pension losses resulting from settlement of pension obligations. Refer to Note 15, "Employee Benefit Plans" for discussion of the impact to the Consolidated Statements of Operations.
(6) Foreign currency transaction gains and losses are inclusive of gains and losses on related foreign currency exchange contracts not designated as hedging instruments for accounting purposes.
(7) The tax effect of adjustments is determined using the effectivestatutory tax rates for the countries comprising such adjustments.
(2) For the years ended December 31, 2016 and 2015, Adjusted Diluted Net Earnings Per Share was retrospectively restated for the number of shares outstanding immediately following the Spin-Off.
Organic Net Sales
The Company refers to Organic Net Sales. Organic Net Sales reflectWe define "Organic net sales" as net sales before the impact of divestituresacquisitions and foreign currency translation. translations during the period. We believe the Organic net sales measure is useful to investors in assessing the ongoing performance of our underlying businesses. Organic net sales reconcile to net sales presented in accordance with U.S. GAAP as follows:
|
| | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2019 | | 2018 |
| Consolidated: | | | | |
| Net sales | | $ | 1,853.4 |
| | $ | 1,842.6 |
|
| Less: Intersegment sales | | (259.5 | ) | | (252.5 | ) |
| Net sales (as reported) | | 1,593.9 |
| | 1,590.1 |
|
| Less: Crem acquisition | | (24.0 | ) | | — |
|
| Organic third-party net sales | | 1,569.9 |
| | 1,590.1 |
|
Impact of foreign currency translation(1) | | 21.9 |
| | — |
|
| Organic net sales | | $ | 1,591.8 |
| | $ | 1,590.1 |
|
| | | | | |
| Americas: | | | | |
| Net sales | | $ | 1,208.4 |
| | $ | 1,228.4 |
|
| Less: Intersegment sales | | (133.1 | ) | | (137.5 | ) |
| Third-party net sales | | 1,075.3 |
| | 1,090.9 |
|
Impact of foreign currency translation(1) | | 2.8 |
| | — |
|
| Total Americas organic net sales | | $ | 1,078.1 |
| | $ | 1,090.9 |
|
| | | | | |
| EMEA: | | | | |
| Net sales | | $ | 392.7 |
| | $ | 385.1 |
|
| Less: Intersegment sales | | (79.5 | ) | | (77.7 | ) |
| Third-party net sales | | 313.2 |
| | 307.4 |
|
| Less: Crem acquisition | | (19.0 | ) | | — |
|
| Organic third-party net sales | | 294.2 |
| | 307.4 |
|
Impact of foreign currency translation(1) | | 15.7 |
| | — |
|
| Total EMEA organic net sales | | $ | 309.9 |
| | $ | 307.4 |
|
| | | | | |
| APAC: | | | | |
| Net sales | | $ | 252.3 |
| | $ | 229.1 |
|
| Less: Intersegment sales | | (46.9 | ) | | (37.3 | ) |
| Third-party net sales | | 205.4 |
| | 191.8 |
|
| Less: Crem acquisition | | (5.0 | ) | | — |
|
| Organic third-party net sales | | 200.4 |
| | 191.8 |
|
Impact of foreign currency translation(1) | | 3.4 |
| | — |
|
| Total APAC organic net sales | | $ | 203.8 |
| | $ | 191.8 |
|
(1) The impact from foreign currency translation is calculated by translating current period balancesactivity at the weighted average prior period rates. We believe this measure is helpful to investors in assessing the Company's ongoing performance of its underlying businesses. Organic Net Sales reconciles to net sales presented in accordance with U.S. GAAP as follows:
|
| | | | | | | | |
| | | Years Ended December 31, |
| | | 2017 | | 2016 |
| (in millions) | | | | (As Restated) |
| Net sales (as reported) | | $ | 1,445.4 |
| | $ | 1,456.1 |
|
| Less: Latin America Kysor Panel Systems sales | | — |
| | (10.6 | ) |
| Less: China field service sales | | — |
| | (4.0 | ) |
| Foreign currency translation | | 1.4 |
| | — |
|
| Organic Net Sales | | $ | 1,446.8 |
| | $ | 1,441.5 |
|
|
| | | | | | | | |
| (in millions) | | Year Ended December 31, |
| | 2019 | | 2018 |
| Net sales (as reported) | | $ | 1,593.9 |
| | $ | 1,590.1 |
|
| Less: Crem net sales | | (24.0 | ) | | — |
|
Impact of foreign currency translation(1) | | 21.9 |
| | — |
|
| Organic net sales | | $ | 1,591.8 |
| | $ | 1,590.1 |
|
(1) The impact from foreign currency translation is calculated by translating current period activity at the weighted average prior period rates.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the consolidated financial statements and related footnotes. In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Although we have listed a number ofseveral accounting policies below which we believe to be most critical, we also believe that all of our accounting policies are important to the reader. Therefore, please refer also to the notesNotes to consolidated financial statementsConsolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K/A10-K for more detailed description of these and other accounting policies of Welbilt.
Basis of Presentation Revenue Recognition- The financial statements for all periods prior to the Spin-Off include the accounts of Welbilt and its subsidiaries as well as entities which were not subsidiaries prior to the Spin-Off but are now part of Welbilt. The initial accounts of Welbilt were prepared on a combined stand-alone basis derived from the foodservice segment within the consolidated financial statements and accounting records of MTW. The initial accounts also include the costs associated with shared functions, primarily corporate support functions that were provided on a centralized basis at the MTW enterprise level. MTW historically only allocated a portion of the costs associated with these shared functions to the segments, but not on a fully allocated basis. See "Corporate Expense Allocations" below for details of the allocations.
Prior to the Spin-off, the consolidated financial statements were prepared on a stand-alone basis and reflect the historical results of operations, financial position and cash flows of Welbilt in accordance with U.S. GAAP. The consolidated financial statements are presented as if Welbilt had been carved out of MTW for all periods presented. All significant intercompany transactions within Welbilt have been eliminated.
Corporate Expense Allocations - The combined financial statements for the periods prior to the Spin-Off include expense allocations for (1) corporate support functions that were provided on a centralized basis at MTW enterprise level including, but not limited to, finance, audit, legal, information technology, human resources, tax, treasury, investor relations, and external reporting; (2) stock-based compensation; (3) employee compensation, pension and benefit costs; and (4) securitization financing costs. These expenses were allocated to Welbilt based on direct usage or direct identification where applicable, and where not applicable, such costs were allocated primarily based on net sales, headcount or based on existing allocation methods, specifically for those costs which were previously partially allocated to Welbilt or other methodologies deemed appropriate by management. Debt obligations of MTW, specifically those that relate to the enterprise senior notes, term loans and revolving credit facilities, have not been allocated to us as we were not an obligor nor a party to the obligations between MTW and the debt holders. Corresponding financing costs related to these debt obligations likewise were not allocated to us as we did not participate in these enterprise financing activities. See Note 24, "Net Parent Company Investment and Related Party Transactions,"adoption of the consolidated financial statements included in Part II, Item 8provisions of this Annual Report on Form 10-K/A forASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" and with additional discussions on expense allocations.
Management believes that the assumptions underlying the combined financial statements, including the assumptions regarding allocated expenses reasonably reflect the use of services provided to or the benefit received by us during the periods presented. Nevertheless, the combined financial statements may not include all of the actual expenses that would have been incurred by us and may not reflect our results of operations, financial position and cash flows hadupdates subsequently issued (collectively, "ASU 2014-09"), we been a stand-alone company during the periods presented. Actual expenses that would have been incurred if we had been a stand-alone company would depend on several factors, including but not limited to the stand-alone organizational structure and certain operational and strategic decisions in various areas like corporate infrastructure.
Revenue Recognition - Revenue is generally recognized and earned revenue when all the following criteria arewere satisfied with regard to a specific transaction: persuasive evidence of ana sales arrangement exists,exists; the price is fixed and determinable,or determinable; collectability of cash is reasonably assured,assured; and delivery has occurred or services have been rendered.
Accounts receivableOn January 1, 2018, we adopted the provisions of ASU 2014-09, which creates a single, comprehensive revenue recognition model for all contracts with customers. The model is based on changes in contract assets (rights to receive consideration) and Allowance for Doubtful Accounts - Accounts receivable is reduced by an allowance for amounts that may become uncollectibleliabilities (obligations to provide a good or service). Management makes judgments including identifying performance obligations in the future. Our estimate forcontract, estimating the allowance for doubtful accounts relatedamount of variable consideration to trade receivables includes evaluationinclude in the transaction price, and allocating the transaction price to each performance obligation. Subsequent to the adoption of specific accounts whereASU 2014-09, revenue is recognized based on the satisfaction of performance obligations, which occurs when service is provided or control of a good transfers to a customer. A majority of our net sales continue to be recognized at the point in time when products are shipped from our manufacturing facilities.
For the majority of foodservice equipment and aftermarket parts and support, the transfer of control and revenue recognition materializes when the products are shipped from the manufacturing facility or the service is provided to the customer. We typically invoice our customers with payment terms of 30 days and our average collection cycle is generally less than 60 days and we have informationdetermined these payment terms do not contain a significant financing component. Costs to obtain a customer contract are expensed as incurred as our contract periods are generally short term in nature. The amount of consideration received and revenue recognized varies with marketing incentives such as annual customer rebate programs and right of return terms that theare offered to customers. Variable consideration as a result of customer may have an inability to meet its financial obligations together with a general provision for unknown but existing doubtful accountsrebate programs is typically based on calendar-year purchases and is determined using the expected value method in interim periods as prescribed in the guidance. Customers have the right to return eligible equipment and parts. The expected returns are based on an analysis of historical experience, whichexperience. The estimate of revenue is adjusted at the earlier of when the most likely amount of the expected consideration changes or when the consideration becomes fixed.
Income Taxes- We are subject to change if experience improvesincome taxes in the U.S. and various foreign jurisdictions. The determination of our income tax positions involves consideration of uncertainties, changing fiscal policies, tax laws, court rulings, regulations and related legislation. The Tax Act, enacted on December 22, 2017, introduced comprehensive and complex tax legislation, including a provision designed to tax global intangible low-taxed income (“GILTI”), foreign-derived intangible income, and other items that are subject to continuous guidance and interpretations. Accordingly, significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits, and the valuation allowance recorded against deferred tax assets.
Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deteriorates.
Transactions underdeductible amounts in future years when the Company's securitization programsreported amount of the assets and liabilities are accountedrecovered or settled, respectively. The recognition and measurement of deferred tax asset and liability balances and the corresponding deferred tax expense are determined for as sales. Sales of trade receivables to the purchaser are reflected aseach tax-paying component in each applicable jurisdiction. We record a valuation allowance that represents a reduction of accounts receivable in the consolidated balance sheets and the proceeds received, including collectionsdeferred tax assets if, based on the deferred purchase price notes, are included in cash flows from operating activities in the consolidated statementsweight of cash flows. The Company deems the interest rate risk related toavailable evidence, both positive and negative, it is more-likely-than-not that the deferred purchase price notes totax assets will not be de minimis, primarily due torealized.
We also recognize liabilities for unrecognized tax benefits, which are recognized if the short average collection cycleweight of available evidence indicates that it is not more-likely-than-not that the positions will be sustained on examination, including resolution of the related receivables (i.e., less than 60 days)appeals or litigation processes, if any. At each reporting period, unrecognized tax benefits are reassessed and adjusted if our judgment changes as noted above.a result of new information.
We adopted the period cost method for the computation of GILTI, that was introduced in the Tax Act.
We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Inventories and Related Reserve for Obsolete and Excess Inventory- The majority of our inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Certain inventories are valued using the last-in, first-out (LIFO) method. All inventories are reduced by a reserve for excess and obsolete inventories. The estimated reserve is based upon specific identification of excess or obsolete inventories based on historical usage, estimated future usage, sales requiring the inventory and on historical write-off experience, and areis subject to change if actual experience improvesdeteriorates.
Business Combinations- We allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth rates and margins, customer attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or deteriorates.liability. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
Goodwill, Other Intangible Assets and Other Long-Lived Assets- The Company performsWe perform annual impairment tests of goodwill and intangible assets with indefinite lives at June 30 of each fiscal year and whenever a triggering event occurs between annual impairment tests. TheWe perform the goodwill impairment test is performed for the Company'seach of our reporting units which have been determined to be:are: Americas, EMEA and APAC. When testing for impairment, the Company haswe have the option to first assess qualitative factors to determine whether it is more likely than notmore-likely-than-not that the fair value of any reporting unit or indefinite lived intangible asset is less than its carrying amount. In conducting a qualitative assessment, the Company evaluateswe evaluate the totality of relevant events and circumstances that affect the fair value or carrying value of the reporting unit or asset. These events and circumstances include, but are not limited to, macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations. In those instances where the Company concludeswe conclude that it is not more likely than notmore-likely-than-not that the fair value is less than the carrying amount, no impairment is indicated and no further impairment test is performed.
When the Company chooseswe choose not to perform a qualitative assessment, or if, based on the qualitative assessment, the Company concludeswe conclude it is more likely than notmore-likely-than-not that the fair value is less than the carrying amount, a quantitative impairment test is performed at the reporting unit level utilizing the one-step approach. This one-step approach identifies both the existence of impairment and the amount of the impairment loss. In conducting the quantitative analysis, the Company compareswe compare the fair value of the reporting unit with goodwill or the indefinite lived intangible asset to its carrying value. The fair value is determined using the income approach based on the present value of expected future cash flows, including terminal value, and a weighted average cost of capital all of which involve management judgment and assumptions. When the carrying amount of the reporting or the intangible asset exceeds its fair value, the Company recognizeswe recognize an impairment loss in an amount equal to the excess; however, the impairment loss for goodwill is limited to the total amount of the goodwill allocated to the reporting unit. See Note 9,7, "Goodwill and Other Intangible Assets — Net," of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further details on the Company'sour impairment assessments.
When reviewing its long-lived assets, other than goodwill and other intangible assets with indefinite lives, we group our assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows to determine impairments. If an impairment is determined to exist, the impairment loss is calculated based upon comparison of the fair value to the net book value of the assets. Impairment losses on assets held for sale are based on the estimated proceeds to be received, less costs to sell.
We will continue to monitor market conditions and determine if any additional interim reviews of goodwill, other intangibles or long-lived assets are warranted. Deterioration in the market or actual results as compared with our projections may ultimately result in a future impairment. In the event we determine that assets are impaired in the future, we would need to recognize a non-cash impairment charge, which could have a material adverse effect on our consolidated balance sheetConsolidated Balance Sheets and resultsConsolidated Statements of operations.Operations.
Employee Benefit Plans Product Warranties- In the normal course of business, we provide our customers warranties covering workmanship, and in some cases materials, on products manufactured by us. Such warranties generally provide that products will be free from defects for periods typically ranging from 12 to 60 months with certain equipment having longer-term warranties. If a product fails to comply with our warranty, we may be obligated, at our expense, to correct any defect by repairing or replacing such defective product. We provide a rangefor an estimate of benefits tocosts that we may incur under our employees and retired employees, including pensions and postretirement health care coverage. Plan assets and obligations are recorded annually based on our measurement date utilizing various actuarial assumptions such as discount rates, expected return on plan assets, compensation increases, retirement and mortality rates, and health care cost trend rates aswarranty at the time of that date. The approaches we use to determine the annual assumptions are as follows:
Discount Rate - Our discount rate assumptions are based on the interest rate of non-callable high-quality corporate bonds, with appropriate consideration of our pension plans’ participants’ demographics and benefit payment terms.
Expected Return on Plan Assets - Our expected return on plan assets assumptions are based on our expectation of the long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds.
Retirement and Mortality Rates - Our retirement and mortality rate assumptions are based primarily on actual plan experience and mortality tables.
Health Care Cost Trend Rates - Our health care cost trend rate assumptions are developedrevenue recognition based on historical cost data, near-term outlook and an assessment of likely long-term trends.
Measurements of net periodic benefit cost are based on the assumptions usedwarranty experience for the previous year-end measurementsrelated product or estimates of assetsprojected losses due to specific warranty issues on new products. These costs primarily include labor and obligations. We reviewmaterials, as necessary, associated with repair or replacement. The primary factors that affect our actuarial assumptions on an annual basiswarranty liability include the number of shipped units and make modifications tohistorical and anticipated rates or warranty claims. As these factors are impacted by actual experience and future expectations, we assess the assumptions when appropriate. As required by U.S. GAAP, the effects of the modifications are recorded currently or amortized over future periods. We have developed the assumptions with the assistanceadequacy of our independent actuariesrecorded warranty liability and other relevant sources, and we believe thatadjust the assumptions used are reasonable; however, changes in these assumptions could impact our financial position, results of operations or cash flows. Refer to Note 20, "Employee Benefit Plans," of the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K/A for a summary of the impact of a 0.5% change in the discount rate and rate of return on plan assets and a 1% change on health care trend rates would have on our financial statements.amounts as necessary.
Product Liability Liabilities- We are subject in the normal course of business to product liability lawsuits. To the extent permitted under applicable laws, our exposure to losses from these lawsuits is mitigated by insurance with self-insurance retention limits. We record product liability reserves for our self-insured portion of any pending or threatened product liability actions. Our reserve is based upon two estimates. First, we track the population of all outstanding pending and threatened product liability cases to determine an appropriate case reserve for each based upon our best judgment and the advice of legal counsel. These estimates are continually evaluated and adjusted based upon changes to the facts and circumstances surrounding the case. Second, we determine the amount of additional reserve required to cover incurred but not reported
reported product liability issues and to account for possible adverse development of the established case reserves. This analysis is performed twice annually. We have established a position within the actuarially determined range that we believe is the best estimate for incurred but unreported claims. We perform this analysis two times per year.
Income TaxesDerivative Financial Instruments and Hedging Activities - Deferred tax assetsWe enter into derivative instruments to hedge interest rate risk, commodity exposure associated with aluminum, copper and liabilities are recognizedsteel prices and foreign currency exchange risk.
We have adopted written policies and procedures that place all financial instruments under the direction of corporate treasury and restrict all derivative transactions to those intended for hedging purposes. The use of financial instruments for trading purposes is strictly prohibited. We record the future tax consequences attributable to differences between financial statement carrying amountsfair values of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable incomeall derivatives in the years in which those temporary differences are expected to be recovered or settled. We record a valuation allowance that represents a reserve on deferred tax assets for which utilization is not more likely than not. Management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against our net deferred tax assets.Consolidated Balance Sheets. We do not currently provideoffset the fair values of derivative contract assets and liabilities. The change in a derivative’s fair value is recorded each period in current earnings or comprehensive income depending on whether the derivative is designated and qualifies as part of a hedge transaction and if so, the type of hedge transaction. The amount of derivative instrument fair market value adjustments for additional U.S.cash flow hedges and foreign income taxes which would become payable upon repatriationnet investment hedges are reported in the Consolidated Statements of undistributed earningsComprehensive Income, net of foreign subsidiaries.
taxes. We recognize liabilitiesfair market value adjustments for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefitfair value hedges, as well as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determineoffsetting gain or loss on the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increasehedged item attributable to the tax accrual.hedged risk in current earnings within the same line item associated with the hedged item.
Stock-Based Compensation - The computation of the expense associated with stock-based compensation requires the use of certain valuation models and is based on projected achievement of underlying performance criteria for performance shares. We currently use a Black-Scholes option pricing model to calculate the fair value of our stock options. The Black-Scholes model requires the use of assumptions regarding the volatility of our stock, the expected life of the stock award and our dividend ratio. We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflectregarding future stock price volatility, future dividend payments and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. Stock-based compensation expense is recognized only for those stock-based awards expected to vest.
Warranties Employee Benefit Plans - In the normal course of business, we provide our customers warranties covering workmanship, and in some cases materials, on products manufactured by us. Such warranties generally provide that products will be free from defects for periods typically ranging from 12 months to 60 months with certain equipment having longer-term warranties. If a product fails to comply with our warranty, we may be obligated, at our expense, to correct any defect by repairing or replacing such defective product. We provide for an estimatea range of costsbenefits to our employees and retired employees, including pensions and postretirement health care coverage. We record Defined Benefit Plan assets and obligations using amounts calculated annually as of our measurement date utilizing various actuarial assumptions such as discount rates, expected return on plan assets, compensation increases, retirement and mortality rates, and health care cost trend rates as of that may be incurred under our warranty atdate. The approaches we use to determine the time product revenue is recognizedannual assumptions are as follows:
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| • | Discount Rate - Our discount rate assumptions are based on the interest rate of non-callable high-quality corporate bonds, with appropriate consideration of demographics of the participants in our pension plans and benefit payment terms. |
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| • | Expected Return on Plan Assets - Our expected return on plan assets assumptions are based on our expectation of the long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds. |
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| • | Retirement and Mortality Rates - Our retirement and mortality rate assumptions are based primarily on actual plan experience and actuarial mortality tables. |
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| • | Health Care Cost Trend Rates - Our health care cost trend rate assumptions are developed based on historical cost data, near-term outlook and an assessment of likely long-term trends. |
Measurements of net periodic benefit cost are based on historical warranty experiencethe assumptions used for the related productprevious year-end measurements of assets and obligations. We review our actuarial assumptions on an annual basis and make modifications to the assumptions when appropriate. As required by U.S. GAAP, the effects of the modifications are recorded currently or estimates of projected losses due to specific warranty issues on new products. These costs primarily include labor and materials, as necessary, associatedamortized over future periods. We have developed the assumptions with repair or replacement. The primary factors that affect our warranty liability include the number of shipped units and historical and anticipated rates or warranty claims. As these factors are impacted by actual experience and future expectations, we assess the adequacyassistance of our recorded warranty liabilityindependent actuaries and adjustother relevant sources, and we believe that the amounts as necessary.assumptions used are reasonable; however, changes in these assumptions could impact our financial position, results of operations or cash flows. Refer to Note 15, "Employee Benefit Plans," of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of the impact of a 0.5% change in the discount rate and rate of return on plan assets would have on our consolidated financial statements.
Restructuring Charges - Restructuring charges for exit and disposal activities are recognized when the liability is incurred. The liability for the restructuring charge associated with an exit or disposal activity is measured initially at its fair value.
Recent Accounting Changes and Pronouncements
See Note 2, "Summary"Basis of Presentation and Summary of Significant Accounting Policies," of the Notes to the Consolidated Financial Statements included in our notes to consolidated financial statements included elsewhere inPart II, Item 8 of this Annual Report on Form 10-K/A10-K for discussion of recently issued accounting pronouncements applicable to us and the impact of those standards on our consolidated financial statements and related disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This market risk discussion contains forward-looking statements and actual results may differ materially from the discussion included below based upon general market conditions and changes in the global financial markets.
We have global operations in the U.S. and globally and are exposed to market risks in the ordinary course of our business. These risks may change over time as business practices evolve and could have a material impact on our financial results in the future. These market risks include, but are not limited to, changes in interest rates, commodity price risk and changes in foreign currency exchange rates. To reduce these risks, we selectively use derivative financial instruments and other proactive management techniques. We haveOur corporate governance includes policies and procedures that place financial instruments under the direction of corporate finance and restrict all derivative transactions to those intended for hedging purposes only. The use of financial instruments for trading purposes or speculation is strictly prohibited. This market risk discussion contains forward-looking statements. Actual results may differ materially from
As further discussed below, we utilize valuation models to estimate the discussion based upon general market conditions andeffects of changes in U.S.interest and global financial markets.currency rates and commodity prices for each of our derivative instruments in order to determine the impact of a hypothetical change of 10.0% on inputs used in the valuation models.
Interest Rate Risk
We are exposed to market risk from fluctuations in interest rates, which could affect our consolidated balance sheet, earningsfinancial position and cash flows. Our interest rate risk management objective is to limit the impact of interest rate changes and to minimize our overall borrowing costs. To achieve our objective, we use a combination of fixed and variable rate debt. The nature and amount of our long-term and short-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. Stockholders' equity can also be adversely affected by changing interest rates, as after-tax changes in the fair value of interest rate swaps designated as cash flow hedges are reflected as increases and decreases to a component of stockholders' equity while for fair value hedges these after-tax changes are reflected as increases and decreases directly to earnings.equity.
We are exposed to interest rate risk on borrowings under the Senior Secured Credit FacilitiesFacility which bear interest at variable rates and are vulnerable to changes primarily in the LIBOR rate. Additionally, we are exposed to fair value risk if we repurchase or exchange Senor Notes prior to maturity. We manage our exposure to market risk through regular operating and financing activities and when considered appropriate, through the use of derivative financial instruments. See Note 610, "Debt," and Note 11, "Derivative Financial Instruments" and Note 12 "Debt"Instruments," of the notesNotes to consolidated financial statementsthe Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information.
As of December 31, 2017,2019, we had $815.0$855.0 million of variable rate debt outstanding under our Term Loan B.B Facility of the Senior Secured Credit Facility. To manage the risk of fluctuations in this variable rate debt, we entered intomaintain an interest rate swapsswap for an aggregate notional amount of $600.0$425.0 million during the first quarter of 2017. Of this amount, $175.0 million terminateswhich matures in March 2020. As of December 31, 2019, and $425.0a 10% change in short-term interest rates would not have a material impact on the fair value of this interest rate swap. Approximately $430.0 million terminatesof our Term Loan B variable rate debt was not hedged as of December 31, 2019. A hypothetical change of 10% in March 2020.short-term interest rates as of December 31, 2019, would result in a $1.6 million change in annualized interest expense for the unhedged portion of the Term Loan B Facility. We also have a $400.0 million Revolving Credit Facility, which bears interest based on market rates plus an applicable margin as determined by our Consolidated Total Leverage Ratio. As our interest rate on the Revolving Credit Facility is based on market rates, we are exposed to fluctuations in interest rates. Based upon the outstanding balance on our Revolving Credit Facility of $141.8 million as of December 31, 2019, a hypothetical change of 10% in short-term interest rates would not have a material impact on the annualized interest expense.
As of December 31, 2017,2019, we had $425.0 million of fixed rate debt outstanding under our Senior Notes with a fair value of approximately $483.8$450.9 million. The terms of the Senior Notes do not generally allow investors to demand payment ofon these obligations prior to maturity. However, we do have exposure to fair value risk if we repurchase or exchange Senior Notes prior to maturity. In the fourth quarter of 2017, we entered into an interest rate swap with a total notional amount of $425.0 million that terminates in February 2024 to manage this risk.
We utilize valuation models to estimate the effects of changing interest rates as an interest rate "shock" and continues to increase or decrease at a consistent level above or below the LIBOR curve. The impact of a hypothetical change of 10.0% in short-term interest rates would result in an increase/decrease in the fair value of these interest rate swaps of approximately $0.2 million.
Approximately $215.0 million of our Term Loan B variable rate debt was not hedged at December 31, 2017. A hypothetical change of 10% in short-term interest rates would result in a $0.3 million change in interest rate expense on an annual basis for this unhedged portion of outstanding debt.
Commodity Price Risk
We are exposed to fluctuating market prices for our key commodities utilized in the production of our product offerings, including steel, nickel,aluminum, copper aluminum, and natural gas.steel. We have established procurement programs to manage the negotiations of these commodity prices. We also routinely enterHistorically, we have entered into commodity hedges that fix the price of certain of our key commodities utilized incommodities. During the productionyear ended December 31, 2019, we discontinued the hedging of our product offerings including copper, aluminum, certain steel inputs and natural gas. Historically, we have not experienced material reductions in our margins as a result of increases in commodity prices. However, to the extent that our hedging is not successful in fixing commodity prices that are favorable in comparison to market prices at the time of purchase and we cannot or do not pass along increased commodity prices to our customers, we would experience a negative impact on our margins.contracts.
As of December 31, 2017,2019, we had openremaining commodity derivatives with aggregate notional values of 1,620524 metric tons of aluminum, 667269 metric tons of copper and 7,7131,778 short tons of steel. A 10% increase in the cost of a commodity would be offset by a gain on the derivative and a 10% decrease in the cost of a commodity would be offset by a loss on the derivative. The A hypothetical change of 10% in the cost of a commodity price risk associated withwould not have a material impact on our derivative positions at December 31, 2017 would be as follows:results of operations.
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| | | | | | | | |
| | | December 31, 2017 |
| (in millions) | | 10% Increase | | 10% Decrease |
| Commodity: | | | | |
| Aluminum | | $ | 0.4 |
| | $ | (0.4 | ) |
| Copper | | 0.5 |
| | (0.5 | ) |
| Steel | | 0.4 |
| | (0.4 | ) |
Currency Price Risk
We are subject to foreign currency exchange risk fordue to our international operations. We have manufacturing, sales and distribution facilities around the world and thusas a result make investments and enter into transactions denominated in various foreign currencies. Non-U.S. sales were approximately 34.7%37.8% of our total sales for 2017,the year ended December 31, 2019, with the largest percentage, 15%17.7%, being sales into various European countries. WhenThe translation of the financial statements of foreign operations into U.S. dollar strengthens compared to other currencies, the effectdollars is a reductionalso impacted by fluctuations in revenues and expenses denominated in currencies other than the U.S. dollar. foreign currency exchange rates, which may positively or negatively impact our results of operations.
To manage a portion of our foreign exchange risk, we enter into limited forward exchange contracts to 1) reduce the impact of changes in foreign currency rates between a budgeted rate and the rate realized at the time we recognize a particular purchase or sale transaction and 2) reduce the earnings and cash flow impact on non-functional currency denominated receivables and payables. Our transactions in foreign currencies are denominated primarily in the currencies below.
The impact of a 10% change in the underlying functional currencies on our currency forward contracts which are outstanding atand continue to qualify for hedge accounting as of December 31, 20172019 would be as follows:
| | | | | December 31, 2017 | | | | | |
| (in millions) | | 10% Increase | | 10% Decrease | | December 31, 2019 |
| (in millions) | | | 10% Increase | | 10% Decrease |
| | Canadian Dollar | | $ | 1.4 |
| | $ | (1.4 | ) | | $ | 0.7 |
| | $ | (0.8 | ) |
| European Euro | | 0.6 |
| | (0.6 | ) | |
| Euro | | | $ | (0.8 | ) | | $ | 0.8 |
|
| British Pound | | (0.1 | ) | | 0.1 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Mexican Peso | | 0.6 |
| | (0.6 | ) | | $ | 0.6 |
| | $ | (0.7 | ) |
| Singapore Dollar | | 0.1 |
| | (0.1 | ) | | $ | 0.2 |
| | $ | (0.2 | ) |
We are further exposed to foreign currency exchange rate risk as our investments in certain foreign subsidiaries are recorded in currencies other than the U.S. dollar. As these foreign currency denominated investments are translated at the end of each period during consolidation using period-end exchange rates, fluctuations of exchange rates between the foreign currency and the U.S. dollar increase or decrease the value of those investments. The associated translation adjustments recorded in "Accumulated other comprehensive loss"Accumulated Other Comprehensive Loss in the consolidated balance sheet atConsolidated Balance Sheets as of December 31, 20172019 was a loss of $4.4$4.3 million. As of December 31, 2019, a United Kingdom-based subsidiary held a British pound denominated borrowing under the Senior Secured Credit Facility, the U.S. dollar equivalent of $31.8 million, that exposes us to additional foreign currency exchange rate fluctuations. During the first quarter of 2017, we entered into a three yearthree-year cross-currency interest rate swap with a notional value of €50.0 million to protect the value of our net investment in Euros. A 10% fluctuation in exchange rates between the Euro and the U.S. dollar as of December 31, 2019would change the fair value of this swap by $6.0 million.$5.6 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedule:
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All other schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
and Stockholders of Welbilt, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Welbilt, Inc. and its subsidiaries (the “Company”)as of December 31, 20172019 and 2016,2018, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2017,2019, including the related notes and financial statement schedule listedof valuation and qualifying accounts for each of the three years in the indexperiod ended December 31, 2019 appearing under Item 15(a)(2) (collectively referred to as the “consolidatedfinancial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain,maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013)issued by the COSO becausea material weaknessCOSO.
Change in internal control over financial reporting existed as of that date related to the accounting for income taxes.Accounting Principle
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 consolidatedfinancial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidatedfinancial statements.
Restatement of Previously Issued Financial Statements and Management’s Conclusion Regarding Internal Control Over Financial Reporting
As discussed in Note 12 to the consolidated financial statements, the Company has restated its 2016 financial statements to correct errors.changed the manner in which it accounts for leases in 2019.
Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2017. However, management has subsequently determined that a material weakness in internal control over financial reporting related to the accounting for income taxes existed as of that date. Accordingly, management’s report has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report.
Basis for Opinions
The Company's management is responsible for these consolidatedfinancial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management's report referred to above.Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income Taxes
As described in Notes 2 and 9 to the consolidated financial statements, the Company is subject to income taxes in the U.S. and various foreign jurisdictions. The Company recorded income tax expense of $19.8 million for the year ended December 31, 2019 and had deferred tax assets of $14.7 million, which included a valuation allowance of $28.3 million, as of December 31, 2019. The determination of the Company’s income tax positions involves consideration of uncertainties, changing fiscal policies, tax laws, court rulings, regulations and related legislation. The Company records a valuation allowance that represents a reduction of deferred tax assets if, based on the weight of available evidence, both positive and negative, it is more-likely-than-not that the deferred tax assets will not be realized. The Company also recognized liabilities for unrecognized tax benefits of $4.2 million as of December 31, 2019, which are recognized if the weight of available evidence indicates that it is not more-likely-than-not that the position will be sustained on examination, including resolution of the related appeals or litigation processes, if any. Management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits, and the valuation allowance recorded against deferred tax assets.
The principal considerations for our determination that performing procedures relating to income taxes is a critical audit matter are there was a high degree of auditor judgment and subjectivity involved in performing audit procedures and evaluating audit evidence relating to (i) assessing the impact of changing fiscal policies, tax laws, court rulings, regulations and related legislation, (ii) the weight of available evidence in determining the realizability of deferred tax assets, and (iii) the weight of available evidence for liabilities for unrecognized tax benefits. Also, a high degree of auditor subjectivity and significant audit effort was required in performing audit procedures and evaluating audit evidence relating to income taxes. As previously disclosed by management, a material weakness existed during the year related to this matter.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the provision for income taxes, the recognition of deferred tax assets and liabilities, the weight of available evidence representing the more-likely-than-not recognition of a valuation allowance recorded against the deferred tax assets, the change in liabilities for unrecognized tax benefits, the accounting for changes in regulations and related legislation, and income tax disclosures. These procedures also included, among others (i) testing the income tax provision, including the effective tax rate reconciliation, return to provision adjustments, and permanent and temporary differences, (ii) evaluating management's assessment of the realizability of deferred tax assets on a tax entity filing basis, (iii) evaluating the weight of available evidence for liabilities for unrecognized tax benefits and (iv) evaluating the impacts of changes in regulations and related legislation.
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| /s/ PricewaterhouseCoopers LLP | |
Certified Public Accountants | |
| Tampa, Florida | |
| February 26, 2020 | |
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| We have served as the Company's auditor since 2015. | |
March 1, 2018, except for the effects of the restatement and revision discussed in Note 1 to the consolidated financial statements and Footnote 2 to the financial statement schedule, the effects of the restatement to the consolidating statement of cash flows discussed in Note 26, and the matter described in the penultimate paragraph of Management’s Report on Internal Control over Financial Reporting, as to which the date is November 19, 2018
We have served as the Company’s auditor since 2015.-51-
WELBILT, INC.
Consolidated Statements of Operations
(In millions, except share and per share data)
| | | | | Year Ended December 31, | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | Year Ended December 31, |
| | | | | (As Restated) | | | | 2019 | | 2018 | | 2017 |
| Net sales | | $ | 1,445.4 |
| | $ | 1,456.1 |
| | $ | 1,570.1 |
| | $ | 1,593.9 |
| | $ | 1,590.1 |
| | $ | 1,445.4 |
|
| Cost of sales | | 908.5 |
| | 922.3 |
| | 1,068.4 |
| | 1,027.0 |
| | 1,020.9 |
| | 908.5 |
|
| Gross profit | | 536.9 |
| | 533.8 |
| | 501.7 |
| | 566.9 |
| | 569.2 |
| | 536.9 |
|
| Selling, general and administrative expenses | | 278.2 |
| | 291.1 |
| | 291.6 |
| | 344.2 |
| | 309.8 |
| | 278.3 |
|
| Amortization expense | | 31.2 |
| | 31.2 |
| | 31.4 |
| | 38.7 |
| | 37.0 |
| | 31.2 |
|
| Separation expense | | 1.6 |
| | 6.5 |
| | 4.3 |
| |
| Restructuring expense | | 10.8 |
| | 2.5 |
| | 4.6 |
| | 9.4 |
| | 6.0 |
| | 10.8 |
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| (Gain) loss from impairment or disposal of assets — net | | (4.0 | ) | | 3.3 |
| | 9.9 |
| |
| Loss (gain) from disposal of assets — net | | | 0.7 |
| | (0.4 | ) | | (4.0 | ) |
| Earnings from operations | | 219.1 |
| | 199.2 |
| | 159.9 |
| | 173.9 |
| | 216.8 |
| | 220.6 |
|
| Interest expense | | 86.9 |
| | 85.2 |
| | 1.4 |
| | 92.6 |
| | 89.0 |
| | 86.9 |
|
| Interest expense (income) on notes with MTW — net | | — |
| | 0.1 |
| | (15.8 | ) | |
| Loss on early extinguishment of debt | | 1.7 |
| | 2.7 |
| | — |
| |
| Other expense (income) — net | | 9.1 |
| | 9.0 |
| | (22.1 | ) | |
| Loss on modification or extinguishment of debt | | | — |
| | 9.0 |
| | 1.7 |
|
| Other expense — net | | | 5.6 |
| | 29.8 |
| | 10.6 |
|
| Earnings before income taxes | | 121.4 |
| | 102.2 |
| | 196.4 |
| | 75.7 |
| | 89.0 |
| | 121.4 |
|
| Income taxes | | (11.5 | ) | | 30.7 |
| | 40.3 |
| | 19.8 |
| | 10.8 |
| | (11.5 | ) |
| Net earnings | | $ | 132.9 |
| | $ | 71.5 |
| | $ | 156.1 |
| | $ | 55.9 |
| | $ | 78.2 |
| | $ | 132.9 |
|
| Per share data | | | | | | | |
| Per share data: | | | | | | | |
| Earnings per share — Basic | | $ | 0.96 |
| | $ | 0.52 |
| | $ | 1.14 |
| | $ | 0.40 |
| | $ | 0.56 |
| | $ | 0.96 |
|
| Earnings per share — Diluted | | $ | 0.94 |
| | $ | 0.51 |
| | $ | 1.14 |
| | $ | 0.39 |
| | $ | 0.55 |
| | $ | 0.94 |
|
| Weighted average shares outstanding — Basic | | 138,995,541 |
| | 137,906,284 |
| | 137,016,712 |
| | 140,953,496 |
| | 140,023,635 |
| | 138,995,541 |
|
| Weighted average shares outstanding — Diluted | | 140,707,092 |
| | 139,714,120 |
| | 137,016,712 |
| | 141,567,785 |
| | 141,388,785 |
| | 140,707,092 |
|
The accompanying notes are an integral part of these consolidated financial statements.
WELBILT, INC.
Consolidated Statements of Comprehensive Income
(In millions)
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | (As Restated) | | |
| Net earnings | | $ | 132.9 |
| | $ | 71.5 |
| | $ | 156.1 |
|
| Other comprehensive income (loss), net of tax: | | | | | | |
| Foreign currency translation adjustments | | 14.2 |
| | (1.9 | ) | | (25.2 | ) |
| Unrealized gain (loss) on derivatives | | 2.8 |
| | 2.6 |
| | (0.8 | ) |
| Employee pension and post-retirement benefits | | (5.6 | ) | | 0.4 |
| | 2.2 |
|
| Total other comprehensive income (loss), net of tax | | 11.4 |
| | 1.1 |
| | (23.8 | ) |
| Comprehensive income | | $ | 144.3 |
| | $ | 72.6 |
| | $ | 132.3 |
|
The accompanying notes are an integral part of these consolidated financial statements.
WELBILT, INC.
Consolidated Statements of Comprehensive Income
(In millions)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net earnings | | $ | 55.9 |
| | $ | 78.2 |
| | $ | 132.9 |
|
| Other comprehensive income (loss), net of tax: | | | | | | |
| Foreign currency translation adjustments | | 2.2 |
| | (10.9 | ) | | 14.2 |
|
| Unrealized (loss) gain on derivatives | | (2.4 | ) | | (2.8 | ) | | 2.8 |
|
| Employee pension and postretirement benefits | | 0.3 |
| | 4.1 |
| | (5.6 | ) |
| Total other comprehensive income (loss), net of tax | | 0.1 |
| | (9.6 | ) | | 11.4 |
|
| Comprehensive income | | $ | 56.0 |
| | $ | 68.6 |
| | $ | 144.3 |
|
The accompanying notes are an integral part of these consolidated financial statements.
WELBILT, INC.
Consolidated Balance Sheets
(In millions, except share and per share data)
| | | | | December 31, | | | | | |
| | | 2017 | | 2016 | | As of December 31, |
| | | | | (As Restated) | | 2019 | | 2018 |
| Assets | | |
| | |
| | |
| | |
|
| Current assets: | | |
| | |
| | |
| | |
|
| Cash and cash equivalents | | $ | 128.4 |
| | $ | 53.8 |
| | $ | 130.7 |
| | $ | 70.4 |
|
| Restricted cash | | 0.3 |
| | 6.4 |
| | — |
| | 2.8 |
|
| Accounts receivable, less allowances of $4.0 and $5.3, respectively | | 83.7 |
| | 81.7 |
| |
| Short-term investment | | | — |
| | 32.0 |
|
| Accounts receivable, less allowance of $4.0 and $3.9, respectively | | | 183.6 |
| | 112.5 |
|
| Inventories — net | | 152.3 |
| | 145.6 |
| | 186.4 |
| | 190.6 |
|
| Prepaids and other current assets | | 19.0 |
| | 13.9 |
| | 28.2 |
| | 32.2 |
|
| Current assets held for sale | | — |
| | 6.8 |
| |
| Total current assets | | 383.7 |
| | 308.2 |
| | 528.9 |
| | 440.5 |
|
| Property, plant and equipment — net | | 112.2 |
| | 109.1 |
| | 127.5 |
| | 116.3 |
|
| Operating lease right-of-use assets | | | 39.9 |
| | — |
|
| Goodwill | | 846.1 |
| | 845.3 |
| | 933.1 |
| | 935.6 |
|
| Other intangible assets — net | | 461.4 |
| | 484.4 |
| | 507.7 |
| | 549.4 |
|
| Other non-current assets | | 37.0 |
| | 22.1 |
| | 28.2 |
| | 33.2 |
|
| Total assets | | $ | 1,840.4 |
| | $ | 1,769.1 |
| | $ | 2,165.3 |
| | $ | 2,075.0 |
|
| Liabilities and equity | | |
| | |
| | |
| | |
|
| Current liabilities: | | |
| | |
| | |
| | |
|
| Accounts payable | | $ | 103.6 |
| | $ | 108.4 |
| |
| Trade accounts payable | | | $ | 104.4 |
| | $ | 151.0 |
|
| Accrued expenses and other liabilities | | 169.5 |
| | 177.6 |
| | 192.4 |
| | 183.7 |
|
| Current portion of capital leases | | 0.7 |
| | 1.6 |
| |
| Short-term borrowings and current portion of finance leases | | | 1.2 |
| | 16.1 |
|
| Product warranties | | 24.1 |
| | 27.9 |
| | 33.3 |
| | 27.9 |
|
| Current liabilities held for sale | | — |
| | 0.7 |
| |
| Total current liabilities | | 297.9 |
| | 316.2 |
| | 331.3 |
| | 378.7 |
|
| Long-term debt and capital leases | | 1,232.2 |
| | 1,281.3 |
| |
| Long-term debt and finance leases | | | 1,403.1 |
| | 1,321.8 |
|
| Deferred income taxes | | 91.3 |
| | 145.0 |
| | 81.9 |
| | 104.3 |
|
| Pension and postretirement health obligations | | 48.3 |
| | 47.4 |
| |
| Pension and postretirement health liabilities | | | 32.8 |
| | 39.2 |
|
| Operating lease liabilities | | | 29.1 |
| | — |
|
| Other long-term liabilities | | 67.1 |
| | 35.6 |
| | 34.1 |
| | 44.6 |
|
| Total non-current liabilities | | 1,438.9 |
| | 1,509.3 |
| | 1,581.0 |
| | 1,509.9 |
|
| Commitments and contingencies (Note 17) | |
|
| |
|
| |
| Total equity (deficit): | | |
| | |
| |
Common stock ($0.01 par value, 300,000,000 shares authorized, 139,491,860 shares and 138,601,327 shares issued and 139,440,470 shares and 138,562,016 shares outstanding, respectively) | | 1.4 |
| | 1.4 |
| |
| Commitments and contingencies (Note 13) | | |
|
| |
|
|
| Total equity: | | | |
| | |
|
| Common stock ($0.01 par value, 300,000,000 shares authorized, 141,213,995 shares and 140,252,693 shares issued and outstanding as of December 31, 2019 and 2018, respectively) | | | 1.4 |
| | 1.4 |
|
| Additional paid-in capital (deficit) | | (54.7 | ) | | (70.6 | ) | | (31.0 | ) | | (41.5 | ) |
| Retained earnings | | 189.1 |
| | 56.2 |
| | 324.5 |
| | 268.4 |
|
| Accumulated other comprehensive loss | | (32.0 | ) | | (43.4 | ) | | (41.5 | ) | | (41.6 | ) |
| Treasury Stock, at cost, 51,390 shares and zero shares, respectively | | (0.2 | ) | | — |
| |
| Total equity (deficit) | | 103.6 |
| | (56.4 | ) | |
| Treasury stock, at cost, 58,935 shares and 53,308 shares, as of December 31, 2019 and 2018, respectively | | | (0.4 | ) | | (0.3 | ) |
| Total equity | | | 253.0 |
| | 186.4 |
|
| Total liabilities and equity | | $ | 1,840.4 |
| | $ | 1,769.1 |
| | $ | 2,165.3 |
| | $ | 2,075.0 |
|
The accompanying notes are an integral part of these consolidated financial statements.
WELBILT, INC.
Consolidated Statements of Cash Flows
(In millions)
| | | | | Years Ended December 31, | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | Year Ended December 31, |
| | | | | (As Restated) | | | | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities | | |
| | |
| | |
| | |
| | |
| | |
|
| Net earnings | | $ | 132.9 |
| | $ | 71.5 |
| | $ | 156.1 |
| | $ | 55.9 |
| | $ | 78.2 |
| | $ | 132.9 |
|
| Adjustments to reconcile net earnings to cash provided by operating activities: | | | | | | |
| |
| Depreciation | | 16.7 |
| | 17.3 |
| | 19.6 |
| |
| Adjustments to reconcile net earnings to cash used in operating activities: | | | | | | | |
|
| Depreciation expense | | | 21.3 |
| | 18.0 |
| | 16.7 |
|
| Amortization of intangible assets | | 31.2 |
| | 31.2 |
| | 31.4 |
| | 39.8 |
| | 37.0 |
| | 31.2 |
|
| Amortization of debt issuance costs | | 5.5 |
| | 4.7 |
| | — |
| | 4.7 |
| | 5.5 |
| | 5.5 |
|
| Loss on early extinguishment of debt | | 1.7 |
| | 2.7 |
| | — |
| |
| Loss on extinguishment of debt | | | — |
| | 2.7 |
| | 1.7 |
|
| Deferred income taxes | | (64.3 | ) | | (7.6 | ) | | (29.0 | ) | | (19.8 | ) | | (12.4 | ) | | (64.3 | ) |
| Stock-based compensation expense | | 11.1 |
| | 6.3 |
| | 2.3 |
| | 7.3 |
| | 7.0 |
| | 11.1 |
|
| (Gain) loss from impairment or disposal of assets — net | | (4.0 | ) | | 3.3 |
| | 9.9 |
| |
| Loss (gain) on divestitures and acquisitions | | 0.2 |
| | — |
| | (14.8 | ) | |
| Changes in operating assets and liabilities, excluding the effects of business acquisitions or dispositions: | | | | | | | |
| Loss (gain) from disposal of assets — net | | | 0.7 |
| | (0.4 | ) | | (4.0 | ) |
| Pension settlement | | | 1.2 |
| | 2.4 |
| | — |
|
| (Gain) loss on remeasurement of debt and other realized foreign currency derivative | | | (0.6 | ) | | 23.4 |
| | — |
|
| Changes in operating assets and liabilities, excluding the effects of the business acquisition: | | | | | | | |
| Accounts receivable | | 10.8 |
| | (8.3 | ) | | (7.5 | ) | | (351.4 | ) | | (590.4 | ) | | (541.2 | ) |
| Inventories | | (1.8 | ) | | (3.6 | ) | | 4.7 |
| | 5.0 |
| | (25.5 | ) | | (1.8 | ) |
| Other assets | | (0.6 | ) | | (11.5 | ) | | 1.4 |
| | 13.4 |
| | (9.3 | ) | | (0.6 | ) |
| Accounts payable | | (7.9 | ) | | (11.1 | ) | | (25.6 | ) | |
| Trade accounts payable | | | (46.8 | ) | | 39.3 |
| | (7.9 | ) |
| Other current and long-term liabilities | | 6.3 |
| | 29.4 |
| | (5.5 | ) | | (0.4 | ) | | (24.0 | ) | | (10.6 | ) |
| Net cash provided by operating activities | | 137.8 |
| | 124.3 |
| | 143.0 |
| |
| Net cash used in operating activities | | | (269.7 | ) | | (448.5 | ) | | (431.3 | ) |
| Cash flows from investing activities | | |
| | |
| | |
| | |
| | |
| | |
|
| Cash receipts on beneficial interest in sold receivables | | | 280.7 |
| | 576.4 |
| | 552.1 |
|
| Capital expenditures | | (20.7 | ) | | (16.0 | ) | | (13.2 | ) | | (33.9 | ) | | (21.4 | ) | | (20.7 | ) |
| Proceeds from sale of property, plant and equipment | | 12.3 |
| | 0.5 |
| | — |
| | — |
| | — |
| | 12.3 |
|
| Changes in restricted cash | | 6.2 |
| | (6.0 | ) | | (0.6 | ) | |
| Acquisition of intangible assets | | (1.2 | ) | | — |
| | — |
| | — |
| | (2.8 | ) | | (1.2 | ) |
| Business acquisitions, net of cash acquired | | — |
| | — |
| | (5.3 | ) | |
| Proceeds from dispositions | | — |
| | 1.1 |
| | 78.2 |
| |
| Net cash (used in) provided by investing activities | | (3.4 | ) | | (20.4 | ) | | 59.1 |
| |
| Purchase of short-term investment | | | — |
| | (35.0 | ) | | — |
|
| Proceeds from maturity of short-term investment | | | 32.0 |
| | 20.7 |
| | — |
|
| Business acquisition, net of cash acquired | | | — |
| | (215.6 | ) | | — |
|
| Settlement of foreign exchange contract | | | — |
| | (10.0 | ) | | — |
|
| Other | | | 1.1 |
| | 1.2 |
| | 0.9 |
|
| Net cash provided by investing activities | | | 279.9 |
| | 313.5 |
| | 543.4 |
|
| Cash flows from financing activities | | |
| | |
| | |
| | |
| | |
| | |
|
| Proceeds from long-term debt and capital leases | | 155.0 |
| | 1,501.1 |
| | 0.5 |
| |
| Repayments on long-term debt and capital leases | | (204.1 | ) | | (186.8 | ) | | (0.7 | ) | |
| Proceeds from long-term debt | | | 410.0 |
| | 475.5 |
| | 155.0 |
|
| Repayments on long-term debt and finance leases | | | (348.4 | ) | | (383.2 | ) | | (204.1 | ) |
| Debt issuance costs | | | — |
| | (6.8 | ) | | (2.0 | ) |
| Proceeds from short-term borrowings | | 4.0 |
| | — |
| | — |
| | — |
| | 30.0 |
| | 4.0 |
|
| Repayment of short-term borrowings | | (4.0 | ) | | — |
| | — |
| | (15.0 | ) | | (15.0 | ) | | (4.0 | ) |
| Debt issuance costs | | (2.0 | ) | | (41.3 | ) | | — |
| |
| Dividend paid to MTW | | — |
| | (1,362.0 | ) | | — |
| |
| Net transactions with MTW | | — |
| | (4.6 | ) | | (182.9 | ) | |
| Payment of contingent consideration | | | (0.8 | ) | | (1.4 | ) | | — |
|
| Exercises of stock options | | 4.8 |
| | 16.2 |
| | — |
| | 3.2 |
| | 6.2 |
| | 4.8 |
|
| Payments on tax withholdings for equity awards | | (5.4 | ) | | (3.8 | ) | | — |
| | (2.4 | ) | | (3.0 | ) | | (5.4 | ) |
| Net cash used in financing activities | | (51.7 | ) | | (81.2 | ) | | (183.1 | ) | |
| Net cash provided by (used in) financing activities | | | 46.6 |
| | 102.3 |
| | (51.7 | ) |
| Effect of exchange rate changes on cash | | (8.1 | ) | | (0.9 | ) | | (3.5 | ) | | 0.7 |
| | (2.9 | ) | | 6.9 |
|
| Net increase in cash and cash equivalents | | 74.6 |
| | 21.8 |
| | 15.5 |
| |
| Net increase (decrease) in cash and cash equivalents and restricted cash | | | 57.5 |
| | (35.6 | ) | | 67.3 |
|
| Balance at beginning of period | | 53.8 |
| | 32.0 |
| | 16.5 |
| | 73.2 |
| | 108.8 |
| | 41.5 |
|
| Balance at end of period | | $ | 128.4 |
| | $ | 53.8 |
| | $ | 32.0 |
| | $ | 130.7 |
| | $ | 73.2 |
| | $ | 108.8 |
|
| Supplemental disclosures of cash flow information: | | |
| | |
| | |
| |
| Cash paid for income taxes, net of refunds | | $ | 34.3 |
| | $ | 42.1 |
| | $ | 13.2 |
| |
| Cash paid for interest | | 94.7 |
| | 69.6 |
| | — |
| |
(Continued)
WELBILT, INC.
Consolidated Statements of Cash Flows (Continued)
(In millions)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Supplemental disclosures of cash flow information: | | |
| | |
| | |
|
| Cash paid for income taxes, net of refunds | | $ | 36.0 |
| | $ | 47.0 |
| | $ | 34.3 |
|
| Cash paid for interest, net of related hedge settlements | | $ | 79.0 |
| | $ | 94.6 |
| | $ | 94.7 |
|
| | | | | | | |
| Supplemental disclosures of non-cash activities: | | | | | | |
| Non-cash investing activity: Beneficial interest obtained in exchange for securitized receivables | | $ | 238.6 |
| | $ | 744.7 |
| | $ | 723.5 |
|
| Non-cash financing activity: Reassessments and modifications of right-of-use assets and lease liabilities and assets obtained through leasing arrangements | | $ | 14.9 |
| | $ | 0.9 |
| | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
WELBILT, INC.
Consolidated Statements of Equity
(In millions, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shares | | Common Stock | | Additional Paid-In Capital (Deficit) | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Treasury Stock | | Total Equity |
| Balance as of December 31, 2016 | | 138,601,327 |
| | $ | 1.4 |
| | $ | (70.6 | ) | | $ | 56.2 |
| | $ | (43.4 | ) | | $ | — |
| | $ | (56.4 | ) |
| Net earnings | | — |
| | — |
| | — |
| | 132.9 |
| | — |
| | — |
| | 132.9 |
|
| Issuance of common stock, stock-based compensation plans | | 890,533 |
| | — |
| | 4.8 |
| | — |
| | — |
| | — |
| | 4.8 |
|
| Stock-based compensation expense | | — |
| | — |
| | 11.1 |
| | — |
| | — |
| | — |
| | 11.1 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 11.4 |
| | — |
| | 11.4 |
|
| Value of shares in deferred compensation plan | | — |
| | — |
| | — |
| | — |
| | — |
| | (0.2 | ) | | (0.2 | ) |
| Balance as of December 31, 2017 | | 139,491,860 |
| | $ | 1.4 |
| | $ | (54.7 | ) | | $ | 189.1 |
| | $ | (32.0 | ) | | $ | (0.2 | ) | | $ | 103.6 |
|
| Cumulative effect of accounting standards adoption (Note 2) | | — |
| | — |
| | — |
| | 1.1 |
| | — |
| | — |
| | 1.1 |
|
| Net earnings | | — |
| | — |
| | — |
| | 78.2 |
| | — |
| | — |
| | 78.2 |
|
| Issuance of common stock, stock-based compensation plans | | 760,833 |
| | — |
| | 6.2 |
| | — |
| | — |
| | — |
| | 6.2 |
|
| Stock-based compensation expense | | — |
| | — |
| | 7.0 |
| | — |
| | — |
| | — |
| | 7.0 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (9.6 | ) | | — |
| | (9.6 | ) |
| Value of shares in deferred compensation plan | | — |
| | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.1 | ) |
| Balance as of December 31, 2018 | | 140,252,693 |
| | $ | 1.4 |
| | $ | (41.5 | ) | | $ | 268.4 |
| | $ | (41.6 | ) | | $ | (0.3 | ) | | $ | 186.4 |
|
| Cumulative effect of accounting standards adoption (Note 2) | | — |
| | — |
| | — |
| | 0.2 |
| | — |
| | — |
| | 0.2 |
|
| Net earnings | | — |
| | — |
| | — |
| | 55.9 |
| | — |
| | — |
| | 55.9 |
|
| Issuance of common stock, stock-based compensation plans | | 961,302 |
| | — |
| | 3.2 |
| | — |
| | — |
| | — |
| | 3.2 |
|
| Stock-based compensation expense | | — |
| | — |
| | 7.3 |
| | — |
| | — |
| | — |
| | 7.3 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Value of shares in deferred compensation plan | | — |
| | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.1 | ) |
| Balance as of December 31, 2019 | | 141,213,995 |
| | $ | 1.4 |
| | $ | (31.0 | ) | | $ | 324.5 |
| | $ | (41.5 | ) | | $ | (0.4 | ) | | $ | 253.0 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shares | | Common Stock | | Additional Paid-In Capital (Deficit) | | Retained Earnings | | Net Parent Company Investment | | Accumulated Other Comprehensive (Loss) Income | | Treasury Stock | | Total Equity (Deficit) |
| Balance at December 31, 2014 | | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,276.0 |
| | $ | (20.7 | ) | | $ | — |
| | $ | 1,255.3 |
|
| Net earnings | | — |
| | — |
| | — |
| | — |
| | 156.1 |
| | — |
| | — |
| | 156.1 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | (23.8 | ) | | — |
| | (23.8 | ) |
| Net decrease in parent company investment | | — |
| | — |
| | — |
| | — |
| | (176.0 | ) | | — |
| | — |
| | (176.0 | ) |
| Balance at December 31, 2015 | | — |
| | — |
| | — |
| | — |
| | 1,256.1 |
| | (44.5 | ) | | — |
| | 1,211.6 |
|
| Net earnings (As Restated) | | — |
| | — |
| | — |
| | 56.2 |
| | 15.3 |
| | — |
| | — |
| | 71.5 |
|
| Net transfers to MTW | | — |
| | — |
| | — |
| | — |
| | (1,362.0 | ) | | — |
| | — |
| | (1,362.0 | ) |
| Separation related adjustments | | — |
| | — |
| | — |
| | — |
| | (1.0 | ) | | — |
| | — |
| | (1.0 | ) |
| Reclassification of net investment to additional paid-in capital (As Restated) | | — |
| | — |
| | (91.6 | ) | | — |
| | 91.6 |
| | — |
| | — |
| | — |
|
| Issuance of common stock at Spin-Off | | 137,016,712 |
| | 1.4 |
| | (1.4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Issuance of common stock, stock-based compensation plans | | 1,584,615 |
| | — |
| | 16.2 |
| | — |
| | — |
| | — |
| | — |
| | 16.2 |
|
| Stock-based compensation expense | | — |
| | — |
| | 6.3 |
| | — |
| | — |
| | — |
| | — |
| | 6.3 |
|
| Adjustments in connection with the Spin-Off (As Restated) | | — |
| | — |
| | (0.1 | ) | | — |
| | — |
| | — |
| | — |
| | (0.1 | ) |
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 1.1 |
| | — |
| | 1.1 |
|
Balance at December 31, 2016 (As Restated) | | 138,601,327 |
| | 1.4 |
| | (70.6 | ) | | 56.2 |
| | — |
| | (43.4 | ) | | — |
| | (56.4 | ) |
| Net earnings | | — |
| | — |
| | — |
| | 132.9 |
| | — |
| | — |
| | — |
| | 132.9 |
|
| Issuance of common stock, stock-based compensation plans | | 890,533 |
| | — |
| | 4.8 |
| | — |
| | — |
| | — |
| | — |
| | 4.8 |
|
| Stock-based compensation expense | | — |
| | — |
| | 11.1 |
| | — |
| | — |
| | — |
| | — |
| | 11.1 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 11.4 |
| | — |
| | 11.4 |
|
| Value of shares in deferred compensation plan | | | | — |
| | — |
| | — |
| | — |
| | — |
| | (0.2 | ) | | (0.2 | ) |
| Balance at December 31, 2017 | | 139,491,860 |
| | $ | 1.4 |
| | $ | (54.7 | ) | | $ | 189.1 |
| | $ | — |
| | $ | (32.0 | ) | | $ | (0.2 | ) | | $ | 103.6 |
|
The accompanying notes are an integral part of these consolidated financial statements.
WELBILT, INC.
Notes to Consolidated Financial Statements
1.Business and Organization
The Spin-Off and Rebranding
On January 29, 2015, the Company's former parent, The Manitowoc Company, Inc. ("MTW"), announced plans to create two independent, public companies to separately operate its two businesses: its crane business and its foodservice business. To effect the separation, MTW first undertook an internal reorganization, following which MTW held the crane business and Manitowoc Foodservice, Inc. ("MFS") held the foodservice business. Then on March 4, 2016, MTW distributed all the MFS common stock to MTW's shareholders on a pro rata basis, and MFS became an independent, publicly-traded company (the "Distribution"). In this Annual Report on Form 10-K/A, "Spin-Off" refers to both the above described internal reorganization and the Distribution, collectively.
On March 3, 2017, MFS filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation to effect a change of the Company’s name from "Manitowoc Foodservice, Inc." to "Welbilt, Inc." effective March 3, 2017 (the "Name Change"). In connection with the Name Change, the Company also amended and restated its bylaws, by substituting “Welbilt, Inc.” for “Manitowoc Foodservice, Inc.” to launch the Company's rebranding of its logo and its brand identity to Welbilt. The change was the final part of the Company's strategic repositioning after the Spin-Off. To meet its future growth objectives, the Company will focus on further developing its portfolio of 12 award-winning brands under the new corporate name.
On March 6, 2017, shares of the Company commenced trading under the Company's new name, Welbilt, Inc., and a new New York Stock Exchange ticker symbol, “WBT.”
In these consolidated financial statements, unless the context otherwise requires:
"Welbilt" and the "Company" refer to Welbilt, Inc. and its consolidated subsidiaries, after giving effect to the Spin-Off, or, in the case of information as of dates or for periods prior to its separation from MTW, the combined entities of the Foodservice business, and certain other assets and liabilities that were historically held at the MTW corporate level, but were specifically identifiable and attributable to the Foodservice business; and
"MTW" refers to The Manitowoc Company, Inc. and its consolidated subsidiaries, other than, for all periods following the Spin-Off, Welbilt.
Description of the Business
The CompanyWelbilt, Inc. ("Welbilt" or the "Company") is one of the world’sworld's leading commercial foodservice equipment companies. It designscompanies leveraging a full suite of equipment capable of storing, cooking, holding, displaying, dispensing and manufactures a complementary portfolio ofserving in both hot and cold foodservice categories. The Company is headquartered in New Port Richey, Florida, and operates 20 manufacturing facilities globally. The Company designs, manufactures and supplies best-in-class equipment products integrated under one operating company and is supported by a growing aftermarket parts and repair service business. Its capabilities span refrigeration, ice-making, cooking, holding, food-preparation and beverage-dispensing technologies,for the global commercial foodservice market which allow it to equip entire commercial kitchens and serve the world’s growing demand for food prepared away from home. The Company's suite of products isare used by commercial and institutional foodservice operators including full-service restaurants, quick-service restaurant chains, hotels, resorts, cruise ships, caterers, supermarkets, convenience stores, business and industrial customers, hospitals, schools and other institutions. The Company'sCompany sells its products through a global network of over 5,000 distributors, dealers, buying groups and aftermarket partsmanufacturers' representatives.
Welbilt was incorporated in Delaware in 2015 and service support are recognized bybecame a publicly traded in March 2016 when the Company completed its customers and channel partners for their quality, reliability and durability that enable profitable growth for Welbilt end customers by improving their menus, enhancing operations and reducing costs.spin-off from The Manitowoc Company, Inc. ("MTW") (the "Spin-Off").
The Company operatesmanages its business in three regional segments,3 geographic business segments: Americas, EMEA and APAC. The Americas segment includes the Americas (includes United States ("U.S."), Canada and Latin America),America. The EMEA (marketssegment consists of markets in Europe, including Middle East, Africa, Russia and the Commonwealth of Independent States, Middle East and Africa) andStates. The APAC (principally comprisedsegment consists primarily of markets in China, India, Australia, Japan, Philippines, South Korea, Singapore, Philippines, Japan, Indonesia, Taiwan,Malaysia, Thailand, Hong Kong,Thailand, Malaysia, Taiwan, New Zealand and New Zealand)Vietnam.
RestatementRebranding
Effective March 3, 2017, Manitowoc Foodservice, Inc. filed a Certificate of Previously Issued Consolidated Financial Statements
DuringAmendment to its Amended and Restated Certificate of Incorporation to effect a change of the third quarter of 2018,Company’s name from "Manitowoc Foodservice, Inc." to "Welbilt, Inc." (the "Name Change"). In connection with the Name Change, the Company identified errors in previously issued financial statements relatedalso amended and restated its bylaws, by substituting "Welbilt, Inc." for "Manitowoc Foodservice, Inc." to the tax basis of a foreign subsidiary and incorrect tax amortization of the intangible assets held by the same entity. These errors impacted the tax determinations of certain intercompany distributions between foreign subsidiaries, thereby resulting in an understatement of U.S. tax liabilities. In addition, the Company discovered certain intercompany transactions were not recorded on a timely basis. While these intercompany transactions had no impact to the Company’s consolidated earnings before income taxes, they did result in an incorrect recognition of income tax expense or benefit recognized in each applicable jurisdiction, thereby resulting in an understatement of U.S. tax liabilities. The impact of these income tax errors, along with other prior period income tax errors previously corrected for as out-of-period adjustments in the period of identification, resulted in a $5.4 million net understatement oflaunch the Company's previously recognized income tax expense in 2016.
As a resultrebranding of these income tax errors, which materially misstated the previously issued 2016 financial statements, the consolidated financial statementsits logo and its brand identity to Welbilt. On March 6, 2017, shares of the Company as ofcommenced trading under the Company's new name, Welbilt, Inc., and for the year ended December 31, 2016 have been restated. In addition, there were certain other prior period errors, including but not limiteda new New York Stock Exchange ("NYSE") ticker symbol, "WBT." Prior to the following:
$2.7 million understatementMarch 6, 2017, shares of the loss incurred on early extinguishment of debt in 2016, which was initially identified and corrected for as an out-of-period correction in 2017;
$2.9 million of net tax errors that primarily originated prior to 2016 and would have increased net parent company investment prior toCompany traded under the Spin-Off, which were identified and initially corrected for as an out-of-period correction in 2016; and
In 2016, subsequent to the initial accounting for the Spin-Off, the Company incorrectly reduced the carrying value of deferred tax liabilities through a credit to retained earnings of $7.2 million. In 2017, the Company adjusted for this error through an out-of-period adjustment to additional paid-in capital, which then resulted in a misclassification between cumulative retained earnings and additional paid-in capital.
Each of these errors were previously determined to be immaterial, individually and in the aggregate, and were corrected for and disclosed as out-of-period adjustments in the period of identification. These and other immaterial errors have been corrected for in this restatement.
Revision of Previously Issued Consolidated Financial Statements
The income tax and other prior period errors, including those noted above, also impacted the previously issued 2017 and 2015 financial statements but did not result in such financial statements being materially misstated. However, in order to correctly reflect the errors in the appropriate period, management has revised the 2017 and 2015 previously issued financial statements in this Form 10-K/A.
The effects of correcting the errors in the 2017 revision and the 2016 restatement on the line items within the Company's consolidated balance sheets as of December 31, 2017 and 2016 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| (in millions) | | As Reported | | Adjustment | | As Revised | | As Reported | | Adjustment | | As Restated |
| Accrued expenses and other liabilities | | $ | 161.7 |
| | $ | 7.8 |
| | $ | 169.5 |
| | $ | 174.5 |
| | $ | 3.1 |
| | $ | 177.6 |
|
| Total current liabilities | | 290.1 |
| | 7.8 |
| | 297.9 |
| | 313.1 |
| | 3.1 |
| | 316.2 |
|
| Long-term debt and capital leases | | 1,232.2 |
| | — |
| | 1,232.2 |
| | 1,278.7 |
| | 2.6 |
| | 1,281.3 |
|
Deferred income taxes (1) | | 92.3 |
| | (1.0 | ) | | 91.3 |
| | 137.8 |
| | 7.2 |
| | 145.0 |
|
| Total non-current liabilities | | 1,439.9 |
| | (1.0 | ) | | 1,438.9 |
| | 1,499.5 |
| | 9.8 |
| | 1,509.3 |
|
| Additional paid-in capital (deficit) | | (63.3 | ) | | 8.6 |
| | (54.7 | ) | | (72.0 | ) | | 1.4 |
| | (70.6 | ) |
| Retained earnings | | 204.5 |
| | (15.4 | ) | | 189.1 |
| | 70.5 |
| | (14.3 | ) | | 56.2 |
|
| Total equity (deficit) | | 110.4 |
| | (6.8 | ) | | 103.6 |
| | (43.5 | ) | | (12.9 | ) | | (56.4 | ) |
(1) In 2017, the income tax error related to a valuation allowance.
The effects of correcting the errors in the restatement and revision on the respective line items within the Company's consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Revised |
| Loss on early extinguishment of debt | | $ | 4.4 |
| | $ | (2.7 | ) | | $ | 1.7 |
|
Other expense (income) — net | | 9.0 |
| | 0.1 |
| | 9.1 |
|
| Earnings before income taxes | | 118.8 |
| | 2.6 |
| | 121.4 |
|
| Income taxes | | (15.2 | ) | | 3.7 |
| | (11.5 | ) |
| Net earnings | | 134.0 |
| | (1.1 | ) | | 132.9 |
|
| | | | | | | |
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 0.96 |
| | $ | — |
| | $ | 0.96 |
|
| Earnings per share — Diluted | | $ | 0.95 |
| | $ | (0.01 | ) | | $ | 0.94 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Restated |
| Net sales | | $ | 1,456.6 |
| | $ | (0.5 | ) | | $ | 1,456.1 |
|
| Cost of sales | | 923.8 |
| | (1.5 | ) | | 922.3 |
|
| Gross profit | | 532.8 |
| | 1.0 |
| | 533.8 |
|
| Selling, general and administrative expenses | | 290.1 |
| | 1.0 |
| | 291.1 |
|
| Loss on early extinguishment of debt | | — |
| | 2.7 |
| | 2.7 |
|
Other expense (income) — net | | 9.1 |
| | (0.1 | ) | | 9.0 |
|
| Earnings before income taxes | | 104.8 |
| | (2.6 | ) | | 102.2 |
|
| Income taxes | | 25.3 |
| | 5.4 |
| | 30.7 |
|
| Net earnings | | 79.5 |
| | (8.0 | ) | | 71.5 |
|
| | | | | | | |
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 0.58 |
| | $ | (0.06 | ) | | $ | 0.52 |
|
| Earnings per share — Diluted | | $ | 0.57 |
| | $ | (0.06 | ) | | $ | 0.51 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2015 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Revised |
| Income taxes | | $ | 39.3 |
| | $ | 1.0 |
| | $ | 40.3 |
|
| Net earnings | | 157.1 |
| | (1.0 | ) | | 156.1 |
|
| | | | | | | |
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 1.15 |
| | $ | (0.01 | ) | | $ | 1.14 |
|
| Earnings per share — Diluted | | $ | 1.15 |
| | $ | (0.01 | ) | | $ | 1.14 |
|
The effects of correcting the errors in the restatement and revision on the respective line items within the Company's consolidated statements of comprehensive income for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| (in millions) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 134.0 |
| | $ | (1.1 | ) | | $ | 132.9 |
|
| Comprehensive income | | 145.4 |
| | (1.1 | ) | | 144.3 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| (in millions) | | As Reported | | Adjustment | | As Restated |
| Net earnings | | $ | 79.5 |
| | $ | (8.0 | ) | | $ | 71.5 |
|
| Comprehensive income | | 80.6 |
| | (8.0 | ) | | 72.6 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2015 |
| (in millions) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 157.1 |
| | $ | (1.0 | ) | | $ | 156.1 |
|
| Comprehensive income | | 133.3 |
| | (1.0 | ) | | 132.3 |
|
The effects of correcting the errors in the restatement and revision on the respective line items within the Company’s consolidated statements of equity for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | |
| (in millions) | | As Reported | | Adjustment | | As Revised |
| Balance at December 31, 2014 | | | | | | |
| Net Parent Company Investment | | $ | 1,272.1 |
| | $ | 3.9 |
| | $ | 1,276.0 |
|
| Total Equity | | 1,251.4 |
| | 3.9 |
| | 1,255.3 |
|
| Net earnings | | 157.1 |
| | (1.0 | ) | | 156.1 |
|
| Total Equity balance at December 31, 2015 | | 1,208.7 |
| | 2.9 |
| | 1,211.6 |
|
|
| | | | | | | | | | | | |
| (in millions) | | As Reported | | Adjustment | | As Restated / Revised |
| Balance at December 31, 2015 | | | | | | |
| Net Parent Company Investment (As Revised) | | $ | 1,253.2 |
| | $ | 2.9 |
| | $ | 1,256.1 |
|
| Total Equity (As Revised) | | 1,208.7 |
| | 2.9 |
| | 1,211.6 |
|
| Net earnings (As Restated) | | 79.5 |
| | (8.0 | ) | | 71.5 |
|
| Adjustments in connection with the Spin-Off (As Restated) | | 7.7 |
| | (7.8 | ) | | (0.1 | ) |
| Total Equity balance at December 31, 2016 (As Restated) | | (43.5 | ) | | (12.9 | ) | | (56.4 | ) |
|
| | | | | | | | | | | | |
| (in millions) | | As Reported | | Adjustment | | As Restated / Revised |
| Balance at December 31, 2016 | | | | | | |
| Additional Paid-In Capital (Deficit) (As Restated) | | $ | (72.0 | ) | | $ | 1.4 |
| | $ | (70.6 | ) |
| Retained Earnings (As Restated) | | 70.5 |
| | (14.3 | ) | | 56.2 |
|
| Total Equity (Deficit) (As Restated) | | (43.5 | ) | | (12.9 | ) | | (56.4 | ) |
| Net earnings (As Revised) | | 134.0 |
| | (1.1 | ) | | 132.9 |
|
| Total Equity balance at December 31, 2017 (As Revised) | | 110.4 |
| | (6.8 | ) | | 103.6 |
|
|
| | | | | | | | | | | | |
| (in millions) | | As Reported | | Adjustment | | As Revised |
| Balance at December 31, 2017 | | | | | | |
| Additional Paid-In Capital (Deficit) | | $ | (63.3 | ) | | $ | 8.6 |
| | $ | (54.7 | ) |
| Retained Earnings | | 204.5 |
| | (15.4 | ) | | 189.1 |
|
The effects of correcting the errors in the restatement and revision on the respective line items within the consolidated statements of cash flows for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| (in millions) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 134.0 |
| | $ | (1.1 | ) | | $ | 132.9 |
|
| Amortization of debt issuance costs | | 5.4 |
| | 0.1 |
| | 5.5 |
|
| Loss on early extinguishment of debt | | 4.4 |
| | (2.7 | ) | | 1.7 |
|
| Deferred income taxes | | (63.3 | ) | | (1.0 | ) | | (64.3 | ) |
| Other current and long-term liabilities | | 1.6 |
| | 4.7 |
| | 6.3 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| (in millions) | | As Reported | | Adjustment | | As Restated |
| Net earnings | | $ | 79.5 |
| | $ | (8.0 | ) | | $ | 71.5 |
|
| Amortization of debt issuance costs | | 4.8 |
| | (0.1 | ) | | 4.7 |
|
| Loss on early extinguishment of debt | | — |
| | 2.7 |
| | 2.7 |
|
| Deferred income taxes | | (9.9 | ) | | 2.3 |
| | (7.6 | ) |
| Other current and long-term liabilities | | 27.8 |
| | 1.6 |
| | 29.4 |
|
| Net cash provided by operating activities | | 125.8 |
| | (1.5 | ) | | 124.3 |
|
| Net transactions with MTW | | (6.1 | ) | | 1.5 |
| | (4.6 | ) |
| Net cash used in financing activities | | (82.7 | ) | | 1.5 |
| | (81.2 | ) |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2015 |
| (in millions) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 157.1 |
| | $ | (1.0 | ) | | $ | 156.1 |
|
| Deferred income taxes | | (30.0 | ) | | 1.0 |
| | (29.0 | ) |
All relevant footnotes to the consolidated financial statements in this Form 10-K/A have also been restated or revised to reflect the items discussed above. In addition, the impact of such errors on the 2017 and 2016 unaudited quarterly financial statements is included in Note 23, "Quarterly Financial Data (Unaudited).NYSE ticker symbol "MFS."
2.Basis of Presentation and Summary of Significant Accounting Policies and Basis of Presentation
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of Welbilt and its subsidiaries and have been prepared by the Company, pursuant to the rules and regulations of the U.S Securities and Exchange Commission. The Company prepares its financial statements in accordance with accounting principles generally accepted in the United StatesU.S. ("U.S. GAAP"). All intercompany balances and transactions between the Company and its affiliates have been eliminated.eliminated in consolidation.
During the periods presented prior to the Spin-Off on March 4, 2016, the Company's financial statements were prepared on a combined stand-alone basis derived from the consolidated financial statements and accounting records of MTW. The Company functioned as part of the larger group of companies controlled by MTW. Accordingly, MTW performed certain corporate overhead functions for the Company. Therefore, certain costs related to the Company have been allocated from MTW for the period of January 1, 2016 up to the Spin-Off on March 4, 2016 and for the entirety of the year ended December 31, 2015. These allocated costs were primarily related to: (1) corporate support functions that were provided on a centralized basis at a MTW enterprise level including, but not limited to, finance, audit, legal, information technology, human resources, tax, treasury, investor relations, and external reporting; (2) stock-based compensation; (3) employee compensation, pension and benefit costs; and (4) securitization financing costs. These expenses were allocated to Welbilt based on direct usage or direct identification where applicable, and where not applicable, such costs were allocated primarily based on net sales, headcount or based on existing allocation methods, specifically for those costs which were previously partially allocated to Welbilt or other methodologies deemed appropriate by management.
Prior to the Spin-Off, cash was managed centrally and flowed through centralized bank accounts controlled and maintained by MTW. Accordingly, cash and cash equivalents held by MTW at the corporate level were not attributable to Welbilt for any of the periods presented prior to the Spin-Off. Only cash amounts specifically attributable to Welbilt are reflected in the accompanying consolidated financial statements. Transfers of cash, both to and from MTW's centralized cash management system, are reflected as a component of "Net parent company investment" as a financing activity in the consolidated statements of cash flows. Additionally, none of MTW’s debt has been allocated to the consolidated financial statements as Welbilt has no legal obligation for any of the debt agreements. Welbilt received or provided funding as part of MTW's centralized treasury program.
Income tax expense in the consolidated statement of operations for the period prior to the Spin-Off is computed on a separate return basis, as if Welbilt was operating as a separate consolidated group and filed separate tax returns in the jurisdictions in which it operates. As a result of potential changes to the Company's business model and potential past and future tax planning, income tax expense included in the consolidated financial statements for the period prior to the Spin-Off may not be indicative of Welbilt's future expected tax rate. In addition, cash tax payments and items of current and deferred taxes may not be reflective of Welbilt's actual tax balances prior to or subsequent to the Spin-Off.
Welbilt, as a stand-alone entity commencing with the Spin-Off, files U.S. federal and state tax returns on its own behalf. The responsibility for current income tax liabilities of U.S. federal and state combined tax filings were deemed to settle immediately with MTW paying entities effective with the Spin-Off in the respective jurisdictions, whereas state tax returns for certain separate Welbilt filing entities were filed by Welbilt for periods prior to and after the Spin-Off. Cash tax payments commencing with the Spin-Off for the estimated liability are the actual cash taxes paid to the respective tax authorities in the jurisdictions wherever applicable.
Prior to the Spin-Off, the operations of Welbilt were generally included in the consolidated tax returns filed by the respective MTW entities, with the related income tax expense and deferred income taxes calculated on a separate return basis in the consolidated financial statements. As a result, the effective tax rate and deferred income taxes of Welbilt may differ from those in periods prior to or subsequent to the Spin-Off.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods including costs allocated prior to the Spin-Off.periods. Significant items subject to such estimates and assumptions include inventory obsolescence costs, warranty costs, product liability costs, employee benefit programs, sales rebates and the measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On an ongoing basis, the Company evaluates these assumptions, judgments and estimates. Actual results may differ from these estimates.
In addition,the opinion of management, the consolidated financial statements may not be indicativecontain all adjustments necessary for a fair statement of the Company's future performance, and they do not necessarily include all of the actual expenses that would have been incurred by the Company and may not reflect the results of operations and comprehensive income for the years ended December 31, 2019, 2018 and 2017, the financial position as of December 31, 2019 and 2018 and the cash flows hadfor the Company beenyears ended December 31, 2019, 2018 and 2017, and except as otherwise discussed herein, such adjustments consist only of those of a stand-alone Company during the entiretynormal recurring nature.
All dollar amounts, except share and per share amounts, are in millions of the period presented prior to the Spin-Off.dollars unless otherwise indicated.
Significant Accounting Policies
Cash and Cash Equivalents All short-term investments purchased with an original maturity of three months or less are considered cash equivalents. The Company's policy is to classify operating demand deposit accounts with high credit quality financial institutions, the balances of which at times may exceed federally insured limits.
Restricted Cash Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded separately on the consolidated balance sheetsConsolidated Balance Sheets and generally, includesinclude cash balances held as security under the Company's accounts receivable securitization program.program, as applicable.
Short-Term Investments The Company considers all investments purchased with an original maturity of more than three months but not greater than one year to be short-term investments. The short-term investment balance as of December 31, 2018 represented a certificate of deposit with an original scheduled maturity of 12 months, for which the Company had the intent and ability to hold until maturity and was classified as held-to-maturity and carried at amortized cost in the Consolidated Balance Sheets. There were no indicators of other-than-temporary impairment for this security and the Company did not experience any credit losses during any period prior to the June 2019 maturity date of the certificate of deposit.
Accounts Receivable Transactions under the Company's securitization programs are accounted for as sales. SalesAccounts receivable consist primarily of trade receivables to the purchaserdue from customers, consisting of distributors, dealers, buying groups and manufacturers' representatives, and are reflected as a reductionstated net of accounts receivable in the consolidated balance sheets and the proceeds received, including collections on the deferred purchase price notes, are included in cash flows from operating activities in the consolidated statements of cash flows. The Company deems the interest rate risk related to the deferred purchase price notes to be de minimis, primarily due to the short average collection cycle of the related receivables (i.e., less than 60 days).
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. OurThe Company's estimate for the allowance for doubtful accounts related to trade receivables includes an evaluation of specific accounts where we haveit has information that the customer may have an inability to meet its financial obligations together with a general provision for unknown but existing doubtful accounts based on historical experience, which are subject to change if experience improves or deteriorates.
InventoriesTransactions under the Company's accounts receivable securitization program, which was terminated in March 2019, were accounted for as sales. Sales of trade receivables are reflected as a reduction of accounts receivable in the Consolidated Balance Sheets. In addition, the Company maintained a "beneficial interest," or right to collect cash, in the sold receivables. Cash receipts from the third-party purchasing financial institution at the time of the sale are classified as operating cash while cash receipts from the beneficial interest on sold receivables are classified as investing activities on the Consolidated Statements of Cash Flows. The majorityCompany deems the interest rate risk related to the deferred purchase price notes to be de minimis, primarily due to the short average collection cycle of inventoriesthe related receivables (i.e., less than 60 days). See Note 4, "Accounts Receivable Securitization," for further details.
Inventories Inventories are valued at the lower of cost or net realizable value. Approximately 92.3%91.7% and 91.2%92.4% of the Company's inventories were valued using the first-in, first-out ("FIFO") method atas of December 31, 20172019 and 2016,2018, respectively. The remaining inventories were valued using the last-in, first-out ("LIFO") method. If the FIFO inventory valuation method had been used exclusively, inventories would have increased by $3.9$4.2 million and $3.5 million atas of both December 31, 20172019 and 2016,2018, respectively. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs.
All inventories are reduced by a reserve for excess and obsolete inventories. The estimated reserve is based upon specific identification of excess or obsolete inventories based on historical usage, estimated future usage, sales requiring the inventory and on historical write-off experience, and is subject to change if the actual experience deteriorates. The inventories' obsolescence reserves are reported as a reduction of the "Inventories — net" balance in the Consolidated Balance Sheets.
Property, Plant and Equipment Property, plant and equipment are stated at cost. Expenditures for maintenance, repairs and minor renewals are charged against earnings as incurred. Expenditures for major renewals and improvements that substantially extend the capacity or useful life of an asset are capitalized and are then depreciated. The Company capitalizes certain internal and external costs incurred to acquire or develop software for internal use. Costs incurred during the preliminary project stage and the post-implementation stage are expensed as incurred. All direct costs incurred to develop internal-use software during the development stage are capitalized. The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are relieved from the accounts, and resulting gains or losses are reflected in earnings.
Property, plant and equipment are depreciated over the estimated useful lives or lease periods of the assets using the straight-line depreciation method for financial reporting and on accelerated methods for income tax purposes. Depreciation for internally developed software commences when the software is available for its intended use. The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. The Company periodically reviews these lives relative to physical factors, economic factors and industry trends. If there are changes in the planned use of property or equipment or if technological changes were to occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of accelerated depreciation expense in future periods.
Property, plant and equipment are primarily depreciated over the following estimated useful lives:
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| | Years |
| Building and improvements | 2 -— 40 |
| Machinery, equipment and tooling | 2 -— 20 |
| Furniture and fixtures | 3 -— 15 |
| Computer hardware and software for internal use | 2 - 7— 10 |
Leases Effective January 1, 2019, the Company adopted the provisions of Accounting Standards Update ("ASU") ASU 2016-02, "Leases (Topic 842)" including subsequent amendments issued thereafter (collectively, "ASC Topic 842"), which requires lessees to recognize a right-of-use asset and corresponding lease liability on the balance sheet for operating leases while the accounting for finance leases remains substantially unchanged. Under ASC Topic 842, a lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (i.e., an identified asset) for a period of time in exchange for consideration. The Company determines if an arrangement is a lease at inception. For a contract to be determined to be a lease or contain a lease, it must include explicitly or implicitly identified assets where the Company has the right to substantially all of the economic benefits of the assets and has the ability to direct how and for what purpose the assets are used during the lease term. Leases are classified as either operating or financing. For operating leases, the Company recognizes a lease liability equal to the present value of the remaining lease payments, and a right-of-use asset equal to the lease liability, subject to certain adjustments, such as prepaid rents. The right-of-use asset represents the right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company uses its incremental borrowing rate to determine the present value of the lease payments. The Company’s incremental borrowing rate is the rate of interest that it would have to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company determines the incremental borrowing rates for its leases by applying its applicable borrowing rate, with adjustment, as appropriate, for instruments with similar characteristics. The lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option and periods covered by an option to extend (or not to terminate) the lease in which the exercise of the option is controlled by the lessor. The Company considers a number of factors when evaluating whether the options in its lease contracts are reasonably certain of exercise, such as length of time before an option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to the Company's operations, costs to negotiate a new lease and any contractual or economic penalties. See additional disclosure of leases in Note 18, "Leases."
See section below titled "Recently Adopted Accounting Pronouncements" for a discussion of the impact of the adoption of ASC Topic 842 on the Company's consolidated financial statements and related notes to the financial statements.
Business Combinations The Company allocates the fair value of purchase consideration to the assets acquired and liabilities assumed based on fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth rates and margins, customer attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
Goodwill and Other Intangible Assets Goodwill isand indefinite lived intangibles are not amortized, but it isare tested for impairment annually, or more frequently, as events dictate. See additional discussion of impairment testing under "Impairment of Long-Lived Assets," below. The Company's othertrademarks and tradenames are classified as indefinite lived intangible assets with indefiniteas there are no regulatory, contractual, competitive, economic or other factors which limit the useful lives including trademarks, are not amortized, but are also tested for impairment annually, or more frequently, as events dictate.of these intangible assets. The Company's other intangible assets with finite lives are subject to amortization and are tested for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable.
The Company capitalizes certain internal and external costs to develop technology classified as software to be sold or otherwise marketed to customers. Capitalization of these costs begins when a product's technological feasibility has been established and ends when a product is available for general release to customers. Amortization commences when the software is ready for general release to customers with useful lives estimated on a product-by-product basis.
Other intangible assets with finite lives are amortized on a straight-line basis over the following estimated useful lives:
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| | Useful livesYears |
PatentsCustomer relationships | 10-20 years10 — 20 |
| Engineering drawings | 15 years |
Customer relationshipsDesign libraries | 10-20 years7 — 20 |
| Software to be sold | 3 — 4 |
| Patents | 10 — 20 |
The Company performsCompany's annual impairment tests of goodwill and intangible assets with indefinite lives atare performed as of June 30 of each fiscal year and whenever a triggering event occurs between annual impairment tests. The goodwill impairment test is performed for the Company's reporting units which have been determined to be:are: Americas, EMEA and APAC. When testing for impairment, the Company has the option to first assess qualitative factors to determine whether it is more likely than notmore-likely-than-not that the fair value of any reporting unit or indefinite lived intangible asset is less than its carrying amount. In conducting a qualitative assessment, the Company evaluates the totality of relevant events and circumstances that
affect the fair value or carrying value of the reporting unit or asset. These events and circumstances include, but are not limited to, macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations. In those instances where the Company concludes that it is not more likely than notmore-likely-than-not that the fair value is less than the carrying amount, no impairment is indicated and no further impairment test is performed.
When the Company chooses not to perform a qualitative assessment, or if, based on the qualitative assessment, the Company concludes it is more likely than notmore-likely-than-not that the fair value is less than the carrying amount, a quantitative impairment test is performed at the reporting unit level utilizing the one-step approach. This one-step approachlevel. The quantitative impairment test identifies both the existence of impairment and the amount of the impairment loss. In conducting the quantitative analysis, the Company compares the fair value of the reporting unit with goodwill or the indefinite lived intangible asset to its carrying value. The fair value is determined using the income approach based on the present value of expected future cash flows, including terminal value, and a weighted average cost of capital all of which involve management judgment and assumptions. When the carrying amount of the reporting or the intangible asset exceeds its fair value, the Company recognizes an impairment loss in an amount equal to the excess; however,the impairment loss for goodwill is limited to the total amount of the goodwill allocated to the reporting unit. See Note 9,7, "Goodwill and Other Intangible Assets — Net," for further details on the Company's impairment assessments.
Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the assets’ carrying amount may not be recoverable.
When reviewing its long-lived assets, other than goodwill and other intangible assets with indefinite lives, the Company groups its assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluates the asset group against the sum of the undiscounted future cash flows to determine impairment. If an impairment is determined to exist, the impairment loss is calculated based upon comparison of the fair value to the net book value of the assets. Impairment losses on assets held for sale are based on the estimated proceeds to be received, less costs to sell. The Company had 0 assets held for sale as of December 31, 2019 or 2018.
Product Warranties Estimated warranty costs are recorded in cost of sales at the time of sale of the products based on historical warranty experience for the related product or estimates of projected costs due to specific warranty issues on new products. These estimates are reviewed periodically and are adjusted based on changes in facts, circumstances or actual experience. See Note 1814, "Product Warranties"Warranties," for further details.
Product Liabilities The Company records product liability reserves for its self-insured portion of any pending or threatened product liability actions. The reserve is based upon two estimates. First, the Company tracks the population of all outstanding pending and threatened product liability cases to determine an appropriate case reserve for each based upon the Company's best judgment and the advice of legal counsel. These estimates are continually evaluated and adjusted based upon changes to facts and circumstances surrounding the individual cases. Second, the Company determines the amount of additional reserve required to cover incurred but not reported product liability obligationsclaims anticipated to have occurred but have not yet been reported and to account for possible adverse development of the established case reserves. This analysis is performed twice annually. by the Company 2 times per year.
Foreign Currency Translation and Transactions The financial statements For most of the Company's non-U.S. subsidiaries, whereforeign operations, local currencies are considered the functional currency. Assets and liabilities of non-U.S. dollar functional currency is not the U.S. dollar,entities are translated usingto U.S. dollars at year-end exchange rates and the current exchange rate forresulting gains and losses arising from the translation of assets and liabilities andlocated outside the average exchange rate for the year for incomeU.S. and expense items. Resulting translation adjustments are recorded toas a component of "Accumulated other comprehensive loss" ("AOCI") as a component of equity. The Company records foreign currency transaction gains or lossesin the Consolidated Balance Sheets. Income and expense items are translated at average exchange rates in effect during the period and are recorded as a component of "Other expense (income) -— net". in the Consolidated Statements of Operations.
Derivative Financial Instruments and Hedging Activities The Company enters into derivative instruments to hedge foreign exchange, interest rate risk, and commodity exposure associated with aluminum, copper and steel prices and natural gas prices.foreign currency exchange risk.
The Company has adopted written policies and procedures that place all financial instruments under the direction of corporate treasury and restrict all derivative transactions to those intended for hedging purposes. The use of financial instruments for trading purposes is strictly
prohibited. The Company uses financial instruments to managerecords the market risk from changes in interest rates, commodities and foreign currency exchange rates. The fair values of all derivatives are recorded in the consolidated balance sheets.Consolidated Balance Sheets. The Company does not offset the fair values of derivative contract assets and liabilities. The change in a derivative’s fair value is recorded each period in current earnings or comprehensive income, depending on whether the derivative is designated and qualifies as part of a hedge transaction and if so, the type of hedge transaction. The amount reported forof the derivative instrument fair market value adjustments for cash flow hedges and net investment hedges are reported in the statementsConsolidated Statements of comprehensive income,Comprehensive Income, net of taxes. FairThe Company recognizes fair market value adjustments for fair value hedges, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings within the the same line item associated with the hedged item.
Stock-Based Compensation Welbilt employees historically participated in MTW's stock-based compensation plans for the periods prior to the Spin-Off. Stock-based compensation expense for the period prior to the Spin-Off has been allocated to Welbilt based on the awards and terms previously granted to its employees. Until consummation of the Spin-Off, Welbilt continued to participate in MTW's stock-based compensation plans and record stock-based compensation expense based on the stock-based awards granted to the Welbilt employees. In conjunction with the Spin-Off, the Company adopted the The Company's 2016 Omnibus Incentive Plan (the "2016 Plan") that permits the granting of stock options, restricted stock awards restricted stockand units, performance share awards and units, and other types of stock-based and cash awards. In addition, the 2016 Plan permits the issuance of awards ("Replacement Awards") in partial substitution for awards relating to shares of common stock of MTW that were outstanding immediately prior to the Spin-Off.
Stock-based compensation awards areis measured at the fair value atof the stock-based award as of the date of grant and is expensed over theirthe vesting periods. Stock based compensation is recognized only for those awards expected to vest.period of the award. The expense, net of forfeitures, is recognized using the straight-line method. Stock-based compensation expense relatedis recognized only for those stock-based awards expected to Welbilt employees of $11.1 million, $6.3 million and $2.3 million has been recorded in the consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015, respectively.vest. Refer to Note 16, "Stock-Based19, "Stock Based Compensation," for additional discussion regarding details of the Company's stock-based compensation plan.
EmployeeDefined Benefit Plans- The Company provideprovides a range of benefits to its employees and retired employees, including, for certain employees, pensions and postretirement health care coverage. The Company records Defined Benefit Plan assets and obligations are recordedusing amounts calculated annually based on ouras of the Company's measurement date utilizing various actuarial assumptions such as discount rates, expected return on plan assets, compensation increases, retirement and mortality rates, and health care cost trend rates as of that date. The approaches used to determine the annual assumptions are as follows:
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| • | Discount Rate - The discount rate assumptions are based on the interest rate of non-callable high-quality corporate bonds, with appropriate consideration demographics of the participants in the Company's pension plans and benefit payment terms. |
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| • | Expected Return on Plan Assets - The expected return on plan assets assumptions are based on the Company's expectation of the long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds. |
Discount Rate - The discount rate assumptions are based on the interest rate of non-callable high-quality corporate bonds, with appropriate consideration of our pension plans’ participants’ demographics and benefit payment terms.
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| • | Retirement and Mortality Rates - The retirement and mortality rate assumptions are based primarily on actual plan experience and actuarial mortality tables. |
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| • | Health Care Cost Trend Rates - The health care cost trend rate assumptions are developed based on historical cost data, near-term outlook and an assessment of likely long-term trends. |
Expected Return on Plan Assets - The expected return on plan assets assumptions are based on our expectation of the long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds.
Retirement and Mortality Rates - The retirement and mortality rate assumptions are based primarily on actual plan experience and mortality tables.
Health Care Cost Trend Rates - The health care cost trend rate assumptions are developed based on historical cost data, near-term outlook and an assessment of likely long-term trends.
Measurements of net periodic benefit cost are based on the assumptions used for the previous year-end measurements of assets and obligations. We review ourThe Company reviews its actuarial assumptions on an annual basis and makemakes modifications to the assumptions when appropriate. As required byIn accordance with U.S. GAAP, the effects of the modifications are recorded currentlyin current periods or amortized over future periods. The Company has developed the assumptions with the assistance of its independent actuaries and other relevant sources, and believes that the assumptions used are reasonable; however, changes in these assumptions could impact the Company's financial position, results of operations or cash flows. See Note 20,15, "Employee Benefit Plans," for further details.
Deferred Compensation Plan The Welbilt Deferred Compensation Plan is an unfunded, non-tax-qualified deferred compensation plan for highly compensated and key management employees and for directors that allows participants to defer a portion of their compensation. The Plan permits the Company, at its option, to make matching contributions to the participantsparticipants' accounts. The Company utilizes a rabbi trust to hold assets intended to satisfy the Company's obligations under the deferred compensation plan. The trust restricts the Company's use and access to the assets held but is subject to the claims of the Company's general creditors. Plan participants are able to direct deferrals and Company matching contributions into two separate investment programs, Program A and Program B. Program A invests solely in the Company’s stock; dividends paid on the Company’s stock, if any, are automatically reinvested, and all distributions must be made in Company stock. Program A is accounted for as a plan that does not permit diversification. The CompanyCompany's stock held by Program A is carried at cost, and is included in "Treasury stock" in the consolidated balance sheets.Consolidated Balance Sheets. The deferred compensation obligation for Program A is included in "Other long-term liabilities" in the consolidated balance sheets.Consolidated Balance Sheets. Program B offers a variety of investment options but does not include Company stock as an investment option. All distributions from Program B must be made in cash. Participants cannot transfer assets between programs. Program B is accounted for as a plan that permits diversification. Changes in the fair value of the assets are recognized in earnings. The deferred compensation obligation is adjusted, with a charge or credit to compensation cost, to reflect changes in the fair value of the obligation. The assets are included in "Other non-current assets", and the related obligations are included in "Other long-term liabilities" in the consolidated balance sheets.Consolidated Balance Sheets.
Revenue Recognition Revenue is Prior to the adoption of the provisions of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" and with additional updates subsequently issued (collectively, "ASU 2014-09"), the Company generally recognized and earned revenue when all the following criteria arewere satisfied with regard to a specific transaction: persuasive evidence of a sales arrangement exists; the price is fixed or determinable; collectability of cash is reasonably assured; and delivery has occurred or services have been rendered. Shipping and handling fees arewere reflected in net sales"Net sales" and shipping and handling costs arewere reflected in "Cost of sales" in the consolidated statementsConsolidated Statements of operations.Operations.
On January 1, 2018, the Company adopted the provisions of ASU 2014-09, using the modified retrospective method and recognized the cumulative effect of the initial application of the new revenue standard as an adjustment to the opening balance of retained earnings. ASU 2014-09 creates a single, comprehensive revenue recognition model for all contracts with customers and is based on changes in contract assets (rights to receive consideration) and liabilities (obligations to provide a good or service). Subsequent to the adoption of ASU 2014-09, revenue is recognized based on the satisfaction of performance obligations, which occurs when service is provided or control of a good transfers to a customer. A majority of the Company's net sales continue to be recognized at the point in time when products are shipped from its manufacturing facilities. The Company records deferred revenue when payment for products is received or due prior to the shipment of products to a customer. Shipping and handling revenues continue to be included as a component of "Net sales" and shipping and handling costs continue to be included in "Cost of sales" in the Consolidated Statements of Operations. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenues.
For the majority of foodservice equipment and aftermarket parts and support, the transfer of control and revenue recognition materializes when the products are shipped from the manufacturing facility or the service is provided to the customer. The Company typically invoices its customers with payment terms of 30 days and the Company's average collection cycle is generally less than 60 days and the Company has determined these payment terms do not contain a significant financing component. Costs to obtain a customer contract are expensed as incurred as the Company's contract periods are generally one year or less. The amount of consideration received and revenue recognized
varies with marketing incentives such as annual customer rebate programs and returns that are offered to customers. Variable consideration as a result of customer rebate programs is typically based on calendar-year purchases and is determined using the expected value method in interim periods as prescribed in the guidance. Customers have the right to return eligible equipment and parts. The expected returns are based on an analysis of historical experience. The estimate of revenue is adjusted at the earlier of when the most likely amount of the expected consideration changes or when the consideration becomes fixed. The impact of such adjustments was not material in the years ended December 31, 2019 and 2018, respectively.
Substantially all of the Company's revenues consist of revenues from contracts with customers. These revenues are disaggregated by major source and geographic location and included in Note 22, "Business Segments." The Company believes this disaggregation best depicts the nature, amount, timing and uncertainty of its revenue and cash flows that are affected by economic factors.
To a lesser extent, the Company also recognizes other sources of revenue from both specific foodservice-based projects and subscriptions. The foodservice-based project revenues are recognized at either the point-in-time in which control transfers to the customer or may be recognized over time, depending on the nature of the performance obligations in the contract. Subscription revenues, which consist of subscription fees from customers accessing the Company's cloud-based application, are recognized ratably over the customer's subscription term.
The Company sells separately-priced extended warranties that extend coverage beyond the standard product warranty by 12 to 60 months. Payments are made at the inception of the contract and revenue is recognized over the term of the warranty agreement on a straight-line basis, which the Company believes approximates the timing of costs expected to be incurred in satisfying the obligations of the contract.
Research and Development Research and development costs are charged to expense as incurred and are included within "Selling, general and administrative expenses" in the consolidated statementsConsolidated Statements of operationsOperations. Research and amounted to $39.4development expenses totaled $41.3 million, $35.2$37.3 million and $33.2$39.4 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. Research and development costs include salaries,employee-related costs, materials, contractor feesoutsourced services and other administrative costs.
Restructuring ChargesRestructuring charges for exit and disposal activities are recognized when the liability is incurred. The liability for the restructuring charge associated with an exit or disposal activity is measured initially at its fair value.
Income Taxes The Company recognizesis subject to income taxes in the U.S. and various foreign jurisdictions. The determination of the Company's income tax positions involves consideration of uncertainties, changing fiscal policies, tax laws, court rulings, regulations and related legislation. Accordingly, significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, forunrecognized tax benefits and the expected futurevaluation allowance recorded against deferred tax assets.
Deferred income taxes arise from temporary differences between the tax consequencesbases of events that have been recognizedassets and liabilities and their reported amounts in the accompanying consolidated financial statements. Deferred taxstatements that will result in taxable or deductible amounts in future years when the reported amount of the assets and liabilities are recovered or settled, respectively. The recognition and measurement of deferred tax asset and liability balances and the corresponding deferred tax expense are determined for each tax-paying component in each relevant jurisdiction. The Company will record a valuation allowance that represents a reduction of deferred tax assets if, based on the temporary difference between financial statement carrying amountsweight of available evidence, both positive and negative, it is more-likely-than-not that the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. Valuation allowances are provided for deferred tax assets wherewill not be realized.
The Company also recognizes liabilities for unrecognized tax benefits which are recognized if the weight of available evidence indicates that it is considered more likely than not more-likely-than-not that the Companypositions will not realizebe sustained on examination, including resolution of the benefitrelated appeals or litigation processes, if any. As of such assets. each balance sheet date, unrecognized tax benefits are reassessed and adjusted if the Company's judgment changes as a result of new information.
The Company evaluates its uncertainadopted the period cost method for the computation of global intangible low-taxed income (“GILTI”), that was introduced in the U.S. Tax Cuts and Jobs Act (the “Tax Act”).
The Company recognizes interest and penalties related to unrecognized tax positionsbenefits as new information becomes available. Tax benefitsa component of income tax expense.
Advertising Costs Advertising costs are recognized toexpensed as incurred and included in "Selling, general and administrative expenses." These costs were $17.4 million, $15.2 million and $14.9 million for the extent a position is more likely than not to be sustained upon examination by the taxing authority.years ended December 31, 2019, 2018 and 2017, respectively.
Comprehensive Income Comprehensive income includes, in addition to net earnings, other items that are reported as direct adjustments to equity. Currently, these items are foreign currency translation adjustments, the change in fair value of certain derivative instruments and employee pension and postretirement benefit adjustments.
Concentration of Credit Risk Credit extended to customers through trade accounts receivable potentially subjects the Company to risk. This risk is limited due to the large number of customers and their dispersion across various industries and many geographical areas. However, a significant amount of the Company's receivables are with distributors, dealers and large companies in the foodservice and beverage industry. Management currently does not foresee a significant credit risk associated with these individual groups of receivables, but continues to monitor the exposure, if any.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.presentation and include:
Reclassification of the current portion of capital leases totaling $1.1 million from "Current portion of capital leases" to "Short-term borrowings and current portion of finance leases" in the Consolidated Balance Sheets as of December 31, 2018 as a result of the adoption of ASU 2016-02, "Leases (Topic 842)."
Reclassification of separation expense totaling $0.1 million and $1.6 million from "Separation expense" to "Selling, general and administrative expenses" in the Consolidated Statements of Operations for the years ended December 31, 2018 and 2017, respectively.
Reclassification of capitalized software to be sold with a net book value of $2.7 million from "Property, plant and equipment — net" to "Other intangible assets — net" in the Consolidated Balance Sheets as of December 31, 2018.
Recently Adopted Accounting Pronouncements
Effective January 1, 2019, the Company adopted the provisions of ASC Topic 842, which requires lessees to recognize a right-of-use asset and corresponding lease liability on the balance sheet for operating leases while the accounting for finance leases remains substantially unchanged. The Company used the modified retrospective method and recognized the cumulative effect of the initial application of ASC Topic 842 as an adjustment to opening retained earnings as of January 1, 2019. The adjustment is principally driven by the recognition of remaining deferred gain associated with a previous sale-leaseback transaction. Prior to the adoption of ASC Topic 842, gains on sale leaseback transactions were generally deferred and recognized in the income statement over the lease term. Prior period results have not been adjusted and continue to be reported under the accounting standards in effect for such period. Upon adoption, the Company recognized right-of-use assets and lease liabilities for operating leases in the amount of $38.0 million and $36.6 million, respectively, with the difference reflective of a reclassification of existing prepaid expense balances to the right-of-use asset.
In January 2017,connection with the adoption of this guidance, the Company elected the package of practical expedients available within the standard and as a result, did not reassess the lease classification of existing contracts or leases or the initial direct costs associated with existing leases. The Company has also made an accounting policy election not to recognize right-of-use assets and lease liabilities for leases with a lease term of 12 months or less, including leases with renewal options that are reasonably certain to be exercised, and do not include an option to purchase the underlying asset that is reasonably certain of exercise. Instead, lease payments for these leases are recognized as lease expense on a straight-line basis over the lease term. In addition, the Company did not elect the hindsight practical expedient and has elected not to separate the accounting for lease components and non-lease components, for all classes of leased assets. Certain of the Company’s leases included variable lease costs consisting primarily of reimbursement to the lessor for taxes and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as maintenance services and usage charges. See additional disclosure of leases in Note 18, "Leases."
In October 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2017-04, "Intangibles—GoodwillASU 2018-16, "Derivatives and OtherHedging (Topic 350)815): Simplifying the Test for Goodwill Impairment," which removes the second stepInclusion of the annual goodwill impairment test. Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes" ("ASU 2017-04 is effective2018-16"). The amendments in this update permit use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for fiscal years,hedge accounting purposes under Topic 815 in addition to the U.S. Treasury Rate, the London Interbank Offered Rate ("LIBOR") swap rate, the OIS rate based on the Fed Funds Effective Rate and interim periods within those fiscal years, for annual impairment tests beginning after December 15, 2019. Early adoption is permittedthe Securities Industry and Financial Markets Association Municipal Swap Rate. The amendments in any interim or annual reporting period for impairment tests performed after January 1, 2017 andthis update were required to be adopted concurrently with the amendments in this ASU should be applied prospectively. The Company early adopted this standard2017-12, "Derivatives and applied the guidance from ASU 2017-04 in its annual goodwill assessment performed as of June 30, 2017. The adoption of this standard did not have an impact on the Company’s consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718):Hedging: Targeted Improvements to Employee Share-Based Payment Accounting for Hedging Activities." which simplifies several aspects of the accounting for share-based payment award transactions. This ASU requires that all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit on the income statement and that excess tax benefits be classified as an operating activity in the cash flow statement. While this new standard allows an entity to account for forfeitures as they occur, the Company elected to continue the current U.S. GAAP practice of estimating forfeitures when calculating stock-based compensation expense. This ASU becamewas effective for the Company on January 1, 20172019 and the adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." This ASU changes the guidance on accounting for inventory accounted for on a first-in first-out ("FIFO") basis. Under the revised standard, an entity should measure FIFO inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured on a last-in, first-out ("LIFO") basis. ASU 2015-11 became effective for the Company on January 1, 2017 and the adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," which clarifies the accounting guidance to assist entities in evaluating whether a transaction should be accounted for as acquisitions of assets or businesses. The Company adopted this in the fourth quarter of 2017 without material impact to the Company's financial statements. The ongoinghad no impact on the Company's consolidated financial statements will be dependent on the nature of any future acquisitions.statements.
Recent Accounting Pronouncements Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," ("ASU 2018-02")to provide guidance on the presentation of certain income statement effects from the Tax Cuts and Jobs Act’s reduction in the corporate statutory tax rate.The ASU 2018-02 provides the option of reclassifying what are called the “stranded”"stranded" tax effects within accumulated other comprehensive income (loss)AOCI to retained earnings and requires increased disclosures describing the accounting policy used to release the income tax effects from accumulated other comprehensive income (loss),AOCI, whether the amounts reclassified are the stranded income tax effects from the Tax Cuts and Jobs Act, and information about the other effects on taxes from the reclassification. ASU 2018-02 may be adopted using one of two transition methods: (1) retrospective to each period (or periods) in which the income tax effects of the Tax Cuts and Jobs Act related to items remaining in accumulated other comprehensive income (loss)AOCI are recognized, or (2) at the beginning of the period of adoption. The ASU isCompany adopted this standard effective for fiscal years beginning after December 15, 2018,January 1, 2019 and elected not to reclassify the quarterly and other interim periods"stranded" income tax effects from AOCI to "Retained earnings." Future income tax effects that are stranded in those years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this ASUAOCI will have on its consolidated financial statements and related disclosures.be released using an investment-by-investment approach.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities," ("ASU 2017-12") which improves the financial reporting of hedging relationships to better align risk management activities in financial statements and make certain targeted improvements to simplify the application of current hedge accounting guidance in current GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting," which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting pursuant to Topic 718. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The amendments in this update are required to be applied prospectively to an award modified on or after the adoption date. This standard becomeswas effective for the Company as ofon January 1, 2018.2019. The impactCompany elected the modified retrospective basis for its adoption of this standard willguidance which did not have a material impact on the Company's consolidated financial statements, and relatedhowever, the guidance does require expanded disclosures will be dependent on the terms and conditions of any modifications made to share-based awards after January 1, 2018.which are included in Note 11, "Derivative Financial Instruments."
In March 2017, the FASB issued ASU 2017-08, "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. This standard was effective for the Company on January 1, 2019 and had no impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2017-082018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," ("ASU 2018-15") which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, with amortization expense being recorded in the same income statement expense line as the hosted service costs and over the expected term of the hosting arrangement. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The Company is currently evaluating thewill adopt ASU 2018-15 prospectively as of January 1, 2020. The impact thatof the adoption of this ASU will have on itsstandard Company's consolidated financial statements andwill be dependent on the related disclosures.implementation costs incurred subsequent to January 1, 2020.
In March 2017, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which requires the employer to disaggregate the service cost component from the other components of net benefit cost. The ASU also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. This standard becomes effective for the Company as of January 1, 2018. The adoption of this ASU will only have an impact on classification within its consolidated statements of operations.
In NovemberJune 2016, the FASB issued ASU 2016-18, "Statement2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Cash Flows (Topic 230): Restricted Cash,Credit Losses on Financial Instruments," including subsequent amendments issued thereafter which requires an entity to reconcileclarify the changes in restricted cash as part of total cash and cash equivalents in its statements of cash flows.standard (collectively, "Topic 326"). This standard becomes effectivesignificantly changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. In accordance with Topic 326, the Company aswill be required to use a current expected credit loss model ("CECL") that will immediately recognize an estimate of January 1, 2018. The adoptioncredit losses that are expected to occur over the life of the financial instruments that are within the scope of this standard will be applied retrospectively. Other thanupdate, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the change in presentationdevelopment of restricted cash within the statement of cash flows, the adoption of this ASU is not expected to have an impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16credit loss estimates. This guidance becomes effective for the Company on January 1, 2018. Adoption2020. The Company has finalized its assessment associated with the adoption as well as policies, processes and internal controls to align with the new standard. Upon adoption, the Company will record an expected credit loss allowance with an offsetting adjustment to the opening balance of this ASU isretained earnings as of January 1, 2020, which the Company has determined will not currently expected to have a material impact toon the Company's consolidated financial statements.
In August 2016,December 2019, the FASB issued ASU 2016-15, "Statement of Cash Flows2019-12, "Income Taxes (Topic 230)740): Classification of Certain Cash ReceiptsSimplifying the Accounting for Income Taxes ("ASU 2019-12"), which amends, and Cash Payments," which clarifiesis intended to simplify, existing guidance related to the accounting guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard becamefor income taxes. ASU 2019-12 is effective for the Company as of January 1, 2018. The adoption of this standard will impact the presentation of collections of the deferred purchase price from its sales of trade accounts receivables in the Company’s consolidated statements of cash flows. Subsequent to adoption, collection of these balances will be reported in cash flows from investing activities rather than cash flows from operating activities with all retrospectivefiscal years, and interim periods reclassified to conform for comparability.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. ASU 2016-02 requires a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, and provides certain practical expedients that companies may elect includingwithin those contained in ASU 2018-01, "Leases (Topic 842): Lease Easement Practical Expedient for Transition to Topic 842". This ASU is effective for fiscal years, beginning after December 15, 2018, including interim
periods within those fiscal years with early2020. Early adoption is permitted. This guidance is effective for the Company beginning January 1, 2021. The Company is currently evaluating the impact that the adoption of this ASUnew standard will have on itsthe Company's consolidated financial statements and related disclosures.statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." This ASU creates a single, comprehensive revenue recognition model for all contracts with customers. The model is based on changes in contract assets (rights to receive consideration) and liabilities (obligations to provide a good or service). Revenue will be recognized based on the satisfaction of performance obligations, which occurs when control of a good or service transfers to a customer and enhanced disclosures will be required regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Either a retrospective or cumulative effect transition method, referred to as the modified retrospective method, is permitted. The Company will adopt ASU 2014-09 on January 1, 2018 using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an increase to the opening balance of retained earnings. The impact from the cumulative effect adjustment is expected to be immaterial and the Company anticipates the impact will be immaterial to the consolidated financial statements for the full fiscal year 2018.
The impact to the Company’s future results is not expected to be material based on the analysis of revenue streams and contracts under the new revenue recognition guidance which supports revenue recognition at a point in time for the majority of the Company’s revenue. This is consistent with the Company’s existing revenue recognition model whereby the majority of revenue is recognized when products are shipped from the Company’s manufacturing facilities. The impacts from the adoption of ASU 2014-09 primarily relate to the timing of revenue recognition for variable consideration received and recording right of return assets in the Americas segment.
The Company’s variable consideration is predominantly comprised of annual customer rebate programs, which will be determined under ASU 2014-09 using the expected value method as prescribed in the guidance. The resulting impact will be a timing shift between quarters within annual periods which could be material to the interim consolidated financial statements. However, as the programs are typically based on calendar-year purchases, these timing shifts will not have an impact on the annual consolidated financial statements, and thus will not result in a cumulative effect adjustment upon adoption of ASU 2014-09. Recording right of return assets for the right to recover products from customers upon settling refund liabilities resulted in a cumulative effect adjustment. Product returns are generally limited to standard products, still crated and within 90 days from the date invoiced. Due to these limited rights of return and the Company’s commercial customer base, the asset value to be recorded on January 1, 2018 as a cumulative effect adjustment is not expected to be material. Recognition of right of return assets is not expected to have a material impact on the consolidated financial statements for the full fiscal year 2018.
Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact toon the Company.
3. AcquisitionsAcquisition
On April 19, 2018, the Company, through a wholly-owned subsidiary, acquired 100% of the share capital of Avaj International Holding AB ("Avaj") (the "Crem Acquisition") for aggregate consideration of approximately 1,800 million Swedish Krona ("SEK") or $220.3 million based on the exchange rate in effect on the closing date. The consideration consisted of $159.8 million in cash, including $2.4 million of interest paid to the seller, and an aggregate $60.5 million for the repayment of certain indebtedness owed under third-party borrowings and stockholder loans. The Crem Acquisition was funded through cash on hand and additional borrowings under existing credit lines.
Crem International Holding AB ("Crem"), a wholly-owned subsidiary of Avaj, is a global manufacturer of professional coffee machines headquartered in Solna, Sweden. Crem develops, manufactures and markets a full suite of commercial coffee machines for use in offices, restaurants, cafes and coffee shops, catering and convenience stores. The Crem Acquisition provides the Company with an established presence in hot beverage equipment, a complementary product category, potential operational synergies and cross-selling benefits and an increased presence in Europe and Asia.
The Crem Acquisition was accounted for under the acquisition method of accounting which requires, among other things, that the assets acquired and the liabilities assumed be measured at their fair values as of the closing date of the transaction. During the first quarter of 2019, the Company finalized its purchase price allocation for the Crem Acquisition with no measurement period adjustments subsequent to December 31, 2018.
On October 21, 2015,During the years ended December 31, 2019 and 2018, the Company acquiredincurred $0.6 million and $5.2 million respectively of professional fees and other direct acquisition and integration costs related to the remaining 50.0% of outstanding shares of a joint ventureCrem Acquisition. These costs are included in Thailand. Welbilt Thailand is a leading manufacturer of kitchen equipment"Selling, general and administrative expenses" in South East Asia and is a part of the Company's APAC reportable segment. TheConsolidated Statements of Operations. In addition, the Company entered into a foreign currency exchange contract for the purchase price netexposure of cash acquired, was approximately $5.3 million. A gainSEK 1,800 million, resulting in a loss of $4.9$10.0 million was recognized onin the acquisition andfirst half of 2018 which is included as a component ofin "Other expense (income) — net" in the consolidated statementConsolidated Statements of operationsOperations for the year ended December 31, 2015. 2018.
The gain related operations of Crem contributed approximately $62.0 millionto the difference between the book value and the fair valuenet sales while incurring a loss from operations of the Company's previously held passive 50.0% equity interest in the joint venture. Allocation of the purchase price resulted in $1.4approximately $2.8 million of goodwill and $4.2 million of intangible assets, which related entirely to the APAC reportable segment. The results of Welbilt Thailand have been included in the consolidated financial statements since the date of the acquisition.
4. Divestitures
In January 2017, the Company completed the sale of a certain parts and field service business in Shanghai, China for a net purchase price of $1.1 million, with cash proceeds received of $1.1 million in December 2016. This sale relates entirely to the APAC reportable segment and met the criteria to be classified as held for sale as of December 31, 2016 and thus, the related assets of $2.3 million and liabilities of $0.7 million are presented in "Current assets held for sale" and "Current liabilities held for sale" in the consolidated balance sheet for the year ended December 31, 2016, respectively.
On December 7, 2015,2018. The loss from operations is inclusive of costs associated with an incident at a subsidiary of Crem which resulted in the diversion of €4.0 million to parties outside of the Company, completedof which €1.0 million was subsequently recovered. As a result of this incident, the sale of Kysor Panel Systems ("KPS"), a manufacturer of wood frame and high-density rail panel systems for walk-in freezers and coolers for the retail and convenience-store markets, to an affiliate of D Cubed Group LLC. The sale price for the transaction was $85.0 million, with cash proceeds received of $78.2 million. The Company recorded a $9.9loss of $3.7 million gain on the sale, which is included in "Other expense (income) - net" in the consolidated statement of operations for the year ended December 31, 2015.diverted funds, net of recovery, and the associated costs for external legal counsel, accounting and administration efforts in "Selling, general and administrative expenses" during the fourth quarter of 2018, of which $3.4 million was incurred directly by Crem. The proceeds fromCompany is continuing to pursue recovery opportunities, however, there can be no assurance that any additional recoveries will be made. Supplemental pro-forma information has not been presented because the sale were usedeffect of this acquisition was not material to reduce outstanding debt under MTW's then-outstanding credit facility. This divestiture did not qualify for discontinued operations; therefore the results of the business are included in the operating results from continuing operations.
5. Fair Value of Financial Instruments
In accordance with the Company's policy, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The policy classifies the inputs used to measure fair value into the following hierarchy:Consolidated Statements of Operations.
| |
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
| |
Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or |
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
Inputs other than quoted prices that are observable for the asset or liability
| |
Level 3 | Unobservable inputs for the asset or liability |
The Company endeavors to utilize the best available information in measuring fair value. The Company estimates the fair value of its Senior Notes and Term Loan B Facility based on quoted market prices of the instruments. Because these markets are typically thinly traded, the assets and liabilities are classified as Level 2 of the fair value hierarchy. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and deferred purchase price notes on receivables sold (see Note 11, "Accounts Receivable Securitization"), approximate fair value, without being discounted as of December 31, 2017 and 2016 due to the short-term nature of these instruments.
The fair value of the Company's 9.50% Senior Notes due 2024 (the "Senior Notes") was approximately $483.8 million and $496.2 million as of December 31, 2017 and 2016, respectively. The fair value of the Company's Term Loan B under its Senior Secured Credit Facilities was approximately $818.1 million and $838.4 million as of December 31, 2017 and 2016, respectively. See Note 12, "Debt," for a description of the debt instruments and their related carrying values. Aside from the asset impairment charges discussed in Note 19, "Restructuring," no other non-recurring fair value adjustments were recorded during the years ended December 31, 2017, 2016 and 2015.
The following tables set forth financialtable summarizes the consideration paid for Crem and the amounts of the identified assets acquired and liabilities that were accounted for at fair value on a recurring basisassumed as of December 31, 2017 and 2016 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.April 19, 2018 acquisition date:
|
| | | | |
| (in millions) | | |
| Total purchase price | | $ | 220.3 |
|
| Less: cash acquired | | 4.7 |
|
| Total purchase price, net of cash acquired | | $ | 215.6 |
|
| | | |
| Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value: | | |
| Cash | | $ | 4.7 |
|
| Accounts receivable | | 17.2 |
|
| Inventories | | 16.9 |
|
| Prepaids and other current assets | | 1.9 |
|
| Property, plant and equipment | | 4.9 |
|
| Other intangible assets | | 131.2 |
|
| Other non-current assets | | 2.1 |
|
| Trade accounts payable | | (11.4 | ) |
| Accrued expenses and other liabilities | | (6.0 | ) |
| Deferred income taxes | | (32.8 | ) |
| Pension and postretirement health obligations | | (0.4 | ) |
| Other long-term liabilities | | (5.0 | ) |
| Fair value of assets acquired and liabilities assumed | | 123.3 |
|
| Allocation to goodwill | | $ | 97.0 |
|
|
| | | | | | | | | | | | | | | | |
| | | Fair Value as of December 31, 2017 |
| (in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Current assets: | | | | | | | | |
| Foreign currency exchange contracts | | $ | — |
| | $ | 1.1 |
| | $ | — |
| | $ | 1.1 |
|
| Commodity contracts | | — |
| | 1.7 |
| | — |
| | 1.7 |
|
| Interest rate swap contracts | | — |
| | 1.7 |
| | — |
| | 1.7 |
|
| Total current assets at fair value | | — |
| | 4.5 |
| | — |
| | 4.5 |
|
| Non-current assets: | | |
| | |
| | |
| | |
|
| Commodity contracts | | — |
| | 0.6 |
| | — |
| | 0.6 |
|
| Interest rate swap contracts | | — |
| | 2.3 |
| | — |
| | 2.3 |
|
| Total non-current assets at fair value | | — |
| | 2.9 |
| | — |
| | 2.9 |
|
| Total assets at fair value | | $ | — |
| | $ | 7.4 |
| | $ | — |
| | $ | 7.4 |
|
| | | | | | | | | |
| Current liabilities: | | |
| | |
| | |
| | |
|
| Foreign currency exchange contracts | | $ | — |
| | $ | 1.1 |
| | $ | — |
| | $ | 1.1 |
|
| Commodity contracts | | — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Total current liabilities at fair value | | — |
| | 1.2 |
| | — |
| | 1.2 |
|
| Non-current liabilities: | | |
| | |
| | |
| | |
|
| Interest rate swap contracts | | — |
| | 17.7 |
| | — |
| | 17.7 |
|
| Total non-current liabilities at fair value | | — |
| | 17.7 |
| | — |
| | 17.7 |
|
| Total liabilities at fair value | | $ | — |
| | $ | 18.9 |
| | $ | — |
| | $ | 18.9 |
|
|
| | | | | | | | | | | | | | | | |
| | | Fair Value as of December 31, 2016 |
| (in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Current assets: | | |
| | |
| | |
| | |
|
| Foreign currency exchange contracts | | $ | — |
| | $ | 0.6 |
| | $ | — |
| | $ | 0.6 |
|
| Commodity contracts | | — |
| | 0.9 |
| | — |
| | 0.9 |
|
| Total current assets at fair value | | — |
| | 1.5 |
| | — |
| | 1.5 |
|
| Non-current assets: | | |
| | |
| | |
| | |
|
| Commodity contracts | | — |
| | 0.2 |
| | — |
| | 0.2 |
|
| Total non-current assets at fair value | | — |
| | 0.2 |
| | — |
| | 0.2 |
|
| Total assets at fair value | | $ | — |
| | $ | 1.7 |
| | $ | — |
| | $ | 1.7 |
|
| Current liabilities: | | |
| | |
| | |
| | |
|
| Foreign currency exchange contracts | | $ | — |
| | $ | 1.0 |
| | $ | — |
| | $ | 1.0 |
|
| Commodity contracts | | — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Total current liabilities at fair value | | — |
| | 1.1 |
| | — |
| | 1.1 |
|
| Total liabilities at fair value | | $ | — |
| | $ | 1.1 |
| | $ | — |
| | $ | 1.1 |
|
The foreign currency exchange, commodity and interest rate swap contracts are valued through an independent valuation source which uses an industry standard data provider, with resulting valuations periodically validated through third-party or counterparty quotes. As such, these derivative instruments are classified within Level 2 of the fair value hierarchy.
6. Derivative Financial Instruments
The Company's risk management objective is to ensure that business exposures to risks that have been identified and measured and are capable of being controlled are minimized or managed using what it believes to be the most effective and efficient methods to eliminate, reduce or transfer such exposures. Operating decisions consider these associated risks and structure transactions to minimize or manage these risks whenever possible.
The primary risks the Company manages using derivative instruments are interest rate risk, commodity price risk and foreign currency exchange risk. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings. Cross-currency interest rate swaps are entered into to protect the value of the Company’s investments in its foreign subsidiaries. Swap contracts on various commodities are used to manage the price risk associated with forecasted purchases of materials used in the Company's manufacturing process. The Company also enters into various foreign currency derivative instruments to help manage foreign currency risk associated with its projected purchases and sales and foreign currency denominated receivable and payable balances.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. Commodity swaps and foreign currency exchange contracts are designated as cash flow hedges of forecasted purchases of commodities and currencies, certain interest rate swaps as cash flow hedges of floating-rate borrowings, and the remainder as fair value hedges of fixed-rate borrowings, and certain cross-currency interest rate swaps as hedges of net investments in its foreign subsidiaries.
Cash flow hedging strategy
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of "Accumulated other comprehensive loss" and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. In the next twelve months, the Company estimates $1.6 million of unrealized gains, net of tax, related to currency rate and commodity price hedging will be reclassified from "Accumulated other comprehensive loss" into earnings. Foreign currency and commodity hedging is generally completed prospectively on a rolling basis for 15 and 36 months, respectively, depending on the type of risk being hedged.
During the first quarter of 2017, the Company entered into two interest rate swap agreements with a total notional amount of $600.0 million to manage interest rate risk exposure by converting the Company’s floating-rate debt to a fixed-rate basis, thus reducing the impact from fluctuations in interest rates on future interest expense. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal and have termination dates of March 2019 for $175.0 million notional amount and March 2020 for the remaining $425.0 million notional amount. Approximately 47.4% of the Company’s outstanding long-term debt had its interest payments designated as cash flow hedges under these interest rate swap agreements as of December 31, 2017. The Company did not enter into any interest rate swap agreements during the year ended December 31, 2016.
As of December 31, 2017, 2016 and 2015, the Company had the following outstanding commodity and currency forward contracts that were entered into as hedges of forecasted transactions:
|
| | | | | | | | | | | |
| | | Units Hedged | | |
| Commodity | | 2017 | | 2016 | | 2015 | | Unit |
| Aluminum | | 1,620 |
| | 1,663 |
| | 1,215 |
| | MT |
| Copper | | 667 |
| | 746 |
| | 472 |
| | MT |
| Natural gas | | — |
| | 56,416 |
| | 49,396 |
| | MMBtu |
| Steel | | 7,713 |
| | 8,663 |
| | 11,073 |
| | Short tons |
|
| | | | | | | | | |
| | | Units Hedged |
| Currency | | 2017 | | 2016 | | 2015 |
| Canadian Dollar | | 18,080,000 |
| | 26,130,000 |
| | 587,556 |
|
| European Euro | | 8,545,000 |
| | 11,261,848 |
| | 231,810 |
|
| British Pound | | 7,807,744 |
| | 4,191,763 |
| | 113,115 |
|
| Mexican Peso | | 126,400,000 |
| | 148,200,000 |
| | 28,504,800 |
|
| Thailand Baht | | — |
| | 23,231,639 |
| | — |
|
| Singapore Dollar | | 1,765,000 |
| | 4,375,000 |
| | — |
|
The effects of derivative instruments on the consolidated statements of comprehensive income and consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 for gains or losses initially recognized in AOCI in the consolidated balance sheets were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives in cash flow hedging relationships (in millions) | | Pretax gain (loss) recognized in AOCI (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | | Pretax gain (loss) reclassified from AOCI into income (effective portion) |
| | | 2017 | | 2016 | | 2015 | | | | 2017 | | 2016 | | 2015 |
| Foreign currency exchange contracts | | $ | 3.8 |
| | $ | (0.1 | ) | | $ | (0.8 | ) | | Cost of sales | | $ | 3.3 |
| | $ | — |
| | $ | (1.4 | ) |
| Commodity contracts | | 2.4 |
| | 2.2 |
| | (5.3 | ) | | Cost of sales | | 1.1 |
| | (1.5 | ) | | (3.4 | ) |
| Interest rate swap contracts | | 2.8 |
| | — |
| | — |
| | Interest expense | | — |
| | — |
| | — |
|
| Total | | $ | 9.0 |
| | $ | 2.1 |
| | $ | (6.1 | ) | | | | $ | 4.4 |
| | $ | (1.5 | ) | | $ | (4.8 | ) |
|
| | | | | | | | | | | | | | |
| Derivatives in cash flow hedging relationships (in millions) | | Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) | | Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) |
| | | 2017 | | 2016 | | 2015 | | |
| Commodity contracts | | $ | 0.2 |
| | $ | — |
| | $ | 0.1 |
| | Cost of sales |
| Total | | $ | 0.2 |
| | $ | — |
| | $ | 0.1 |
| | |
Fair value hedging strategy
For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item in current earnings.
During the first quarter of 2017, the Company entered into an interest rate swap agreement with a total notional amount of $425.0 million to manage interest rate risk exposure by converting the Company’s fixed-rate debt to a floating-rate basis. This agreement involved the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal. On June 14, 2017, this interest rate swap agreement was terminated and the Company received $7.7 million, the fair value of the swap including accrued interest. Accordingly, hedge accounting was discontinued and the hedge accounting adjustment to the Company's Senior Notes due 2024 of $0.3 million will be amortized to "Interest expense" in the consolidated statements of operations through February 2024.
On October 3, 2017, the Company entered into an interest rate swap agreement with a total notional amount of $425.0 million to manage interest rate risk exposure by converting the Company’s fixed-rate debt to a floating-rate basis. This agreement involves the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal and terminates in February 2024. Approximately 33.6% of the Company’s outstanding long-term debt had its interest payments designated as a fair value hedge under this interest rate swap agreement as of December 31, 2017.
The gain or loss on the hedged items (that is, fixed-rate borrowing of 9.50% Senior Notes due 2024) attributable to the hedged benchmark interest rate risk (risk of changes in the applicable LIBOR swap rate) and the offsetting gain or loss on the related interest rate swap is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives in fair value hedging relationships (in millions) | | Gain/(Loss) on Swap | | Income Statement Classification | | Gain/(Loss) on Borrowings |
| | | 2017 | | 2016 | | 2015 | | | | 2017 | | 2016 | | 2015 |
| Interest rate swap contract | | $ | (9.0 | ) | | $ | — |
| | $ | — |
| | Interest Expense | | $ | 8.7 |
| | $ | — |
| | $ | — |
|
| Total | | $ | (9.0 | ) | | $ | — |
| | $ | — |
| | | | $ | 8.7 |
| | $ | — |
| | $ | — |
|
The difference of $0.3 million represents hedge ineffectiveness. The net swap settlements that accrue each period are reported in "Interest expense" in the consolidated statements of operations. As of December 31, 2017, the total notional amount of the Company’s receive-fixed/pay-variable interest rate swap was $425.0 million. The Company did not enter into any interest rate swap agreements during the year ended December 31, 2016.
Hedge of net investment in foreign operations strategy
For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in "Accumulated other comprehensive loss" as part of the cumulative translation adjustment to the extent it is effective. Any ineffective portions of net investment hedges are recognized in earnings during the period of change.
During the first quarter of 2017, the Company entered into a three year cross-currency interest rate swap contract for a notional value of €50.0 million to protect the value of its net investment in Euros. The carrying value of the net investment in Euros that is designated as a hedging instrument is remeasured at each reporting date to reflect the changes in the foreign currency exchange spot rate, with changes since the last remeasurement date recorded in "Accumulated other comprehensive loss." The Company uses the forward-rate method of assessing hedge effectiveness when cross-currency swap contracts are designated as hedging instruments. The Company did not enter into any cross-currency interest rate swap contracts during the years ended December 31, 2016 or 2015.
The effects of derivative instruments on the consolidated statements of comprehensive income and consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 for gains or losses initially recognized in AOCI in the consolidated balance sheets were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives in net investments hedging relationships (in millions) | | Pretax gain (loss) recognized in AOCI (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | | Amount of gain (loss) reclassified from AOCI into income (effective portion) |
| | | 2017 | | 2016 | | 2015 | | | | 2017 | | 2016 | | 2015 |
| Interest rate swap contract | | $ | (7.5 | ) | | $ | — |
| | $ | — |
| | Selling, general and administrative expenses | | $ | — |
| | $ | — |
| | $ | — |
|
| Total | | $ | (7.5 | ) | | $ | — |
| | $ | — |
| | | | $ | — |
| | $ | — |
| | $ | — |
|
As of December 31, 2017, there was no ineffectiveness on hedges designated as net investment hedges.
Derivatives Not Designated as Hedging Instruments
The Company enters into foreign currency exchange contracts that are not designated as hedge relationships to offset, in part, the impact of certain intercompany transactions and to further mitigate short-term currency impacts. These derivative instruments are not designated as hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings.
For derivative instruments that are not designated as hedging instruments, the gains or losses on the derivatives are recognized in current earnings within "Other expense (income) — net" in the consolidated statements of operations. As of December 31, 2017, 2016 and 2015, the Company had the following outstanding currency forward contracts that were not designated as hedging instruments:
|
| | | | | | | | | | | | | |
| | | Units Hedged | | | | |
| Commodity | | 2017 | | 2016 | | 2015 | | Unit | | Type |
| Aluminum | | — |
| | 28 |
| | — |
| | MT | | Cash flow |
| Steel | | — |
| | 340 |
| | — |
| | Short tons | | Cash flow |
|
| | | | | | | | | | | | | |
| | | Units Hedged | | | | |
| Currency | | 2017 | | 2016 | | 2015 | | Recognized Location | | Purpose |
| Canadian Dollar | | — |
| | — |
| | 1,117,850 |
| | Other expense (income) — net | | Accounts payable and receivable settlement |
| European Euro | | 69,300,000 |
| | 16,000,000 |
| | — |
| | Other expense (income) — net | | Accounts payable and receivable settlement |
| Swiss Franc | | 4,800,000 |
| | 3,150,000 |
| | — |
| | Other expense (income) — net | | Accounts payable and receivable settlement |
| British Pound | | 14,912,019 |
| | 8,192,692 |
| | — |
| | Other expense (income) — net | | Accounts payable and receivable settlement |
| Singapore Dollar | | 28,127,000 |
| | — |
| | — |
| | Other expense (income) — net | | Accounts payable and receivable settlement |
|
| | | | | | | | | | | | | | |
| Derivatives NOT designated as hedging instruments (in millions) | | Amount of gain (loss) recognized in income on derivative | | Location of gain (loss) recognized in income on derivative |
| | | Year Ended | | |
| | | 2017 | | 2016 | | 2015 | | |
| Foreign currency exchange contracts | | $ | (6.5 | ) | | $ | (0.2 | ) | | $ | 0.1 |
| | Other expense (income) — net |
| Commodity contracts — short-term | | — |
| | 0.8 |
| | (0.7 | ) | | Other expense (income) — net |
| Commodity contracts — long-term | | — |
| | — |
| | (0.1 | ) | | Other expense (income) — net |
| Total | | $ | (6.5 | ) | | $ | 0.6 |
| | $ | (0.7 | ) | | |
The fair value of outstanding derivative contracts recorded as assets in the consolidated balance sheets as of December 31, 2017 and 2016 was as follows:
|
| | | | | | | | | | |
| | | | | Asset Derivatives |
| (in millions) | | Balance Sheet Location | | Fair Value |
| | | | | 2017 | | 2016 |
| Derivatives designated as hedging instruments: | | | | | | |
| Foreign currency exchange contracts | | Prepaids and other current assets | | $ | 1.1 |
| | $ | 0.6 |
|
| Commodity contracts | | Prepaids and other current assets | | 1.7 |
| | 0.9 |
|
| Interest rate swap contracts | | Prepaids and other current assets | | 1.7 |
| | — |
|
| Commodity contracts | | Other non-current assets | | 0.6 |
| | 0.2 |
|
| Interest rate swap contracts | | Other non-current assets | | 2.3 |
| | — |
|
| Total derivatives designated as hedging instruments | | | | $ | 7.4 |
| | $ | 1.7 |
|
| | | | | | | |
| Total asset derivatives | | | | $ | 7.4 |
| | $ | 1.7 |
|
The fair value of outstanding derivative contracts recorded as liabilities in the consolidated balance sheets as of December 31, 2017 and 2016 was as follows:
|
| | | | | | | | | | |
| | | | | Liability Derivatives |
| (in millions) | | Balance Sheet Location | | Fair Value |
| | | | | 2017 | | 2016 |
| Derivatives designated as hedging instruments: | | | | | | |
| Foreign currency exchange contracts | | Accrued expenses and other liabilities | | $ | 0.6 |
| | $ | 0.8 |
|
| Commodity contracts | | Accrued expenses and other liabilities | | 0.1 |
| | 0.1 |
|
| Interest rate swap contracts | | Other long-term liabilities | | 17.7 |
| | — |
|
| Total derivatives designated as hedging instruments | | | | $ | 18.4 |
| | $ | 0.9 |
|
| | | | | | | |
| Derivatives NOT designated as hedging instruments: | | | | | | |
| Foreign currency exchange contracts | | Accrued expenses and other liabilities | | $ | 0.5 |
| | $ | 0.2 |
|
| Total derivatives NOT designated as hedging instruments | | | | $ | 0.5 |
| | $ | 0.2 |
|
| | | | | | | |
| Total liability derivatives | | | | $ | 18.9 |
| | $ | 1.1 |
|
7. Inventories—Net
The components of "Inventories—net" at December 31, 2017 and 2016 are summarized as follows:
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Inventories — gross: | | | | |
|
| Raw materials | | $ | 73.9 |
| | $ | 68.2 |
|
| Work-in-process | | 18.9 |
| | 18.3 |
|
| Finished goods | | 86.9 |
| | 85.1 |
|
| Total inventories — gross | | 179.7 |
| | 171.6 |
|
| Excess and obsolete inventory reserve | | (23.5 | ) | | (22.5 | ) |
| Net inventories at FIFO cost | | 156.2 |
| | 149.1 |
|
| Excess of FIFO costs over LIFO value | | (3.9 | ) | | (3.5 | ) |
| Inventories — net | | $ | 152.3 |
| | $ | 145.6 |
|
8. Property, Plant and Equipment—Net
The components of "Property, plant and equipment — net" at December 31, 2017 and 2016 are summarized as follows:
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Land | | $ | 9.5 |
| | $ | 7.3 |
|
| Building and improvements | | 88.9 |
| | 91.3 |
|
| Machinery, equipment and tooling | | 227.3 |
| | 215.1 |
|
| Furniture and fixtures | | 6.0 |
| | 5.8 |
|
| Computer hardware and software | | 55.1 |
| | 52.9 |
|
| Construction in progress | | 15.7 |
| | 11.2 |
|
| Total cost | | 402.5 |
| | 383.6 |
|
| Less accumulated depreciation | | (290.3 | ) | | (274.5 | ) |
| Property, plant and equipment — net | | $ | 112.2 |
| | $ | 109.1 |
|
9. Goodwill and Other Intangible Assets—Net
The Company has three reportable segments: Americas, EMEA and APAC. The changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Americas | | EMEA | | APAC | | Total |
| Gross balance as of December 31, 2015 | | $ | 1,144.8 |
| | $ | 208.3 |
| | $ | 8.4 |
| | $ | 1,361.5 |
|
| Accumulated asset impairments | | (312.2 | ) | | (203.5 | ) | | — |
| | (515.7 | ) |
| Net balance as of December 31, 2015 | | $ | 832.6 |
| | $ | 4.8 |
| | $ | 8.4 |
| | $ | 845.8 |
|
| | | | | | | | | |
| Foreign currency impact | | $ | — |
| | $ | (0.1 | ) | | $ | (0.4 | ) | | $ | (0.5 | ) |
| Gross balance as of December 31, 2016 | | 1,144.8 |
| | 208.2 |
| | 8.0 |
| | 1,361.0 |
|
| Accumulated asset impairments | | (312.2 | ) | | (203.5 | ) | | — |
| | (515.7 | ) |
| Net balance as of December 31, 2016 | | $ | 832.6 |
| | $ | 4.7 |
| | $ | 8.0 |
| | $ | 845.3 |
|
| | | | | | | | | |
| Foreign currency impact | | $ | — |
| | $ | 0.2 |
| | $ | 0.6 |
| | $ | 0.8 |
|
| Gross balance as of December 31, 2017 | | 1,144.8 |
| | 208.4 |
| | 8.6 |
| | 1,361.8 |
|
| Accumulated asset impairments | | (312.2 | ) | | (203.5 | ) | | — |
| | (515.7 | ) |
| Net balance as of December 31, 2017 | | $ | 832.6 |
| | $ | 4.9 |
| | $ | 8.6 |
| �� | $ | 846.1 |
|
As of June 30, 2017 and 2016, the Company performed the annual impairment test for its reporting units, as well as its indefinite-lived intangible assets, and based on those results, the fair value of each of the Company's reporting units exceeded their respective carrying values and no impairment was indicated.
The gross carrying amount and accumulated amortization of the Company'sidentifiable intangible assets other than goodwill areacquired as follows as of December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 |
| (in millions) | | Gross
Carrying
Amount | | Accumulated
Amortization
Amount | | Net
Book
Value | | Gross
Carrying
Amount | | Accumulated
Amortization
Amount | | Net
Book
Value |
| Trademarks and tradenames | | $ | 177.5 |
| | $ | — |
| | $ | 177.5 |
| | $ | 172.4 |
| | $ | — |
| | $ | 172.4 |
|
| Customer relationships | | 415.3 |
| | (192.3 | ) | | 223.0 |
| | 415.2 |
| | (171.4 | ) | | 243.8 |
|
| Patents | | 2.8 |
| | (1.7 | ) | | 1.1 |
| | 1.6 |
| | (1.6 | ) | | — |
|
| Other intangibles | | 144.9 |
| | (85.1 | ) | | 59.8 |
| | 140.7 |
| | (72.5 | ) | | 68.2 |
|
| Total | | $ | 740.5 |
| | $ | (279.1 | ) | | $ | 461.4 |
| | $ | 729.9 |
| | $ | (245.5 | ) | | $ | 484.4 |
|
Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $31.2 million, $31.2 million and $31.4 million, respectively. At December 31, 2017, the weighted average remaining useful livespart of the customer relationships, patents, and other intangibles were approximately 11 years, 13 years and 6 years, respectively. The total weighted average remaining useful life of the definite-lived intangible assets was approximately 10 years.
As of December 31, 2017, the estimated future amortization of intangible assets, other than goodwill, excluding the impact of any future acquisitions or divestitures isCrem Acquisition are as follows:
|
| | | | | | | | |
| (in millions) | | Estimated Fair Values | | Useful Life (in years) | | Weighted Average Amortization Period (in years) |
| Customer relationships | | $ | 64.2 |
| | 10 | | 10.0 |
| Design libraries | | 20.6 |
| | 7 — 20 | | 10.4 |
| Total definite-lived intangible assets | | 84.8 |
| | | | 10.1 |
| Trade name | | 46.4 |
| | Indefinite | | |
| Total intangible assets | | $ | 131.2 |
| | | | |
|
| | | | |
| (in millions) | | |
| Year ending December 31: | | |
| 2018 | | $ | 33.7 |
|
| 2019 | | 33.4 |
|
| 2020 | | 33.2 |
|
| 2021 | | 28.8 |
|
| 2022 | | 26.7 |
|
| Thereafter | | 128.1 |
|
| | | $ | 283.9 |
|
10. Accounts Payable and Accrued Expenses and Other Liabilities
Accounts payable and accrued expenses and other liabilities at December 31, 2017 and 2016 are summarized as follows:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| (in millions) | | | | (As Restated) |
| Accounts payable: | | | | |
| Trade accounts payable | | $ | 103.6 |
| | $ | 108.4 |
|
| Total accounts payable | | $ | 103.6 |
| | $ | 108.4 |
|
| Accrued expenses and other liabilities: | |
|
| | |
| Interest payable | | $ | 7.8 |
| | $ | 15.7 |
|
| Income taxes payable | | 13.9 |
| | 5.6 |
|
| Employee related expenses | | 30.8 |
| | 29.8 |
|
| Restructuring expenses | | 5.0 |
| | 3.3 |
|
| Profit sharing and incentives | | 11.5 |
| | 14.2 |
|
| Accrued rebates | | 50.0 |
| | 56.0 |
|
| Deferred revenue - current | | 4.2 |
| | 4.4 |
|
| Customer advances | | 2.6 |
| | 7.4 |
|
| Product liability | | 1.4 |
| | 2.3 |
|
| Miscellaneous accrued expenses | | 42.3 |
| | 38.9 |
|
| Total accrued expenses and other liabilities | | $ | 169.5 |
| | $ | 177.6 |
|
11. Accounts Receivable Securitization
Prior to the Spin-Off, the Company sold accounts receivable through an accounts receivable securitization facility, ("the Prior Securitization Program"), comprised of two funding entities: Manitowoc Funding, LLC ("U.S. Seller") and Manitowoc Cayman Islands Funding Ltd. ("Cayman Seller"). The U.S. Seller historically serviced domestic entities of both the Foodservice and Crane segments of MTW and remitted all funds received directly to MTW. The Cayman Seller historically serviced solely Welbilt foreign entities and remitted all funds to Welbilt entities. The U.S. Seller remained with MTW subsequent to the Spin-Off, while the Cayman Sellergoodwill was transferred to Welbilt subsequent to the Spin-Off. A portion of the U.S. Seller's historical expenses related to bond administration fees and settlement fees were allocated to the Company. AsCompany's geographic business segments as follows: EMEA $84.2 million and APAC $12.8 million. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the Cayman Sellerintegration of Crem and is directly attributablenot expected to Welbilt, the assets, liabilities, income and expenses of the Cayman Seller are included in the Company's consolidated balance sheets and statements of operations. The Company's cost of funds under the facility used a London interbank offered rate ("LIBOR") index rate plus a 1.25% fixed spread.be deductible for tax purposes.
On
4.Accounts Receivable Securitization
Prior to its termination on March 3, 2016,13, 2019, the Company entered intoparticipated in a new $110.0 million accounts receivable securitization program (as amended, restated, supplemented or otherwise modified from time to time the "2016 Securitization Facility") among the Cayman Seller, as seller, Welbilt, Inc., Garland Commercial Ranges Limited, Convotherm Elektrogeräte GmbH, Welbilt Deutschland GmbH, Welbilt UK Limited, Welbilt Asia Pacific Private Limited and the other persons who may be from time to time, a party thereto, as servicers, and Wells Fargo Bank, National Association, as purchaser and agent, whereby the Company will sellsold certain of its domestic trade accounts receivable and certain of its non-U.S. trade accounts receivable to a wholly-owned, bankruptcy-remote, foreign special purpose entity, which would in turn, will sell, convey, transfer and assign to a third-party financial institution (the "Purchaser"), all of the rights, title and interest in and to its pool of receivables.
The Purchaser receives ownership Under this program, the Company generally received cash consideration up to a certain limit and recorded a non-cash exchange for sold receivables for the remainder of the poolpurchase price ("deferred purchase price"). The sale of these receivables qualified for sale accounting treatment. The Company maintained a "beneficial interest," or right to collect cash, in the sold receivables. During the period of this program, cash receipts from the Purchaser at the time of the sale were classified as operating activities while cash receipts from the beneficial interest on sold receivables were classified as investing activities on the Consolidated Statements of Cash Flows.
The Company along with certain of its subsidiaries, actacted as servicers of the receivables and as suchsold receivables. The servicers would administer, collect and otherwise enforce the receivables. The servicers arethese receivables and were compensated for doing so on terms that arewere generally consistent with what would be charged by an unrelated servicer. AsThe servicers they initially receivereceived payments made by obligors on the receivables but arewere required to remit those payments in accordance with athe receivables purchase agreement. TheUpon termination of the program, the Purchaser hashad no recourse for uncollectible receivables. The 2016 Securitization Facility also contains customary affirmative and negative covenants. Among other restrictions, these covenants require the Company to meet specified financial tests, which include a Consolidated Interest Coverage Ratio and a Consolidated Total Leverage Ratio that are the same as those required under the 2016 Credit Agreement as described in Note 12, "Debt."
The 2016 Securitization Facility was amended on February 2, 2018 in conjunction with an amendment to the 2016 Credit Agreement to provide for certain conforming changes including amending the Consolidated Total Leverage Ratio required thereunder. See Note 12, "Debt" for additional details regarding the amendment to the 2016 Credit Agreement.
Due to a shortthe Company's average collection cycle of less than 60 days for such accounts receivable as well as the Company's collection history, the fair value of its beneficial interest in the sold receivables approximated book value and, as of December 31, 2018, totaled $56.9 million and was included in "Accounts receivable, less allowance " in the Consolidated Balance Sheets. The Company deemed the interest rate risk related to this beneficial interest to be de minimis, primarily due to the short average collection cycle of the related receivables. The carrying value of trade receivables removed from the Company's Consolidated Balance Sheets in connection with the accounts receivable securitization program was $96.9 million as of December 31, 2018.
In connection with the termination of the accounts receivable securitization program during the first quarter of 2019, $156.9 million of accounts receivable sold under the program were reacquired in exchange for the outstanding deferred purchase price notes approximated book value. receivable and cash, which was provided by receipts of previously sold trade receivables. Cash receipts on the reacquired receivables were $149.7 million for the year ended December 31, 2019 and have been classified as investing activity in the Company's Consolidated Statements of Cash Flows. As of June 30, 2019, the reacquired trade receivables had either been collected or reserved.
5. Inventories — Net
The fair valuecomponents of "Inventories — net" are as follows:
|
| | | | | | | | |
| (in millions) | | As of December 31, |
| | 2019 | | 2018 |
| Inventories — net: | | | | |
|
| Raw materials | | $ | 81.4 |
| | $ | 83.9 |
|
| Work-in-process | | 14.2 |
| | 14.8 |
|
| Finished goods | | 95.0 |
| | 96.1 |
|
| Total inventories at FIFO cost | | 190.6 |
| | 194.8 |
|
| Excess of FIFO costs over LIFO value | | (4.2 | ) | | (4.2 | ) |
| Total inventories — net | | $ | 186.4 |
| | $ | 190.6 |
|
6.Property, Plant and Equipment — Net
The components of "Property, plant and equipment — net" are as follows:
|
| | | | | | | | |
| (in millions) | | As of December 31, |
| | 2019 | | 2018 |
| Property, plant and equipment — net: | | | | |
| Land | | $ | 9.7 |
| | $ | 9.8 |
|
| Building and improvements | | 93.2 |
| | 88.5 |
|
| Machinery, equipment and tooling | | 223.3 |
| | 223.6 |
|
| Furniture and fixtures | | 7.6 |
| | 6.5 |
|
| Computer hardware and software for internal use | | 66.1 |
| | 58.3 |
|
| Construction in progress | | 22.0 |
| | 20.8 |
|
| Total cost | | 421.9 |
| | 407.5 |
|
| Less accumulated depreciation | | (294.4 | ) | | (291.2 | ) |
| Total property, plant and equipment — net | | $ | 127.5 |
| | $ | 116.3 |
|
7. Goodwill and Other Intangible Assets — Net
The changes in the carrying amount of goodwill by business segment for the years ended December 31, 2019, 2018 and 2017 are as follows:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Americas | | EMEA | | APAC | | Total |
| Gross balance as of December 31, 2017 | | $ | 1,144.8 |
| | $ | 208.4 |
| | $ | 8.6 |
| | $ | 1,361.8 |
|
| Accumulated asset impairments | | (312.2 | ) | | (203.5 | ) | | — |
| | (515.7 | ) |
| Net balance as of December 31, 2017 | | $ | 832.6 |
| | $ | 4.9 |
| | $ | 8.6 |
| | $ | 846.1 |
|
| | | | | | | | | |
| Impact of acquisition | | $ | — |
| | $ | 84.2 |
| | $ | 12.8 |
| | $ | 97.0 |
|
| Foreign currency impact | | — |
| | (6.0 | ) | | (1.5 | ) | | (7.5 | ) |
| Gross balance as of December 31, 2018 | | 1,144.8 |
| | 286.6 |
| | 19.9 |
| | 1,451.3 |
|
| Accumulated asset impairments | | (312.2 | ) | | (203.5 | ) | | — |
| | (515.7 | ) |
| Net balance as of December 31, 2018 | | $ | 832.6 |
| | $ | 83.1 |
| | $ | 19.9 |
| | $ | 935.6 |
|
| | | | | | | | | |
| Foreign currency impact | | $ | — |
| | $ | (2.5 | ) | | $ | — |
| | $ | (2.5 | ) |
| Gross balance as of December 31, 2019 | | 1,144.8 |
| | 284.1 |
| | 19.9 |
| | 1,448.8 |
|
| Accumulated asset impairments | | (312.2 | ) | | (203.5 | ) | | — |
| | (515.7 | ) |
| Net balance as of December 31, 2019 | | $ | 832.6 |
| | $ | 80.6 |
| | $ | 19.9 |
| | $ | 933.1 |
|
As of June 30, 2019 and 2018, the Company performed the annual impairment test for its reporting units, as well as its indefinite-lived intangible assets, and based on those results, 0 impairment was indicated.
The gross carrying amounts and accumulated amortization of the deferred purchase price notes recorded atCompany's intangible assets, other than goodwill, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | As of December 31, |
| | 2019 | | 2018 |
| | Gross
Carrying
Amount | | Accumulated
Amortization
Amount | | Net
Book
Value | | Gross
Carrying
Amount | | Accumulated
Amortization
Amount | | Net
Book
Value |
| Customer relationships | | $ | 472.8 |
| | $ | (243.6 | ) | | $ | 229.2 |
| | $ | 474.8 |
| | $ | (217.4 | ) | | $ | 257.4 |
|
| Trademarks and trade names | | 217.6 |
| | — |
| | 217.6 |
| | 218.7 |
| | — |
| | 218.7 |
|
| Other intangibles | | 166.9 |
| | (109.8 | ) | | 57.1 |
| | 165.7 |
| | (96.5 | ) | | 69.2 |
|
| Patents | | 5.8 |
| | (2.0 | ) | | 3.8 |
| | 5.8 |
| | (1.7 | ) | | 4.1 |
|
| Total | | $ | 863.1 |
| | $ | (355.4 | ) | | $ | 507.7 |
| | $ | 865.0 |
| | $ | (315.6 | ) | | $ | 549.4 |
|
Amortization expense for the years ended December 31, 2019, 2018 and 2017 was $39.8 million, $37.0 million and $31.2 million, respectively. For the year ended December 31, 2019, $1.1 million of amortization expense related to software to be sold is classified in "Cost of sales" in the Consolidated Statements of Operations. As of December 31, 2019, the weighted average remaining useful lives of the definite-lived intangible assets for customer relationships, patents, and other intangibles was 9 years, 16 years and 6 years, respectively, and the weighted average remaining useful life of all definite-lived intangible assets was approximately 8 years.
As of December 31, 2019, the estimated future amortization for the Company's definite lived intangible assets for each of the five succeeding years is as follows:
|
| | | | |
| (in millions) | | |
| Year ending December 31: | | |
| 2020 | | $ | 39.6 |
|
| 2021 | | $ | 39.3 |
|
| 2022 | | $ | 36.7 |
|
| 2023 | | $ | 31.9 |
|
| 2024 | | $ | 30.1 |
|
8.Accrued Expenses and Other Liabilities
The components of "Accrued expenses and other liabilities" are as follows:
|
| | | | | | | | |
| (in millions) | | As of December 31, |
| | 2019 | | 2018 |
| Accrued expenses and other liabilities: | | | | |
| Accrued rebates and commissions | | $ | 56.2 |
| | $ | 54.9 |
|
| Miscellaneous accrued expenses | | 37.8 |
| | 38.0 |
|
| Employee related expenses | | 34.7 |
| | 47.9 |
|
| Interest payable | | 15.8 |
| | 2.2 |
|
| Operating lease liabilities | | 10.0 |
| | — |
|
| Restructuring liabilities | | 6.3 |
| | 3.0 |
|
| Business Transformation Program related expenses | | 5.8 |
| | — |
|
| Derivative liabilities | | 5.0 |
| | 18.4 |
|
| Income and other taxes payable | | 11.2 |
| | 10.2 |
|
| Deferred revenues | | 3.1 |
| | 2.7 |
|
| Customer deposits | | 3.1 |
| | 3.1 |
|
| Pension and postretirement health liabilities | | 2.1 |
| | 2.0 |
|
| Product liabilities | | 1.3 |
| | 1.3 |
|
| Total accrued expenses and other liabilities | | $ | 192.4 |
| | $ | 183.7 |
|
9. Income Taxes
On December 22, 2017, the U.S. government enacted the Tax Act, which is a comprehensive tax legislation resulting in broad and complex changes to the U.S. tax code. The significant changes resulting from the Tax Act for the year ended December 31, 2017 included, but were not limited to, the requirement of a one-time Deemed Repatriation Transition Tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. Effective for the year ended December 31, 2018 and going forward, the Tax Act also reduced the U.S. federal corporate statutory tax rate to 21.0%, introduced new provisions designed to tax GILTI, limited the interest deduction and provided a tax rate incentive for foreign derived intangible income.
"Earnings before income taxes" in the Consolidated Statements of Operations consists of the following:
|
| | | | | | | | | | | | |
| (in millions) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Domestic | | $ | (35.8 | ) | | $ | (8.0 | ) | | $ | 32.5 |
|
| Foreign | | 111.5 |
| | 97.0 |
| | 88.9 |
|
| Total earnings before income taxes | | $ | 75.7 |
| | $ | 89.0 |
| | $ | 121.4 |
|
"Income taxes" in the Consolidated Statements of Operations consists of the following:
|
| | | | | | | | | | | | |
| (in millions) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Current: | | | | | | |
| Federal and state | | $ | 9.0 |
| | $ | (4.3 | ) | | $ | 28.2 |
|
| Foreign | | 30.4 |
| | 29.1 |
| | 24.6 |
|
| Total current tax expense | | 39.4 |
| | 24.8 |
| | 52.8 |
|
| Deferred: | | | | | | |
| Federal and state | | (15.0 | ) | | (14.0 | ) | | (56.6 | ) |
| Foreign | | (4.6 | ) | | — |
| | (7.7 | ) |
| Total deferred tax benefit | | (19.6 | ) | | (14.0 | ) | | (64.3 | ) |
| Total: | | | | | | |
| Federal and state | | (6.0 | ) | | (18.3 | ) | | (28.4 | ) |
| Foreign | | 25.8 |
| | 29.1 |
| | 16.9 |
|
| Income taxes | | $ | 19.8 |
| | $ | 10.8 |
| | $ | (11.5 | ) |
A reconciliation of the U.S. federal statutory income tax rate to the Company's effective tax rate is as follows:
|
| | | | | | | | | |
| | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Federal income tax at statutory rate | | 21.0 | % | | 21.0 | % | | 35.0 | % |
| State income (benefit) provision | | (0.2 | ) | | 0.5 |
| | (2.6 | ) |
| Manufacturing and research incentives | | (1.2 | ) | | (3.1 | ) | | (1.7 | ) |
| Taxes on foreign income | | 8.4 |
| | 7.6 |
| | (3.5 | ) |
| Repatriation of foreign income - Tax Act | | — |
| | (11.2 | ) | | 11.1 |
|
| Change in federal income tax statutory rate - Tax Act | | — |
| | — |
| | (37.5 | ) |
| Global intangible low taxed income - Tax Act | | 2.0 |
| | 1.5 |
| | — |
|
| Foreign derived intangible income | | (1.0 | ) | | (1.3 | ) | | — |
|
| Adjustments for valuation allowances | | (2.1 | ) | | (0.2 | ) | | (11.2 | ) |
| Unrecognized tax benefits | | (1.9 | ) | | 0.2 |
| | — |
|
| Discrete adjustments | | — |
| | (2.6 | ) | | — |
|
| Other items | | 1.2 |
| | (0.3 | ) | | 0.9 |
|
| Effective tax rate | | 26.2 | % | | 12.1 | % | | (9.5 | )% |
For the year ended December 31, 2019, the Company's effective tax rate was 26.2%, compared to an effective tax rate of 12.1% for the year ended December 31, 2018. The increase in the effective tax rate for the year ended December 31, 2019 compared to the same period of the prior year is primarily the result of a 11.2% income tax benefit recorded for the year ended December 31, 2018 to incorporate the impact of the Tax Act within the measurement period and a 1.9% decrease in the tax benefit received from manufacturing and research incentives. These increases are partially offset by 2.1% of tax benefits for favorable audit settlements and the expiration of the statute of limitations of unrecognized tax benefits and a 1.9% increase in tax benefits resulting from valuation allowance adjustments for the year ended December 31, 2019 as compared to the same period of the prior year. Taxes on foreign income unfavorably impacted the effective tax rate for both the years ended December 31, 2019 and 2018 primarily as a result of earnings in high tax jurisdictions, including Germany, China, and Canada whose statutory rates range from 25% to 30%.
For the year ended December 31, 2018, the Company's effective tax rate was 12.1%, compared to an effective tax rate of (9.5)% for the same period of the prior year. The increase in the effective tax rate was primarily driven by a decreased net income tax benefit of 15.4% from the impact of the Tax Act recorded for the year ended December 31, 2017 and 2016a reduced benefit of 11.0% for valuation allowance adjustments partially offset by a 2.6% discrete tax benefit recorded for the year ended December 31, 2018. In addition, the statutory rate was $62.921.0% and 35.0% for the years ended December 31, 2018 and 2017 respectively, which resulted in a tax impact of 7.6% for taxes on foreign income for the year ended December 31, 2018, including non-deductible Crem acquisition costs, compared to an income tax benefit of 3.5% for the year ended December 31, 2017.
As a result of the Tax Act, U.S. federal and state income taxes have been recorded on undistributed foreign earnings accumulated through December 31, 2019. As of December 31, 2019, the Company considers the foreign earnings to be indefinitely reinvested outside the U.S. and has not recorded a deferred tax liability for U.S. state income taxes, foreign withholding or other foreign income taxes that would be due if cash is repatriated to the U.S. because those foreign earnings are considered permanently reinvested or may be remitted substantially free of any additional income or withholding taxes. While the Company does not anticipate a need to repatriate funds to the U.S. to satisfy domestic liquidity needs, management reviews cash positions regularly and, to the extent it is determined that all or a portion of foreign earnings are not indefinitely reinvested, the Company will record a liability for the additional taxes, if applicable, including foreign withholding taxes and U.S. state income taxes. Further, the determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.
Deferred income tax assets and liabilities are provided for the impact of temporary differences between amounts of assets and liabilities recognized for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. These temporary differences result in taxable or deductible amounts in future years.
Significant components of the Company’s non-current deferred tax assets and liabilities are as follows:
|
| | | | | | | | |
| (in millions) | | As of December 31, |
| | 2019 | | 2018 |
| Non-current deferred tax assets (liabilities): | | | | |
| Inventories | | $ | 3.5 |
| | $ | 2.8 |
|
| Accounts receivable | | 0.5 |
| | 1.0 |
|
| Property, plant and equipment | | (6.7 | ) | | (3.7 | ) |
| Intangible assets | | (130.9 | ) | | (139.3 | ) |
| Deferred employee benefits | | 15.2 |
| | 20.1 |
|
| Product warranty reserves | | 8.4 |
| | 7.6 |
|
| Product liability reserves | | 1.7 |
| | 2.6 |
|
| Operating lease right-of-use assets | | (9.9 | ) | | — |
|
| Operating lease liabilities | | 9.7 |
| | — |
|
| Interest carryforwards | | 20.6 |
| | 8.4 |
|
| Loss carryforwards | | 36.2 |
| | 40.6 |
|
| Other | | 12.8 |
| | 10.9 |
|
| Non-current deferred tax liabilities | | (38.9 | ) | | (49.0 | ) |
| Less valuation allowance | | (28.3 | ) | | (40.7 | ) |
| Net non-current deferred tax liabilities | | $ | (67.2 | ) | | $ | (89.7 | ) |
Current and long-term tax assets and liabilities included in the Company's Consolidated Balance Sheets consist of the following:
|
| | | | | | | | | | |
| (in millions) | | As of December 31, | | Consolidated Balance Sheets Line Item Location |
| | 2019 | | 2018 | |
| Income tax receivable | | $ | 11.3 |
| | $ | 15.6 |
| | Prepaids and other current assets |
| Deferred tax assets | | $ | 14.7 |
| | $ | 14.6 |
| | Other non-current assets |
| Income taxes payable | | $ | (11.2 | ) | | $ | (10.2 | ) | | Accrued expenses and other liabilities |
| Income taxes payable | | $ | (0.6 | ) | | $ | (0.9 | ) | | Other long-term liabilities |
| Deferred tax liabilities | | $ | (81.9 | ) | | $ | (104.3 | ) | | Deferred income taxes |
As of December 31, 2019, the Company has approximately $187.3 million of pre-tax foreign net operating loss carryforwards, which are available to reduce future foreign taxable income. Substantially all of these foreign net operating loss carryforwards have no time restrictions on their use. Pre-tax net operating loss carryforwards of $127.7 million resulted in deferred tax assets that were fully offset by a valuation allowance after considering the weight of all available evidence and determination that it was more-likely-than-not that such deferred tax assets will not be realized.
As of each reporting date, the Company's management considers new evidence, both positive and negative, that could impact management's view regarding future realization of deferred tax assets. The Company will continue to periodically evaluate its valuation allowance requirements, including the U.S. interest expense limitation of the Tax Act. The Company may adjust its deferred tax asset valuation allowances accordingly based on possible sources of taxable income that may available to realize a tax benefit for deferred tax assets.
As of December 31, 2019, the Company has determined that a valuation allowance is not required for the deferred tax asset for U.S. interest expense as the future reversals of existing taxable temporary differences are sufficient to realize the deferred tax asset. The Company will continue to record a deferred tax asset related to the U.S. interest expense limitation until future reversals of existing taxable temporary differences or projected future taxable income are not sufficient to utilize the U.S. deferred tax asset. The Company expects these two sources of income will not be sufficient to realize the interest deferred tax asset beginning in 2020 and the Company expects to record a valuation allowance to reduce the deferred tax asset to an amount that does not exceed such sources of income at that time. Such changes in the deferred tax asset valuation allowances will be reflected in the current operations through the Company’s income tax provision and could have a material effect on the Company’s results of operations, balance sheets and cash flows.
For the year ended December 31, 2019, the Company determined that, based on a change in facts and the weight of all available evidence, it is more-likely-than-not that a deferred tax asset of $1.9 million in EMEA entities is realizable, and has reduced the valuation allowance accordingly. The Company determined that deferred income tax assets of certain entities in the United Kingdom ("U.K."), Singapore, Thailand and India will not be realized and has not released these valuation allowance as of December 31, 2019.
Approximately $63.3 million of pre-tax U.S. capital loss carryforwards expired on December 31, 2019. The reversal of deferred taxes related to the expiration of these capital losses was fully offset by the release of the associated valuation allowance and the liability related to unrecognized tax benefits recorded against the capital loss carryforwards.
A reconciliation of the Company's gross change in unrecognized tax benefits, excluding interest and penalties, is as follows:
|
| | | | | | | | | | | | |
| (in millions) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 11.5 |
| | $ | 12.3 |
| | $ | 12.5 |
|
| Additions for tax positions of prior years | | — |
| | 3.3 |
| | 0.2 |
|
| Reductions for tax positions of prior years | | — |
| | (4.1 | ) | | (0.4 | ) |
| Reductions based on settlements with taxing authorities | | (1.3 | ) | | — |
| | — |
|
| Reductions for lapse of statute of limitations | | (7.3 | ) | | — |
| | — |
|
| Balance at end of year | | $ | 2.9 |
| | $ | 11.5 |
| | $ | 12.3 |
|
The decrease in the unrecognized tax benefits from December 31, 2018 to December 31, 2019 is primarily due to the expiration of statute of limitations and audit settlements during 2019. Accrued interest and penalties were $1.3 million and $60.0$1.5 million, as of December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, the Company's net liability related to unrecognized tax benefits, including accrued interest and penalties, is $4.2 million and $4.9 million, respectively, and is included in "Accounts receivable, less allowances""Other long-term liabilities" in the Consolidated Balance Sheets. The Company recognized (benefit) expense for interest and penalties of $(0.2) million, $0.2 million and $0.1 million for the years ended December 31, 2019, 2018 and 2017, respectively, included in current income tax expense in the Consolidated Statements of Operations.
The Company’s unrecognized tax benefits as of December 31, 2019, 2018 and 2017, if recognized, would impact the effective tax rate. During the next twelve months, it is reasonably possible that unrecognized tax benefits could change in the range of $0.1 million to $0.3 million due to the expiration of the relevant statutes of limitations and federal, state and foreign tax audit resolutions.
The Company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities globally. The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of December 31, 2019, the Company believes that it is more-likely-than-not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on the Company's consolidated balance sheets.financial position, results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates and/or from its historical income tax provisions and accruals and could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.
Trade accounts receivables soldThe Company's separate federal and state tax returns for tax years 2016 through 2018 and 2014 through 2018, respectively, remain subject to the Purchaserexamination by U.S. federal and being serviced by the Company totaled $99.5 millionvarious state taxing authorities. The tax years 2014 - 2018 remain subject to examination in Canada and $96.7 million at December 31, 2017Germany and 2016, respectively.tax years 2009 - 2018 remain subject to examination in China.
12. 10.Debt
OutstandingThe carrying value of the Company's outstanding debt at December 31, 2017 and 2016 is summarized as follows:consists of the following:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| (in millions) | | | | (As Restated) |
| Revolving credit facility | | $ | 25.0 |
| | $ | 63.5 |
|
| Term Loan B | | 815.0 |
| | 825.0 |
|
| Senior Notes due 2024 | | 425.0 |
| | 425.0 |
|
| Capital leases | | 2.7 |
| | 3.3 |
|
| Total debt and capital leases, including current portion | | 1,267.7 |
| | 1,316.8 |
|
| Less current portion of capital leases | | (0.7 | ) | | (1.6 | ) |
Less unamortized debt issuance costs (1) | | (26.4 | ) | | (33.9 | ) |
Less hedge accounting fair value adjustment (2) | | (8.4 | ) | | — |
|
| Total long-term debt and capital leases | | $ | 1,232.2 |
| | $ | 1,281.3 |
|
|
| | | | | | | | | | | | | | |
| | | As of December 31, 2019 | | As of December 31, 2018 |
| (in millions, except percentage data) | | Carrying value | | Weighted Average Interest Rate | | Carrying value | | Weighted Average Interest Rate |
| Long-term debt and finance leases: | | | | | | | | |
| Revolving loan facility | | $ | — |
| | 4.35 | % | | $ | 15.0 |
| | 4.06 | % |
| Revolving Credit Facility | | 141.8 |
| | 5.00 | % | | 78.0 |
| | 4.70 | % |
| Term Loan B Facility | | 855.0 |
| | 5.11 | % | | 855.0 |
| | 5.22 | % |
| 9.50% Senior Notes due 2024 | | 425.0 |
| | 9.72 | % | | 425.0 |
| | 9.72 | % |
| Finance leases | | 2.5 |
| | 4.83 | % | | 2.8 |
| | 4.50 | % |
| Total debt and finance leases, including current portion | | 1,424.3 |
| | | | 1,375.8 |
| | |
| Less current portion: | | | | | | | | |
| Revolving loan facility | | — |
| | | | (15.0 | ) | | |
| Current portion of finance leases | | (1.2 | ) | | | | (1.1 | ) | | |
Unamortized debt issuance costs (1) | | (20.5 | ) | | | | (24.2 | ) | | |
Hedge accounting fair value adjustment (2) | | 0.5 |
| | | | (13.7 | ) | | |
| Total long-term debt and finance leases | | $ | 1,403.1 |
| | | | $ | 1,321.8 |
| | |
(1) Total outstanding debt issuance costs, net of amortization as of December 31, 2017 was $28.62019 and 2018 were $23.0 million and $27.3 million, respectively, of which $2.2$2.5 million wasand $3.1 million are related to the revolving credit facilityRevolving Credit Facility and recorded in "Other non-current assets" in the consolidated balance sheet.Consolidated Balance Sheets.
(2) RepresentsAs of December 31, 2019, the change inbalance represents the deferred gains from the terminations of interest rate swaps designated as fair value duehedges. Refer to changes in benchmark interest ratesNote 11, "Derivative Financial Instruments," for further discussion. As of December 31, 2018, the balance is primarily related to ourthe fair value of the hedge on the Company's 9.50% Senior Notes due 2024. Refer to Note 6, "Derivative Financial Instruments", for additional information on the Company's interest rate swap designated as a fair value hedge.
As of December 31, 2017, the Company had $25.0 million of borrowings outstanding under the revolving credit facility, $3.6 million outstanding stand-by letters of credit and $196.4 million available for future borrowings. During the year ended December 31, 2017, the highest daily borrowing was $194.0 million and the average borrowing was $124.9 million, while the average interest rate was 4.41%. The interest rate fluctuates based upon LIBOR or a Prime rate plus a spread, which is based upon the Consolidated Total Leverage Ratio of the Company. As of December 31, 2017, the spreads for LIBOR and Prime borrowings were 2.50% and 1.50%, respectively, given the Company's effective Consolidated Total Leverage Ratio for this period. The commitment fee on the unused portion of the revolving credit facility was 0.25% per year.2016 Credit Agreement
The interest rate on the Term Loan B also fluctuates based on LIBOR or a Prime rate plus a spread as discussed below under Senior Secured Credit Facilities. The weighted average interest rate for the Term Loan B was 4.90% and the weighted average interest rate for the Senior Notes due 2024 was 9.72% for the year ending December 31, 2017.
Maturities of debt, excluding capital leases, are as follows as of December 31, 2017:
|
| | | | |
| (in millions) | | |
| Year ending December 31: | | |
| 2018 | | $ | — |
|
| 2019 | | — |
|
| 2020 | | — |
|
| 2021 | | 25.0 |
|
| 2022 | | — |
|
| Thereafter | | 1,240.0 |
|
| | | $ | 1,265.0 |
|
As of December 31, 2017, the Company had outstanding $2.7 million of other indebtedness that has a weighted-average interest rate for the year ended December 31, 2017 of approximately 4.17%.
Senior Secured Credit Facilities
OnIn March 3, 2016, the Company entered into a credit agreement, as amended, restated, supplemented or otherwise modified from time to time (the "2016 Credit Agreement") for a new senior secured revolving credit facility in an aggregate principal amount$1,300.0 million Senior Secured Credit Facility (the "Senior Secured Credit Facility") consisting of $225.0 million (the "Revolving Facility") and(i) a senior secured Term Loan B facility in an aggregate principal amount of $975.0$900.0 million (the "Term Loan B Facility") and together with the Revolving Facility, the "Senior Secured(ii) a senior secured revolving credit facility in an aggregate principal amount of $400.0 million (the "Revolving Credit Facilities"Facility") with JPMorgan Chase Bank, N.A, as administrative agent and collateral agent, J.P. Morgan Securities LLC, Goldman Sachs Bank USA, HSBC Securities (USA) Inc., and Citigroup Global Markets Inc., on behalf of certain of its affiliates, as joint lead arrangers and joint bookrunners, and certain lenders, as lenders.. The Term Loan B Facility matures in March 2023. The Revolving Facility includes2016 Credit Agreement also provides for a (i) a $20.0 million sublimit for the issuance of letters of credit on customary terms,under the revolving commitments to $30.0 million and (ii) a $40.0aggregate principal amount of allowed incremental revolving or term loan facilities thereunder in an amount not to exceed the sum of (a) $275.0 million sublimit for swingline loans on customary terms. The Revolving Facility matures in March 2021. The Company entered into security and other agreements relatingplus (b) an additional amount, as long as after giving effect to the 2016 Credit Agreement.
At inception, borrowings underincurrence of such additional amount, the Senior Secured Credit Facilities bore interest at a rate per annum equal to, at the optionproforma secured leverage ratio does not exceed 3.75:1.00. The maturity of the Company, (i) LIBOR plus the applicable margin of 4.75% for term loans subject to a 1.00% LIBOR floor and 1.50% - 2.75% for revolving loans, based on consolidated total leverage, or (ii) an alternate base rate plus the applicable margin, which will be 1.00% lower than for LIBOR loans.
On March 6, 2017, the 2016 Credit Agreement was amended, providing for a decrease to the maximum applicable margin for LIBOR and Alternate Base Rate (“ABR”) loans by 1.75% on the Term Loan B Facility (the "Second Amendment"). The repricing was completed at par, and established for six months a 1.0% premium inRevolving Credit Facility is October 2025 and October 2023, respectively. Each of the case of another repricing event. JPMorgan Chase Bank, N.A., as administrative agent, and JPMorgan Chase Bank, N.A. and Goldman Sachs Bank, USAterms above were joint bookrunners on the repricing. In connectionapplicable with the Second Amendment, the Company incurred costs of $1.4 million during the first quarter of 2017, which were recordedlatest amendment completed in "Long-term debt and capital leases" in the consolidated balance sheets and are being amortized over the remaining term of the Term Loan B Facility. Additionally, the Company recorded a loss on early extinguishment of debt of $0.5 million during the first quarter of 2017, related to unamortized debt issuance costs as a result of the Second Amendment.October 2018.
During the second, third and fourth quarters of 2016, the Company made voluntary prepayments of the outstanding principal on the Term Loan B Facility of $25.0 million, $45.0 million and $80.0 million, respectively, and incurred losses for the write-off of the related unamortized debt issuance costs of $0.5 million, $0.8 million and $1.4 million, respectively, totaling $2.7 million which is included in "Loss on early extinguishment of debt" in the consolidated statement of operations for the year ended December 31, 2016.
During the second quarter of 2017, the Company made a voluntary prepayment of the outstanding principal on the Term Loan B Facility of $10.0 million and incurred a loss for the write-off of the related unamortized debt issuance costs of $0.2 million, which is included in "Loss on early extinguishment of debt" in the consolidated statement of operations for the year ended December 31, 2017.
Subsequent to the Second Amendment, the borrowings under the Senior Secured Credit Facilities bore interest at a rate per annum equal to, at the option of the Company, (i) LIBOR plus an applicable margin of 3.00% for term loans subject to a 1.00% LIBOR floor and LIBOR plus 1.50% - 2.75% for revolving loans, based on consolidated total leverage, or (ii) an alternate base rate plus the applicable margin, which will be 1.00% lower than for LIBOR loans.
On September 7, 2017, the 2016 Credit Agreement was again amended, providing a 25 basis-point decrease to the maximum applicable margin for LIBOR and ABR loans on the Term Loan B Facility (the "Third Amendment"). The repricing was completed at par, and establishes for six months a 1.0% premium in the case of another repricing event. JPMorgan Chase Bank, N.A., was the administrative agent on this repricing. In connection with the Third Amendment, the Company incurred costs of $0.6 million during the third quarter of 2017, which were recorded in "Long-term debt and capital leases" in the consolidated balance sheets and are being amortized over the remaining term of the Term Loan B Facility. Additionally, the Company recorded a loss on early extinguishment of debt of $1.0 million during the third quarter of 2017, related to unamortized debt issuance costs as a result of the Third Amendment.
Subsequent to the Third Amendment, the borrowings under the Senior Secured Credit Facilities bore interest at a rate per annum equal to, at the option of the Company, (i) LIBOR plus an applicable margin of 2.75% for term loans subject to a 1.00% LIBOR floor and LIBOR plus 1.50% - 2.75% for revolving loans, based on consolidated total leverage, or (ii) an alternate base rate plus the applicable margin, which will be 1.00% lower than for LIBOR loans.
The 2016 Credit Agreement contains financial covenants including, but not limited to (a) a Consolidated Interest Coverage Ratio, which measures the ratio of (i) Consolidated EBITDA as defined in the 2016 Credit Agreement, to (ii) Consolidated Cash Interest Expense, and (b) a Consolidated Total Leverage Ratio, which measures the ratio of (i) Consolidated Indebtedness to (ii) Consolidated EBITDA for the most recent four fiscal quarters. The current levels of the financial ratio covenants under the Senior Secured Credit Facilities and the Company's actual ratios forquarters, in each quarter ended during 2017 are set forth below:
|
| | | | | | | | |
Fiscal Quarter Ending | | Consolidated Total Leverage Ratio Level (less than) | | Actual Consolidated Total Leverage Ratio | | Consolidated Interest Coverage Ratio Level (greater than) | | Actual Consolidated Interest Coverage Ratio |
March 31, 2017 | | 5.50:1.00 | | 5.20:1.00 | | 2.50:1.00 | | 2.71:1.00 |
June 30, 2017 | | 5.25:1.00 | | 5.06:1.00 | | 2.50:1.00 | | 2.87:1.00 |
September 30, 2017 | | 5.00:1.00 | | 4.82:1.00 | | 2.75:1.00 | | 3.06:1.00 |
December 31, 2017 (1)
| | 4.75:1.00 | | 4.53:1.00 | | 3.00:1.00 | | 3.25:1.00 |
(1) Consolidated Total Leverage Ratio level shown does not incorporate the increase to 5.25:1.00case, as discussed below for the amendment todefined in the 2016 Credit Agreement entered into subsequent to December 31, 2017.Agreement.
The 2016 Credit Agreement also includes negative covenants that, among other things, limitand indenture governing the Senior Secured Credit Facility contains limitations on the Company's ability to incur indebtedness; grant liens; engage ineffect mergers consolidations and liquidations; make asset dispositions,change of control events as well as certain other limitations, including limitations on: (i) the declaration and payment of dividends or other restricted payments, including(ii) incurrence of additional indebtedness or issuing preferred stock, (iii) the creation or existence of certain liens, (iv) incurrence of restrictions on the ability of certain of the Company's subsidiaries to pay dividends and investments; enter intoor other payments, (v) transactions with affiliates;affiliates and amend, modify or prepay certain indebtedness.(vi) sales of assets.
On February 2, 2018, the Company entered into an amendment toThe Company’s obligations under the 2016 Credit Agreement (the "Fourth Amendment"), which increases the Consolidated Total Leverage Ratio for each of the fiscal quarters ended December 31, 2017, March 31, 2018 and June 30, 2018 to 5.25:1.00. The required ratio level will then reduce 0.25 each subsequent fiscal quarter until the ratio reaches 4.00:1.00 in the fiscal quarter ending September 30, 2019.
Obligations of the Company under the Senior Secured Credit Facilities are jointly and severally guaranteed by certain of its existing and future direct and indirectly wholly-ownedwholly owned U.S. subsidiaries (but excluding (i) unrestricted subsidiaries, (ii) immaterial subsidiaries, and (iii) special purpose securitization vehicles)vehicles and (iv) controlled foreign corporations (“CFCs”) or any subsidiary substantially all the assets of which consist of equity interests of one or more CFCs or other CFC holding companies).
There is a first priority perfected lien on substantially all of the assets and property of the Company and guarantors and proceeds therefrom excluding certain excluded assets. The liens securing the obligations of the Company
At inception, borrowings under the Senior Secured Credit Facilities are pari passu.Facility bore interest at a rate per annum equal to, at the option of the Company, (i) LIBOR plus the applicable margin of 4.75% (reduced in connection with amendments to 3.00% in March 2017, to 2.75% in September 2017 and to 2.50% in October 2018) for the Term Loan B Facility subject to a 1.00% LIBOR floor and 1.50% - 2.75% for the Revolving Credit Facility, based on consolidated total leverage, or (ii) an alternate base rate plus the applicable margin, which was 1.00% lower than for LIBOR loans.
The 2016 Credit Agreement was amended twice during the year ended December 31, 2017, for which the Company incurred total related costs of $2.0 million, which were recorded in "Long-term debt and finance leases" in the Consolidated Balance Sheets to be amortized over the remaining term of the Term Loan B Facility. During the year ended December 31, 2017, the Company also made a $10.0 million voluntary principal prepayment on the Term Loan B Facility. In connection with these amendments and voluntary prepayments, the Company recorded losses on extinguishment of debt of $1.7 million, related to the write-off of the unamortized debt issuance costs, which is included in "Loss on modification or extinguishment of debt" in the Consolidated Statements of Operations for the year ended December 31, 2017.
The 2016 Credit Agreement was again amended during the year ended December 31, 2018, for which the Company incurred costs of $12.8 million. Of this amount, $4.6 million associated with the Term Loan B facility were capitalized and recorded in "Long-term debt and finance leases" and $1.9 million associated with the Revolving Credit Facility in "Other non-current assets" in the Consolidated Balance Sheets each to be amortized over their respective amended terms applicable in the October 2018 amendment to the 2016 Credit Agreement. The remaining $6.3 million of costs incurred were expensed as these costs related to third-party costs in association with modification of the 2016 Credit Agreement and have been included in "Loss on modification or extinguishment of debt" in the Consolidated Statements of Operations for the year ended December 31, 2018. In connection with this amendment, the Company also recorded a $1.7 million loss on extinguishment of debt related to the write-off of the unamortized debt issuance costs, which is included in "Loss on modification or extinguishment of debt" in the Consolidated Statements of Operations for the year ended December 31, 2018.
During the year ended December 31, 2018, the Company also made $45.0 million of voluntary principal prepayments on the Term Loan B Facility and incurred losses for the write-off of the related unamortized debt issuance costs of $1.0 million, which is included in "Loss on modification or extinguishment of debt" in the Consolidated Statements of Operations for the year ended December 31, 2018.
During the fourth quarter of 2018 and through the first half of 2019, borrowings under the 2016 Credit Agreement bore interest at a rate per annum equal to, at the Company's option, either (i) LIBOR plus an applicable margin of 2.50% for the Term Loan B Facility and a range from 1.50% to 2.50% for the Revolving Credit Facility (depending on the Company's Consolidated Total Leverage Ratio) or (ii) an alternate base rate plus an applicable margin which was 1.00% less than the LIBOR-based applicable margin. Beginning in the third quarter of 2019, the spreads for LIBOR and alternate base rate borrowings were 2.25% and 1.25%, respectively.
As of December 31, 2019, the Company had $4.1 million in outstanding stand-by letters of credit and $254.1 million available for additional borrowings under the Revolving Credit Facility. As of December 31, 2019, the Company also had $0.8 million in other outstanding letters of credit or guarantees of payment to certain third-parties in accordance with commercial terms and conditions and which do not reduce the amount available for additional borrowings under the Revolving Credit Facility.
The financial covenants under the 2016 Credit Agreement require (a) maximum consolidated total leverage ratio of 5.75:1.00, with decreases of 0.25 every fourth fiscal quarter beginning with the fiscal quarter ending December 31, 2019, and decreases of 0.50 every fourth fiscal quarter beginning with the fiscal quarter ending December 31, 2021 until the ratio reaches 4.25:1.00 in the fiscal quarter ending December 31, 2022, and (b) a minimum consolidated interest coverage ratio of 2.50:1.00, with increases of 0.25 every fourth fiscal quarter beginning with the fiscal quarter ended December 31, 2019 until the ratio reaches 3.00:1.00 in the fiscal quarter ending December 31, 2020; provided, however, that during a covenant holiday acquisition transition period, the consolidated total leverage ratio may exceed the applicable maximum by up to and including 0.50 (but in no event shall exceed 5.50:1.00).
As of December 31, 2019, the Company was in compliance with all affirmative and negative covenants of the 2016 Credit Agreement.
Senior Notes
OnIn February 18, 2016, the Company issued 9.50% Senior Notes due 2024 in an aggregate principal amount of $425.0 million (the "Senior Notes") under an indenture with Wells Fargo Bank, National Association, as trustee (the "Trustee"). The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of the Company's domestic restricted subsidiaries that is a borrower or guarantor under the Senior Secured Credit Facilities. The Senior Notes and the subsidiary guarantees are unsecured, senior obligations.
The Senior Notes were initially sold to qualified institutional buyers pursuant to Rule 144A (and outside the United StatesU.S. in reliance on Regulation S) under the Securities Act of 1933 as amended (the "Securities("Securities Act"). In September 2016, the Company completed an exchange offer pursuant to which all of the initial Senior Notes were exchanged for new Senior Notes, the issuance of which was registered under the Securities Act.
The Senior Notes are redeemable, at the Company's option, in whole or in part from time to time, at any time prior to February 15, 2019, at a redemption price (expressed as percentages of the principal amount thereof) equal to 100.0% of the principal amount thereof plus a "make-whole" premium and accrued but unpaid interest to the date of redemption. In addition, the Company may redeem the Senior Notes at its option, in whole or in part, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the remaining 12-month periodperiods commencing on February 15 of the years set forth below:
|
| | | |
| | | Percentage |
|
| 2019 | | 107.125 | % |
| 2020 | | 104.750 | % |
| 2021 | | 102.375 | % |
| 2022 and thereafter | | 100.000 | % |
|
| | | |
| Year | | Percentage |
| 2019 | | 107.125 | % |
| 2020 | | 104.750 | % |
| 2021 | | 102.375 | % |
| 2022 and thereafter | | 100.000 | % |
At any time, or from time to time, on or prior to February 15, 2019, the Company may, at its option, use the net cash proceeds of one or more underwritten public equity offerings of qualified capital stock to redeem up to 35% of the principal amount of the Senior Notes at a
redemption price of 109.500% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of redemption, upon the terms and subject to the conditions set forth in the indenture governing the Senior Notes.
The Company must generally offer to repurchase all of the outstanding Senior Notes upon the occurrence of certain specific change of control events at a purchase price equal to 101.000% of the principal amount of Senior Notes purchased plus accrued and unpaid interest to the date of purchase. The indenture provides for customary events of default. Generally, if an event of default occurs (subject to certain exceptions), the Trustee or the holders of at least 25.0%25% in aggregate principal amount of the then-outstanding Senior Notes may declare all the Senior Notes to be due and payable immediately.
The indenture governing the Senior Notes contains limitations on the Company's ability to effect mergers and change of control events as well as other limitations, including limitations on: the declaration and payment of dividends or other restricted payments; incurring additional indebtedness or issuing preferred stock; the creation or existence of certain liens; incurring restrictions on the ability of certain of the Company's subsidiaries to pay dividends or other payments; transactions with affiliates; and salesales of assets.
As of December 31, 2017,2019, the Company was in compliance with all affirmative and negative covenants in its debt instruments, inclusive of the financial covenants pertaining to the Senior Secured Credit FacilitiesNotes.
Revolving Loan Facility
In April 2018, the Company, through a wholly-owned subsidiary, entered into a short-term secured $30.0 million revolving loan facility for working capital requirements at an interest rate based on LIBOR plus an applicable margin of 1.90%. The Company repaid the outstanding balance of the facility during the first quarter of 2019 prior to the maturity of the facility on April 18, 2019.
Future Debt Maturities
Future debt maturities, excluding finance leases, as of December 31, 2019 and for succeeding years are as follows:
|
| | | | |
| (in millions) | | |
| Year ending December 31: | | |
| 2020 | | $ | — |
|
| 2021 | | 3.3 |
|
| 2022 | | 3.3 |
|
| 2023 | | 145.1 |
|
| 2024 | | 428.3 |
|
| Thereafter | | 841.8 |
|
| Total | | $ | 1,421.8 |
|
11.Derivative Financial Instruments
The Company's risk management objective is to ensure that business exposures to risks that have been identified and measured and are capable of being controlled are minimized or managed using what the Company believes to be the most effective and efficient methods to eliminate, reduce or transfer such exposures. Operating decisions consider these associated risks and the Senior Notes. Based upon management's current plansCompany structures transactions to minimize or manage these risks whenever possible.
The primary risks the Company manages using derivative instruments are interest rate risk, commodity price risk and outlookforeign currency exchange risk. The Company enters into interest rate swap agreements to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings. Cross-currency interest rate swaps are entered into to protect the value of the Company’s investments in its foreign subsidiaries. Swap contracts on various commodities are used to manage the price risk associated with forecasted purchases of materials used in the Company's manufacturing process. The Company also enters into various foreign currency derivative instruments to manage foreign currency risk associated with its projected purchases and sales and foreign currency denominated receivable and payable balances.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets. Commodity swaps and foreign currency exchange contracts are designated as cash flow hedges of forecasted purchases of commodities and currencies,
certain interest rate swaps are designated as cash flow hedges of floating-rate borrowings, and the remainder of the instruments are designated as fair value hedges of fixed-rate borrowings, and a cross-currency interest rate swap as a hedge of net investments in its foreign subsidiaries.
Discontinuance of Cash Flow Hedge Accounting for Commodity Contracts
Through September 30, 2019, the Company designated all of its commodity derivative contracts as cash flow hedges, for which unrealized changes in fair value were recorded to AOCI the Company's Consolidated Balance Sheets, to the extent the commodity hedges were effective. As of October 1, 2019, the Company elected to de-designate all of its commodity derivative contracts and as a result, the Company now recognizes all future gains and losses from changes in the fair value of the commodity derivative immediately in earnings. As a result of discontinuing hedge accounting effective October 1, 2019, the associated amounts in AOCI as of September 30, 2019 will remain in AOCI and will be reclassified into earnings when the original hedged transaction affects earnings or it becomes probable that the forecasted transactions will not occur.
Cash flow hedging strategy
For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is recorded in AOCI in the Company's Consolidated Balance Sheets and is subsequently reclassified into earnings in the periods in which the hedged transaction affects earnings. During the next twelve months, the Company estimates $0.6 million of unrealized losses, net of tax, related to currency rate, commodity price and interest rate risk hedging will be reclassified from AOCI into earnings. Foreign currency and commodity hedging, prior to de-designation, is generally completed prospectively on a rolling basis for 15 and 36 months, respectively, depending on the type of risk being hedged.
In March 2017, the Company entered into 2 interest rate swap agreements, with a total notional amount of $600.0 million, to manage interest rate risk exposure by converting the Company’s floating-rate debt to a fixed-rate basis, thus reducing the impact from fluctuations in interest rates on future interest expense. These interest rate swap agreements involved the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal. In the first quarter of 2019, the interest rate swap with a notional amount of $175.0 million matured. The remaining interest rate swap agreement with a notional amount of $425.0 million matures in March 2020. Approximately 29.9% of the Company’s total outstanding long-term debt had its interest payments designated as a cash flow hedge under the remaining interest rate swap agreement as of December 31, 2019.
The outstanding commodity and currency forward contracts were entered into as hedges of forecasted transactions and continue to qualify for hedge accounting are as follows:
|
| | | | | | | | | | | |
| Commodity | | Units Hedged | | Unit |
| | As of December 31, | |
| | 2019(1) | | 2018 | | 2017 | |
| Aluminum | | — |
| | 1,446 |
| | 1,620 |
| | MT |
| Copper | | — |
| | 546 |
| | 667 |
| | MT |
| Steel | | — |
| | 7,080 |
| | 7,713 |
| | Short tons |
(1) As of October 1, 2019, the Company elected to de-designate all of its commodity derivative contracts.
|
| | | | | | | | | |
| Currency | | Units Hedged |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| Canadian Dollar | | 8,014,000 |
| | 10,990,000 |
| | 18,080,000 |
|
| Euro | | 7,593,000 |
| | 9,878,000 |
| | 8,545,000 |
|
| British Pound | | 8,046,471 |
| | 12,041,770 |
| | 7,807,744 |
|
| Mexican Peso | | 111,250,000 |
| | 175,960,000 |
| | 126,400,000 |
|
| Singapore Dollar | | 2,019,000 |
| | 1,480,000 |
| | 1,765,000 |
|
The effects of Company's derivative instruments on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Operations for gains or losses initially recognized in AOCI in the Consolidated Balance Sheets were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives in cash flow hedging relationships | | Pretax gain/(loss) recognized in AOCI | | Pretax gain/(loss) reclassified from AOCI into income |
| (in millions) | | Years Ended December 31, | | Location | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 | | | 2019 | | 2018 | | 2017 |
| Foreign currency exchange contracts | | $ | 0.4 |
| | $ | (2.2 | ) | | $ | 3.8 |
| | Cost of sales | | $ | (0.9 | ) | | $ | (0.7 | ) | | $ | 3.3 |
|
| Commodity contracts | | (1.2 | ) | | (1.0 | ) | | 2.4 |
| | Cost of sales | | (1.3 | ) | | 2.3 |
| | 1.1 |
|
| Interest rate swap contracts | | (1.7 | ) | | 3.4 |
| | 0.3 |
| | Interest expense | | 2.6 |
| | 1.9 |
| | (2.5 | ) |
| Total | | $ | (2.5 | ) | | $ | 0.2 |
| | $ | 6.5 |
| | | | $ | 0.4 |
| | $ | 3.5 |
| | $ | 1.9 |
|
Fair value hedging strategy
For derivative instruments that qualify and are designated as a fair value hedge (i.e. hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the covenant changesoffsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the Fourth Amendment, management believessame line item associated with the hedged item in the Company's Consolidated Statements of Operations.
In October 2017, the Company will be ableentered into an interest rate swap agreement with a total notional amount of $425.0 million to comply with these covenants duringmanage interest rate risk exposure by converting the subsequent 12 months.
13. Income Taxes (As Restated)
As further describedCompany’s fixed-rate debt to a floating-rate basis. This agreement involved the receipt of fixed rate amounts in Note 1, "Businessexchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal and Organization,"had a scheduled maturity of February 2024. In June 2019, this interest rate swap agreement was terminated, and the Company has restated for 2016,received cash in the amount of $14.0 million, representing the fair value of the swap and revised for 2017interest accrued through the date of termination. Accordingly, hedge accounting was discontinued and 2015, its previously issued consolidated financial statementsa hedge accounting adjustment to the Company's Senior Notes of $0.3 million was recorded and is being amortized to "Interest expense" in the Consolidated Statements of Operations through the termination of the Senior Notes.
The following amounts were recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for the years ended December 31, 2017, 2016 and 2015.fair value hedge:
The Company, as a stand-alone entity commencing with the Spin-Off, files U.S. federal and state tax returns on its own behalf. The responsibility for current income tax liabilities of U.S. federal and state combined tax filings were deemed to settle immediately with MTW paying entities effective with the Spin-Off in the respective jurisdictions, whereas state tax returns for certain separate filing entities of the Company's were filed by the Company for periods prior to and after the Spin-Off. Net cash tax payments commencing with the Spin-Off for the estimated liability are the actual cash taxes paid to the respective tax authorities in the jurisdictions wherever applicable.
Prior to the Spin-Off, the operations of the Company were generally included in the consolidated tax returns filed by the respective MTW entities, with the related income tax expense and deferred income taxes calculated on separate return bases in the consolidated financial statements. As a result, the effective tax rate and deferred income taxes in 2017 may differ from those in historical periods.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that does affect 2017, including, but not limited to, (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years, and (2) bonus depreciation that will allow for full expensing of qualified property. Effective in 2018, the Tax Act reduces the U.S. federal corporate statutory tax rate to 21%, and introduces a new provision designed to tax global intangible low-taxed income (“GILTI”). Refer to additional discussion of the impact of the Tax Act on the consolidated financial statements included below.
"Earnings before income taxes" in the consolidated statements of operations is comprised of the following for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| (in millions) | | | | (As Restated) | | |
| Domestic | | $ | 32.5 |
| | $ | 31.5 |
| | $ | 121.3 |
|
| Foreign | | 88.9 |
| | 70.7 |
| | 75.1 |
|
| Total | | $ | 121.4 |
| | $ | 102.2 |
| | $ | 196.4 |
|
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Carrying amount of the hedged liability | | Cumulative amount of fair value hedge adjustment included in the carrying amount of the hedged liability (2) |
| Line item in the Consolidated Balance Sheets in which the hedged item is included | | As of December 31, | | As of December 31, |
| | 2019(1) | | 2018 | | 2019 | | 2018 |
| Long-term debt and finance leases | | $ | — |
| | $ | 411.3 |
| | $ | 0.5 |
| | $ | (13.7 | ) |
"Income taxes" in the consolidated statements(1) The interest rate swap agreement with a total notional amount of operations is comprised of the following for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| (in millions) | | | | (As Restated) | | |
| Current: | | | | | | |
| Federal and state | | $ | 28.2 |
| | $ | 19.7 |
| | $ | 51.1 |
|
| Foreign | | 24.6 |
| | 18.6 |
| | 18.2 |
|
| Total current expense | | 52.8 |
| | 38.3 |
| | 69.3 |
|
| Deferred: | | | | | | |
| Federal and state | | (56.6 | ) | | (9.2 | ) | | (26.9 | ) |
| Foreign | | (7.7 | ) | | 1.6 |
| | (2.1 | ) |
| Total deferred benefit | | (64.3 | ) | | (7.6 | ) | | (29.0 | ) |
| Income taxes | | $ | (11.5 | ) | | $ | 30.7 |
| | $ | 40.3 |
|
A reconciliation of the U.S. federal statutory income tax rate to the Company's effective tax rate is as follows for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| | | | | (As Restated) | | |
| Federal income tax at statutory rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income (benefit) provision | | (2.6 | ) | | 0.9 |
| | 1.9 |
|
| Manufacturing and research incentives | | (1.7 | ) | | (1.9 | ) | | (1.7 | ) |
| Taxes on foreign income | | (3.5 | ) | | (4.8 | ) | | (9.6 | ) |
| Repatriation of foreign income - Tax Act | | 11.1 |
| | — |
| | — |
|
| Change in federal income tax statutory rate - Tax Act | | (37.5 | ) | | — |
| | — |
|
| Adjustments for valuation allowances | | (11.2 | ) | | 2.5 |
| | (13.8 | ) |
| Business divestitures | | — |
| | — |
| | 4.1 |
|
| Other items | | 0.9 |
| | (1.7 | ) | | 4.6 |
|
| Effective tax rate | | (9.5 | )% | | 30.0 | % | | 20.5 | % |
During 2017, the Company's effective tax rate$425.0 million was (9.5)%, compared to the 2016 effective tax rate of 30.0%. The net decrease in the effective tax rate is primarily due to the benefit from the revaluation of the U.S. deferred tax assets and liabilities in conjunction with the Tax Act. In addition, a valuation allowance was released that was recorded against the deferred tax assets for certain entities in the United Kingdom ("U.K"). A $3.5 million net state tax benefit was recorded in 2017 primarily due to revised estimates of the Company's state tax liabilities. These benefits are partially offset by the Deemed Repatriation Transition Tax (“Transition Tax”) on previously untaxed accumulated and current earnings and profits ("E&P") of certain foreign subsidiaries.
During 2016, the Company's effective tax rate was 30.0%, compared to the 2015 effective tax rate of 20.5%. The change was due to nonrecurring 2015 items and a change in the mix of earnings in jurisdictions without a valuation allowance.
Domestic earnings before income taxes in 2017 represent 26.8% of total earnings and a favorable 3.5% effective tax rate impact for net lower taxes on foreign income due in part to changes in foreign tax laws, whereas 2016 domestic earnings represent 30.8% of total earnings and a favorable 4.8% effective tax rate impact for net lower taxes on foreign income. The 2017 and 2016 effective tax rates were favorably impacted by income earned in jurisdictions, primarily in Canada and China, where the statutory rates are approximately 25.0%. The 2015 domestic earnings represent 61.8% of total earnings and a 9.6% effective tax rate benefit for net lower taxes on foreign income.
Deferred income taxes are provided for the effects of temporary differences between the assets and liabilities recognized for financial reporting and tax reporting. These temporary differences result in taxable or deductible amounts in future years.
Significant components of the Company’s non-current deferred tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| (in millions) | | | | (As Restated) |
| Non-current deferred tax assets (liabilities): | | | | |
| Inventories | | $ | 3.5 |
| | $ | 7.2 |
|
| Accounts receivable | | 0.9 |
| | 1.7 |
|
| Property, plant and equipment | | (2.4 | ) | | (2.7 | ) |
| Intangible assets | | (118.0 | ) | | (190.8 | ) |
| Deferred employee benefits | | 19.9 |
| | 19.2 |
|
| Product warranty reserves | | 7.5 |
| | 13.3 |
|
| Product liability reserves | | 2.2 |
| | 0.9 |
|
| Loss carryforwards | | 41.3 |
| | 43.8 |
|
| Deferred revenue | | — |
| | 1.3 |
|
| Other | | 12.9 |
| | 28.2 |
|
| Non-current deferred tax liabilities | | (32.2 | ) | | (77.9 | ) |
| Less valuation allowance | | (41.0 | ) | | (59.9 | ) |
| Net non-current deferred tax liabilities | | $ | (73.2 | ) | | $ | (137.8 | ) |
Current and long-term tax assets and liabilities included in the consolidated balance sheets are comprised of the following as of December 31, 2017 and 2016:
|
| | | | | | | | | | |
| | | 2017 | | 2016 | | Financial Statement Line Item |
| (in millions) | | | | (As Restated) | | |
| Income taxes receivable | | $ | 4.3 |
| | $ | 2.9 |
| | Prepaids and other current assets |
| Deferred tax assets | | 18.1 |
| | 7.2 |
| | Other non-current assets |
| Income taxes payable | | (13.9 | ) | | (5.6 | ) | | Accrued expenses and other liabilities |
| Income taxes payable | | (12.5 | ) | | — |
| | Other long-term liabilities |
| Deferred tax liabilities | | (91.3 | ) | | (145.0 | ) | | Deferred income taxes |
The Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB No. 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date. To the extent that the accounting for certain income tax effects of the Tax Act is incomplete but a reasonable estimate can be determined, a provisional estimate must be recorded in the financial statements. If a provisional estimate cannot be determined for inclusion in the financial statements, existing accounting guidance continues to apply on the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
The Company’s accounting for the following elements of the Tax Act is incomplete. However, management was able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
Reduction of U.S. federal corporate tax rate: The Tax Act reduces the U.S. corporate statutory tax rate to 21%, effective January 1, 2018. For the U.S. related deferred tax assets and deferred tax liabilities, the Company has recorded a net provisional deferred tax benefit of $45.5 million forterminated during the year ended December 31, 2017. While management is able to make a reasonable estimate2019.
(2) The balance as of the impactDecember 31, 2019 and December 31, 2018 includes $0.5 million and $0.3 million, respectively, of the reduction in U.S. corporate tax rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, the calculation of deemed repatriation of deferred foreign income and the state tax effect ofhedging adjustments made to federal temporary differences.on discontinued hedge relationships.
Effect of Fair Value and Cash Flow Derivative Instruments on Consolidated Statements of Operations
Deemed Repatriation Transition Tax:
The Transition Tax is a tax on E&P of certaintable below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Location and amount of gain/(loss) recognized on effect of fair value and cash flow derivative instruments |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | Cost of Sales | | Interest Expense | | Cost of Sales | | Interest Expense | | Cost of Sales | | Interest Expense |
| Total amounts of expense line items presented in the Consolidated Statements of Operations in which effects of fair value and cash flow hedges are recorded | | $ | 1,027.0 |
| | $ | 92.6 |
| | $ | 1,020.9 |
| | $ | 89.0 |
| | $ | 908.5 |
| | $ | 86.9 |
|
| The effects of fair value and cash flow hedging: | | | | | | | | | | | | |
| Gain/(loss) on fair value hedging relationship: | | | | | | | | | | | | |
| Interest rate contract: | | | | | | | | | | | | |
| Hedged item | | $ | — |
| | $ | (14.2 | ) | | $ | — |
| | $ | 5.3 |
| | $ | — |
| | $ | 8.7 |
|
| Derivative designated as hedging instrument | | $ | — |
| | $ | 13.3 |
| | $ | — |
| | $ | (4.0 | ) | | $ | — |
| | $ | (9.0 | ) |
| | | | | | | | | | | | | |
| Gain/(loss) on cash flow hedging relationships: | | | | | | | | | | | | |
| Foreign currency exchange contracts: | | | | | | | | | | | | |
| Amount of gain/(loss) reclassified from AOCI into income | | $ | (0.9 | ) | | $ | — |
| | $ | (0.7 | ) | | $ | — |
| | $ | 3.3 |
| | $ | — |
|
| Commodity contracts: | | | | | | | | | | | | |
| Amount of gain/(loss) reclassified from AOCI into income | | $ | (1.3 | ) | | $ | — |
| | $ | 2.3 |
| | $ | — |
| | $ | 1.1 |
| | $ | — |
|
| Interest rate contracts: | | | | | | | | | | | | |
| Amount of gain/(loss) reclassified from AOCI into income | | $ | — |
| | $ | 2.6 |
| | $ | — |
| | $ | 1.9 |
| | $ | — |
| | $ | (2.5 | ) |
Hedge of net investment in foreign subsidiaries. To determineoperations strategy
For derivative instruments that qualify and are designated as a hedge of a net investment in a foreign currency, the amountgain or loss is reported in AOCI as a component of the Transition Tax,cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.
In March 2017, the Company must determine,entered into a three-year cross-currency interest rate swap contract ("CCS") for a notional value of €50.0 million to protect the value of its net investment in addition to other factors, the amount of post-1986 E&PEuros. The carrying value of the relevant subsidiaries,net investment in Euros designated as well asa hedging instrument is remeasured at each reporting date to reflect the amount of non-U.S. income taxes paid on such earnings. Management was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $13.5 million as an element of our current income tax provision, which will be payable over a period of up to eight years. This provisional estimate may be impacted by a number of additional considerations, including but not limited to the issuance of final regulations, ongoing analysis of the Tax Act and gathering additional information to more precisely compute the amount of the Transition Tax.
Cost recovery: While management has not yet completed all of the computations necessary or completed an inventory of the Company’s 2017 U.S. expenditures that qualify for immediate expensing, the Company has recorded a provisional benefit of approximately $0.1 million, based on management’s current intent to fully expense all qualifying expenditures.
The Company’s accounting for the following elements of the Tax Act is incomplete, and management was not able to make reasonable estimates of the effects. Therefore, no provisional adjustment was recorded.
GILTI: The Tax Act creates a new requirement that certain income earned by controlled foreign corporations (“CFCs”) must be included currentlychanges in the gross income offoreign currency exchange spot rate, with changes since the CFC's U.S. shareholder. Because of the complexity of the new GILTI tax rules, management is continuing to evaluate this provision of the Tax Act. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusionslast remeasurement date recorded in taxable income related to GILTI as a current-period expense, commencing in 2018 upon its effective date, when incurred (the “period cost method”) or (2) factoring such amounts into the measurement of deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether management expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether management expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the Company’s current structure and estimated future results of global operations but also management’s intent and ability to modify the structure and/or the business, management is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any deferred tax adjustments related to potential GILTI tax in the consolidated financial statements for the year ended December 31, 2017 and has not made a policy decision regarding whether to record deferred taxes on GILTI.
AOCI.
Valuation allowances: The Company must determine whether assessments of valuation allowances are affected by various aspects of the Tax Act (e.g., GILTI inclusions, new categories of foreign tax credits). Since, as discussed above, the Company has recorded no deferred tax adjustments related to the GILTI element of the Tax Act, any corresponding determination of the need for or change in a valuation allowance has not been completed and no changes to valuation allowancesEffective January 1, 2019, as a result of the GILTI elementadoption of ASU 2017-12, the Company elected to re-designate the CCS as a net investment hedge under the spot method. Changes in the fair value of the Tax Act have been recorded.
CCS included in the assessment of effectiveness due to spot foreign exchange rates are recorded as cumulative translation adjustment within AOCI and will remain in AOCI until either the sale or substantially complete liquidation of the hedged subsidiaries. The initial value of any component excluded from the assessment of effectiveness is recognized in income using a systematic and rational method over the remaining life of the hedging instrument. The excluded component is the cross-currency basis spread, which will be recognized as an increase in interest income within "Other expense — net" in the Consolidated Statements of Operations using the straight-line method over the remaining term of the CCS. Any difference between the change in the fair value of the excluded component and amounts recognized in income under that systematic and rational method is recognized in AOCI. In addition, the accrual of periodic U.S. dollar and Euro-denominated interest receipts under the terms of the CCS are recognized as interest income within "Other expense — net" in the Consolidated Statements of Operations.
The location and effects of the net investment hedge on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Operations are as follows:
Capital requirements:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives in net investments hedging relationships | | Pretax gain/(loss) recognized in AOCI | | Gain/(loss) reclassified from AOCI into income | | Gain/(loss) recognized in income (amount excluded from effectiveness testing) |
| (in millions) | | Years Ended December 31, | | Location | | Years Ended December 31, | | Location | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 | | | 2019 | | 2018 | | 2017 | | | 2019 | | 2018 | | 2017 |
| Interest rate swap contract | | $ | 2.8 |
| | $ | 3.9 |
| | $ | (6.6 | ) | | N/A | | $ | — |
| | $ | — |
| | $ | — |
| | Other expense — net | | $ | 1.6 |
| | $ | — |
| | $ | — |
|
N/A = Not applicable
As of December 31, 2017, approximately $120.42019, there was no ineffectiveness on the hedge designated as a net investment hedge.
Derivatives Not Designated as Hedging Instruments
The Company enters into commodity and foreign currency exchange contracts that are not designated as hedge relationships to offset, in part, the impact of certain intercompany transactions and to further mitigate certain other short-term commodity and currency impacts, as identified. For derivative instruments that are not designated as hedging instruments, the gains or losses on the derivatives are recognized in current earnings within "Other expense — net" in the Consolidated Statements of Operations.
During the first quarter of 2018, the Company entered into a short-term foreign currency exchange contract to purchase SEK 1,800.0 million and sell $223.8 million with maturity dates ranging from March 1, 2018 to April 5, 2018 ("SEK Contract"). The purpose of this contract was to mitigate the impact of currency price fluctuations on the contracted price of the $128.7Crem Acquisition (see Note 3, "Acquisition," for additional discussion of the Crem Acquisition). In April 2018, the Company settled the SEK Contract and realized a loss of $10.0 million, all of which was recognized during 2018 in "Other expense — net" in the Consolidated Statements of Operations. The cash flows related to the settlement of the SEK Contract were not related to the Company's ongoing revenue-producing or cost-generating activities and, therefore, were included within the investing activities in the Consolidated Statements of Cash Flows.
The Company had the following outstanding commodity and currency forward contracts not designated as hedging instruments:
|
| | | | | | | | | | | |
| Commodity | | Units Hedged | | Unit |
| | As of December 31, | |
| | 2019 | | 2018 | | 2017 | |
| Aluminum | | 524 |
| | — |
| | — |
| | MT |
| Copper | | 269 |
| | — |
| | — |
| | MT |
| Steel | | 1,778 |
| | — |
| | — |
| | Short tons |
|
| | | | | | | | | |
| Currency | | Units Hedged |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 |
| Canadian Dollar | | 1,330,000 |
| | — |
| | — |
|
| Euro | | 75,557,000 |
| | 69,700,000 |
| | 69,300,000 |
|
| Swiss Franc | | 7,000,000 |
| | 5,300,000 |
| | 4,800,000 |
|
| British Pound | | 20,323,932 |
| | 23,704,468 |
| | 14,912,019 |
|
| Singapore Dollar | | 28,427,000 |
| | 28,447,000 |
| | 28,127,000 |
|
| Mexican Peso | | 11,805,000 |
| | — |
| | — |
|
The location and impact on the Consolidated Statements of Operations for gains or losses related to derivative instruments not designated as hedging instruments are as follows:
|
| | | | | | | | | | | | | | |
| Derivatives NOT designated as hedging instruments | | Amount of gain/(loss) | | Location of gain/(loss) |
| (in millions) | | Years Ended December 31, | | |
| | 2019 | | 2018 | | 2017 | |
| Foreign currency exchange contracts | | $ | 6.6 |
| | $ | (9.7 | ) | | $ | (6.5 | ) | | Other expense — net |
| Commodity contracts | | 0.1 |
| | — |
| | — |
| | Other expense — net |
| Total | | $ | 6.7 |
| | $ | (9.7 | ) | | $ | (6.5 | ) | | |
The fair value of outstanding derivative contracts recorded as assets in the Consolidated Balance Sheets are as follows:
|
| | | | | | | | | | |
| (in millions) | | Balance Sheet Location | | Asset Derivatives |
| | | Fair Value |
| | | As of December 31, |
| | | 2019 | | 2018 |
| Derivatives designated as hedging instruments: | | | | | | |
| Foreign currency exchange contracts | | Prepaids and other current assets | | $ | 0.8 |
| | $ | 0.5 |
|
| Commodity contracts | | Prepaids and other current assets | | — |
| | 0.2 |
|
| Interest rate swap contracts | | Prepaids and other current assets | | — |
| | 4.8 |
|
| Interest rate swap contracts | | Other non-current assets | | — |
| | 3.4 |
|
| Total derivatives designated as hedging instruments | | | | $ | 0.8 |
| | $ | 8.9 |
|
| | | | | | | |
| Derivatives NOT designated as hedging instruments: | | | | | | |
| Foreign currency exchange contracts | | Prepaids and other current assets | | $ | 0.4 |
| | $ | 0.1 |
|
| Total derivatives NOT designated as hedging instruments | | | | $ | 0.4 |
| | $ | 0.1 |
|
| | | | | | | |
| Total asset derivatives | | | | $ | 1.2 |
| | $ | 9.0 |
|
The fair value of outstanding derivative contracts recorded as liabilities in the Consolidated Balance Sheets are as follows:
|
| | | | | | | | | | |
| (in millions) | | Balance Sheet Location | | Liability Derivatives |
| | | Fair Value |
| | | As of December 31, |
| | | 2019 | | 2018 |
| Derivatives designated as hedging instruments: | | | | | | |
| Foreign currency exchange contracts | | Accrued expenses and other liabilities | | $ | 0.6 |
| | $ | 1.5 |
|
| Commodity contracts | | Accrued expenses and other liabilities | | — |
| | 0.9 |
|
| Interest rate swap contracts | | Accrued expenses and other liabilities | | 3.2 |
| | 15.7 |
|
| Commodity contracts | | Other long-term liabilities | | — |
| | 0.4 |
|
| Interest rate swap contracts | | Other long-term liabilities | | — |
| | 5.9 |
|
| Total derivatives designated as hedging instruments | | | | $ | 3.8 |
| | $ | 24.4 |
|
| | | | | | | |
| Derivatives NOT designated as hedging instruments: | | | | | | |
| Foreign currency exchange contracts | | Accrued expenses and other liabilities | | $ | 0.6 |
| | $ | 0.3 |
|
| Commodity contracts | | Accrued expenses and other liabilities | | 0.6 |
| | — |
|
| Total derivatives NOT designated as hedging instruments | | | | $ | 1.2 |
| | $ | 0.3 |
|
| | | | | | | |
| Total liability derivatives | | | | $ | 5.0 |
| | $ | 24.7 |
|
12.Fair Value of Financial Instruments
In accordance with the Company's policy, fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The policy classifies the inputs used to measure fair value into the following hierarchy:
| |
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
| |
| Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or |
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
Inputs other than quoted prices that are observable for the asset or liability
| |
| Level 3 | Unobservable inputs for the asset or liability |
The Company utilizes the best available information in measuring fair value. The carrying values of cash and cash equivalents, including restricted cash,accounts receivable, trade accounts payable and beneficial interest in sold receivables (see Note 4, "Accounts Receivable Securitization,") approximate fair value, without being discounted, as of December 31, 2019 and 2018, as applicable, due to the short-term nature of these instruments. The Company's Revolving Credit Facility Term Loan B Facility and Senior Notes are recorded at their carrying values on the consolidated balance sheet was held by foreign entities. Management’s intent is to reinvest the earnings of foreign subsidiaries indefinitely outside the U.S., irrespectiveCompany's Consolidated Balance Sheets, as disclosed in Note 10, "Debt." The carrying value of the Tax Act. The Tax Act includes the Transition Tax provision that imposes a tax on foreign earnings whether or not such earnings are repatriatedRevolving Credit Facility approximates its fair value due to the U.S. As a resultshort-term variable interest rates of the Transition Tax, management is reviewingborrowings. The Company estimates the current positionfair value of the Term Loan B Facility and the Senior Notes based on quoted market prices of the instruments. Because these instruments are typically thinly traded, the assets and liabilities are classified as Level 2 of the fair value hierarchy. The fair value of the Company's Term Loan B Facility was approximately $860.9 million and $815.5 million as of December 31, 2019 and 2018, respectively. The fair value of the Company's Senior Notes was approximately $450.9 million and $457.0 million as of December 31, 2019 and 2018, respectively.
The following tables set forth financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2019 and 2018 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the reinvestmentlowest level of the earnings of foreign subsidiaries outside of the U.S. This review may be impacted by a number of additional considerations, including but not limitedinput that is significant to the issuance of additional regulations, ongoing analysis of the Tax Actfair value measurement.
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Fair Value as of December 31, 2019 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Current assets: | | | | | | | | |
| Foreign currency exchange contracts | | $ | — |
| | $ | 1.2 |
| | $ | — |
| | $ | 1.2 |
|
| Total current assets at fair value | | — |
| | 1.2 |
| | — |
| | 1.2 |
|
| Total assets at fair value | | $ | — |
| | $ | 1.2 |
| | $ | — |
| | $ | 1.2 |
|
| | | | | | | | | |
| Current liabilities: | | |
| | |
| | |
| | |
|
| Foreign currency exchange contracts | | $ | — |
| | $ | 1.2 |
| | $ | — |
| | $ | 1.2 |
|
| Commodity contracts | | — |
| | 0.6 |
| | — |
| | 0.6 |
|
| Interest rate swap contracts | | — |
| | 3.2 |
| | — |
| | 3.2 |
|
| Total current liabilities at fair value | | — |
| | 5.0 |
| | — |
| | 5.0 |
|
| Total liabilities at fair value | | $ | — |
| | $ | 5.0 |
| | $ | — |
| | $ | 5.0 |
|
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Fair Value as of December 31, 2018 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Current assets: | | |
| | |
| | |
| | |
|
| Short-term investment | | $ | — |
| | $ | 32.0 |
| | $ | — |
| | $ | 32.0 |
|
| Foreign currency exchange contracts | | — |
| | 0.6 |
| | — |
| | 0.6 |
|
| Commodity contracts | | — |
| | 0.2 |
| | — |
| | 0.2 |
|
| Interest rate swap contracts | | — |
| | 4.8 |
| | — |
| | 4.8 |
|
| Total current assets at fair value | | — |
| | 37.6 |
| | — |
| | 37.6 |
|
| Non-current assets: | | | | | | | | |
| Interest rate swap contracts | | — |
| | 3.4 |
| | — |
| | 3.4 |
|
| Total non-current assets at fair value | | — |
| | 3.4 |
| | — |
| | 3.4 |
|
| Total assets at fair value | | $ | — |
| | $ | 41.0 |
| | $ | — |
| | $ | 41.0 |
|
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Foreign currency exchange contracts | | $ | — |
| | $ | 1.8 |
| | $ | — |
| | $ | 1.8 |
|
| Commodity contracts | | — |
| | 0.9 |
| | — |
| | 0.9 |
|
| Interest rate swap contracts | | — |
| | 15.7 |
| | — |
| | 15.7 |
|
| Total current liabilities at fair value | | — |
| | 18.4 |
| | — |
| | 18.4 |
|
| Non-current liabilities: | | | | | | | | |
| Commodity contracts | | — |
| | 0.4 |
| | — |
| | 0.4 |
|
| Interest rate swap contracts | | — |
| | 5.9 |
| | — |
| | 5.9 |
|
| Total non-current liabilities at fair value | | — |
| | 6.3 |
| | — |
| | 6.3 |
|
| Total liabilities at fair value | | $ | — |
| | $ | 24.7 |
| | $ | — |
| | $ | 24.7 |
|
13.Contingencies and gathering additional information to make a more informed decision for our intent to reinvest earnings of foreign subsidiaries indefinitely outside the U.S.
Significant Estimates
Product-Related and Environmental Matters
As of December 31, 2017,2019 and 2018, the Company has approximately $191.3 million of foreign loss carryforwards, which are available to reduce future foreign tax liabilities. Substantially all of the foreign loss carryforwards are not subject to any time restrictions on their future use, and $144.9 million are offset by a valuation allowance. The Company also has approximately $63.3 million of pre-tax U.S. capital loss carryforwards which expire in 2019 and are offset by a valuation allowance and an unrecognized tax benefit.
As of each reporting date, the Company's management considers new evidence, both positive and negative, that could impact management's view regarding future realization of deferred tax assets. For the year ended December 31, 2017, the Company determined that sufficient positive evidence existed to conclude that it is more likely than not that additional deferred taxes of $8.6 million of the total $36.8 million recorded in the U.K. are realizable, and therefore, reduced the valuation allowance accordingly. The Company has additional valuation allowances recorded on some of the other deferred income tax assets in the United Kingdom, and certain entities in Singapore, Thailand and India as it remains more likely than not that they will not be utilized.
The Company will continue to periodically evaluate its valuation allowance requirements in light of changing facts and circumstances, and may adjust its deferred tax asset valuation allowances accordingly. It is reasonably possible that the Company will either add to, or reverse a portion of its existing deferred tax asset valuation allowances in the future. Such changes in the deferred tax asset valuation allowances will be reflected in the current operations through the Company’s income tax provision, and could have a material effect on operating results.
A reconciliation of the Company's unrecognized tax benefits is as follows for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | |
| (in millions) | | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | | $ | 12.5 |
| | $ | 16.6 |
| | $ | 16.6 |
|
| Additions based on tax positions related to the current year | | — |
| | 0.8 |
| | 0.2 |
|
| Additions for tax positions of prior years | | 0.2 |
| | 1.0 |
| | — |
|
| Reductions for tax positions of prior years | | (0.4 | ) | | — |
| | — |
|
| Reductions for equity adjustment | | — |
| | (4.3 | ) | | — |
|
| Reductions for lapse of statute | | — |
| | (1.6 | ) | | (0.2 | ) |
| Balance at end of year | | $ | 12.3 |
| | $ | 12.5 |
| | $ | 16.6 |
|
The Company’s unrecognized tax benefits as of December 31, 2017, 2016 and 2015, if recognized, would not materially impact the effective tax rate due to the offset of the capital loss carryforward deferred tax asset. The Company recognizes interest and penalties related to tax liabilities as a part of income tax expense. As of December 31, 2017 and 2016, the Company has accrued interest and penalties of $0.2had reserved $43.9 million and $0.1$39.7 million, respectively.
During the next twelve months, it is reasonably possiblerespectively, for warranty claims expected to be paid. Certain of these warranty and other related claims involve matters in dispute that federal, state and foreign tax resolutions could change unrecognized tax benefits and income tax expense in the range of $0.1 million to $0.3 million.
MTW has filed tax returns on behalf of the Company in the U.S. and various state and foreign jurisdictions prior to the Spin-Off. The Company's separate federal and state tax returns for the 2013 through 2017 tax years generally remain subject to examinationwill ultimately be resolved by U.S. and various state authorities. Tax years 2013 through 2017 remain subject to examination in Canada and Germany. Tax years 2008 through 2017 remain subject to audit in China.
The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of December 31, 2017, the Company believes that it is more likely than not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position and the results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates and/negotiations, arbitration or from its historical income tax provisions and accruals and could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.
14. Other Expense (Income) — Net
The components of "Other expense (income) — net" in the consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 are summarized as follows:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| (in millions) | | | | (As Restated) | | |
Gain on sale of Kysor Panel Systems (1) | | $ | — |
| | $ | — |
| | $ | (9.9 | ) |
| Gain on sale of investment property | | — |
| | — |
| | (5.4 | ) |
Gain on acquisition of Thailand joint venture (2) | | — |
| | — |
| | (4.9 | ) |
| Amortization of debt issuance costs | | 5.5 |
| | 4.7 |
| | — |
|
| Other | | 3.6 |
| | 4.3 |
| | (1.9 | ) |
| Other expense (income) — net | | $ | 9.1 |
| | $ | 9.0 |
| | $ | (22.1 | ) |
(1)litigation. See Note 4, "Divestitures" for further discussion on the sale of Kysor Panel Systems.
(2) See Note 3, "Acquisitions" for further discussion on the acquisition of the Thailand joint venture.
15. Accumulated Other Comprehensive Loss
The components of "Accumulated other comprehensive loss" as of December 31, 2017 and 2016 are as follows:
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Foreign currency translation, net of income tax benefit of $2.8 and zero, respectively | | $ | 4.4 |
| | $ | (9.8 | ) |
| Derivative instrument fair market value, net of income tax expense of $1.8 and zero, respectively | | 3.6 |
| | 0.8 |
|
| Employee pension and postretirement benefit adjustments, net of income tax benefit of $6.5 and $6.3, respectively | | (40.0 | ) | | (34.4 | ) |
| | | $ | (32.0 | ) | | $ | (43.4 | ) |
A summary of the changes in "Accumulated other comprehensive loss," net of tax, by component for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Foreign Currency Translation (1) | | Gains and Losses on Cash Flow Hedges | | Pension & Postretirement | | Total |
| Balance at December 31, 2014 | | $ | 17.3 |
| | $ | (1.0 | ) | | $ | (37.0 | ) | | $ | (20.7 | ) |
| Other comprehensive (loss) income before reclassifications | | (25.2 | ) | | (6.1 | ) | | 1.1 |
| | (30.2 | ) |
| Amounts reclassified out | | — |
| | 4.8 |
| | 1.1 |
| | 5.9 |
|
| Tax effect | | — |
| | 0.5 |
| | — |
| | 0.5 |
|
| Net current period other comprehensive (loss) income | | (25.2 | ) | | (0.8 | ) | | 2.2 |
| | (23.8 | ) |
| Balance at December 31, 2015 | | (7.9 | ) | | (1.8 | ) | | (34.8 | ) | | (44.5 | ) |
| Other comprehensive (loss) income before reclassifications | | (1.9 | ) | | 2.1 |
| | (1.5 | ) | | (1.3 | ) |
| Amounts reclassified out | | — |
| | 1.5 |
| | 2.5 |
| | 4.0 |
|
| Tax effect | | — |
| | (1.0 | ) | | (0.6 | ) | | (1.6 | ) |
| Net current period other comprehensive (loss) income | | (1.9 | ) | | 2.6 |
| | 0.4 |
| | 1.1 |
|
| Balance at December 31, 2016 | | (9.8 | ) | | 0.8 |
| | (34.4 | ) | | (43.4 | ) |
| Other comprehensive income (loss) before reclassifications | | 11.4 |
| | 9.0 |
| | (7.8 | ) | | 12.6 |
|
| Amounts reclassified out | | — |
| | (4.4 | ) | | 2.0 |
| | (2.4 | ) |
| Tax effect | | 2.8 |
| | (1.8 | ) | | 0.2 |
| | 1.2 |
|
| Net current period other comprehensive income (loss) | | 14.2 |
| | 2.8 |
| | (5.6 | ) | | 11.4 |
|
| Balance at December 31, 2017 | | $ | 4.4 |
| | $ | 3.6 |
| | $ | (40.0 | ) | | $ | (32.0 | ) |
(1) Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation does include the impact of the net investment hedge transaction. Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income.
A reconciliation of the reclassifications out of "Accumulated other comprehensive loss," net of tax, for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | 2017 | | 2016 | | 2015 | | | | Recognized Location |
| Gains (losses) on cash flow hedges: | | | | | | | | | | |
| Foreign currency exchange contracts | | $ | 3.3 |
| | $ | — |
| | $ | (1.4 | ) | | | | Cost of sales |
| Commodity contracts | | 1.1 |
| | (1.5 | ) | | (3.4 | ) | | | | Cost of sales |
| | | 4.4 |
| | (1.5 | ) | | (4.8 | ) | | | | Total before tax |
| | | (1.6 | ) | | 0.6 |
| | 1.8 |
| | | | Tax (expense) benefit |
| | | $ | 2.8 |
| | $ | (0.9 | ) | | $ | (3.0 | ) | | | | Net of tax |
| Amortization of pension and postretirement items: | | | | | | | | | | |
| Actuarial losses | | $ | (2.0 | ) | | $ | (2.5 | ) | | $ | (1.1 | ) | | (a) | | |
| | | (2.0 | ) | | (2.5 | ) | | (1.1 | ) | | | | Total before tax |
| | | 0.7 |
| | 1.0 |
| | — |
| | | | Tax benefit |
| | | $ | (1.3 | ) | | $ | (1.5 | ) | | $ | (1.1 | ) | | | | Net of tax |
| | | | | | | | | | | |
| Total reclassifications for the period | | $ | 1.5 |
| | $ | (2.4 | ) | | $ | (4.1 | ) | | | | Net of tax |
(a) This other comprehensive income component is included in the periodic pension cost (see Note 20, "Employee Benefit Plans,14, "Product Warranties," for further details).information.
16. Stock-Based Compensation
Prior to the Spin-Off, the Company's employees historically participated in MTW's stock-based compensation plans. Stock-based compensation expense relating to awards under MTW's stock-based compensation plans have been allocated to the Company based on the awards and terms previously granted to its employees. Until consummation of the Spin-Off, the Company continued to participate in MTW's stock-based compensation plans and record stock-based compensation expense based on the stock-based awards granted to the Company's employees.
The Company adopted the 2016 Omnibus Incentive Plan (the "2016 Plan") that permits the granting of stock options, restricted stock awards and units, performance share awards and units, and other types of stock-based and cash awards. In addition, the 2016 Plan allowed for the adjustment and replacement of certain awards of MTW common stock that were outstanding immediately prior to the Spin-Off through the issuance of replacement awards ("Replacement Awards"). As of December 31, 2017, the maximum number of shares of common stock available for issuance pursuant to the 2016 Plan was 13.7 million.
The Company recognizes stock-based compensation expense based on the fair value of the award on the grant date over the requisite service period and estimates forfeitures when calculating compensation expense, which is generally recognized in "Selling, general and administrative expenses" in the consolidated statements of operations. The Company recognized stock-based compensation expense as a result of the modification of certain MTW performance share units to pay out at target upon consummation of the Spin-Off, which is reflected in "Separation expense" in the consolidated statements of operations. Additionally, the Company recognized stock-based compensation for the accelerated vesting of certain equity awards in connection with the retirement of two executives during the first half of 2017 and in connection with a company-wide reduction in force ("August 2017 RIF") during the third quarter of 2017. These events are described in Note 19, "Restructuring," and are reflected in "Restructuring expense" in the consolidated statements of operations. Stock-based compensation expense was recorded in the aforementioned financial statement line items for the years ended December 31, 2017, 2016 and 2015 as follows:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in millions) | | 2017 | | 2016 | | 2015 |
| Stock-based compensation expense: | | | | | | |
| Selling, general and administrative expenses | | $ | 8.1 |
| | $ | 4.7 |
| | $ | 2.3 |
|
| Separation expense | | 0.1 |
| | 1.6 |
| | — |
|
| Restructuring expense | | 2.9 |
| | — |
| | — |
|
| Total stock-based compensation expense | | $ | 11.1 |
| | $ | 6.3 |
| | $ | 2.3 |
|
Stock-based compensation expense by award type was as follows for the periods indicated:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in millions) | | 2017 | | 2016 | | 2015 |
| Stock-based compensation expense: | | | | | | |
| Stock options | | $ | 3.0 |
| | $ | 1.2 |
| | $ | 0.6 |
|
| Restricted stock awards and units | | 3.6 |
| | 3.0 |
| | 1.3 |
|
| Performance share units | | 4.5 |
| | 2.1 |
| | 0.4 |
|
| Total stock-based compensation expense | | $ | 11.1 |
| | $ | 6.3 |
| | $ | 2.3 |
|
Stock Options
Prior to the Spin-Off, any stock option granted to directors of MTW was exercisable immediately upon grant and expires ten years subsequent to the grant date. For all outstanding grants made to officers and employees prior to 2011, stock options became exercisable in 25% increments annually over a four-year period beginning on the second anniversary of the grant date and expire ten years subsequent to the grant date. Beginning in 2011 for grants to officers and employees, such stock options became exercisable in 25% increments annually over a four-year period beginning on the first anniversary of the grant date and expire ten years subsequent to the grant date.
A summary of the Company's stock option activity for all holders of Welbilt stock options is as follows:
|
| | | | | | | | | | | | | |
| (in millions, except weighted average exercise price and contractual life) | | Options | | Weighted
Average
Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Aggregate
Intrinsic
Value |
| Options outstanding as of January 1, 2017 | | 3.6 |
| | $ | 15.62 |
| | 4.5 | | $ | 20.0 |
|
| Granted | | 0.3 |
| | 18.67 |
| | | | |
|
| Exercised | | (0.6 | ) | | 8.19 |
| | | | |
|
| Forfeited | | (0.1 | ) | | 16.54 |
| | | | |
| Canceled | | (0.5 | ) | | 24.34 |
| | | | |
|
Options outstanding as of December 31, 2017 (1) | | 2.7 |
| | $ | 15.95 |
| | 4.9 | | $ | 22.9 |
|
| | | | | | | | | |
Options vested and expected to vest as of December 31, 2017 (2) | | 2.7 |
| | $ | 15.94 |
| | 4.8 | | $ | 22.5 |
|
| | | | | | | | | |
| Options exercisable as of December 31, 2017 | | 2.2 |
| | $ | 15.81 |
| | 4.0 | | $ | 18.8 |
|
(1) The outstanding stock options at December 31, 2017 have a range of exercise prices from $3.51 to $31.14 per share.
(2) Number of options expected to vest is total unvested options less estimated forfeitures.
The Company uses the Black-Scholes valuation model to value stock options. The Company used historical stock prices for MTW shares of common stock as the basis for its volatility assumptions prior to the Spin-Off. Subsequent to the Spin-Off, the volatility assumption is based on the reported data of a peer group of publicly traded companies for which historical information is available. The assumed risk-free rates were based on ten-year U.S. Treasury rates in effect at the time of grant. The expected option life represents the period of time that the options granted are expected to be outstanding and is based on historical experience.
The assumptions used in the Black-Scholes option pricing model and the weighted average fair value of option awards granted were as follows for the periods indicated:
|
| | | | | | | | | |
| | | Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Expected life (years) | | 6.0 |
| | 6.0 |
| | 6.0 |
|
| Risk-free interest rate | | 2.3 | % | | 1.6 | % | | 1.8 | % |
| Expected volatility | | 39.0 | % | | 39.0 | % | | 56.0 | % |
| Expected dividend yield | | — | % | | — | % | | 0.3 | % |
The following represents stock option compensation information for the periods indicated:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in millions, except weighted average grant date fair value per option granted) | | 2017 | | 2016 | | 2015 |
| Weighted average grant date fair value per option granted | | $ | 7.86 |
| | $ | 5.97 |
| | $ | 10.40 |
|
| Fair value of options vested | | 3.0 |
| | 2.8 |
| | 6.8 |
|
| Intrinsic value of options exercised | | 7.5 |
| | 8.5 |
| | 0.1 |
|
| Excess tax benefit for tax deductions related to the exercise of stock options | | 1.2 |
| | — |
| | — |
|
Cash received from option exercises, net of tax withholding | | 1.9 |
| | 12.9 |
| | — |
|
| Tax benefits for stock-option compensation expense | | 0.7 |
| | 0.5 |
| | 0.2 |
|
As of December 31, 2017,2019, the Company had $2.4has various product liability lawsuits pending. For products sold outside of the U.S. and Canada, the Company is insured by third-party insurance companies. For products sold in the U.S. and Canada, the Company is insured, to the extent permitted under applicable law, with self-insurance retention levels. The Company's self-insurance retention levels vary by business and fluctuate with the Company's risk management practices. In the U.S., the Company's current self-insured retention level is $0.3 million per occurrence and $1.0 million in the aggregate for product liability claims. In Canada, the Company's self-insured retention level is $0.1 million per occurrence and $2.0 million in the aggregate for product liability claims. In addition, the Company's self-insured retention level for commercial general liability is $2.0 million in the aggregate.
Product liability reserves are included in "Accrued expenses and other liabilities" in the Consolidated Balance Sheets and totaled $1.3 million as of unrecognized compensation expense before tax relatedboth December 31, 2019 and 2018, of which $0.7 million and $0.6 million, respectively, is reserved for specific cases and $0.6 million and $0.7 million, respectively, is reserved using actuarial methods for claims anticipated to stock options, which will be recognized over a weighted average period of 2.5 years.
Restricted Stock Awards and Units
The fair value of restricted stock awards and units (collectively, "restricted stock") is basedhave occurred but are not yet reported. Based on the closing priceCompany's experience in defending product liability claims, management believes the current reserves are adequate for estimated case resolutions on aggregate self-insured claims and third-party insured claims. Any recoveries from insurance carriers are dependent upon the legal sufficiency of the Company’s common stock on the grant date. Restricted stock granted in 2017 to employees generally vests over three years in an equal numberclaims and solvency of shares each year beginning on the first anniversary of the date of grant and for directors generally cliff vests after two years from the date of grant, both assuming continued employment. Restricted stock granted in 2016 and 2015 for directors and employees generally cliff vest on either the second or third anniversary of the grant date, assuming continued employment. Additional restricted stock granted to the chairperson of the Board of Directors vests immediately.insurance carriers.
A summary of activity for all Welbilt restricted stock for the year ended December 31, 2017 is as follows:
|
| | | | | | | |
| (in millions, except weighted average grant date fair value) | | Restricted Stock | | Weighted
Average
Grant Date Fair Value |
| Unvested as of January 1, 2017 | | 0.9 |
| | $ | 16.86 |
|
| Granted | | 0.1 |
| | 21.39 |
|
| Vested | | (0.2 | ) | | 18.29 |
|
| Forfeited | | (0.1 | ) | | 16.56 |
|
| Unvested as of December 31, 2017 | | 0.7 |
| | $ | 17.14 |
|
The following represents restricted stock compensation information for the periods indicated:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in millions, except weighted average grant date fair value per award granted) | | 2017 | | 2016 | | 2015 |
| Weighted average grant date fair value per award granted | | $ | 21.39 |
| | $ | 15.25 |
| | $ | 21.90 |
|
| Fair value of awards vested | | 4.0 |
| | 2.8 |
| | — |
|
| Tax benefits for restricted stock compensation expense | | 0.8 |
| | 1.2 |
| | 0.5 |
|
As of December 31, 2017, the Company had $3.4 million of unrecognized compensation expense before tax related to restricted stock, which will be recognized over a weighted average period of 2.0 years.
Performance Share Units
The Company granted performance share units ("PSUs") that cliff vest after three years. The number of units that vest is determined for each grant based on the achievement of certain Company performance criteria as set forth in the award agreement and may range from zero to 200% of the target shares granted. The PSUs are settled in shares of common stock, with holders receiving one share of common stock for each PSU that vests. The fair value of PSUs is based on the closing price of the Company’s common stock on the grant date. Compensation expense for PSUs is recognized over the vesting period when it is probable the performance criteria will be achieved. As of December 31, 2017, the following PSU programs were in progress:
|
| | | | | | |
| Award Date | | PSUs Outstanding (in millions) | | Expected Vesting Threshold |
| 2016 Program | | 0.3 |
| | 125.0 | % |
| 2017 Program | | 0.2 |
| | 100.0 | % |
| Total PSUs outstanding | | 0.5 |
| | |
A summary of activity for all Welbilt performance share units for the year ended December 31, 2017 is as follows:
|
| | | | | | | |
| (in millions, except weighted average grant date fair value) | | Performance Share Units | | Weighted
Average
Grant Date Fair Value |
| Unvested as of January 1, 2017 | | 0.5 |
| | $ | 16.88 |
|
| Granted | | 0.3 |
| | 18.67 |
|
| Vested | | (0.2 | ) | | 20.52 |
|
| Forfeited | | (0.1 | ) | | 16.60 |
|
| Unvested as of December 31, 2017 | | 0.5 |
| | $ | 16.87 |
|
The following represents PSU compensation information for the periods indicated:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in millions, except weighted average grant date fair value per award granted) | | 2017 | | 2016 | | 2015 |
| Weighted average grant date fair value per award granted | | $ | 18.70 |
| | $ | 14.97 |
| | $ | — |
|
| Fair value of awards vested | | 3.0 |
| | 3.6 |
| | 6.0 |
|
| Tax benefits for PSU compensation expense | | 1.0 |
| | 0.8 |
| | 0.1 |
|
As of December 31, 2017, the Company had $5.5 million of unrecognized compensation expense before tax related to PSUs, which will be recognized over a weighted average period of 1.8 years.
17. Contingencies and Significant Estimates
As of December 31, 2017 and 2016, the Company held reserves for environmental matters related to certain locationsof its current and former facilities as of both December 31, 2019 and 2018 of approximately $0.8$0.7 million, which are included in "Accrued expenses and $0.5 million, respectively.other liabilities" in the Consolidated Balance Sheets. At certain of the Company's other facilities, it has identified potential contaminants in the soil and groundwater.groundwater have been identified. The ultimate cost of any required remediation required will depend upon the results of future investigation.investigation and is not reasonably estimable. Based upon available information, the Company does not expect the ultimate costs of any required remediation at any of these locationsfacilities will have a material adverse effect on its financial condition, results of operations or cash flows individually or in the aggregate.
The Company believes that it has obtained and is in substantial compliance with those material environmental permits and approvals necessary to conduct its various businesses. Based on the facts presently known, the Company does not expect environmental compliance costs to have a material adverse effect on its financial condition, results of operations or cash flows.
As of December 31, 2017, various product-related lawsuits were pending. To the extent permitted under applicable law, all of these are insured with self-insurance retention levels. The Company's self-insurance retention levels vary by business, and have fluctuated over the last ten years. The current range of our self-insured retention levels is $0.1 million to $0.3 million per occurrence and $1.3 million in the aggregate. As of December 31, 2017, the largest self-insured retention level for new occurrences currently maintained by the Company is $0.3 million per occurrence and applies to product liability claims for the hot category products manufactured in the United States.
Product liability reserves are included in "Accrued expenses and other liabilities" in the consolidated balance sheets and were $1.4 million and $2.3 million at December 31, 2017 and 2016, respectively; $0.4 million and $0.7 million, respectively, was reserved specifically for
actual cases, and $1.0 million and $1.6 million, respectively, for claims incurred but not reported, which were estimated using actuarial methods. Based on our experience in defending product liability claims, management believes the current reserves are adequate for estimated case resolutions on aggregate self-insured claims and insured claims. Any recoveries from insurance carriers are dependent upon the legal sufficiency of claims and solvency of insurance carriers.
At December 31, 2017 and 2016, the Company had reserved $24.1 million and $27.9 million, respectively, for warranty claims expected to be paid out within a year or less, which are included in "Product warranties" in the consolidated balance sheets. At December 31, 2017 and 2016, the Company had reserved $11.9 million and $8.4 million, respectively, for warranty claims expected to be paid out after a year, which are included in "Other long-term liabilities" in the consolidated balance sheets. Certain of these warranty and other related claims involve matters in dispute that ultimately are resolved by negotiations, arbitration or litigation. See Note 18, "Product Warranties," for further information.
It is reasonably possible that the estimates for environmental remediation,product warranty, product liability and warrantyenvironmental remediation costs may change in the near future based upon new information that may arise or matters that are beyond the scope of the Company's historical experience. Presently, there are no reliable methods to estimate the amount of any such potential changes.
Other Contingencies
The Company is also subject to litigation, government inquiries, audits, commercial disputes, claims and other legal proceedings arising in the ordinary course of business. From time to time, the Company may be subject to audits by tax, export, customs and other governmental authorities or incur routine and non-routine fees, expenses or penalties relating to compliance with complex laws and regulations impacting the Company's business. The Company records accruals for anticipated losses related to legal and other matters, which are both probable and reasonably estimable, as well as for related legal costs as incurred. The Company believes that it has adequately accrued for legalsuch matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable and for related legal costs as incurred.of December 31, 2019 based on the best available information. In the opinion of management, the ultimate resolution of all litigationsuch legal and other matters is not expected to have, individually or in the aggregate, a material adverse effect on the Company's financial condition, results of operations or cash flows.
On December 13, 2018, a purported securities class action lawsuit was filed in the U.S. District Court for the Middle District of Florida against the Company and certain of its former executive officers. The lawsuit is captioned Schlimm v. Welbilt, Inc., et al., and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making material misstatements or omissions in certain of its periodic reports filed with the Securities and Exchange Commission relating to, among other things, the Company's business operations and the effectiveness of its internal control over financial reporting. The lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On October 17, 2019, the defendants filed a motion to dismiss the lawsuit. On February 6, 2020, the Court issued an order granting defendants motion and dismissed the Schlimm lawsuit without prejudice. The plaintiff was granted leave to file an amended complaint by March 5, 2020. On March 15, 2019, a purported stockholder derivative action was filed in the U.S. District Court for the District of Delaware against certain of the Company's current and former executive officers and directors, and the Company was named as a nominal defendant. The lawsuit is captioned Quinney v. Muehlhaeuser, et al., and alleges violation of Section 14(a) of the Securities Exchange Act of 1934 and breach of fiduciary duty, among other claims, based upon similar underlying allegations as those in the Schlimm lawsuit. The Quinney lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On June 5, 2019, the Delaware court stayed the Quinney lawsuit, pending further developments in the Schlimm lawsuit. On September 4, 2019, a purported stockholder derivative action was filed in the U.S. District Court for the Middle District of Florida against certain of the Company's current and former executive officers and directors, and the Company was named as a nominal defendant. The lawsuit is captioned The Lee S. Kosby Trust v. Muehlhaeuser, et al., and alleges violation of Section 14(a) of the Securities Exchange Act of 1934 and breach of fiduciary duty, among other claims, based upon similar underlying allegations as those in the Quinney and Schlimm lawsuits. The Kosby lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On November 4, 2019, the Florida court stayed the Kosby lawsuit, pending further developments in the Schlimm lawsuit.
The Company intends to defend vigorously against the above pending lawsuits. However, litigation is inherently uncertain, and the Company is unable to predict the outcome of these lawsuits and is unable to estimate the range of loss, if any, that could result from an unfavorable outcome. The Company also cannot provide any assurance that the ultimate resolution of each of these lawsuits will not have a material adverse effect on the Company's future results of operations or financial condition.
On June 3, 2019, f’real Foods, LLC ("f’real") filed a patent infringement lawsuit against Welbilt, Inc. in the U.S. District Court for the District of Delaware, captioned f’real Foods LLC v. Welbilt, Inc. The lawsuit alleges that the Company has willfully infringed U.S. Patent No. 7,144,150 and U.S. Patent No. 7,520,662 by manufacturing and selling three blenders: the Multiplex FreshBlender®, the Multiplex Blend In Cup® Workstation, and the MAM9904 Blend-In-Cup® - Manual Fill. On June 6, 2019, f’real filed a nearly identical patent infringement lawsuit against Fresh Blends North America, Inc. ("Fresh Blends") in the U.S. District Court for the Southern District of Florida, captioned f’real Foods LLC v. Fresh Blends North America, Inc. Welbilt intervened in that case in September 2019. In each of the Delaware and Florida actions, f’real requested that Welbilt and certain affiliates be enjoined from the allegedly infringing activity, among other requested relief, and sought monetary damages including royalties and attorneys’ fees. On December 3, 2019, the parties reached a settlement of all claims and counterclaims, which was subsequently finalized by the parties. On December 6, 2019, the Florida Court dismissed the Florida action without prejudice.
The Company has voluntarily disclosed to U.S. Customs & Border Protection ("CBP") certain errors in the declaration of imported products relating to quantity, value, classification, North American Free Trade Agreement eligibility and other matters as well as potential violations of antidumping and countervailing duties. Following such disclosures, the Company began a comprehensive review of its import practices in order to quantify the loss of revenue to CBP. The Company has completed the design of a statistical sample that is representative of its import activity and is in the process of collecting and analyzing relevant records. The Company is working diligently to provide CBP with a complete and accurate analysis and such efforts are actively ongoing. While the Company cannot predict with any certainty the outcome of this comprehensive review, based on currently known information, the Company expects to record a charge in its consolidated financial statements at the time it becomes reasonably estimable with respect to the range of potential loss that may result.
18.
14.Product Warranties
In the normal course of business, the Company provides its customers a warrantywith product warranties covering workmanship, and in some cases materials, on products manufactured by the Company. Such warrantyproduct warranties generally providesprovide that products will be free from defects for periods typically ranging from 12 months to 60 months, with certain equipment having longer-term warranties. If a product fails to comply with the Company’s warranty, the Company may be obligated, at its expense, to correct certain defectsany defect by repairing or replacing such defective products. The Company provides foraccrues an estimate of costs that may be incurred under itsthe product warranty at the time the product revenue is recognized. These costs primarily include estimates of labor and materials, as necessary, associated with repair or replacement.replacement of the products. The primary factors thatwhich affect ourthe warranty liability include the number of units shipped and historical and anticipated warranty claims. As these factors are impacted by actual experience and future expectations, the Company assesses the adequacy of its recorded warranty liability on an ongoing basis and adjusts the amountsliability as determined necessary.
BelowThe product warranty liability activity is a table summarizing the warranty activity for the years ended December 31, 2017 and 2016:as follows:
|
| | | | | | | | |
| (in millions) | | As of December 31, |
| | 2019 | | 2018 |
| Balance at the beginning of the period | | $ | 39.7 |
| | $ | 36.0 |
|
| Additions for issuance of warranties | | 42.4 |
| | 39.5 |
|
| Settlements (in cash or in kind) | | (38.5 | ) | | (35.1 | ) |
| Currency translation impact | | 0.3 |
| | (0.7 | ) |
Balance at the end of the period (1) | | $ | 43.9 |
| | $ | 39.7 |
|
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Balance at the beginning of the period | | $ | 36.3 |
| | $ | 40.0 |
|
| Accruals for warranties issued | | 33.3 |
| | 22.1 |
|
| Settlements made (in cash or in kind) | | (34.4 | ) | | (25.1 | ) |
| Currency translation impact | | 0.8 |
| | (0.7 | ) |
Balance at the end of the period (1) | | $ | 36.0 |
| | $ | 36.3 |
|
(1) Long-term product warranty liabilities are included in "Other long-term liabilities" and totaled $11.9$10.6 million and $8.4$11.8 million at December 31, 20172019 and 2016,2018, respectively.
The Company also offerssells extended warranties, which are recorded as deferred revenue and are amortized to income"Net sales" on a straight-line basis over a period equal to that of the warranty period. TotalThe short-term portion of deferred revenue on extended warranties, included in "Accrued expenses and other current liabilities" and "Other long-term liabilities" in the consolidated balance sheets at December 31, 2017 and 2016 was $6.7 million and $6.1 million, respectively.
19. Restructuring
Certain restructuring activities have been undertaken to realize cost synergies and rationalize the cost structure of the Company. In 2016, the Company recorded restructuring costs primarily related to a company-wide reduction in force and the closing of its Cleveland, Singapore and Sellersburg facilities. In 2017, the Company recorded additional amounts related primarily to one-time expenses for severance and other related benefits upon the retirement of two executive officers during the first half of 2017, the August 2017 RIF during the third quarter of 2017 and the reduction in force in EMEA ("December 2017 RIF") during the fourth quarter of 2017.
The following is a rollforward of all restructuring activities related to the Company for the year ended December 31, 2017 and 2016:
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Balance at January 1 | | $ | 14.4 |
| | $ | 16.8 |
|
| Restructuring charges | | 10.8 |
| | 2.5 |
|
| Use of reserve | | (6.2 | ) | | (4.9 | ) |
Non-cash adjustment (1) | | (2.9 | ) | | — |
|
| Balance at December 31 | | $ | 16.1 |
| | $ | 14.4 |
|
(1) This non-cash adjustment represents the non-cash stock-based compensation expense recognized during the year ended December 31, 2017 resulting from the accelerated vesting of certain stock options, restricted stock units and performance share units upon the retirement of two executive officers and in connection with the August 2017 RIF.
As of December 31, 2017 and 2016, the short-term portion of the liability of $5.0 million and $3.3 million, respectively, was reflected in "Accrued expenses and other liabilities" in the consolidated balance sheets. As ofConsolidated Balance Sheets at December 31, 20172019 and 2016, $11.12018, was $1.8 million was reflectedand $2.2 million, respectively. The long-term portion of deferred revenue on warranties included in "Other long-term liabilities" in the consolidated balance sheets and relates to the long-term portionConsolidated Balance Sheets as of the pension withdrawal obligation incurred in connection with the reorganization and plant restructuring of the Company's former Lincoln Foodservice operations. See Note 20, "Employee Benefit Plans," for further details regarding this obligation.
During the fourth quarter of 2015 and through the first half of 2016, the Company relocated its manufacturing, warehousing and distribution operations conducted at its Cleveland, Ohio plant and subsequently closed this facility. The Company sold the related building for a net sales price of $2.2 million in April 2017 and recognized a loss on the sale of the building of $0.4 million during the second quarter of 2017, which is included in "(Gain) loss from impairment or disposal of assets — net" in the consolidated statements of operations. These actions relate entirely to the Company's Americas reportable segment.
In September 2016, the Company closed the Singapore plant and transferred the manufacturing to its plants in Prachinburi, Thailand and Foshan, China. In July 2017, the Company sold the related building for a net sales price of $6.2 million. The Company recognized a $3.8 million gain from the sale of the building during the third quarter of 2017, which is included in "(Gain) loss from impairment or disposal of assets — net" in the consolidated statements of operations.
In the first quarter of 2017, the Company ceased the manufacturing at its Sellersburg Indiana plant and products manufactured were transferred to its plants in Tijuana and Monterrey, Mexico. The Company subsequently closed the Sellersburg plant and in June 2017, the Company sold the related building for a net sales price of $4.8 million and recognized a gain on the sale of the building of $1.1 million during the second quarter of 2017, which is included in "(Gain) loss from impairment or disposal of assets — net" in the consolidated statements of operations.
The Company incurred total restructuring costs associated with the aforementioned plant closures of approximately $3.8 million. Of this amount, $0.8 million, $1.7 million and $1.3 million were recorded during the years endedboth December 31, 2017, 20162019 and 2015, respectively. These charges are presented separately in "Restructuring expense" in the consolidated statements of operations.2018 was $3.8 million.
Effective January 2, 2017, Maurice Jones, the Company's former Senior Vice President, General Counsel and Secretary, retired from the Company and pursuant to the terms of his employment agreement, the Company is required to provide severance and other related benefits over the subsequent 18-month period. The Company incurred a total one-time cost of $2.2 million, including $1.1 million of additional stock-based compensation expense resulting from the accelerated vesting of certain stock options and restricted stock units, that was recorded during the first quarter of 2017 in "Restructuring expense" in the consolidated statements of operations. Mr. Jones will also receive the amount of vested benefits of $2.5 million plus interest at the rate of 9.0% from the Company’s Supplemental Executive Retirement Plan (“SERP”) that will be paid over five annual installments.
Effective May 5, 2017, John Stewart, the Company's Senior Vice President and Chief Financial Officer, retired from the Company. Pursuant to the terms of his employment agreement, the Company is required to provide severance and other related benefits over the next 12-month period. The Company incurred a total one-time cost of $2.5 million, including $1.5 million of additional stock-based compensation resulting from the accelerated vesting of certain stock options and restricted stock units. Of this amount, $1.5 million and $1.0 million were recognized during the first and second quarters of 2017, respectively, in "Restructuring expense" in the consolidated statements of operations.
In August 2017, the Company completed the August 2017 RIF to optimize and enhance operational efficiency primarily in the Americas region. As a result, the Company incurred severance and related costs of $3.6 million, including $0.3 million of additional stock-based compensation expense resulting from the accelerated vesting of certain stock options, restricted stock units and performance share units. Of the total $3.6 million, $2.9 million was recognized during the third quarter of 2017 and the remaining $0.7 million was recognized in the fourth quarter of 2017 in "Restructuring expense" in the consolidated statements of operations.
In December 2017, the Company completed the December 2017 RIF to optimize and enhance operational efficiency in the EMEA region. The Company incurred severance and related costs related to the December 2017 RIF of $1.7 million, which was recognized during the fourth quarter of 2017 in "Restructuring expense" in the consolidated statements of operations.
20. 15.Employee Benefit Plans
The Company maintains several different retirement plans for certain employees in each of its operations in the Americas, EMEA and APAC. The current plans are based largely upon benefit plans that MTW maintained prior to the Spin-Off.geographic business segments. The Company has established a Retirement Plan Committee to manage the operations and administration of all retirement plans and related trusts. The details of these retirement plans are described in further detail below.
Defined Benefit Plans
Prior to December 31, 2015, MTW maintained two defined benefit pension plans for its eligible employees and retirees: (1) The Manitowoc Company, Inc. Pension Plan (the "MTW Pension Plan"); and (2) The Manitowoc Company, Inc. Supplemental Executive Retirement Plan (the "MTW SERP"). The MTW Pension Plan and the MTW SERP (together, the "MTW DB Plans") covered eligible employees of MTW, including MTW's crane business and foodservice business. The MTW Pension Plan is frozen to new participants and future benefit accruals.
Effective January 1, 2016, a portion of each MTW DB Plan was spun off to create separate plans for MTW's foodservice business, for which "MFS" was substituted with "Welbilt" in the following plans due to the Name Change: (1) the Welbilt Pension Plan and (2) the Welbilt Supplemental Executive Retirement Plan (the "Welbilt SERP"). The Welbilt Pension Plan and the Welbilt SERP (together, the "Welbilt DB Plans") were initially sponsored by Manitowoc FSG U.S. Holding, LLC (name of the entity changed to Welbilt FSG U.S. Holdings, LLC effective April 19, 2017). The Company assumed sponsorship of the Welbilt DB Pension Plans on March 4, 2016. The Company no longer participates in the MTW DB Plans. The Welbilt DB Plans are substantially similar to the former MTW DB Plans.
When comparing the current financial information to financial statements for prior years, it is important to distinguish between: (1) the defined benefit plans that also covered employees of MTW and other MTW subsidiaries (the "Shared Plans"); and (2) the defined benefit plans which are sponsored directly by the Company or its subsidiaries and offered only to the Company's employees or retirees (the "Direct Plans").
The Company accountedsponsors and maintains defined benefit retirement plans ("Pension Plans") and postretirement health and other plans ("Postretirement Health and Other Plans") (collectively "Defined Benefit Plans") for certain retired and resigned employees. Benefits under the Shared Plans for the purposeemployee retirement plans are primarily based on years of the consolidated financial statements as a multiemployer plan. Accordingly, the Company did not record an asset or liability to recognize the funded status of the Shared Plans. However, the costs associated with these Shared Plans of $0.9 millionservice and $1.6 million forcompensation during the years ended December 31, 2016immediately preceding retirement. The current plans are based largely upon benefit plans MTW maintained prior to the Spin-Off and 2015, respectively, are reflected in the consolidated statements of operations. This expense reflects an approximationgenerally closed to new participants.
The funded and unfunded positions of the Company's portion of the costs of the SharedDefined Benefit Plans including costs attributable to MTW corporate employees, which have been allocated to the Company based on a methodology deemed reasonable by management. Because the Company no longer participated in the MTW DB Plans as of March 4, 2016, no such costs wereare recorded in the year ended December 31, 2017.
DuringConsolidated Balance Sheets and the year ended December 31, 2016, Welbilt assumed certain pension obligations of $55.6 million and related plan assets of $34.1 million, and certain postretirement health obligations of $6.8 million, to newly-created single employer plans for the Company's employees and certain other Company-sponsored pension plans, as described above. This net transfer of approximately $28.3 million was treated as a non-cash transaction between the Company and MTW. The Company also assumed after-tax deferred gains of $6.1 million related to these plans, which were recorded in "Accumulated other comprehensive loss."
Direct Plans
The Direct Plans are accounted for as defined benefit plans. Accordingly, the funded and unfunded position of each Direct Plan is recorded in the consolidated balance sheets and the income and expenses are recorded in the consolidated statementsConsolidated Statements of operations.Operations. Actuarial gains and losses that have not yet been recognized throughin income are recorded in "Accumulated other comprehensive loss"AOCI until theysuch amounts are amortized as a component of the net periodic benefit cost. The determination of the benefit obligations and the recognition of expenses related to each of the DirectDefined Benefit Plans are dependent on various assumptions. There have been no changes made to the valuation techniques and inputs used to measure fair value. The majormost significant assumptions primarily relate toare the discount rates and long-term expected rates of return on plan assets and future compensation increases.each of the plan's assets. Management develops each assumption using relevant Company experience in conjunction with market-related data for each individual country in which suchthe plans exist.
The components of periodic benefit costs for the DirectCompany's Defined Benefit Plans for the years ended December 31, 2017, 2016 and 2015 are as follows:
| | | | | Pension Plans | | Postretirement Health
and Other | |
| (in millions, except percentage data) | | | Pension Plans | | Postretirement Health
and Other Plans |
| | Years Ended December 31, | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Service cost - benefits earned during the year | | $ | — |
| | $ | 0.2 |
| | $ | 0.4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest cost of projected benefit obligation | | 5.4 |
| | 8.3 |
| | 6.5 |
| | 0.3 |
| | 0.4 |
| | 0.1 |
| | 5.2 |
| | 5.2 |
| | 5.4 |
| | 0.2 |
| | 0.3 |
| | 0.3 |
|
| Expected return on assets | | (6.2 | ) | | (6.2 | ) | | (5.4 | ) | | — |
| | — |
| | — |
| | (4.7 | ) | | (5.8 | ) | | (6.2 | ) | | — |
| | — |
| | — |
|
| Amortization of actuarial net loss (gain) | | 2.0 |
| | 2.5 |
| | 1.2 |
| | — |
| | — |
| | (0.1 | ) | |
| Amortization of prior service cost | | | — |
| | — |
| | — |
| | (0.2 | ) | | — |
| | — |
|
| Amortization of actuarial net loss | | | 2.5 |
| | 2.2 |
| | 2.0 |
| | 0.3 |
| | 0.2 |
| | — |
|
| Settlement loss recognized | | | 1.2 |
| | 2.4 |
| | — |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost | | $ | 1.2 |
| | $ | 4.8 |
| | $ | 2.7 |
| | $ | 0.3 |
| | $ | 0.4 |
| | $ | — |
| | $ | 4.3 |
| | $ | 4.1 |
| | $ | 1.2 |
| | $ | 0.3 |
| | $ | 0.5 |
| | $ | 0.3 |
|
| Weighted average assumptions: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Discount rate | | 3.1 | % | | 3.9 | % | | 3.5 | % | | 3.5 | % | | 3.9 | % | | 3.7 | % | | 3.3 | % | | 2.8 | % | | 3.1 | % | | 3.8 | % | | 3.2 | % | | 3.5 | % |
| Expected return on plan assets | | 3.6 | % | | 3.7 | % | | 3.5 | % | | N/A |
| | N/A |
| | N/A |
| | 3.1 | % | | 3.2 | % | | 3.6 | % | | N/A |
| | N/A |
| | N/A |
|
| Rate of compensation increase | | — | % | | 4.0 | % | | 4.0 | % | | 1.5 | % | | 1.5 | % | | 1.5 | % | | 2.0 | % | | 2.0 | % | | — | % | | 3.0 | % | | 1.5 | % | | 1.5 | % |
Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants.
To develop the expected long-term rate of return on assets assumptions, the Company consideredconsiders the historical returns and future expectations for returns in each asset class, as well as targeted asset allocation percentages within the asset portfolios.
During the first quarter of 2019, the Company took various actions to settle a portion of its U.K. pension portfolio.obligations. These actions resulted in a reduction in accrued pension obligations of approximately $5.5 million and a non-cash loss of approximately $1.2 million for the accelerated recognition of unamortized losses, which is included in "Other expense — net" in the Consolidated Statements of Operations for the year ended December 31, 2019.
In October 2018, the Company completed the purchase of a group annuity contract using assets from a U.S.-based pension plan. Under the U.S.-based pension plan, accrued pension obligations of $7.9 million for certain participants receiving payments from the plan were transferred to an insurer. This transaction was an irrevocable action that unconditionally transferred the legal obligation to provide these payments to the insurer, as well as the risks attributable to the obligation. As a result, the Company recorded a non-cash settlement loss of $2.4 million, related to the accelerated recognition of unamortized losses, which is included in "Other expense — net" in the Consolidated Statements of Operations for the year ended December 31, 2018.
The following is a reconciliation of the changes in benefit obligation, the changes in plan assets and the funded status of the Direct Plans asCompany's Defined Benefit Plans:
|
| | | | | | | | | | | | | | | | |
| (in millions, except percentage data) | | Pension Plans | | Postretirement Health
and Other Plans |
| | As of December 31, | | As of December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Change in Benefit Obligations: | | |
| | |
| | |
| | |
|
| Benefit obligation, beginning of year | | $ | 186.5 |
| | $ | 216.8 |
| | $ | 7.3 |
| | $ | 10.1 |
|
| Service cost | | 0.1 |
| | 0.1 |
| | — |
| | — |
|
| Interest cost | | 5.2 |
| | 5.2 |
| | 0.2 |
| | 0.3 |
|
| Participant contributions | | — |
| | — |
| | 0.3 |
| | 0.7 |
|
| Plan settlements | | (5.5 | ) | | (7.9 | ) | | — |
| | — |
|
| Plan amendments | | — |
| | (0.6 | ) | | (0.1 | ) | | (1.5 | ) |
| Acquisition | | — |
| | 0.6 |
| | — |
| | — |
|
| Actuarial loss/(gain) | | 12.7 |
| | (9.0 | ) | | 2.0 |
| | 0.5 |
|
| Currency translation adjustment | | 5.0 |
| | (7.4 | ) | | — |
| | (0.1 | ) |
| Benefits paid | | (10.6 | ) | | (11.3 | ) | | (2.1 | ) | | (2.7 | ) |
| Benefit obligation, end of year | | $ | 193.4 |
| | $ | 186.5 |
| | $ | 7.6 |
| | $ | 7.3 |
|
| Change in Plan Assets: | | |
| | |
| | |
| | |
|
| Fair value of plan assets, beginning of year | | $ | 152.6 |
| | $ | 176.7 |
| | $ | — |
| | $ | — |
|
| Actual return on plan assets | | 16.5 |
| | (6.8 | ) | | — |
| | — |
|
| Employer contributions | | 8.3 |
| | 8.4 |
| | 1.8 |
| | 2.0 |
|
| Participant contributions | | — |
| | — |
| | 0.3 |
| | 0.7 |
|
| Plan settlements | | (5.5 | ) | | (7.9 | ) | | — |
| | — |
|
| Currency translation adjustment | | 5.0 |
| | (6.7 | ) | | — |
| | — |
|
| Acquisition | | — |
| | 0.2 |
| | — |
| | — |
|
| Benefits paid | | (10.6 | ) | | (11.3 | ) | | (2.1 | ) | | (2.7 | ) |
| Fair value of plan assets, end of year | | $ | 166.3 |
| | $ | 152.6 |
| | $ | — |
| | $ | — |
|
Unfunded status (1) | | $ | (27.1 | ) | | $ | (33.9 | ) | | $ | (7.6 | ) | | $ | (7.3 | ) |
| Weighted-Average Assumptions: | | |
| | |
| | |
| | |
|
| Discount rate | | 2.4 | % | | 3.3 | % | | 2.6 | % | | 3.8 | % |
| Rate of compensation increase | | 1.8 | % | | 2.0 | % | | 3.0 | % | | 3.0 | % |
(1) As of both December 31, 20172019 and 2016:
|
| | | | | | | | | | | | | | | | |
| | | Pension Plans | | Postretirement
Health
and Other |
| (in millions, except percentage data) | | 2017 | | 2016 | | 2017 | | 2016 |
| Change in Benefit Obligation | | |
| | |
| | |
| | |
|
| Benefit obligation, beginning of year | | $ | 203.9 |
| | $ | 177.2 |
| | $ | 9.0 |
| | $ | 3.2 |
|
| Service cost | | — |
| | 0.2 |
| | — |
| | — |
|
| Interest cost | | 5.4 |
| | 8.3 |
| | 0.3 |
| | 0.4 |
|
| Participant contributions | | — |
| | — |
| | 0.6 |
| | 0.4 |
|
| Plan combinations | | — |
| | 55.6 |
| | — |
| | 6.8 |
|
| Actuarial loss | | 7.7 |
| | 4.1 |
| | 1.7 |
| | — |
|
| Currency translation adjustment | | 13.8 |
| | (29.3 | ) | | 0.1 |
| | — |
|
| Benefits paid | | (14.0 | ) | | (12.2 | ) | | (1.6 | ) | | (1.8 | ) |
| Benefit obligation, end of year | | $ | 216.8 |
| | $ | 203.9 |
| | $ | 10.1 |
| | $ | 9.0 |
|
| Change in Plan Assets | | |
| | |
| | |
| | |
|
| Fair value of plan assets, beginning of year | | $ | 163.8 |
| | $ | 147.9 |
| | $ | — |
| | $ | — |
|
| Actual return on plan assets | | 9.2 |
| | 14.1 |
| | — |
| | — |
|
| Employer contributions | | 5.4 |
| | 6.1 |
| | 1.0 |
| | 1.4 |
|
| Participant contributions | | — |
| | — |
| | 0.6 |
| | 0.4 |
|
| Plan combinations | | — |
| | 34.1 |
| | — |
| | — |
|
| Currency translation adjustment | | 12.3 |
| | (26.2 | ) | | — |
| | — |
|
| Benefits paid | | (14.0 | ) | | (12.2 | ) | | (1.6 | ) | | (1.8 | ) |
| Fair value of plan assets, end of year | | $ | 176.7 |
| | $ | 163.8 |
| | $ | — |
| | $ | — |
|
Unfunded status (1) | | $ | (40.1 | ) | | $ | (40.1 | ) | | $ | (10.1 | ) | | $ | (9.0 | ) |
| Weighted-Average Assumptions | | |
| | |
| | |
| | |
|
| Discount rate | | 2.8 | % | | 3.1 | % | | 3.2 | % | | 3.5 | % |
| Rate of compensation increase | | — | % | | — | % | | 1.5 | % | | 1.5 | % |
(1) As of December 31, 2017 and 2016,2018, the short-term portion of the pensionPension Plans obligation totaled $0.7 million$0.9 million. The short-term portion of the Postretirement Health and $0.7 million, respectively and postretirement health and other benefitOther Plans obligation totaled $1.2 million, and $1.0$1.1 million, as of December 31, 2019 and 2018, respectively. These short-term obligations are included in "Accrued expenses and other liabilities."liabilities" in the Consolidated Balance Sheets.
The primary driver of the actuarial loss in the Company's Pension Plans in 2019 within the change in benefit obligation is a result of a decrease in the discount rate assumption. The primary driver of the actuarial gain in 2018 within the change in the benefit obligation is a result of an increase in the discount rate assumption partially offset by the increase in inflation rate assumption and updated census data.
Amounts recognized in "Accumulated other comprehensive loss" as of December 31, 2017 and 2016,AOCI consist of the following:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Pension Plans | | Postretirement
Health and Other |
| | As of December 31, | | As of December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net actuarial loss | | $ | (40.0 | ) | | $ | (41.8 | ) | | $ | (4.2 | ) | | $ | (2.5 | ) |
| Prior service credit | | 0.6 |
| | 0.6 |
| | 1.5 |
| | 1.5 |
|
| Total amount recognized | | $ | (39.4 | ) | | $ | (41.2 | ) | | $ | (2.7 | ) | | $ | (1.0 | ) |
|
| | | | | | | | | | | | | | | | |
| | | Pension Plans | | Postretirement
Health and Other |
| (in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| Net actuarial loss | | $ | (44.3 | ) | | $ | (40.5 | ) | | $ | (2.2 | ) | | $ | (0.5 | ) |
| Total amount recognized | | $ | (44.3 | ) | | $ | (40.5 | ) | | $ | (2.2 | ) | | $ | (0.5 | ) |
The estimated portion of actuarial losses remaining in "Accumulated other comprehensive loss" that are expected to be amortized asAssumed health care cost trend rates have a component of net periodic benefit cost in 2018 are $2.2 million and $0.2 millionsignificant effect on the amounts reported for the pension planCompany's Postretirement Health and postretirement health and other plans, respectively.Other Plans. For measurement purposes, a 6.3%5.7% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2017.the year ended December 31, 2019. The rate was assumed to decrease gradually to 4.5% for 20372038 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.
The following table summarizes the sensitivity of ourthe Company's retirement obligations as of December 31, 2017 retirement obligations and 20172019 for retirement benefit costs of our plansthe Defined Benefit Plans and the impact of changes to changes in the key assumptions used to determine those results (in millions):
|
| | | | | | | | | | | | | | | | |
| Change in assumption: | | Estimated
(decrease) increase in 2020
pension cost | | Estimated
(decrease) increase in projected
benefit obligation for
the year ended
December 31,
2019 | | Estimated increase
(decrease) in 2020 other
postretirement benefit
costs | | Estimated
(decrease) increase in other
postretirement benefit
obligation
as of
December 31, 2019 |
| 0.5% increase in discount rate | | $ | (0.4 | ) | | $ | (11.3 | ) | | $ | — |
| | $ | (0.2 | ) |
| 0.5% decrease in discount rate | | $ | 0.4 |
| | $ | 12.2 |
| | $ | — |
| | $ | 0.2 |
|
| 0.5% increase in long-term return on assets | | $ | (0.8 | ) | | N/A |
| | N/A |
| | N/A |
|
| 0.5% decrease in long-term return on assets | | $ | 0.8 |
| | N/A |
| | N/A |
| | N/A |
|
|
| | | | | | | | | | | | | | | | |
| Change in assumption: | | Estimated increase
(decrease) in 2018
pension cost | | Estimated increase
(decrease) in projected
benefit obligation for
the year ended
December 31,
2017 | | Estimated increase
(decrease) in 2018 other
postretirement benefit
costs | | Estimated increase
(decrease) in other
postretirement benefit
obligation
for the year ended
December 31, 2017 |
| 0.5% increase in discount rate | | $ | (0.5 | ) | | $ | (14.6 | ) | | $ | — |
| | $ | (0.3 | ) |
| 0.5% decrease in discount rate | | 0.5 |
| | 16.0 |
| | — |
| | 0.3 |
|
| 0.5% increase in long-term return on assets | | (0.9 | ) | | N/A |
| | N/A |
| | N/A |
|
| 0.5% decrease in long-term return on assets | | 0.9 |
| | N/A |
| | N/A |
| | N/A |
|
| 1% increase in medical trend rates | | N/A |
| | N/A |
| | 0.1 |
| | 0.6 |
|
| 1% decrease in medical trend rates | | N/A |
| | N/A |
| | (0.1 | ) | | (0.5 | ) |
It is reasonably possible that the estimate for future retirement and health costs may change in the near future due to changes in the health care environment or changes in interest rates that may arise. Presently, there is no reliable means to estimate the amount of any such potential changes.
The weighted-average asset allocations of the pension plans at December 31, 2017 and 2016,Pension Plans asset portfolios by asset category are as follows:
|
| | | | | | |
| | | As of December 31, |
| | 2019 | | 2018 |
| Equity | | 17.8 | % | | 14.2 | % |
| Debt securities | | 33.4 | % | | 32.1 | % |
| Other | | 48.8 | % | | 53.7 | % |
|
| | | | | | |
| | | 2017 | | 2016 |
| Equity securities | | 17.6 | % | | 20.8 | % |
| Debt securities | | 34.6 | % | | 34.5 | % |
| Other | | 47.8 | % | | 44.7 | % |
| | | 100.0 | % | | 100.0 | % |
Investment Strategy
The overall objective of the Company's pension assetsPension Plans asset portfolios is to earn a rate of return over time to satisfy the benefit obligations of the pension plansPension Plans and to maintain sufficient liquidity to pay benefits and address other cash requirements of the pension fund.Pension Plans. Specific investment objectives for the Company's long-term investment strategy include reducing the volatility of pension assets relative to pension liabilities, achieving a competitive total investment return, achieving diversification between and within asset classes and managing other risks. Investment objectives for each asset class are determined based on specific risks and investment opportunities identified.
The Company reviews its long-term, strategic asset allocations annually. The Company uses various analytics to determine the optimal asset mix and considerconsiders plan liability characteristics, liquidity characteristics, funding requirements, expected rates of return and the distribution of returns. The Company identifies investment benchmarks for the asset classes in the strategic asset allocation that are market-based and investableviable where possible.
Actual allocations to each asset class vary from target allocations due to periodic investment strategy changes, market value fluctuations, the length of time it takes to fully implement investment allocation positions and the timing of benefit payments and contributions. The asset allocation is monitored and rebalanced on a monthly basis.
The actual allocations for the pension assets at December 31, 2017,Pension Plans asset portfolios and target allocations by asset class as of December 31, 2019, are as follows:
|
| | | | | | |
| | | Target Allocations | | Weighted Average Asset Allocations |
| Equity securities | | 18.2 | % | | 17.8 | % |
| Debt securities | | 39.9 | % | | 33.4 | % |
| Other | | 41.9 | % | | 48.8 | % |
|
| | | | | | |
| | | Target Allocations | | Weighted Average Asset Allocations |
| Equity securities | | 20.4 | % | | 17.6 | % |
| Debt securities | | 36.2 | % | | 34.6 | % |
| Other | | 43.4 | % | | 47.8 | % |
Risk Management
In managing the Pension Plans portfolio of plan assets, the Company reviews and manages risk associated with funded status risk, interest rate risk, market risk, counterparty risk, liquidity risk and operational risk. Liability management and asset class diversification are central to the Company's risk management approach and are integral to the overall investment strategy. Further, asset classes are constructed to achieve diversification by investment strategy, by investment manager, by industry or sector and by holding. Investment manager guidelines for publicly traded assets are specified and are monitored regularly.
Fair Value Measurements
The following table presentstables present the Company's plan assetsPension Plans asset portfolios using the three levels of the fair value hierarchy as of December 31, 2017 and 2016. The fair value hierarchy has three levelswhich are based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs.
| | | | | December 31, 2017 | |
| Assets (in millions) | | | As of December 31, 2019 |
| | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Unobservable
Inputs (Level 3) | | Total | | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Unobservable
Inputs (Level 3) | | Total |
| Cash and cash equivalents | | $ | 2.4 |
| | $ | — |
| | $ | — |
| | $ | 2.4 |
| | $ | 1.0 |
| | $ | — |
| | $ | — |
| | $ | 1.0 |
|
| Insurance group annuity contracts | | — |
| |
|
| | 74.6 |
| | 74.6 |
| | — |
| | — |
| | 69.0 |
| | 69.0 |
|
| Common/collective trust funds — Government, corporate and other non-government debt | | — |
| | 63.2 |
| | — |
| | 63.2 |
| | — |
| | 55.5 |
| | — |
| | 55.5 |
|
| Common/collective trust funds — Corporate equity | | — |
| | 30.4 |
| | — |
| | 30.4 |
| | — |
| | 29.5 |
| | — |
| | 29.5 |
|
| Common/collective trust funds — Customized strategy | | — |
| | 6.1 |
| | — |
| | 6.1 |
| | — |
| | 11.3 |
| | — |
| | 11.3 |
|
| Total | | $ | 2.4 |
| | $ | 99.7 |
| | $ | 74.6 |
| | $ | 176.7 |
| | $ | 1.0 |
| | $ | 96.3 |
| | $ | 69.0 |
| | $ | 166.3 |
|
|
| | | | | | | | | | | | | | | | |
| Assets (in millions) | | As of December 31, 2018 |
| | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Unobservable
Inputs (Level 3) | | Total |
| Cash and cash equivalents | | $ | 6.1 |
| | $ | — |
| | $ | — |
| | $ | 6.1 |
|
| Insurance group annuity contracts | | — |
| | — |
| | 65.6 |
| | 65.6 |
|
| Common/collective trust funds — Government, corporate and other non-government debt | | — |
| | 49.0 |
| | — |
| | 49.0 |
|
| Common/collective trust funds — Corporate equity | | — |
| | 21.7 |
| | — |
| | 21.7 |
|
| Common/collective trust funds — Customized strategy | | — |
| | 10.2 |
| | — |
| | 10.2 |
|
| Total | | $ | 6.1 |
| | $ | 80.9 |
| | $ | 65.6 |
| | $ | 152.6 |
|
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2016 |
| Assets (in millions) | | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Unobservable
Inputs (Level 3) | | Total |
| Cash and cash equivalents | | $ | 1.0 |
| | $ | — |
| | $ | — |
| | $ | 1.0 |
|
| Insurance group annuity contracts | | — |
| | — |
| | 72.2 |
| | 72.2 |
|
| Common/collective trust funds — Government, corporate and other non-government debt | | — |
| | 51.6 |
| | — |
| | 51.6 |
|
| Common/collective trust funds — Corporate equity | | — |
| | 34.1 |
| | — |
| | 34.1 |
|
| Common/collective trust funds — Customized strategy | | — |
| | 4.9 |
| | — |
| | 4.9 |
|
| Total | | $ | 1.0 |
| | $ | 90.6 |
| | $ | 72.2 |
| | $ | 163.8 |
|
Cash equivalents and other short-term investments, which are used to pay benefits, are primarily held in registered money market funds whichand are valued using a market approach based on the quoted market prices of identical instruments. Other cash equivalent and short-term investments are valued daily by the fund using a market approach with inputs that include quoted market prices for similar instruments.
Insurance group annuity contracts are valued at the present value of the future benefit payments owed by the insurance company to the plans’ participants.
Common/collective trust funds are typically common or collective trusts valued at their net asset values that are calculated by the investment manager or sponsor of the fund and have daily or monthly liquidity.
A reconciliation of the fair valuesvalue measurements of planthe Pensions Plans portfolio of assets using significant unobservable inputs (Level 3) from the beginning of the year to the end of the year is as follows:
|
| | | | | | | | |
| (in millions) | | Insurance Contracts
Years Ended December 31, |
| | 2019 | | 2018 |
| Beginning Balance | | $ | 65.6 |
| | $ | 74.6 |
|
| Acquisition | | — |
| | 0.2 |
|
| Contributions | | 0.1 |
| | 0.1 |
|
| Actual return on assets | | 5.1 |
| | (1.2 | ) |
| Benefit payments | | (4.4 | ) | | (4.6 | ) |
| Foreign currency impact | | 2.6 |
| | (3.5 | ) |
| Ending Balance | | $ | 69.0 |
| | $ | 65.6 |
|
|
| | | | | | | | |
| | | Insurance Contracts
Year Ended December 31, |
| (in millions) | | 2017 | | 2016 |
| Beginning Balance | | $ | 72.2 |
| | $ | 89.9 |
|
| Actual return on assets | | — |
| | 2.5 |
|
| Benefit payments | | (4.6 | ) | | (4.8 | ) |
| Foreign currency impact | | 7.0 |
| | (15.4 | ) |
| Ending Balance | | $ | 74.6 |
| | $ | 72.2 |
|
The expected 2018 contributions for pension plans are as follows: the minimum contribution for 20182020 for the Pension Plans is $8.4$9.6 million with no planned discretionary or non-cash contributions. Expected companyThe expected Company paid claims for the postretirement healthPostretirement Health and life insurance plansOther Plans are $1.3$1.2 million for 2018.2020.
Projected benefit payments from the plansDefined Benefit Plans as of December 31, 20172019 are estimated as follows:
|
| | | | | | | | |
| (in millions) | | Pension Plans | | Postretirement
Health and Other |
| Year ending December 31: | | | | |
| 2020 | | $ | 10.8 |
| | $ | 1.2 |
|
| 2021 | | 10.8 |
| | 1.2 |
|
| 2022 | | 10.8 |
| | 1.2 |
|
| 2023 | | 10.8 |
| | 1.0 |
|
| 2024 | | 10.8 |
| | 0.8 |
|
| 2025-2029 | | 50.8 |
| | 2.0 |
|
| Total | | $ | 104.8 |
| | $ | 7.4 |
|
|
| | | | | | | | |
| (in millions) | | Pension Plans | | Postretirement
Health and Other |
| 2018 | | $ | 10.9 |
| | $ | 1.3 |
|
| 2019 | | 11.0 |
| | 1.3 |
|
| 2020 | | 11.2 |
| | 1.2 |
|
| 2021 | | 11.2 |
| | 1.2 |
|
| 2022 | | 11.2 |
| | 1.2 |
|
| 2023-2027 | | 54.7 |
| | 3.4 |
|
The fair value of planthe Pension Plans' portfolio of assets for which the accumulated benefit obligation is in excess of the plan assets as of December 31, 2017 and 2016 is as follows:
|
| | | | | | | | |
| (in millions) | | Pension Plans |
| | As of December 31, |
| | 2019 | | 2018 |
| Projected benefit obligation | | $ | 193.4 |
| | $ | 186.5 |
|
| Accumulated benefit obligation | | $ | 193.4 |
| | $ | 186.5 |
|
| Fair value of plan assets | | $ | 166.3 |
| | $ | 152.6 |
|
|
| | | | | | | | |
| | | Pension Plans |
| (in millions) | | 2017 | | 2016 |
| Projected benefit obligation | | $ | 216.8 |
| | $ | 203.9 |
|
| Accumulated benefit obligation | | 216.8 |
| | 203.9 |
|
| Fair value of plan assets | | 176.7 |
| | 163.8 |
|
The measurement date for all plansthe Defined Benefit Plans is December 31, 2017.2019.
The Company, through its former Lincoln Foodservice operation, participated in a multiemployer defined benefit pension plan under a collective bargaining agreement that covered certain of its union-represented employees. In 2013, with the finalization of the reorganization and plant restructuring that affected the Lincoln Foodservice operation, the Company was deemed to have effectively withdrawn its participation in the multiemployer defined benefit pension plan. This withdrawal obligation is partincluded as a component of the restructuring accrualliability in the consolidated balance sheetsConsolidated Balance Sheets as described in Note 19, "Restructuring.16, "Business Transformation Program and Restructuring." The withdrawal obligation totaled $17.5 million, of which $12.2$9.9 million and $13.1$11.3 million were outstanding as of December 31, 20172019 and 2016, respectively, and2018, respectively. The remaining withdrawal obligation is payable in quarterly installments of principal and accrued interest totaling $0.5 million through April 2026, which includes both principal and accrued interest.2026. As the Company was deemed to have effectively withdrawn its participation in this plan in 2013, no further contributions werehave been made to the plan.plan since that date.
Defined Contribution Plans
Prior to December 31, 2015, MTW maintained threeThe Company maintains and sponsors 3 defined contribution retirement plans for its eligible employees and retirees: (1) The Manitowoc Company, Inc.the Welbilt 401(k) Retirement Plan (the "MTW 401(k) Retirement Plan"); (2) The Manitowoc Company, Inc. Retirement Savings Plan (the "MTW Retirement Savings Plan"); and (3) The Manitowoc Company, Inc. Deferred Compensation Plan (the "MTW Deferred Compensation Plan"). The MTW 401(k) Retirement Plan, the MTW Retirement Savings Plan and the MTW Deferred Compensation Plan (together, the "MTW DC Plans") covered eligible employees of MTW, including MTW's crane business and foodservice business.
Effective January 1, 2016, a portion of each MTW DC Plan was spun off to create separate plans for MTW's Foodservice business: for which "MFS" was substituted with "Welbilt" in the following plans due to the Name Change (1) the Manitowoc Foodservice 401(k) Retirement Plan (the "Welbilt 401(k) Retirement Plan");Plan; (2) the Welbilt Retirement Savings Plan and (3) the Welbilt Foodservice Deferred Compensation Plan, (the "Welbilt Deferred Compensation Plan"). The each of which is further discussed below.
Welbilt 401(k) Retirement Plan the Welbilt Retirement Savings Plan and the Welbilt Deferred Compensation Plan (together, the "Welbilt DC Plans") were initially sponsored by Manitowoc FSG U.S. Holding, LLC. Welbilt assumed sponsorship of the Welbilt DC Pension Plans on March 4, 2016. Welbilt no longer participates in the MTW DC Plans. The Welbilt DC Plans are substantially similar to the former MTW DC Plans.
Welbilt 401(k) Retirement PlanThe Welbilt 401(k) Retirement Plan is a tax-qualified retirement plan that is available to substantially all non-union U.S. employees of Welbilt, its subsidiaries and related entities.the Company.
Welbilt Retirement Savings Plan
The Welbilt Retirement Savings Plan is a tax-qualified retirement plan that is available to certain collectively bargained U.S. employees of Welbilt, its subsidiaries and related entities.
For both plans mentioned above,the Welbilt 401(k) Retirement Plan and the Welbilt Retirement Savings Plan, the Company's portion of total costsexpenses incurred underfor these plans were $2.8was $4.4 million, $2.0$4.0 million, and $1.5$2.8 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
Welbilt Deferred Compensation Plan
The Welbilt Deferred Compensation Plan is an unfunded, non-tax-qualified supplemental deferred compensation plan for highly compensated and key management employees and for directors thatwhich allows participants to defer a portion of their compensation. The Company utilizes a rabbi trust to hold assets intended to satisfy the Company's obligations under the deferred compensation plan. The rabbi trust restricts the Company's use and access to the assets held but is subject to the claims of the Company's general creditors. As of December 31, 2017,2019, the fair value of the investments held in the rabbi trust was $3.8 million, Company stock held in trust was $0.4 million, at cost, and the related liability was $4.2 million. As of December 31, 2018, the fair value of the investments held in trust was $5.1$4.2 million, Company stock held in trust was $0.2$0.3 million at cost, and the related liability was $5.3$4.5 million.
16.Business Transformation Program and Restructuring
Business Transformation Program
During the first quarter of 2019, the Company initiated a comprehensive operational review to validate the Company's long-term growth and margin targets and to refine the Company's execution plans, which culminated in launching the Business Transformation Program ("Transformation Program") in May 2019. The Transformation Program is structured in multiple phases extending through 2021 and is focused on specific areas of opportunity including strategic sourcing, manufacturing facility workflow redesign, distribution and administrative process efficiencies and optimizing the Company's global brand platforms. For the year ended December 31, 2019, the Transformation Program costs have consisted primarily of fees for consulting services.
The components of Transformation Program expense incurred for the year ended December 31, 2019 are as follows:
|
| | | | |
| (in millions) | | |
| Transformation Program expense: | | |
| Cost of sales | | $ | 2.0 |
|
| Selling, general and administrative expenses | | 33.3 |
|
| Total | | $ | 35.3 |
|
Restructuring
The Company periodically takes action to improve operating efficiencies, typically in connection with recognizing cost synergies and rationalizing the cost structure of the Company. These actions generally include facility rationalization, headcount reductions and organizational integration activities resulting from discrete restructuring events, which are supported by approved plans for workforce reductions.
The Company's restructuring activity and balance of the restructuring liability is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2019 Plans | | 2018 and Previous Plans | | |
| | Workforce reductions | | Other | | Workforce reductions | | Pension withdrawal obligation | | Total |
| Restructuring liability as of December 31, 2017 | | $ | — |
| | $ | — |
| | $ | 3.9 |
| | $ | 12.2 |
| | $ | 16.1 |
|
| Restructuring activities | | — |
| | — |
| | 6.0 |
| | — |
| | 6.0 |
|
| Cash payments | | — |
| | — |
| | (7.6 | ) | | (1.1 | ) | | (8.7 | ) |
Non-cash adjustments (1) | | — |
| | — |
| | (0.3 | ) | | — |
| | (0.3 | ) |
| Restructuring liability as of December 31, 2018 | | — |
| | — |
| | 2.0 |
| | 11.1 |
| | 13.1 |
|
| Restructuring activities | | 9.6 |
| | 0.4 |
| | (0.2 | ) | | — |
| | 9.8 |
|
| Cash payments | | (3.8 | ) | | — |
| | (1.6 | ) | | (1.2 | ) | | (6.6 | ) |
Non-cash adjustments (1) | | (1.0 | ) | | (0.4 | ) | | — |
| | — |
| | (1.4 | ) |
| Restructuring liability as of December 31, 2019 | | $ | 4.8 |
| | $ | — |
| | $ | 0.2 |
| | $ | 9.9 |
| | $ | 14.9 |
|
(1) Non-cash adjustments primarily consist of stock-based compensation resulting from the accelerated vesting of certain stock awards, inventory write-downs and accelerated depreciation.
As of December 31, 2019 and 2018, the current portion of the restructuring liability was $6.3 million and $3.0 million, respectively, and was included in "Accrued expenses and other liabilities" in the Consolidated Balance Sheets. As of December 31, 2019 and 2018, the long-term portion of the restructuring liability was $8.6 million and $10.1 million, respectively, and was included in "Other long-term liabilities" in the Consolidated Balance Sheets. As of both December 31, 2019 and 2018, the long-term portion of the restructuring liability is primarily related to a pension withdrawal obligation incurred in connection with the reorganization and plant restructuring of one of the Company's former operating entities. See Note 15, "Employee Benefit Plans," for further discussion of the pension withdrawal obligation.
The Company's restructuring expense by segment is as follows:
|
| | | | | | | | | | | | |
| (in millions) | | December 31, |
| | 2019 | | 2018 | | 2017 |
| Americas | | $ | 3.4 |
| | $ | 2.3 |
| | $ | 4.4 |
|
| EMEA | | 2.6 |
| | 1.7 |
| | 1.7 |
|
| APAC | | 0.6 |
| | 0.5 |
| | — |
|
| Corporate | | 3.2 |
| | 1.5 |
| | 4.7 |
|
| Total restructuring activities | | $ | 9.8 |
| | $ | 6.0 |
| | $ | 10.8 |
|
The Company's restructuring expense is reported as follows in the Consolidated Statements of Operations:
|
| | | | | | | | | | | | |
| (in millions) | | December 31, |
| | 2019 | | 2018 | | 2017 |
| Cost of sales | | $ | 0.4 |
| | $ | — |
| | $ | — |
|
| Restructuring expense | | 9.4 |
| | 6.0 |
| | 10.8 |
|
| Total restructuring activities | | $ | 9.8 |
| | $ | 6.0 |
| | $ | 10.8 |
|
2017 Restructuring Activities
During the year ended December 31, 2017, the Company sold the Singapore plant closed in 2016 for a net sales price of $6.2 million and recognized a $3.8 million gain on the sale of the building. In addition, the Company also ceased the manufacturing at its Sellersburg, Indiana plant and products manufactured were transferred to its plants in Tijuana and Monterrey, Mexico. The Sellersburg, Indiana plant was sold for $4.8 million, resulting in a gain on the sale of $1.1 million. The gain on the sale of these plants is included in "Loss (gain) from disposal of assets — net" in the Consolidated Statements of Operations for the year ended December 31, 2017. The Company incurred costs associated with these plant closures of $0.8 million, which are included in "Restructuring expense" in the Consolidated Statements of Operations for the year ended December 31, 2017.
Effective January 2017, the Company's former Senior Vice President, General Counsel and Secretary ("Former General Counsel"), retired from the Company and pursuant to the terms of the Former General Counsel's employment agreement, the Company was required to provide severance and other related benefits over the subsequent 18-month period, resulting in a total one-time expense of $2.2 million, including $1.1 million of additional stock-based compensation expense resulting from the accelerated vesting of certain stock options and restricted stock units, included in "Restructuring expense" in the Consolidated Statements of Operations for the year ended December 31, 2017. The Former General Counsel also receives the amount of vested benefits of $2.5 million plus interest at the rate of 9.0% from the Company’s Supplemental Executive Retirement Plan that is being paid over five annual installments.
Effective May 2017, the Company's former Senior Vice President and Chief Financial Officer ("Former CFO"), retired from the Company. Pursuant to the terms of the Former CFO's employment agreement, the Company was required to provide severance and other related benefits over the subsequent 12-month period, resulting in a total one-time expense of $2.5 million, including $1.5 million of additional stock-based compensation resulting from the accelerated vesting of certain stock options and restricted stock units, included in "Restructuring expense" in the Consolidated Statements of Operations for the year ended December 31, 2017.
In August 2017, the Company completed a workforce reduction in the Americas region and incurred total severance and related costs of $3.6 million during the year ended December 31, 2017, including $0.3 million of additional stock-based compensation expense resulting from the accelerated vesting of certain stock options, restricted stock units and performance share units. The Company also completed a workforce reduction in the EMEA region in December 2017 and incurred severance and related costs of $1.9 million, of which $1.7 million was recognized during the year ended December 31, 2017 and $0.2 million was recognized in the year ended December 31, 2018. These severance and related costs are included in "Restructuring expense" in the Consolidated Statements of Operations for each of the respective periods.
2018 Restructuring Activities
In the first half of 2018, the Company completed a limited management restructuring within its EMEA region and a workforce reduction within its EMEA and APAC regions. In connection with these actions, the Company incurred severance and related costs of $0.6 million and $1.4 million, respectively, which are included in "Restructuring expense" in the Consolidated Statements of Operations for the year ended December 31, 2018.
During the third quarter of 2018, the Company’s former President and Chief Executive Officer ("Former CEO"), separated from the Company. In connection with the Former CEO's separation, the Company incurred separation charges of $0.8 million, which are included in "Restructuring expense" for the year ended December 31, 2018. In addition, $3.7 million of expenses were reversed from the forfeiture of
unvested stock awards and accrued incentive compensation, which were included in "Selling, general and administrative expenses" in the Consolidated Statements of Operations for the year ended December 31, 2018.
During the third quarter of 2018, the Company also completed a RIF in its Americas region and a limited management restructuring within its corporate division and incurred severance and related costs of $3.0 million, including $0.3 million of additional stock-based compensation resulting from the accelerated vesting of certain stock compensation awards, which is included in "Restructuring expense" in the Consolidated Statements of Operations for the year ended December 31, 2018.
2019 Restructuring Activities
During the first and second quarters of 2019, the Company recognized $4.2 million and $1.2 million, respectively, totaling $5.4 million of severance and related costs resulting from a global workforce reduction and limited executive management and restructuring actions initiated during the first quarter of 2019. The severance and related costs are included in "Restructuring expense" in the Company's Consolidated Statements of Operations for the year ended December 31, 2019.
During the second quarter of 2019, the Company completed the closure and plant consolidation of a small manufacturing facility in Baltimore, Maryland and recognized total costs of $0.6 million, consisting of $0.2 million of inventory write-down and $0.2 million of accelerated depreciation included in "Cost of sales" and $0.2 million of severance and related costs, which are included in "Restructuring expense" in the Company's Consolidated Statements of Operations for the year ended December 31, 2019.
During the fourth quarter of 2019, the Company approved restructuring actions in the Americas and APAC regions in conjunction with the Transformation Program and a restructuring action to reduce overhead in the EMEA region. As a result of these actions, the Company expects to incur severance and related costs of approximately $6.3 million, consisting of $1.1 million in the Americas, $3.7 million in EMEA and $1.5 million in APAC. During the fourth quarter of 2019, the Company recorded $4.1 million of these severance and related costs, consisting of $1.1 million in the Americas, $2.5 million in EMEA and $0.5 million in APAC, which are included in "Restructuring expense" in the Consolidated Statements of Operations. The remaining $2.2 million of restructuring costs are expected to be recognized during the year ending December 31, 2020 as the details of the restructuring actions are communicated to the remaining impacted employees and continuing service requirements are met.
In addition, during the fourth quarter of 2019, the Company completed certain payouts and adjustments related to the Company's 2018 EMEA workforce reductions and recorded certain other non-cash adjustments related to the Company's 2019 restructuring activities.
17. Accumulated Other Comprehensive Loss
Comprehensive income includes foreign currency translation adjustments, changes in the fair value of certain financial derivative instruments that quality for hedge accounting and actuarial gains and losses arising from the investments held in trust was $5.5 millionCompany's employee pension and postretirement benefit obligations.
The components of the related liability was $5.5 million.Company's AOCI are as follows:
|
| | | | | | | | |
| (in millions) | | As of December 31, |
| | 2019 | | 2018 |
| Accumulated other comprehensive loss: | | | | |
| Foreign currency translation, net of income tax benefit of $1.6 million and $2.1 million, respectively | | $ | (4.3 | ) | | $ | (6.5 | ) |
| Derivative instrument fair market value, net of income tax expense of $0.8 million and $1.3 million, respectively | | (1.6 | ) | | 0.8 |
|
| Employee pension and postretirement benefit adjustments, net of income tax benefit of $6.5 million and $6.3 million, respectively | | (35.6 | ) | | (35.9 | ) |
| Total accumulated other comprehensive loss | | $ | (41.5 | ) | | $ | (41.6 | ) |
21. Leases
The Company leases various property, plant and equipment under non-cancelable operating leases, subject to certain provisions for renewal options and escalation clauses. Termssummary of the leases vary, but generally require the Company to pay property taxes, insurance premiums and maintenance costs associated with the leased property. Rental expense attributable to operating leases was $17.1 million, $12.8 million and $11.2 millionchanges in AOCI for the years ended December 31, 2019, 2018 and 2017 2016are as follows:
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Foreign Currency Translation Adjustments (1) | | Gains and Losses on Cash Flow Hedges | | Pension & Postretirement | | Total |
| Balance as of December 31, 2016 | | $ | (9.8 | ) | | $ | 0.8 |
| | $ | (34.4 | ) | | $ | (43.4 | ) |
| Other comprehensive income (loss) before reclassifications | | 11.4 |
| | 6.5 |
| | (7.8 | ) | | 10.1 |
|
| Reclassifications | | — |
| | (1.9 | ) | | 2.0 |
| | 0.1 |
|
| Tax effect of reclassifications | | 2.8 |
| | (1.8 | ) | | 0.2 |
| | 1.2 |
|
| Net current period other comprehensive income (loss) | | 14.2 |
| | 2.8 |
| | (5.6 | ) | | 11.4 |
|
| Balance as of December 31, 2017 | | 4.4 |
| | 3.6 |
| | (40.0 | ) | | (32.0 | ) |
| Other comprehensive (loss) income before reclassifications | | (10.2 | ) | | 0.2 |
| | (0.5 | ) | | (10.5 | ) |
| Reclassifications | | — |
| | (3.5 | ) | | 4.8 |
| | 1.3 |
|
| Tax effect of reclassifications | | (0.7 | ) | | 0.5 |
| | (0.2 | ) | | (0.4 | ) |
| Net current period other comprehensive (loss) income | | (10.9 | ) | | (2.8 | ) | | 4.1 |
| | (9.6 | ) |
| Balance as of December 31, 2018 | | (6.5 | ) | | 0.8 |
| | (35.9 | ) | | (41.6 | ) |
| Other comprehensive income (loss) before reclassifications | | 2.7 |
| | (2.5 | ) | | (3.7 | ) | | (3.5 | ) |
| Reclassifications | | — |
| | (0.4 | ) | | 3.8 |
| | 3.4 |
|
| Tax effect of reclassifications | | (0.5 | ) | | 0.5 |
| | 0.2 |
| | 0.2 |
|
| Net current period other comprehensive income (loss) | | 2.2 |
| | (2.4 | ) | | 0.3 |
| | 0.1 |
|
| Balance as of December 31, 2019 | | $ | (4.3 | ) | | $ | (1.6 | ) | | $ | (35.6 | ) | | $ | (41.5 | ) |
2015, respectively.net earnings.
Reclassifications from AOCI, net of tax, to income were as follows:
|
| | | | | | | | | | | | | | |
| (in millions) | | Years Ended December 31, | | Location in Consolidated Statements of Operations |
| | 2019 | | 2018 | | 2017 | |
| (Losses) gains on cash flow hedges: | | | | | | | | |
| Foreign currency exchange contracts | | $ | (0.9 | ) | | $ | (0.7 | ) | | $ | 3.3 |
| | Cost of sales |
| Commodity contracts | | (1.3 | ) | | 2.3 |
| | 1.1 |
| | Cost of sales |
| Interest expense | | 2.6 |
| | 1.9 |
| | (2.5 | ) | | Interest expense |
| Gains on cash flow hedges, before tax | | 0.4 |
| | 3.5 |
| | 1.9 |
| | |
| Tax effect | | 0.1 |
| | (0.8 | ) | | (0.6 | ) | | Income taxes |
| Gains on cash flow hedges, net of tax | | $ | 0.5 |
| | $ | 2.7 |
| | $ | 1.3 |
| | |
| | | | | | | | | |
| Amortization of pension and postretirement items: | | | | | | | | |
| Amortization of prior service cost | | $ | 0.2 |
| | $ | — |
| | $ | — |
| | Other expense — net |
| Actuarial losses | | (2.8 | ) | | (2.4 | ) | | (2.0 | ) | | Other expense — net |
| Pension settlement | | (1.2 | ) | | (2.4 | ) | | — |
| | Other expense — net |
| Amortization of pension and postretirement items, before tax | | (3.8 | ) | | (4.8 | ) | | (2.0 | ) | | |
| Tax effect | | 0.4 |
| | 0.8 |
| | 0.7 |
| | Income taxes |
| Amortization of pension and postretirement items, net of tax | | $ | (3.4 | ) | | $ | (4.0 | ) | | $ | (1.3 | ) | | |
| | | | | | | | | |
| Total reclassifications, net of tax | | $ | (2.9 | ) | | $ | (1.3 | ) | | $ | — |
| | |
18.Leases
The Company enters into contracts to lease real estate, manufacturing and office equipment and vehicles. Operating leases result in a straight-line lease expense, while the accounting for finance leases results in a front-loaded expense pattern. The Company’s most significant leases are for real estate and have remaining contract lease terms ranging from less than one to 13 years.
The Company does not have any contracts where it is the lessor, does not sublease any of its leased assets to third-parties and is not party to any lease contracts with related parties. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. As a lessee, the Company periodically reassesses and remeasures its leases based on certain triggering events or conditions, including whether a contract is or contains a lease, assessment of lease term and purchase options, measurement of lease payments, assessment of lease classification and discount rate. No impairment indicators were identified as of or during the year ended December 31, 2019.
The components of the Company's lease expense for the year ended December 31, 2019 are as follows:
|
| | | | |
| (in millions) | | |
| Operating lease expense | | $ | 15.9 |
|
| Finance lease expense: | | |
| Depreciation of assets | | 1.2 |
|
| Interest on lease liabilities | | 0.1 |
|
| Short-term lease expense | | 2.8 |
|
| Variable lease expense | | 1.0 |
|
| Total lease expense | | $ | 21.0 |
|
Future minimum rental obligations under non-cancelable operating leasesThe supplemental balance sheet information as of December 31, 2017 are payable as follows:
|
| | | |
| (in millions) | |
| Year ending December 31: | |
| 2018 | $ | 13.3 |
|
| 2019 | 11.2 |
|
| 2020 | 7.6 |
|
| 2021 | 5.1 |
|
| 2022 | 3.4 |
|
| Thereafter | 2.9 |
|
| $ | 43.5 |
|
22. Business Segments
The Company identifies its segments using the “management approach,” which designates the internal organization that is used by management2019 for making operating decisions and assessing performance as the source of the Company's reportable segments. Management organizes the business based on geography, and has designated the regions Americas, EMEA, and APAC as reportable segments.
The accounting policies of the Company's reportable segments are the same as those described in the summary of accounting policies in Note 2, "Summary of Significant Accounting Policies and Basis of Presentation," except that certain corporate-level expenses are not allocated to the segments. These unallocated expenses include corporate overhead, stock-based compensation expense, amortization expense of intangible assets with definite lives, separation expense, restructuring expense and other non-operating expenses. For the period prior to the Spin-Off, certain additional MTW corporate overhead expenses that were allocated to the Company were also not allocated to the segments.
The Company evaluates segment performance based upon earnings before interest, taxes, other expense (income) - net, depreciation and amortization expense and is adjusted for certain other non-cash or non-recurring items, including gain or loss from impairment or disposal of assets, restructuring, separation charges and loss on early extinguishment of debt ("Adjusted Operating EBITDA"). Adjusted Operating EBITDA is a non-GAAP measure, and the Company's presentation of Adjusted Operating EBITDA may not be comparable to similar measures used by other companies. Beginning in January 2017, the Company updated its performance measure and definition of Adjusted Operating EBITDA (previously titled "Operating EBITA") to additionally exclude at the segment level depreciation expense, gain or loss from impairment or disposal of assets, restructuring, separation charges and loss on early extinguishment of debt. All prior segment information has been recast to reflect these changes for consistency of presentation.
Financial information relating to the Company's reportable segments as of and for the years ended December 31, 2017, 2016 and 2015 respectivelyleases is as follows:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| (in millions, except percentage data) | | | | (As Restated) | | |
| Net sales: | | | | | | |
| Americas | | $ | 1,166.8 |
| | $ | 1,186.1 |
| | $ | 1,323.7 |
|
| EMEA | | 296.5 |
| | 287.6 |
| | 281.6 |
|
| APAC | | 190.2 |
| | 190.9 |
| | 191.1 |
|
| Elimination of intersegment sales | | (208.1 | ) | | (208.5 | ) | | (226.3 | ) |
| Total net sales | | $ | 1,445.4 |
| | $ | 1,456.1 |
| | $ | 1,570.1 |
|
| | | | | | | |
| Segment Adjusted Operating EBITDA: | | | | | | |
| Americas | | $ | 240.7 |
| | $ | 233.6 |
| | $ | 215.6 |
|
| EMEA | | 55.2 |
| | 44.3 |
| | 27.0 |
|
| APAC | | 22.7 |
| | 24.7 |
| | 25.3 |
|
| Total Segment Adjusted Operating EBITDA | | 318.6 |
| | 302.6 |
| | 267.9 |
|
| Corporate and unallocated | | (43.2 | ) | | (42.6 | ) | | (38.2 | ) |
| Amortization expense | | (31.2 | ) | | (31.2 | ) | | (31.4 | ) |
| Depreciation expense | | (16.7 | ) | | (17.3 | ) | | (19.6 | ) |
| Separation expense | | (1.6 | ) | | (6.5 | ) | | (4.3 | ) |
| Restructuring expense | | (10.8 | ) | | (2.5 | ) | | (4.6 | ) |
| Gain (loss) from impairment or disposal of assets — net | | 4.0 |
| | (3.3 | ) | | (9.9 | ) |
| Earnings from operations | | 219.1 |
| | 199.2 |
| | 159.9 |
|
| Interest expense | | (86.9 | ) | | (85.2 | ) | | (1.4 | ) |
| Interest (expense) income on notes with MTW — net | | — |
| | (0.1 | ) | | 15.8 |
|
| Loss on early extinguishment of debt | | (1.7 | ) | | (2.7 | ) | | — |
|
| Other (expense) income — net | | (9.1 | ) | | (9.0 | ) | | 22.1 |
|
| Earnings before income taxes | | $ | 121.4 |
| | $ | 102.2 |
| | $ | 196.4 |
|
| | | | | | | |
Adjusted Operating EBITDA % by segment (1) : | | | | | | |
| Americas | | 20.6 | % | | 19.7 | % | | 16.3 | % |
| EMEA | | 18.6 | % | | 15.4 | % | | 9.6 | % |
| APAC | | 11.9 | % | | 12.9 | % | | 13.2 | % |
(1) Adjusted Operating EBITDA % in the section above is calculated by dividing the dollar amount of Adjusted Operating EBITDA by net sales for each respective segment. |
| | | | | | | |
| Capital expenditures: | | | | | | |
| Americas | | $ | 17.2 |
| | $ | 12.4 |
| | $ | 8.4 |
|
| EMEA | | 2.0 |
| | 0.9 |
| | 1.5 |
|
| APAC | | 1.0 |
| | 1.8 |
| | 1.4 |
|
| Corporate | | 0.5 |
| | 0.9 |
| | 1.9 |
|
| Total capital expenditures | | $ | 20.7 |
| | $ | 16.0 |
| | $ | 13.2 |
|
| | | | | | | |
| Depreciation: | | | | | | |
| Americas | | $ | 11.5 |
| | $ | 12.1 |
| | $ | 14.3 |
|
| EMEA | | 2.4 |
| | 2.5 |
| | 2.6 |
|
| APAC | | 1.9 |
| | 2.0 |
| | 2.1 |
|
| Corporate | | 0.9 |
| | 0.7 |
| | 0.6 |
|
| Total depreciation | | $ | 16.7 |
| | $ | 17.3 |
| | $ | 19.6 |
|
|
| | | | |
| (in millions, except lease term and discount rate) | | |
| Operating leases: | | |
| Operating lease right-of-use assets | | $ | 39.9 |
|
| | | |
| Current operating lease liabilities | | $ | 10.0 |
|
| Non-current operating lease liabilities | | 29.1 |
|
| Total operating lease liabilities | | $ | 39.1 |
|
| | | |
| Finance leases: | | |
| Property, plant and equipment, at cost | | $ | 6.2 |
|
| Accumulated depreciation | | (3.5 | ) |
| Total finance leases - property and equipment — net | | $ | 2.7 |
|
| | | |
| Current obligations of finance leases | | $ | 1.2 |
|
| Non-current finance lease liabilities | | 1.3 |
|
| Total finance lease liabilities | | $ | 2.5 |
|
| | | |
| Weighted average remaining lease term (in years): | | |
| Operating leases | | 7.1 |
|
| Finance leases | | 2.3 |
|
| | | |
| Weighted average discount rate: | | |
| Operating leases | | 7.6 | % |
| Finance leases | | 4.8 | % |
As of December 31, 2017The assets associated with operating leases are included in "Operating lease right-of-use assets" with the current and December 31, 2016, total assets by reportable segment are as follows:
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Total assets by segment: | | | | |
| Americas | | $ | 1,445.6 |
| | $ | 1,463.7 |
|
| EMEA | | 112.1 |
| | 102.6 |
|
| APAC | | 128.7 |
| | 110.8 |
|
| Corporate | | 154.0 |
| | 92.0 |
|
| Total assets | | $ | 1,840.4 |
| | $ | 1,769.1 |
|
Net sales by product class are categorized into commercial foodservice whole goodsnon-current liabilities included in "Accrued expenses and aftermarket partsother liabilities" and service. Net sales by product class for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| (in millions) | | | | (As Restated) | | |
| Commercial foodservice whole goods | | $ | 1,173.3 |
| | $ | 1,191.0 |
| | $ | 1,277.2 |
|
| Aftermarket parts and support | | 272.1 |
| | 265.1 |
| | 292.9 |
|
| Total net sales | | $ | 1,445.4 |
| | $ | 1,456.1 |
| | $ | 1,570.1 |
|
Net sales information by geographic area for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| (in millions) | | | | (As Restated) | | |
Net sales by geographic area (1): | | | | | | |
| United States | | $ | 945.6 |
| | $ | 945.2 |
| | $ | 1,066.7 |
|
| Other Americas | | 95.0 |
| | 104.3 |
| | 106.6 |
|
| EMEA | | 239.2 |
| | 242.0 |
| | 237.2 |
|
| APAC | | 165.6 |
| | 164.6 |
| | 159.6 |
|
| Total net sales by geographic area | | $ | 1,445.4 |
| | $ | 1,456.1 |
| | $ | 1,570.1 |
|
(1) Net sales"Operating lease liabilities," respectively, in the section aboveCompany's Consolidated Balance Sheets. The assets associated with finance leases are attributed to geographic regions based on location of customer.
The Company sells primarily through distributors and dealers ("direct customers"), who ultimately sell to end customers. No single direct customer represented 10.0% or greater of the Company's net sales for the years ended December 31, 2017, 2016 or 2015.
As of December 31, 2017 and December 31, 2016,included in "Property, plant and equipment -— net" with the current and non-current liabilities recognized in "Short-term borrowings and current portion of finance leases" and "Long-term debt and finance leases," respectively, in the Company's Consolidated Balance Sheets.
The supplemental cash flow information by geographic areafor the year ended December 31, 2019 for the Company's leases is as follows:
|
| | | | |
| (in millions) | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows used in operating leases | | $ | 14.6 |
|
| Operating cash flows used in financing leases | | $ | 0.1 |
|
| Financing cash flows used in financing leases | | $ | 1.2 |
|
| Right-of-use assets obtained in exchange for lease obligations: | | |
| Operating Leases | | $ | 14.1 |
|
| Finance Leases | | $ | 0.8 |
|
|
| | | | | | | | |
| (in millions) | | 2017 | | 2016 |
| Property, plant and equipment - net by geographic area: | | | | |
| United States | | $ | 68.1 |
| | $ | 68.1 |
|
| Other Americas | | 19.5 |
| | 17.1 |
|
| EMEA | | 11.6 |
| | 10.8 |
|
| APAC | | 13.0 |
| | 13.1 |
|
| Total property, plant, equipment - net by geographic area | | $ | 112.2 |
| | $ | 109.1 |
|
23. Quarterly Financial Data (Unaudited)
The following table presents financial data for each quarterthe future maturities of the Company's lease liabilities as of December 31, 2019:
|
| | | | | | | | |
| (in millions) | | Operating | | Financing |
| Year ending December 31: | | | | |
| 2020 | | $ | 12.3 |
| | $ | 1.2 |
|
| 2021 | | 8.5 |
| | 0.9 |
|
| 2022 | | 5.6 |
| | 0.5 |
|
| 2023 | | 4.5 |
| | 0.1 |
|
| 2024 | | 3.7 |
| | — |
|
| Thereafter | | 18.1 |
| | — |
|
| Total lease payments | | 52.7 |
| | 2.7 |
|
| Less: imputed interest | | (13.6 | ) | | (0.2 | ) |
| Total lease obligations | | $ | 39.1 |
| | $ | 2.5 |
|
The Company's future minimum lease commitments as of December 31, 2018, presented in 2017accordance with ASC Codification Topic 840, the predecessor to ASC Topic 842 adopted as of January 1, 2019, are as follows:
|
| | | | | | | | |
| (in millions) | | Operating | | Financing |
| Year ending December 31: | | | | |
| 2019 | | $ | 15.1 |
| | $ | 1.1 |
|
| 2020 | | 10.8 |
| | 0.9 |
|
| 2021 | | 6.7 |
| | 0.5 |
|
| 2022 | | 3.6 |
| | 0.3 |
|
| 2023 | | 1.5 |
| | — |
|
| Thereafter | | 5.9 |
| | — |
|
| Total minimum lease commitments | | $ | 43.6 |
| | $ | 2.8 |
|
19.Stock-Based Compensation
The Company's 2016 Plan authorizes the Company to grant officers, employees and 2016:
|
| | | | | | | | | | | | | | | | |
| | | 2017 |
| (in millions, except per share data) | | First | | Second | | Third | | Fourth |
| Net sales | | $ | 328.0 |
| | $ | 371.1 |
| | $ | 380.4 |
| | $ | 365.9 |
|
| Gross profit | | 123.0 |
| | 137.2 |
| | 143.9 |
| | 132.8 |
|
| Net earnings | | 6.9 |
| | 28.4 |
| | 30.7 |
| | 66.9 |
|
| Per share data | |
|
| | | | | | |
| Earnings per share — Basic | | $ | 0.05 |
| | $ | 0.20 |
| | $ | 0.22 |
| | $ | 0.48 |
|
| Earnings per share — Diluted | | $ | 0.05 |
| | $ | 0.20 |
| | $ | 0.22 |
| | $ | 0.47 |
|
|
| | | | | | | | | | | | | | | | |
| | | 2016 |
| (in millions, except per share data) | | First | | Second | | Third | | Fourth |
| Net sales | | $ | 325.5 |
| | $ | 368.4 |
| | $ | 384.0 |
| | $ | 378.2 |
|
| Gross profit | | 117.6 |
| | 134.7 |
| | 142.0 |
| | 139.5 |
|
| Net earnings | | 14.6 |
| | 14.2 |
| | 23.1 |
| | 19.6 |
|
Per share data (1) | | |
| | |
| | |
| | |
|
| Earnings per share — Basic | | $ | 0.11 |
| | $ | 0.10 |
| | $ | 0.17 |
| | $ | 0.14 |
|
| Earnings per share — Diluted | | $ | 0.11 |
| | $ | 0.10 |
| | $ | 0.17 |
| | $ | 0.14 |
|
(1) On March 4, 2016, MTW distributed 137.0 million sharesnon-employee members of the Company's Board of Directors stock options awards, restricted stock awards and units, performance share awards and units, and other types of stock-based and cash awards. All awards are recorded at the fair market value of the Company's common stock to MTW shareholders in connection with the Spin-Off. See Note 25, "Earnings Per Share," for more information. Basic and diluted earnings per share and the average number of common shares outstanding were retrospectively restated for the number of the Company's shares outstanding immediately following this transaction.
The effect of the restatement and revision discussed within Note 1, "Business and Organization" on the 2017date of grant. In addition, the 2016 Plan provides for an adjustment and 2016 unaudited quarterly financial data is as follows:
|
| | | | | | | | | | | | |
| | | Three Months Ended March 31, 2017 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 5.0 |
| | $ | 1.9 |
| | $ | 6.9 |
|
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 0.04 |
| | $ | 0.01 |
| | $ | 0.05 |
|
| Earnings per share — Diluted | | $ | 0.04 |
| | $ | 0.01 |
| | $ | 0.05 |
|
|
| | | | | | | | | | | | |
| | | Three Months Ended June 30, 2017 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 30.1 |
| | $ | (1.7 | ) | | $ | 28.4 |
|
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 0.22 |
| | $ | (0.02 | ) | | $ | 0.20 |
|
| Earnings per share — Diluted | | $ | 0.21 |
| | $ | (0.01 | ) | | $ | 0.20 |
|
|
| | | | | | | | | | | | |
| | | Three Months Ended September 30, 2017 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 33.1 |
| | $ | (2.4 | ) | | $ | 30.7 |
|
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 0.24 |
| | $ | (0.02 | ) | | $ | 0.22 |
|
| Earnings per share — Diluted | | $ | 0.24 |
| | $ | (0.02 | ) | | $ | 0.22 |
|
|
| | | | | | | | | | | | |
| | | Three Months Ended December 31, 2017 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 65.8 |
| | $ | 1.1 |
| | $ | 66.9 |
|
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 0.47 |
| | $ | 0.01 |
| | $ | 0.48 |
|
| Earnings per share — Diluted | | $ | 0.47 |
| | $ | — |
| | $ | 0.47 |
|
|
| | | | | | | | | | | | |
| | | Three Months Ended March 31, 2016 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 18.1 |
| | $ | (3.5 | ) | | $ | 14.6 |
|
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 0.13 |
| | $ | (0.02 | ) | | $ | 0.11 |
|
| Earnings per share — Diluted | | $ | 0.13 |
| | $ | (0.02 | ) | | $ | 0.11 |
|
|
| | | | | | | | | | | | |
| | | Three Months Ended June 30, 2016 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 15.1 |
| | $ | (0.9 | ) | | $ | 14.2 |
|
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 0.11 |
| | $ | (0.01 | ) | | $ | 0.10 |
|
| Earnings per share — Diluted | | $ | 0.11 |
| | $ | (0.01 | ) | | $ | 0.10 |
|
|
| | | | | | | | | | | | |
| | | Three Months Ended September 30, 2016 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Revised |
| Net earnings | | $ | 24.9 |
| | $ | (1.8 | ) | | $ | 23.1 |
|
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 0.18 |
| | $ | (0.01 | ) | | $ | 0.17 |
|
| Earnings per share — Diluted | | $ | 0.18 |
| | $ | (0.01 | ) | | $ | 0.17 |
|
|
| | | | | | | | | | | | |
| | | Three Months Ended December 31, 2016 |
| (in millions, except per share data) | | As Reported | | Adjustment | | As Revised |
| Net sales | | $ | 378.7 |
| | $ | (0.5 | ) | | $ | 378.2 |
|
| Gross profit | | 138.5 |
| | 1.0 |
| | 139.5 |
|
| Net earnings | | 21.4 |
| | (1.8 | ) | | 19.6 |
|
| Per share data | | | | | | |
| Earnings per share — Basic | | $ | 0.15 |
| | $ | (0.01 | ) | | $ | 0.14 |
|
| Earnings per share — Diluted | | $ | 0.15 |
| | $ | (0.01 | ) | | $ | 0.14 |
|
24. Net Parent Company Investment and Related Party Transactions
Related Party Transactions and Cash ManagementPrior to the Spin-Off
The Company does not enter into transactions with related parties to purchase and/or sell goods or services in the ordinary coursereplacement of business. Transactions between the Company andcertain awards of MTW are reflected in the consolidated statements of cash flows as a financing activity in "Net transactions with MTW." Prior to the Spin-Off, the Company participated in MTW's centralized cash management program in which cash was swept each day and held in a centralized account at the corporate level.
Net Parent Company Investment and Corporate Cost Allocations Prior to the Spin-Off
Prior to the Spin-Off, MTW performed certain general and corporate functions on the Company's behalf. The combined financial statements for the periodscommon stock that were outstanding immediately prior to the Spin-Off includethrough the issuance of replacement awards from the Company. As of December 31, 2019, the maximum number of shares of common stock available for issuance pursuant to the 2016 Plan was 8.6 million.
The Company's stock-based compensation expense allocationsis included in the following financial statement line items:
|
| | | | | | | | | | | | |
| (in millions) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Stock-based compensation expense: | | | | | | |
| Selling, general and administrative expenses | | $ | 6.4 |
| | $ | 6.7 |
| | $ | 8.2 |
|
| Restructuring expense | | 0.9 |
| | 0.3 |
| | 2.9 |
|
| Total stock-based compensation expense | | $ | 7.3 |
| | $ | 7.0 |
| | $ | 11.1 |
|
Stock-based compensation expense included in "Restructuring expense" in the Consolidated Statements of Operations is the result of the accelerated vesting of certain equity awards in connection with various restructuring events. These events are described in Note 16, "Business Transformation Program and Restructuring."
Stock-based compensation expense by award type is as follows:
|
| | | | | | | | | | | | |
| (in millions) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Stock-based compensation expense: | | | | | | |
| Stock options | | $ | 1.5 |
| | $ | 1.5 |
| | $ | 3.0 |
|
| Restricted stock awards and units | | 3.8 |
| | 3.0 |
| | 3.6 |
|
| Performance share units | | 2.0 |
| | 2.5 |
| | 4.5 |
|
| Total stock-based compensation expense | | $ | 7.3 |
| | $ | 7.0 |
| | $ | 11.1 |
|
Stock Options
Stock option awards to officers and employees become exercisable in 25% increments annually over a four-year period beginning on the first anniversary of the grant date and expire ten years from the date of grant.
A summary of the Company's stock option activity for the year ended December 31, 2019 is as follows:
|
| | | | | | | | | | | | | |
| (in millions, except weighted average exercise price and contractual life) | | Options | | Weighted
Average
Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Aggregate
Intrinsic
Value |
| Options outstanding as of January 1, 2019 | | 2.1 |
| | $ | 14.85 |
| | 4.9 | | $ | 1.5 |
|
| Granted | | 0.6 |
| | $ | 15.04 |
| | | | |
|
| Exercised | | (0.4 | ) | | $ | 8.51 |
| | | | |
|
| Forfeited | | (0.1 | ) | | $ | 16.48 |
| | | | |
| Canceled | | (0.2 | ) | | $ | 16.63 |
| | | | |
|
Options outstanding as of December 31, 2019 (1) | | 2.0 |
| | $ | 15.82 |
| | 5.4 | | $ | 2.1 |
|
| | | | | | | | | |
Options vested or expected to vest as of December 31, 2019 (2) | | 1.8 |
| | $ | 15.81 |
| | 5.3 | | $ | 2.1 |
|
| | | | | | | | | |
| Options exercisable as of December 31, 2019 | | 1.2 |
| | $ | 15.63 |
| | 3.4 | | $ | 1.7 |
|
(1) corporate support functions that were provided The outstanding stock options as of December 31, 2019 have exercise prices ranging from $9.03 to $23.14 per share.
(2) The number of options expected to vest is total unvested options less estimated forfeitures.
The Company uses the Black-Scholes valuation model to value stock options. The volatility assumptions are based on a centralized basis atweighting of a MTW enterprise level including, but not limited to, finance, audit, legal, information technology, human resources, tax, treasury, investor relations,peer group of publicly-traded companies and external reporting; (2) stock-based compensation; (3) employee compensation, pension and benefit costs; and (4) securitization financing costs. These expenses were allocated to Welbiltthe Company's life-to-date historical volatility since the Spin-off. The risk-free rates are based on direct usage or direct identification where applicable,ten-year U.S. Treasury rates in effect at the time of the stock grant. The expected stock option life represents the period of time that the stock options granted are expected to be outstanding and where not applicable, such costs were allocated primarilyis based on net sales, headcount or based on existing allocation methods, specifically for those costs which were previously partially allocated to Welbilt or other methodologies deemed appropriate by management. These allocated costs are included within "Selling, general and administrative", "interest expense", and "Net parent company investment"historical experience.
The assumptions used in the consolidated financial statements. Management believesBlack-Scholes option pricing model and the assumptions associated with allocating these costsweighted average fair value of option awards granted are reasonable. Nevertheless, the combined financial statements may not include allas follows:
|
| | | | | | | | | |
| | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Expected life (years) | | 6.0 |
| | 6.0 |
| | 6.0 |
|
| Risk-free interest rate | | 2.5 | % | | 2.7 | % | | 2.3 | % |
| Expected volatility | | 31.0 | % | | 29.0 | % | | 39.0 | % |
| Expected dividend yield | | — | % | | — | % | | — | % |
The following represents stock option compensation information:
|
| | | | | | | | | | | | |
| (in millions, except weighted average grant date fair value per option granted) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Weighted average grant date fair value | | $ | 5.27 |
| | $ | 6.84 |
| | $ | 7.86 |
|
| Fair value of options vested | | $ | 1.5 |
| | $ | 1.7 |
| | $ | 3.0 |
|
| Intrinsic value of options exercised | | $ | 2.8 |
| | $ | 3.3 |
| | $ | 7.5 |
|
| Excess tax benefit for tax deductions related to the exercise of stock options | | $ | 0.9 |
| | $ | 0.8 |
| | $ | 1.2 |
|
| Cash received from option exercises, net of tax withholding | | $ | 2.5 |
| | $ | 5.1 |
| | $ | 1.9 |
|
| Tax benefits for stock-option compensation expense | | $ | 0.3 |
| | $ | 0.4 |
| | $ | 0.7 |
|
As of the actual expense that would have been incurred and may not represent the Company's' results of operations, financial position or cash flows had it been a stand-alone company during the periods prior to the Spin-Off. Actual costs that would have been incurred ifDecember 31, 2019, the Company had been$2.3 million of unrecognized compensation expense before tax related to stock options, which is expected to be recognized over a stand-alone company would dependweighted average period of 2.7 years.
Restricted Stock Awards and Units
Beginning in 2019, restricted stock granted to employees generally cliff vest after three years or vest equally over three years beginning on multiple factors, including organizational structurethe first anniversary from the date of grant. For awards granted in 2018 and strategic decisions made in various areas, including information technology and infrastructure. General corporate expenses allocated2017, restricted stock granted to employees generally vests equally over three years beginning on the first anniversary from the date of grant. Restricted stock granted to the CompanyCompany's directors, generally cliff vests after one year from the date of grant for awards made during the years ended December 31, 2019 and 2018 and two years from the date of grant for awards made during the year ended December 31, 2017. Restricted stock awards made to the chairperson of the Board of Directors vest immediately. Restricted stock awards made during the years ended December 31, 2016 and 2015 were $5.2 millionfor directors and $24.6 million, respectively.employees generally cliff vested on either the second or third anniversary from the date of grant.
The total effect of the settlement of these intercompany transactions is reflected as a financingCompany's restricted stock activity in the consolidated statements of cash flows. However, the interest income and expense related to the notes with MTW is presented on a net basis in the consolidated statements of operations. Interest income on the notes with MTW for the yearsyear ended December 31, 2016, and 20152019 is netas follows:
|
| | | | | | | |
| (in millions, except weighted average grant date fair value) | | Restricted Stock | | Weighted Average Grant Date Fair Value |
| Unvested as of January 1, 2019 | | 0.4 |
| | $ | 17.48 |
|
| Granted | | 0.3 |
| | $ | 15.29 |
|
| Vested | | (0.3 | ) | | $ | 17.28 |
|
| Unvested as of December 31, 2019 | | 0.4 |
| | $ | 15.88 |
|
The Company's restricted stock expense is as follows:
|
| | | | | | | | | | | | |
| (in millions, except weighted average grant date fair value per award granted) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Weighted average grant date fair value | | $ | 15.29 |
| | $ | 18.15 |
| | $ | 21.39 |
|
| Fair value of awards vested | | $ | 5.4 |
| | $ | 8.1 |
| | $ | 4.0 |
|
| Tax benefits for restricted stock compensation expense | | $ | 0.7 |
| | $ | 0.7 |
| | $ | 0.8 |
|
As of interestDecember 31, 2019, the Company had $3.1 million of unrecognized compensation expense before tax related to restricted stock, which is expected to be recognized over a weighted average period of 2.0 years.
Performance Share Units
The Company's performance share units ("PSUs") cliff vest after three years. The number of PSUs that vest is determined for each grant based on the notesachievement of certain Company performance criteria over the 3-year period, as set forth in the award agreement, and may range from 0 to 200% of the target shares granted. The PSUs are settled in shares of the Company's common stock, with MTWholders receiving one share of $0.1 million, $0.6 million, respectively.common stock for each PSU that vests. Compensation expense for PSUs is recognized over the vesting period when it is probable the performance criteria will be achieved.
Guarantees Prior toAs of December 31, 2019, the Spin-Offfollowing PSU programs were ongoing:
Certain |
| | | | | | |
| Award Date | | PSUs Outstanding (in millions) | | Expected Vesting Threshold |
| 2018 Program | | 0.2 |
| | 70.0 | % |
| 2019 Program | | 0.2 |
| | 100.0 | % |
| Total PSUs outstanding | | 0.4 |
| | |
A summary of MTW's subsidiaries, which includes selected entities thatactivity for the Company's PSUs for the year ended December 31, 2019 is as follows:
|
| | | | | | | |
| (in millions, except weighted average grant date fair value) | | Performance Share Units | | Weighted
Average
Grant Date Fair Value |
| Unvested as of January 1, 2019 | | 0.4 |
| | $ | 19.57 |
|
| Granted | | 0.3 |
| | $ | 15.11 |
|
Vested (1) | | (0.2 | ) | | $ | 18.73 |
|
| Forfeited | | (0.1 | ) | | $ | 18.51 |
|
| Unvested as of December 31, 2019 | | 0.4 |
| | $ | 17.45 |
|
(1) The vested PSUs are partbased on the target amount of the Company, entered into guarantee agreements with MTW's lenders whereby these subsidiaries guaranteedaward for the obligations under, and/or pledged their assets as collateral, with respect to such MTW debt. However, none of these Company subsidiaries were named as obligors in the debt agreements held in the name of MTW. For that reason, MTW did not historically allocate debt balances and/or charge out third-party debt-related expenses to the Company.
Post Spin-Off Activity
In connection with the Spin-Off, the Company entered into a series of agreements with MTW, which are intended to govern the relationship between the Company and MTW and to facilitate an orderly separation of the Company from MTW. These agreements include a Master Separation and Distribution Agreement ("Separation Agreement"), Transition Services Agreement ("TSA"), Employee Matters Agreement, Intellectual Property Matters Agreement and Tax Matters Agreement.
2017 Program. In accordance with the Separation Agreement, at the timeterms of the Spin-Off, MTW contributed its net investment inunderlying award agreements, the Companyactual shares earned and certain assets and liabilities in exchangedistributed for a $1,362.0 million cash distribution thatthe three-year performance period ended December 31, 2019 was funded through76.8% of the long-term debt incurred bytarget shares granted, rounded up the Company. In addition, separation related adjustments are included in "Additional paid-in capital (deficit)" innearest whole share.
The following represents PSU information for the consolidated balance sheet asperiods indicated:
|
| | | | | | | | | | | | |
| (in millions, except weighted average grant date fair value per award granted) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Weighted average grant date fair value | | $ | 15.11 |
| | $ | 20.25 |
| | $ | 18.70 |
|
| Fair value of awards vested | | $ | 2.0 |
| | $ | 2.6 |
| | $ | 3.0 |
|
| Tax benefits for PSU compensation expense | | $ | 0.5 |
| | $ | 0.6 |
| | $ | 1.0 |
|
As of December 31, 2016 consisting of net liabilities assumed by2019, the Company had $3.2 million of unrecognized compensation expense before tax related to the pension plansPSUs, which is expected to be recognized over a weighted average period of $21.5 million, post-retirement medical obligations of $6.8 million and income taxes payable of $0.6 million.1.8 years.
The Separation Agreement included provisions on the allocation of assets and liabilities between legal entities that were being split into a separate MTW and Welbilt legal entity as part of the Spin-Off. The Separation Agreement also included provisions on the split of joint administrative costs that were incurred post Spin-Off.
Under the TSA, the Company and MTW provided each other certain specified services on a transitional basis, including, among others, payroll and other human resource services, information systems, insurance, legal, finance and other corporate services, as well as procurement and sourcing support. The charges for the transition services were generally intended to allow the providing company to fully recover the allocated direct costs of providing the services, plus all out-of-pocket costs and expenses, generally without profit except where required by local law. The Company had completed its use of these transition services by the end of the second quarter of 2017 and the TSA is no longer in effect.
25. 20.Other Expense — Net
The components of "Other expense — net" in the Consolidated Statements of Operations are summarized as follows:
|
| | | | | | | | | | | | |
| (in millions) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Pension and post-retirement expense | | $ | 4.6 |
| | $ | 4.6 |
| | $ | 1.5 |
|
Foreign currency transaction losses (1) | | 0.7 |
| | 20.1 |
| | 6.5 |
|
| Amortization of debt issuance costs | | 4.7 |
| | 5.5 |
| | 5.5 |
|
| Other | | (4.4 | ) | | (0.4 | ) | | (2.9 | ) |
| Other expense — net | | $ | 5.6 |
| | $ | 29.8 |
| | $ | 10.6 |
|
(1) Included in foreign currency transaction losses for the year ended December 31, 2018, is a $10.0 million loss on the foreign currency hedge for the acquisition price of Crem. Refer to Note 3, "Acquisition," for additional discussion.
21.Earnings Per Share
The Company computes basicpresents earnings per share based on a basic and diluted basis. Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares that were outstanding during the reported period. Diluted earnings per share includes the dilutive effect of common stock equivalents consisting of stock options, restricted stock awards, restricted stock units and performance share units, using the treasury stock method. Performance share units, which are considered contingently issuable, are considered dilutive when the related performance criterion has been met.
On March 4, 2016, MTW distributed 137.0 million sharesThe components of the Company's common stock to MTW shareholders, thereby completing the Spin-Off. Basic and diluted earnings per share and theweighted average number of common shares outstanding for periods prior to the Spin-Off were retrospectively restated for the number of the Company's shares outstanding immediately following this transaction. The same number of shares were used to calculate basic and diluted earnings per share, for each year presented, since no equity awardsshares outstanding are as follows:
|
| | | | | | | | | | | | |
| (in millions, except share and per share data) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net earnings | | $ | 55.9 |
| | $ | 78.2 |
| | $ | 132.9 |
|
| | | | | | | |
| Weighted average shares outstanding — Basic | | 140,953,496 |
| | 140,023,635 |
| | 138,995,541 |
|
| | | | | | | |
| Effect of dilutive securities: | | | | | | |
| Stock options | | 224,860 |
| | 585,270 |
| | 840,820 |
|
| Unvested restricted stock units | | 245,416 |
| | 437,720 |
| | 610,148 |
|
| Unvested performance share units | | 144,013 |
| | 342,160 |
| | 260,583 |
|
| Effect of dilutive securities | | 614,289 |
| | 1,365,150 |
| | 1,711,551 |
|
| | | | | | | |
| Weighted average shares outstanding — Diluted | | 141,567,785 |
| | 141,388,785 |
| | 140,707,092 |
|
| | | | | | | |
| Earnings per share — Basic | | $ | 0.40 |
| | $ | 0.56 |
| | $ | 0.96 |
|
| Earnings per share — Diluted | | $ | 0.39 |
| | $ | 0.55 |
| | $ | 0.94 |
|
For the years ended December 31, 2019, 2018 and 2017 there were outstanding prior to the Spin-Off.
The following is a reconciliation of the numerator1.2 million, 0.6 million, and denominator used to compute basic and diluted earnings per share for the periods presented:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| (in millions, except share and per share data) | | | | (As Restated) | | |
| Net earnings | | $ | 132.9 |
| | $ | 71.5 |
| | $ | 156.1 |
|
| | | | | | | |
| Basic weighted average common shares outstanding | | 138,995,541 |
| | 137,906,284 |
| | 137,016,712 |
|
| | | | | | | |
| Effect of dilutive securities: | | | | | | |
| Stock options | | 840,820 |
| | 945,140 |
| | — |
|
| Unvested restricted stock | | 610,148 |
| | 626,144 |
| | — |
|
| Unvested performance share units | | 260,583 |
| | 236,552 |
| | — |
|
| Effect of dilutive securities | | 1,711,551 |
| | 1,807,836 |
| | — |
|
| | | | | | | |
| Diluted weighted average common shares outstanding | | 140,707,092 |
| | 139,714,120 |
| | 137,016,712 |
|
| | | | | | | |
| Basic earnings per share | | $ | 0.96 |
| | $ | 0.52 |
| | $ | 1.14 |
|
| Diluted earnings per share | | $ | 0.94 |
| | $ | 0.51 |
| | $ | 1.14 |
|
Dilutive0.8 million securities, outstanding not included inrespectively, excluded from the computation of diluted earnings per share because their effect was antidilutive forwould have been antidilutive. In addition, certain performance share units whose conditions were not met at the years ended December 31, 2017 and 2016, totaled 0.8 million and 3.6 million, respectively.
On March 3, 2016, prior to the completionend of the Spin-Off,respective reporting periods have also been excluded from the Company paid a one-time cash dividend to MTWcomputation of $1,362.0 million. earnings per share.
The Company did not declare or pay any other dividends to its stockholders during the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
26. 22.Business Segments
The Company identifies its geographic business segments using the "management approach," which designates the internal organization used by management for making operating decisions and assessing performance as the source for determining the Company's geographic business segments. Management organizes and manages the business based on 3 geographic business segments: the Americas, EMEA, and APAC. The accounting policies of the Company's geographic business segments are the same as those described in Note 2, "Basis of Presentation and Summary of Significant Accounting Policies."
The Company evaluates segment performance based on an "Adjusted Operating EBITDA" basis. Adjusted Operating EBITDA is defined as net earnings before interest, income taxes, other income or expense, depreciation and amortization expense plus certain other items such as gain or loss from impairment or disposal of assets, restructuring activities, separation expense, loss on modification or extinguishment of debt, acquisition-related transaction and integration costs, Transformation Program expense and certain other items. In addition, certain corporate-level expenses and eliminations are not allocated to the segments. These unallocated expenses include corporate overhead, stock-based compensation expense and certain other non-operating expenses. The Company's presentation of Adjusted Operating EBITDA may not be comparable to similar measures used by other companies.
Financial information relating to the Company's geographic business segments is as follows:
|
| | | | | | | | | | | | |
| (in millions, except percentage data) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net sales: | | | | | | |
| Americas | | $ | 1,208.4 |
| | $ | 1,228.4 |
| | $ | 1,166.8 |
|
| EMEA | | 392.7 |
| | 385.1 |
| | 296.5 |
|
| APAC | | 252.3 |
| | 229.1 |
| | 190.2 |
|
| Elimination of intersegment sales | | (259.5 | ) | | (252.5 | ) | | (208.1 | ) |
| Total net sales | | $ | 1,593.9 |
| | $ | 1,590.1 |
| | $ | 1,445.4 |
|
| | | | | | | |
| Segment Adjusted Operating EBITDA: | | | | | | |
| Americas | | $ | 222.9 |
| | $ | 233.1 |
| | $ | 240.7 |
|
| EMEA | | 71.0 |
| | 78.4 |
| | 55.2 |
|
| APAC | | 41.0 |
| | 31.2 |
| | 22.7 |
|
| Total Segment Adjusted Operating EBITDA | | 334.9 |
| | 342.7 |
| | 318.6 |
|
| Corporate and unallocated expenses | | (48.7 | ) | | (52.5 | ) | | (41.7 | ) |
| Amortization expense | | (39.8 | ) | | (37.0 | ) | | (31.2 | ) |
| Depreciation expense | | (21.1 | ) | | (18.0 | ) | | (16.7 | ) |
Transaction costs (1) | | (1.1 | ) | | (7.1 | ) | | — |
|
Other items (2) | | (4.5 | ) | | (5.6 | ) | | — |
|
Transformation Program expense (3) | | (35.3 | ) | | — |
| | — |
|
| Separation expense | | — |
| | (0.1 | ) | | (1.6 | ) |
Restructuring activities (4) | | (9.8 | ) | | (6.0 | ) | | (10.8 | ) |
| (Loss) gain from disposal of assets — net | | (0.7 | ) | | 0.4 |
| | 4.0 |
|
| Earnings from operations | | 173.9 |
| | 216.8 |
| | 220.6 |
|
| Interest expense | | (92.6 | ) | | (89.0 | ) | | (86.9 | ) |
| Loss on modification or extinguishment of debt | | — |
| | (9.0 | ) | | (1.7 | ) |
| Other expense — net | | (5.6 | ) | | (29.8 | ) | | (10.6 | ) |
| Earnings before income taxes | | $ | 75.7 |
| | $ | 89.0 |
| | $ | 121.4 |
|
(1) Transaction costs are associated with acquisition-related transaction and integration activities. Transaction costs recorded in "Cost of sales" include $0.1 million and $1.9 million related to inventory fair value purchase accounting adjustments for the years ended December 31, 2019 and 2018, respectively. Professional services and other direct acquisition and integration costs recorded in "Selling, general and administrative expenses" were $1.0 million and $5.2 million for the years ended December 31, 2019 and 2018, respectively. |
(2) Other items are costs which are not representative of the Company's operational performance. For the year ended December 31, 2019, the amount includes certain costs related to concluded litigation and other professional fees. For the year ended December 31, 2018, these costs include a $3.7 million loss on misappropriation of funds within the Crem business, $1.3 million related to the costs associated with the restatement of previously issued consolidated financial statements in the Company's Form 10-K/A for the year ended December 31, 2017 and $0.6 million of other professional fees. All such amounts are included within "Selling, general and administrative expenses" in the Consolidated Statements of Operations. |
(3) Transformation Program expense includes consulting and other costs associated with executing the Company's Transformation Program initiatives. Refer to Note 16, "Business Transformation Program and Restructuring" for discussion of the impact on the Consolidated Statements of Operations. |
(4) Restructuring activities include costs associated with actions to improve operating efficiencies and rationalization of the Company's cost structure. Refer to Note 16, "Business Transformation Program and Restructuring" for discussion of the impact on the Consolidated Statements of Operations. |
| | | | | | | |
Adjusted Operating EBITDA % by segment (5): | | | | | | |
| Americas | | 18.4 | % | | 19.0 | % | | 20.6 | % |
| EMEA | | 18.1 | % | | 20.4 | % | | 18.6 | % |
| APAC | | 16.3 | % | | 13.6 | % | | 11.9 | % |
(5) Adjusted Operating EBITDA % is calculated by dividing Adjusted Operating EBITDA by net sales for each respective segment. |
|
| | | | | | | | | | | | |
| (in millions) | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Third-party net sales by geographic area (6): | | | | | | |
| United States | | $ | 991.8 |
| | $ | 995.0 |
| | $ | 945.6 |
|
| Other Americas | | 97.8 |
| | 112.0 |
| | 95.0 |
|
| EMEA | | 308.9 |
| | 300.7 |
| | 239.2 |
|
| APAC | | 195.4 |
| | 182.4 |
| | 165.6 |
|
| Total net sales by geographic area | | $ | 1,593.9 |
| | $ | 1,590.1 |
| | $ | 1,445.4 |
|
(6) Net sales presented in this table are attributed to geographic regions based on location of customer. |
| | | | | | | |
| Capital expenditures: | | | | | | |
| Americas | | $ | 24.3 |
| | $ | 13.7 |
| | $ | 17.2 |
|
| EMEA | | 2.9 |
| | 1.8 |
| | 2.0 |
|
| APAC | | 2.6 |
| | 3.0 |
| | 1.0 |
|
| Corporate | | 4.1 |
| | 2.9 |
| | 0.5 |
|
| Total capital expenditures | | $ | 33.9 |
| | $ | 21.4 |
| | $ | 20.7 |
|
| | | | | | | |
| Depreciation: | | | | | | |
| Americas | | $ | 14.1 |
| | $ | 12.1 |
| | $ | 11.5 |
|
| EMEA | | 3.2 |
| | 3.0 |
| | 2.4 |
|
| APAC | | 2.7 |
| | 2.4 |
| | 1.9 |
|
| Corporate | | 1.3 |
| | 0.5 |
| | 0.9 |
|
| Total depreciation | | $ | 21.3 |
| | $ | 18.0 |
| | $ | 16.7 |
|
|
| | | | | | | | |
| (in millions) | | As of December 31, |
| | 2019 | | 2018 |
| Property, plant and equipment — net by geographic area: | | | | |
| United States | | $ | 78.8 |
| | $ | 70.4 |
|
| Other Americas | | 21.6 |
| | 18.6 |
|
| EMEA | | 12.1 |
| | 12.1 |
|
| APAC | | 15.0 |
| | 15.2 |
|
| Total property, plant and equipment | | $ | 127.5 |
| | $ | 116.3 |
|
| | | | | |
| Assets by geographic business segment: | | | | |
| Americas | | $ | 1,533.9 |
| | $ | 1,437.3 |
|
| EMEA | | 349.8 |
| | 324.2 |
|
| APAC | | 211.8 |
| | 169.0 |
|
| Corporate | | 69.8 |
| | 144.5 |
|
| Total assets | | $ | 2,165.3 |
| | $ | 2,075.0 |
|
Net sales by product class and geographic business segment are as follows:
|
| | | | | | | | | | | | |
| (in millions) | | Year Ended December 31, 2019 |
| | Commercial Foodservice Equipment | | Aftermarket Parts and Support | | Total |
| Americas | | $ | 896.3 |
| | $ | 179.0 |
| | $ | 1,075.3 |
|
| EMEA | | 265.2 |
| | 48.0 |
| | 313.2 |
|
| APAC | | 174.3 |
| | 31.1 |
| | 205.4 |
|
| Total net sales | | $ | 1,335.8 |
| | $ | 258.1 |
| | $ | 1,593.9 |
|
|
| | | | | | | | | | | | |
| (in millions) | | Year Ended December 31, 2018 |
| | Commercial Foodservice Equipment | | Aftermarket Parts and Support | | Total |
| Americas | | $ | 907.0 |
| | $ | 183.9 |
| | $ | 1,090.9 |
|
| EMEA | | 258.8 |
| | 48.6 |
| | 307.4 |
|
| APAC | | 163.2 |
| | 28.6 |
| | 191.8 |
|
| Total net sales | | $ | 1,329.0 |
| | $ | 261.1 |
| | $ | 1,590.1 |
|
|
| | | | | | | | | | | | |
| (in millions) | | Year Ended December 31, 2017 |
| | Commercial Foodservice Equipment | | Aftermarket Parts and Support | | Total |
| Americas | | $ | 845.6 |
| | $ | 196.5 |
| | $ | 1,042.1 |
|
| EMEA | | 191.7 |
| | 45.8 |
| | 237.5 |
|
| APAC | | 136.0 |
| | 29.8 |
| | 165.8 |
|
| Total net sales | | $ | 1,173.3 |
| | $ | 272.1 |
| | $ | 1,445.4 |
|
23. Quarterly Financial Data (Unaudited)
The following table presents financial data for each of the quarters for the years ended December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | |
| (in millions, except per share data) | | 2019 |
| | First(1) | | Second | | Third | | Fourth |
| Net sales | | $ | 375.3 |
| | $ | 426.3 |
| | $ | 410.5 |
| | $ | 381.8 |
|
| Gross profit | | $ | 126.5 |
| | $ | 156.3 |
| | $ | 150.9 |
| | $ | 133.2 |
|
| Net (loss) earnings | | $ | (2.6 | ) | | $ | 20.0 |
| | $ | 20.1 |
| | $ | 18.4 |
|
| | | | | | | | | |
| Per share data: | |
|
| | | | | | |
| (Loss) earnings per share — Basic | | $ | (0.02 | ) | | $ | 0.14 |
| | $ | 0.14 |
| | $ | 0.13 |
|
| (Loss) earnings per share — Diluted | | $ | (0.02 | ) | | $ | 0.14 |
| | $ | 0.14 |
| | $ | 0.13 |
|
(1) The Company's net loss in the first quarter of 2019 is primarily the result of increased professional fees, consisting primarily of third-party consulting costs incurred in connection with the operational review performed prior to the execution of the Company's Transformation Program launch in May 2019 and increased restructuring expense resulting from the global workforce reduction and limited executive management restructuring action completed during the quarter. Refer to Note 16, "Business Transformation Program and Restructuring," for further information.
|
| | | | | | | | | | | | | | | | |
| (in millions, except per share data) | | 2018(1) |
| | First | | Second | | Third | | Fourth |
| Net sales | | $ | 350.4 |
| | $ | 420.7 |
| | $ | 412.9 |
| | $ | 406.1 |
|
| Gross profit | | $ | 126.2 |
| | $ | 149.3 |
| | $ | 153.1 |
| | $ | 140.6 |
|
| Net earnings | | $ | 12.4 |
| | $ | 12.0 |
| | $ | 26.8 |
| | $ | 27.0 |
|
| | | | | | | | | |
| Per share data: | | |
| | |
| | |
| | |
|
| Earnings per share — Basic | | $ | 0.09 |
| | $ | 0.09 |
| | $ | 0.19 |
| | $ | 0.19 |
|
| Earnings per share — Diluted | | $ | 0.09 |
| | $ | 0.09 |
| | $ | 0.19 |
| | $ | 0.19 |
|
(1) On April 19, 2018, the Company, through a wholly-owned subsidiary, acquired Crem and such operations have been included in the consolidated results of operations beginning on the acquisition date. See Note 3, "Acquisition," for further information.
24.Subsidiary Guarantors ofand Senior Notes due 2024
The following tables present consolidating financial information for (a) Welbilt;Welbilt's parent entity; (b) the guarantors of the Senior Notes, which include substantially all of the domestic, 100% owned subsidiaries of Welbilt ("Subsidiary Guarantors"Guarantor Subsidiaries"); and (c) the wholly owned foreign subsidiaries of Welbilt, which do not guarantee the Senior Notes ("Non-Guarantor Subsidiaries"). The information includes elimination entries necessary to consolidate the Subsidiary GuarantorsGuarantor Subsidiaries and the Non-Guarantor Subsidiaries. Investments in subsidiaries are accounted for using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries, equity and intercompany balances and transactions. Separate financial statements of the Subsidiary GuarantorsGuarantor Subsidiaries are not presented because the guarantors are fully and unconditionally, jointly and severally liable under the guarantees, except for normal and customary release provisions.
The Company identified errors as described in Note 1, “Business and Organization,” and has restated the consolidated financial statements for the year ended December 31, 2016 and revised the Company's consolidated financial statements for the years ended December 31, 2017 and 2015 each within this footnote to correct the identified errors. Additionally, it was determined that there were classification errors within the operating and investing sections of the statement of cash flows for Subsidiary Guarantors and Non-Guarantor Subsidiaries. Specifically, operating cash flows for Subsidiary Guarantors decreased offset by an increase in investing cash flows while operating cash flows for Non-Guarantor Subsidiaries increased offset by a decrease in investing cash flows. The misclassification was $27.5 million for the year ended December 31, 2016. This error is eliminated in consolidation and therefore has no impact on the Company’s consolidated financial condition, results of operations or cash flows. The Company has restated the consolidating statements of cash flows for the Subsidiary Guarantors and Non-Guarantor Subsidiaries for the year ended December 31, 2016 to correct for this and one additional immaterial classification error.
WELBILT, INC.
Consolidating Statement of Operations
For the year ended December 31, 20172019
| | | (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Net sales | | $ | — |
| | $ | 1,042.3 |
| | $ | 773.0 |
| | $ | (369.9 | ) | | $ | 1,445.4 |
| | $ | — |
| | $ | 1,104.8 |
| | $ | 951.2 |
| | $ | (462.1 | ) | | $ | 1,593.9 |
|
| Cost of sales | | 3.8 |
| | 750.6 |
| | 524.0 |
| | (369.9 | ) | | 908.5 |
| | 3.6 |
| | 838.8 |
| | 646.7 |
| | (462.1 | ) | | 1,027.0 |
|
| Gross profit | | (3.8 | ) | | 291.7 |
| | 249.0 |
| | — |
| | 536.9 |
| | (3.6 | ) | | 266.0 |
| | 304.5 |
| | — |
| | 566.9 |
|
| Selling, general and administrative expenses | | 36.8 |
| | 144.0 |
| | 97.4 |
| | — |
| | 278.2 |
| | 71.0 |
| | 153.3 |
| | 119.9 |
| | — |
| | 344.2 |
|
| Amortization expense | | — |
| | 28.4 |
| | 2.8 |
| | — |
| | 31.2 |
| | — |
| | 28.5 |
| | 10.2 |
| | — |
| | 38.7 |
|
| Separation expense | | 1.5 |
| | 0.1 |
| | — |
| | — |
| | 1.6 |
| |
| Restructuring expense | | 5.0 |
| | 3.5 |
| | 2.3 |
| | — |
| | 10.8 |
| | 2.6 |
| | 2.7 |
| | 4.1 |
| | — |
| | 9.4 |
|
| Gain from impairment or disposal of assets — net | | — |
| | (0.4 | ) | | (3.6 | ) | | — |
| | (4.0 | ) | |
| Loss from disposal of assets — net | | | 0.1 |
| | 0.3 |
| | 0.3 |
| | — |
| | 0.7 |
|
| (Loss) earnings from operations | | (47.1 | ) | | 116.1 |
| | 150.1 |
| | — |
| | 219.1 |
| | (77.3 | ) | | 81.2 |
| | 170.0 |
| | — |
| | 173.9 |
|
| Interest expense | | 82.8 |
| | 1.1 |
| | 3.0 |
| | — |
| | 86.9 |
| | 88.1 |
| | 0.9 |
| | 3.6 |
| | — |
| | 92.6 |
|
| Loss on early extinguishment of debt | | 1.7 |
| | — |
| | — |
| | — |
| | 1.7 |
| |
| Other (income) expense — net | | (11.1 | ) | | (24.0 | ) | | 44.2 |
| | — |
| | 9.1 |
| | (14.2 | ) | | (26.7 | ) | | 46.5 |
| | — |
| | 5.6 |
|
| Equity in earnings (loss) of subsidiaries | | 232.6 |
| | 86.1 |
| | — |
| | (318.7 | ) | | — |
| |
| Earnings (loss) before income taxes | | 112.1 |
| | 225.1 |
| | 102.9 |
| | (318.7 | ) | | 121.4 |
| |
| Equity in earnings of subsidiaries | | | 175.3 |
| | 89.8 |
| | — |
| | (265.1 | ) | | — |
|
| Earnings before income taxes | | | 24.1 |
| | 196.8 |
| | 119.9 |
| | (265.1 | ) | | 75.7 |
|
| Income taxes | | (20.8 | ) | | (7.5 | ) | | 16.8 |
| | — |
| | (11.5 | ) | | (31.8 | ) | | 21.5 |
| | 30.1 |
| | — |
| | 19.8 |
|
| Net earnings (loss) | | $ | 132.9 |
| | $ | 232.6 |
| | $ | 86.1 |
| | $ | (318.7 | ) | | $ | 132.9 |
| |
| Net earnings | | | $ | 55.9 |
| | $ | 175.3 |
| | $ | 89.8 |
| | $ | (265.1 | ) | | $ | 55.9 |
|
| Total other comprehensive income (loss), net of tax | | 11.4 |
| | 20.3 |
| | 17.8 |
| | (38.1 | ) | | 11.4 |
| | 0.1 |
| | (26.4 | ) | | (23.5 | ) | | 49.9 |
| | 0.1 |
|
| Comprehensive income (loss) | | $ | 144.3 |
| | $ | 252.9 |
| | $ | 103.9 |
| | $ | (356.8 | ) | | $ | 144.3 |
| |
| Comprehensive income | | | $ | 56.0 |
| | $ | 148.9 |
| | $ | 66.3 |
| | $ | (215.2 | ) | | $ | 56.0 |
|
WELBILT, INC.
Consolidating Statement of Operations
For the year ended December 31, 20162018
(As Restated)
| | | (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Net sales | | $ | — |
| | $ | 1,069.5 |
| | $ | 782.2 |
| | $ | (395.6 | ) | | $ | 1,456.1 |
| | $ | — |
| | $ | 1,110.8 |
| | $ | 937.8 |
| | $ | (458.5 | ) | | $ | 1,590.1 |
|
| Cost of sales | | 3.4 |
| | 774.4 |
| | 540.1 |
| | (395.6 | ) | | 922.3 |
| | 21.2 |
| | 836.8 |
| | 621.4 |
| | (458.5 | ) | | 1,020.9 |
|
| Gross profit | | (3.4 | ) | | 295.1 |
| | 242.1 |
| | — |
| | 533.8 |
| | (21.2 | ) | | 274.0 |
| | 316.4 |
| | — |
| | 569.2 |
|
| Selling, general and administrative expenses | | 35.5 |
| | 153.9 |
| | 101.7 |
| | — |
| | 291.1 |
| | 37.3 |
| | 142.4 |
| | 130.1 |
| | — |
| | 309.8 |
|
| Amortization expense | | — |
| | 28.4 |
| | 2.8 |
| | — |
| | 31.2 |
| | — |
| | 28.5 |
| | 8.5 |
| | — |
| | 37.0 |
|
| Separation expense | | 6.3 |
| | — |
| | 0.2 |
| | — |
| | 6.5 |
| |
| Restructuring expense | | — |
| | 1.6 |
| | 0.9 |
| | — |
| | 2.5 |
| | 1.6 |
| | 1.2 |
| | 3.2 |
| | — |
| | 6.0 |
|
| Loss from impairment or disposal of assets — net | | — |
| | 2.9 |
| | 0.4 |
| | — |
| | 3.3 |
| |
| (Gain) loss from disposal of assets — net | | | — |
| | (0.5 | ) | | 0.1 |
| | — |
| | (0.4 | ) |
| (Loss) earnings from operations | | (45.2 | ) | | 108.3 |
| | 136.1 |
| | — |
| | 199.2 |
| | (60.1 | ) | | 102.4 |
| | 174.5 |
| | — |
| | 216.8 |
|
| Interest expense | | 82.2 |
| | 1.2 |
| | 1.8 |
| | — |
| | 85.2 |
| | 80.6 |
| | 1.0 |
| | 7.4 |
| | — |
| | 89.0 |
|
| Interest expense on notes with MTW — net | | — |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
| |
| Loss on early extinguishment of debt | | 2.7 |
| | — |
| | — |
| | — |
| | 2.7 |
| |
| Loss on modification or extinguishment of debt | | | 9.0 |
| | — |
| | — |
| | — |
| | 9.0 |
|
| Other (income) expense — net | | (5.7 | ) | | 16.0 |
| | (1.3 | ) | | — |
| | 9.0 |
| | (6.8 | ) | | (29.6 | ) | | 66.2 |
| | — |
| | 29.8 |
|
| Equity in earnings (loss) of subsidiaries | | 194.1 |
| | 115.4 |
| | — |
| | (309.5 | ) | | — |
| |
| Earnings (loss) before income taxes | | 69.7 |
| | 206.5 |
| | 135.5 |
| | (309.5 | ) | | 102.2 |
| |
| Equity in earnings of subsidiaries | | | 191.1 |
| | 71.9 |
| | — |
| | (263.0 | ) | | — |
|
| Earnings before income taxes | | | 48.2 |
| | 202.9 |
| | 100.9 |
| | (263.0 | ) | | 89.0 |
|
| Income taxes | | (1.8 | ) | | 12.4 |
| | 20.1 |
| | — |
| | 30.7 |
| | (30.0 | ) | | 11.8 |
| | 29.0 |
| | — |
| | 10.8 |
|
| Net earnings (loss) | | $ | 71.5 |
| | $ | 194.1 |
| | $ | 115.4 |
| | $ | (309.5 | ) | | $ | 71.5 |
| |
| Total other comprehensive income (loss), net of tax | | 1.1 |
| | 3.0 |
| | 7.3 |
| | (10.3 | ) | | 1.1 |
| |
| Comprehensive income (loss) | | $ | 72.6 |
| | $ | 197.1 |
| | $ | 122.7 |
| | $ | (319.8 | ) | | $ | 72.6 |
| |
| Net earnings | | | $ | 78.2 |
| | $ | 191.1 |
| | $ | 71.9 |
| | $ | (263.0 | ) | | $ | 78.2 |
|
| Total other comprehensive loss, net of tax | | | (9.6 | ) | | (19.5 | ) | | (23.3 | ) | | 42.8 |
| | (9.6 | ) |
| Comprehensive income | | | $ | 68.6 |
| | $ | 171.6 |
| | $ | 48.6 |
| | $ | (220.2 | ) | | $ | 68.6 |
|
WELBILT, INC.
Consolidating Statement of Operations
For the year ended December 31, 20152017
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Net sales | | $ | — |
| | $ | 1,042.3 |
| | $ | 773.0 |
| | $ | (369.9 | ) | | $ | 1,445.4 |
|
| Cost of sales | | 3.8 |
| | 750.6 |
| | 524.0 |
| | (369.9 | ) | | 908.5 |
|
| Gross profit | | (3.8 | ) | | 291.7 |
| | 249.0 |
| | — |
| | 536.9 |
|
| Selling, general and administrative expenses | | 37.4 |
| | 143.8 |
| | 97.1 |
| | — |
| | 278.3 |
|
| Amortization expense | | — |
| | 28.4 |
| | 2.8 |
| | — |
| | 31.2 |
|
| Restructuring expense | | 5.0 |
| | 3.5 |
| | 2.3 |
| | — |
| | 10.8 |
|
| Loss from disposal of assets — net | | — |
| | (0.4 | ) | | (3.6 | ) | | — |
| | (4.0 | ) |
| (Loss) earnings from operations | | (46.2 | ) | | 116.4 |
| | 150.4 |
| | — |
| | 220.6 |
|
| Interest expense | | 82.8 |
| | 1.1 |
| | 3.0 |
| | — |
| | 86.9 |
|
| Loss on modification or extinguishment of debt | | 1.7 |
| | — |
| | — |
| | — |
| | 1.7 |
|
| Other (income) expense — net | | (10.2 | ) | | (23.7 | ) | | 44.5 |
| | — |
| | 10.6 |
|
| Equity in earnings of subsidiaries | | 232.6 |
| | 86.1 |
| | — |
| | (318.7 | ) | | — |
|
| Earnings before income taxes | | 112.1 |
| | 225.1 |
| | 102.9 |
| | (318.7 | ) | | 121.4 |
|
| Income taxes | | (20.8 | ) | | (7.5 | ) | | 16.8 |
| | — |
| | (11.5 | ) |
| Net earnings | | $ | 132.9 |
| | $ | 232.6 |
| | $ | 86.1 |
| | $ | (318.7 | ) | | $ | 132.9 |
|
| Total other comprehensive income, net of tax | | 11.4 |
| | 20.3 |
| | 17.8 |
| | (38.1 | ) | | 11.4 |
|
| Comprehensive income | | $ | 144.3 |
| | $ | 252.9 |
| | $ | 103.9 |
| | $ | (356.8 | ) | | $ | 144.3 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Net sales | | $ | — |
| | $ | 1,109.8 |
| | $ | 809.9 |
| | $ | (349.6 | ) | | $ | 1,570.1 |
|
| Cost of sales | | 0.1 |
| | 803.6 |
| | 614.3 |
| | (349.6 | ) | | 1,068.4 |
|
| Gross profit | | (0.1 | ) | | 306.2 |
| | 195.6 |
| | — |
| | 501.7 |
|
| Selling, general and administrative expenses | | 32.2 |
| | 144.6 |
| | 114.8 |
| | — |
| | 291.6 |
|
| Amortization expense | | — |
| | 28.5 |
| | 2.9 |
| | — |
| | 31.4 |
|
| Separation expense (income) | | 4.4 |
| | 0.1 |
| | (0.2 | ) | | — |
| | 4.3 |
|
| Restructuring expense | | — |
| | 1.9 |
| | 2.7 |
| | — |
| | 4.6 |
|
| Loss from impairment or disposal of assets — net | | — |
| | 8.4 |
| | 1.5 |
| |
|
| | 9.9 |
|
| (Loss) earnings from operations | | (36.7 | ) | | 122.7 |
| | 73.9 |
| | — |
| | 159.9 |
|
| Interest expense | | — |
| | 1.2 |
| | 0.2 |
| | — |
| | 1.4 |
|
| Interest income on notes with MTW — net | | — |
| | (14.9 | ) | | (0.9 | ) | | — |
| | (15.8 | ) |
| Other (income) expense — net | | (78.6 | ) | | 77.8 |
| | (21.3 | ) | | — |
| | (22.1 | ) |
| Equity in earnings (loss) of subsidiaries | | 122.2 |
| | 77.9 |
| | — |
| | (200.1 | ) | | — |
|
| Earnings (loss) before income taxes | | 164.1 |
| | 136.5 |
| | 95.9 |
| | (200.1 | ) | | 196.4 |
|
| Income taxes | | 8.0 |
| | 14.3 |
| | 18.0 |
| | — |
| | 40.3 |
|
| Net earnings (loss) | | $ | 156.1 |
| | $ | 122.2 |
| | $ | 77.9 |
| | $ | (200.1 | ) | | $ | 156.1 |
|
| Total other comprehensive (loss) income, net of tax | | (23.8 | ) | | (27.7 | ) | | (26.9 | ) | | 54.6 |
| | (23.8 | ) |
| Comprehensive income (loss) | | $ | 132.3 |
| | $ | 94.5 |
| | $ | 51.0 |
| | $ | (145.5 | ) | | $ | 132.3 |
|
WELBILT, INC.
Consolidating Balance Sheet
As of December 31, 20172019
| | | (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Assets | | |
| | | | | | | | | | |
| | | | | | | | |
| Current assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 8.8 |
|
| $ | — |
|
| $ | 120.4 |
|
| $ | (0.8 | ) | | $ | 128.4 |
| | $ | 10.7 |
| | $ | 0.7 |
| | $ | 119.3 |
|
| $ | — |
| | $ | 130.7 |
|
| Restricted cash | | — |
| | — |
| | 0.3 |
| | — |
| | 0.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Accounts receivable — net | | — |
| | — |
| | 84.7 |
| | (1.0 | ) | | 83.7 |
| | 0.1 |
| | 82.5 |
| | 101.0 |
| | — |
| | 183.6 |
|
| Intercompany interest receivable | | | — |
| | — |
| | — |
| | — |
| | — |
|
| Inventories — net | | — |
| | 69.8 |
| | 82.5 |
| | — |
| | 152.3 |
| | — |
| | 100.2 |
| | 86.2 |
| | — |
| | 186.4 |
|
| Prepaids and other current assets | | 5.3 |
| | 5.9 |
| | 7.8 |
| | — |
| | 19.0 |
| | 6.7 |
| | 6.8 |
| | 14.7 |
| | — |
| | 28.2 |
|
| Total current assets | | 14.1 |
| | 75.7 |
| | 295.7 |
| | (1.8 | ) | | 383.7 |
| | 17.5 |
| | 190.2 |
| | 321.2 |
| | — |
| | 528.9 |
|
| Property, plant and equipment — net | | 0.5 |
| | 68.7 |
| | 43.0 |
| | — |
| | 112.2 |
| | 11.1 |
| | 72.3 |
| | 44.1 |
| | — |
| | 127.5 |
|
| Operating lease right-of-use assets | | | — |
| | 3.6 |
| | 36.3 |
| | — |
| | 39.9 |
|
| Goodwill | | — |
| | 832.4 |
| | 13.7 |
| | — |
| | 846.1 |
| | — |
| | 832.4 |
| | 100.7 |
| | — |
| | 933.1 |
|
| Other intangible assets — net | | — |
| | 396.3 |
| | 65.1 |
| | — |
| | 461.4 |
| | — |
| | 344.2 |
| | 163.5 |
| | — |
| | 507.7 |
|
| Intercompany long-term note receivable | | — |
| | 20.0 |
| | — |
| | (20.0 | ) | | — |
| | — |
| | 10.1 |
| | 9.9 |
| | (20.0 | ) | | — |
|
| Due from affiliates | | — |
| | 3,252.8 |
| | — |
| | (3,252.8 | ) | | — |
| | — |
| | 3,408.2 |
| | — |
| | (3,408.2 | ) | | — |
|
| Investment in subsidiaries | | 4,009.4 |
| | — |
| | — |
| | (4,009.4 | ) | | — |
| | 4,374.3 |
| | — |
| | — |
| | (4,374.3 | ) | | — |
|
| Other non-current assets | | 10.8 |
| | 5.2 |
| | 28.7 |
| | (7.7 | ) | | 37.0 |
| | 7.6 |
| | 4.2 |
| | 16.4 |
| | — |
| | 28.2 |
|
| Total assets | | $ | 4,034.8 |
| | $ | 4,651.1 |
| | $ | 446.2 |
| | $ | (7,291.7 | ) | | $ | 1,840.4 |
| | $ | 4,410.5 |
| | $ | 4,865.2 |
| | $ | 692.1 |
| | $ | (7,802.5 | ) | | $ | 2,165.3 |
|
| Liabilities and equity | | | | | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 0.2 |
| | $ | 58.2 |
| | $ | 47.0 |
| | $ | (1.8 | ) | | $ | 103.6 |
| |
| Trade accounts payable | | | $ | 0.2 |
| | $ | 49.0 |
| | $ | 55.2 |
| | $ | — |
| | $ | 104.4 |
|
| Accrued expenses and other liabilities | | 20.7 |
| | 95.9 |
| | 52.9 |
| | — |
| | 169.5 |
| | 35.3 |
| | 87.7 |
| | 69.4 |
| | — |
| | 192.4 |
|
| Current portion of capital leases | | — |
| | 0.5 |
| | 0.2 |
| | — |
| | 0.7 |
| |
| Short-term borrowings and current portion of finance leases | | | — |
| | 0.7 |
| | 0.5 |
| | — |
| | 1.2 |
|
| Intercompany Interest Payable | | | — |
| | — |
| | — |
| | — |
| | — |
|
| Product warranties | | — |
| | 16.2 |
| | 7.9 |
| | — |
| | 24.1 |
| | — |
| | 21.9 |
| | 11.4 |
| | — |
| | 33.3 |
|
| Total current liabilities | | 20.9 |
| | 170.8 |
| | 108.0 |
| | (1.8 | ) | | 297.9 |
| | 35.5 |
| | 159.3 |
| | 136.5 |
| | — |
| | 331.3 |
|
| Long-term debt and capital leases | | 1,230.2 |
| | 1.2 |
| | 0.8 |
| | — |
| | 1,232.2 |
| |
| Long-term debt and finance leases | | | 1,370.0 |
| | 0.6 |
| | 32.5 |
| | — |
| | 1,403.1 |
|
| Deferred income taxes | | 73.7 |
| | — |
| | 17.6 |
| | — |
| | 91.3 |
| | 45.0 |
| | — |
| | 36.9 |
| | — |
| | 81.9 |
|
| Pension and postretirement health obligations | | 51.3 |
| | 4.7 |
| | — |
| | (7.7 | ) | | 48.3 |
| |
| Pension and postretirement health liabilities | | | 15.5 |
| | 10.2 |
| | 7.1 |
| | — |
| | 32.8 |
|
| Intercompany long-term note payable | | 15.7 |
| | — |
| | 4.3 |
| | (20.0 | ) | | — |
| | 15.7 |
| | — |
| | 4.3 |
| | (20.0 | ) | | — |
|
| Due to affiliates | | 2,501.4 |
| | — |
| | 751.4 |
| | (3,252.8 | ) | | — |
| | 2,668.5 |
| | — |
| | 739.7 |
| | (3,408.2 | ) | | — |
|
| Investment in subsidiaries | | — |
| | 440.2 |
| | — |
| | (440.2 | ) | | — |
| | — |
| | 298.5 |
| | — |
| | (298.5 | ) | | — |
|
| Operating lease liabilities | | | — |
| | 1.8 |
| | 27.3 |
| | — |
| | 29.1 |
|
| Other long-term liabilities | | 38.0 |
| | 24.8 |
| | 4.3 |
| | — |
| | 67.1 |
| | 7.4 |
| | 20.5 |
| | 6.3 |
| | (0.1 | ) | | 34.1 |
|
| Total non-current liabilities | | 3,910.3 |
| | 470.9 |
| | 778.4 |
| | (3,720.7 | ) | | 1,438.9 |
| | 4,122.1 |
| | 331.6 |
| | 854.1 |
| | (3,726.8 | ) | | 1,581.0 |
|
| Total equity (deficit): | | | | | | | | | | | |
| Total equity (deficit) | | 103.6 |
| | 4,009.4 |
| | (440.2 | ) | | (3,569.2 | ) | | 103.6 |
| | 252.9 |
| | 4,374.3 |
| | (298.5 | ) | | (4,075.7 | ) | | 253.0 |
|
| Total liabilities and equity | | $ | 4,034.8 |
| | $ | 4,651.1 |
| | $ | 446.2 |
| | $ | (7,291.7 | ) | | $ | 1,840.4 |
| | $ | 4,410.5 |
| | $ | 4,865.2 |
| | $ | 692.1 |
| | $ | (7,802.5 | ) | | $ | 2,165.3 |
|
WELBILT, INC.
Consolidating Balance Sheet
As of December 31, 20162018
(As Restated)
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Assets | | |
| | | | | | | | |
| Current assets: | | |
| | | | | | | | |
| Cash and cash equivalents | | $ | 0.2 |
| | $ | 0.5 |
| | $ | 69.7 |
| | $ | — |
| | $ | 70.4 |
|
| Restricted cash | | — |
| | — |
| | 2.8 |
| | — |
| | 2.8 |
|
| Short-term investment | | — |
| | — |
| | 32.0 |
| | — |
| | 32.0 |
|
| Accounts receivable — net | | — |
| | — |
| | 114.3 |
| | (1.8 | ) | | 112.5 |
|
| Inventories — net | | — |
| | 99.8 |
| | 90.8 |
| | — |
| | 190.6 |
|
| Prepaids and other current assets | | 17.0 |
| | 3.5 |
| | 11.7 |
| | — |
| | 32.2 |
|
| Total current assets | | 17.2 |
| | 103.8 |
| | 321.3 |
| | (1.8 | ) | | 440.5 |
|
| Property, plant and equipment — net | | 3.0 |
| | 68.4 |
| | 44.9 |
| | — |
| | 116.3 |
|
| Goodwill | | — |
| | 832.4 |
| | 103.2 |
| | — |
| | 935.6 |
|
| Other intangible assets — net | | — |
| | 373.5 |
| | 175.9 |
| | — |
| | 549.4 |
|
| Intercompany long-term note receivable | | 20.0 |
| | 10.1 |
| | 9.9 |
| | (40.0 | ) | | — |
|
| Due from affiliates | | — |
| | 3,395.0 |
| | — |
| | (3,395.0 | ) | | — |
|
| Investment in subsidiaries | | 4,200.5 |
| | — |
| | — |
| | (4,200.5 | ) | | — |
|
| Other non-current assets | | 12.1 |
| | 4.0 |
| | 28.1 |
| | (11.0 | ) | | 33.2 |
|
| Total assets | | $ | 4,252.8 |
| | $ | 4,787.2 |
| | $ | 683.3 |
| | $ | (7,648.3 | ) | | $ | 2,075.0 |
|
| Liabilities and equity | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | |
| Trade accounts payable | | $ | 0.2 |
| | $ | 81.5 |
| | $ | 71.2 |
| | $ | (1.9 | ) | | $ | 151.0 |
|
| Accrued expenses and other liabilities | | 33.9 |
| | 88.8 |
| | 61.0 |
| | — |
| | 183.7 |
|
| Short-term borrowings and current portion of finance leases | | — |
| | 0.9 |
| | 15.2 |
| | — |
| | 16.1 |
|
| Product warranties | | — |
| | 18.2 |
| | 9.7 |
| | — |
| | 27.9 |
|
| Total current liabilities | | 34.1 |
| | 189.4 |
| | 157.1 |
| | (1.9 | ) | | 378.7 |
|
| Long-term debt and finance leases | | 1,246.6 |
| | 1.2 |
| | 74.0 |
| | — |
| | 1,321.8 |
|
| Deferred income taxes | | 60.5 |
| | — |
| | 43.8 |
| | — |
| | 104.3 |
|
| Pension and postretirement health liabilities | | 45.5 |
| | 4.6 |
| | — |
| | (10.9 | ) | | 39.2 |
|
| Intercompany long-term note payable | | 15.7 |
| | — |
| | 24.3 |
| | (40.0 | ) | | — |
|
| Due to affiliates | | 2,649.5 |
| | — |
| | 745.5 |
| | (3,395.0 | ) | | — |
|
| Investment in subsidiaries | | — |
| | 368.3 |
| | — |
| | (368.3 | ) | | — |
|
| Other long-term liabilities | | 14.5 |
| | 23.2 |
| | 6.9 |
| | — |
| | 44.6 |
|
| Total non-current liabilities | | 4,032.3 |
| | 397.3 |
| | 894.5 |
| | (3,814.2 | ) | | 1,509.9 |
|
| Total equity (deficit) | | 186.4 |
| | 4,200.5 |
| | (368.3 | ) | | (3,832.2 | ) | | 186.4 |
|
| Total liabilities and equity | | $ | 4,252.8 |
| | $ | 4,787.2 |
| | $ | 683.3 |
| | $ | (7,648.3 | ) | | $ | 2,075.0 |
|
WELBILT, INC.
Consolidating Statement of Cash Flows
For the year ended December 31, 2019
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Assets | | |
| | | | | | | | |
| Current assets: | | |
| | | | | | | | |
| Cash and cash equivalents | | $ | 0.4 |
| | $ | 2.3 |
| | $ | 51.1 |
| | $ | — |
| | $ | 53.8 |
|
| Restricted cash | | — |
| | — |
| | 6.4 |
| | — |
| | 6.4 |
|
| Accounts receivable — net | | 0.5 |
| | — |
| | 86.1 |
| | (4.9 | ) | | 81.7 |
|
| Inventories — net | | — |
| | 74.3 |
| | 71.3 |
| | — |
| | 145.6 |
|
| Prepaids and other current assets | | 0.9 |
| | 4.5 |
| | 8.5 |
| | — |
| | 13.9 |
|
| Current assets held for sale | | — |
| | 2.3 |
| | 4.5 |
| | — |
| | 6.8 |
|
| Total current assets | | 1.8 |
| | 83.4 |
| | 227.9 |
| | (4.9 | ) | | 308.2 |
|
| Property, plant and equipment — net | | 1.2 |
| | 67.9 |
| | 40.0 |
| | — |
| | 109.1 |
|
| Goodwill | | — |
| | 832.4 |
| | 12.9 |
| | — |
| | 845.3 |
|
| Other intangible assets — net | | — |
| | 423.5 |
| | 60.9 |
| | — |
| | 484.4 |
|
| Intercompany long-term note receivable | | — |
| | 20.0 |
| | — |
| | (20.0 | ) | | — |
|
| Due from affiliates | | — |
| | 3,089.4 |
| | — |
| | (3,089.4 | ) | | — |
|
| Investment in subsidiaries | | 3,776.8 |
| | — |
| | — |
| | (3,776.8 | ) | | — |
|
| Other non-current assets | | 2.7 |
| | 5.1 |
| | 19.7 |
| | (5.4 | ) | | 22.1 |
|
| Total assets | | $ | 3,782.5 |
| | $ | 4,521.7 |
| | $ | 361.4 |
| | $ | (6,896.5 | ) | | $ | 1,769.1 |
|
| Liabilities and equity | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | |
| Accounts payable | | $ | 0.1 |
| | $ | 64.6 |
| | $ | 48.6 |
| | $ | (4.9 | ) | | $ | 108.4 |
|
| Accrued expenses and other liabilities | | 13.7 |
| | 102.9 |
| | 61.0 |
| | — |
| | 177.6 |
|
| Current portion of capital leases | | — |
| | 0.5 |
| | 1.1 |
| | — |
| | 1.6 |
|
| Product warranties | | — |
| | 18.4 |
| | 9.5 |
| | — |
| | 27.9 |
|
| Current liabilities held for sale | | — |
| | — |
| | 0.7 |
| | — |
| | 0.7 |
|
| Total current liabilities | | 13.8 |
| | 186.4 |
| | 120.9 |
| | (4.9 | ) | | 316.2 |
|
| Long-term debt and capital leases | | 1,279.6 |
| | 1.7 |
| | — |
| | — |
| | 1,281.3 |
|
| Deferred income taxes | | 127.7 |
| | — |
| | 17.3 |
| | — |
| | 145.0 |
|
| Pension and postretirement health obligations | | 47.9 |
| | 4.9 |
| | — |
| | (5.4 | ) | | 47.4 |
|
| Intercompany long-term note payable | | 15.7 |
| | — |
| | 4.3 |
| | (20.0 | ) | | — |
|
| Due to affiliates | | 2,344.8 |
| | — |
| | 744.6 |
| | (3,089.4 | ) | | — |
|
| Investment in subsidiaries | | — |
| | 526.3 |
| | — |
| | (526.3 | ) | | — |
|
| Other long-term liabilities | | 9.4 |
| | 25.6 |
| | 0.6 |
| | — |
| | 35.6 |
|
| Total non-current liabilities | | 3,825.1 |
| | 558.5 |
| | 766.8 |
| | (3,641.1 | ) | | 1,509.3 |
|
| Total (deficit) equity: | | | | | | | | | | |
| Total (deficit) equity | | (56.4 | ) | | 3,776.8 |
| | (526.3 | ) | | (3,250.5 | ) | | (56.4 | ) |
| Total liabilities and equity | | $ | 3,782.5 |
| | $ | 4,521.7 |
| | $ | 361.4 |
| | $ | (6,896.5 | ) | | $ | 1,769.1 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Parent | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities | | | | | | | | | | |
| Net cash used in operating activities | | $ | (131.7 | ) | | $ | (40.2 | ) | | $ | (97.8 | ) | | $ | — |
| | $ | (269.7 | ) |
| Cash flows from investing activities | | | | | | | | | | |
| Cash receipts on beneficial interest in sold receivables | | — |
| | 75.8 |
| | 204.9 |
| | — |
| | 280.7 |
|
| Capital expenditures | | (4.2 | ) | | (20.5 | ) | | (9.2 | ) | | — |
| | (33.9 | ) |
| Proceeds from maturity of short-term investment | | — |
| | — |
| | 32.0 |
| | — |
| | 32.0 |
|
| Other | | 1.1 |
| | — |
| | — |
| | — |
| | 1.1 |
|
| Intercompany investment | | — |
| | (13.2 | ) | | (25.8 | ) | | 39.0 |
| | — |
|
| Net cash (used in) provided by investing activities | | (3.1 | ) | | 42.1 |
| | 201.9 |
| | 39.0 |
| | 279.9 |
|
| Cash flows from financing activities | | | | | | | | | |
|
|
| Proceeds from long-term debt | | 410.0 |
| | — |
| | — |
| | — |
| | 410.0 |
|
| Repayments on long-term debt and finance leases | | (304.5 | ) | | (0.9 | ) | | (43.0 | ) | | — |
| | (348.4 | ) |
| Repayment of short-term borrowings | | — |
| | — |
| | (15.0 | ) | | — |
| | (15.0 | ) |
| Payment of contingent consideration | | — |
| | (0.8 | ) | | — |
| | — |
| | (0.8 | ) |
| Exercises of stock options | | 3.2 |
| | — |
| | — |
| | — |
| | 3.2 |
|
| Payments on tax withholdings for equity awards | | (2.4 | ) | | — |
| | — |
| | — |
| | (2.4 | ) |
| Intercompany financing | | 39.0 |
| | — |
| | — |
| | (39.0 | ) | | — |
|
| Net cash provided by (used in) financing activities | | 145.3 |
| | (1.7 | ) | | (58.0 | ) | | (39.0 | ) | | 46.6 |
|
| Effect of exchange rate changes on cash | | — |
| | — |
| | 0.7 |
| | — |
| | 0.7 |
|
| Net increase in cash and cash equivalents and restricted cash | | 10.5 |
| | 0.2 |
| | 46.8 |
| | — |
| | 57.5 |
|
| Balance at beginning of period | | 0.2 |
| | 0.5 |
| | 72.5 |
| | — |
| | 73.2 |
|
| Balance at end of period | | $ | 10.7 |
| | $ | 0.7 |
| | $ | 119.3 |
| | $ | — |
| | $ | 130.7 |
|
WELBILT, INC.
Consolidating Statement of Cash Flows
For the year ended December 31, 2018
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities | |
|
| |
|
| |
|
| |
|
| |
|
|
| Net cash (used in) provided by operating activities | | $ | (150.9 | ) | | $ | 148.5 |
| | $ | (446.9 | ) | | $ | 0.8 |
| | $ | (448.5 | ) |
| Cash flows from investing activities | | | | | | | | | | |
| Cash receipts on beneficial interest in sold receivables | | — |
| | — |
| | 576.4 |
| | — |
| | 576.4 |
|
| Capital expenditures | | (2.9 | ) | | (11.1 | ) | | (7.4 | ) | | — |
| | (21.4 | ) |
| Acquisition of intangible assets | | — |
| | (2.8 | ) | | — |
| | — |
| | (2.8 | ) |
| Business acquisition, net of cash acquired | | — |
| | — |
| | (215.6 | ) | | — |
| | (215.6 | ) |
| Purchase of short-term investment | | — |
| | — |
| | (35.0 | ) | | — |
| | (35.0 | ) |
| Proceeds from maturity of short-term investment | | — |
| | — |
| | 20.7 |
| | — |
| | 20.7 |
|
| Settlement of foreign exchange contract | | — |
| | — |
| | (10.0 | ) | | — |
| | (10.0 | ) |
| Other | | 1.2 |
| | — |
| | — |
| | — |
| | 1.2 |
|
| Intercompany investment | | — |
| | (132.3 | ) | | 4.2 |
| | 128.1 |
| | — |
|
| Net cash (used in) provided by investing activities | | (1.7 | ) | | (146.2 | ) | | 333.3 |
| | 128.1 |
| | 313.5 |
|
| Cash flows from financing activities | | | | | | | | | | |
| Proceeds from long-term debt | | 300.5 |
| | — |
| | 175.0 |
| | — |
| | 475.5 |
|
| Repayments on long-term debt and finance leases | | (281.0 | ) | | (0.4 | ) | | (101.8 | ) | | — |
| | (383.2 | ) |
| Proceeds from short-term borrowings | | — |
| | — |
| | 30.0 |
| | — |
| | 30.0 |
|
| Repayment of short-term borrowings | | — |
| | — |
| | (15.0 | ) | | — |
| | (15.0 | ) |
| Debt issuance costs | | (6.8 | ) | | — |
| | — |
| | — |
| | (6.8 | ) |
| Payment of deferred consideration | | — |
| | (1.4 | ) | | — |
| | — |
| | (1.4 | ) |
| Exercises of stock options | | 6.2 |
| | — |
| | — |
| | — |
| | 6.2 |
|
| Payments on tax withholdings for equity awards | | (3.0 | ) | | — |
| | — |
| | — |
| | (3.0 | ) |
| Intercompany financing | | 128.1 |
| | — |
| | — |
| | (128.1 | ) | | — |
|
| Net cash provided by (used in) financing activities | | 144.0 |
| | (1.8 | ) | | 88.2 |
| | (128.1 | ) | | 102.3 |
|
| Effect of exchange rate changes on cash | | — |
| | — |
| | (2.9 | ) | | — |
| | (2.9 | ) |
| Net (decrease) increase in cash and cash equivalents and restricted cash | | (8.6 | ) | | 0.5 |
| | (28.3 | ) | | 0.8 |
| | (35.6 | ) |
| Balance at beginning of period | | 8.8 |
| | — |
| | 100.8 |
| | (0.8 | ) | | 108.8 |
|
| Balance at end of period | | $ | 0.2 |
| | $ | 0.5 |
| | $ | 72.5 |
| | $ | — |
| | $ | 73.2 |
|
WELBILT, INC.
Consolidating Statement of Cash Flows
For the year ended December 31, 2017
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities | | | | | | | | | | |
| Net cash (used in) provided by operating activities | | $ | (97.6 | ) | | $ | 169.3 |
| | $ | (502.2 | ) | | $ | (0.8 | ) | | $ | (431.3 | ) |
| Cash flows from investing activities | | | | | | | | | | |
| Cash receipts on beneficial interest in sold receivables | | — |
| | — |
| | 552.1 |
| | — |
| | 552.1 |
|
| Capital expenditures | | (0.5 | ) | | (12.5 | ) | | (7.7 | ) | | — |
| | (20.7 | ) |
| Proceeds from sale of property, plant and equipment | | — |
| | 6.0 |
| | 6.3 |
| | — |
| | 12.3 |
|
| Acquisition of intangible assets | | — |
| | (1.2 | ) | | — |
| | — |
| | (1.2 | ) |
| Other | | 0.9 |
| | — |
| | — |
| | — |
| | 0.9 |
|
| Intercompany investment | | — |
| | (163.4 | ) | | 6.8 |
| | 156.6 |
| | — |
|
| Net cash provided by (used in) investing activities | | 0.4 |
| | (171.1 | ) | | 557.5 |
| | 156.6 |
| | 543.4 |
|
| Cash flows from financing activities | | | | | | | | | | |
| Proceeds from long-term debt | | 155.0 |
| | — |
| | — |
| | — |
| | 155.0 |
|
| Repayments on long-term debt and finance leases | | (203.4 | ) | | (0.5 | ) | | (0.2 | ) | | — |
| | (204.1 | ) |
| Proceeds from short-term borrowings | | — |
| | — |
| | 4.0 |
| | — |
| | 4.0 |
|
| Repayment of short-term borrowings | | — |
| | — |
| | (4.0 | ) | | — |
| | (4.0 | ) |
| Debt issuance costs | | (2.0 | ) | | — |
| | — |
| | — |
| | (2.0 | ) |
| Exercises of stock options | | 4.8 |
| | — |
| | — |
| | — |
| | 4.8 |
|
| Payments on tax withholdings for equity awards | | (5.4 | ) | | — |
| | — |
| | — |
| | (5.4 | ) |
| Intercompany financing | | 156.6 |
| | — |
| | — |
| | (156.6 | ) | | — |
|
| Net cash provided by (used in) financing activities | | 105.6 |
| | (0.5 | ) | | (0.2 | ) | | (156.6 | ) | | (51.7 | ) |
| Effect of exchange rate changes on cash | | — |
| | — |
| | 6.9 |
| | — |
| | 6.9 |
|
| Net increase (decrease) in cash and cash equivalents and restricted cash | | 8.4 |
| | (2.3 | ) | | 62.0 |
| | (0.8 | ) | | 67.3 |
|
| Balance at beginning of period | | 0.4 |
| | 2.3 |
| | 38.8 |
| | — |
| | 41.5 |
|
| Balance at end of period | | $ | 8.8 |
| | $ | — |
| | $ | 100.8 |
| | $ | (0.8 | ) | | $ | 108.8 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities | |
|
| |
|
| |
|
| |
|
| | |
| Net cash (used in) provided by operating activities | | $ | (96.7 | ) | | $ | 169.3 |
| | $ | 66.0 |
| | $ | (0.8 | ) | | $ | 137.8 |
|
| Cash flows from investing activities | |
|
| |
|
| |
|
| |
|
| | |
| Capital expenditures | | (0.5 | ) | | (12.5 | ) | | (7.7 | ) | | — |
| | (20.7 | ) |
| Proceeds from sale of property, plant and equipment | | — |
| | 6.0 |
| | 6.3 |
| | — |
| | 12.3 |
|
| Changes in restricted cash | | — |
| | — |
| | 6.2 |
| | — |
| | 6.2 |
|
| Acquisition of intangible assets | | — |
| | (1.2 | ) | | — |
| | — |
| | (1.2 | ) |
| Intercompany investment | | — |
| | (163.4 | ) | | 6.8 |
| | 156.6 |
| | — |
|
| Net cash (used in) provided by investing activities | | (0.5 | ) | | (171.1 | ) | | 11.6 |
| | 156.6 |
| | (3.4 | ) |
| Cash flows from financing activities | |
|
| |
|
| |
|
| |
|
| |
|
|
| Proceeds from long-term debt and capital leases | | 155.0 |
| | — |
| | — |
| | — |
| | 155.0 |
|
| Repayments on long-term debt and capital leases | | (203.4 | ) | | (0.5 | ) | | (0.2 | ) | | — |
| | (204.1 | ) |
| Proceeds from short-term borrowings | | — |
| | — |
| | 4.0 |
| | — |
| | 4.0 |
|
| Repayment of short-term borrowings | | — |
| | — |
| | (4.0 | ) | | — |
| | (4.0 | ) |
| Debt issuance costs | | (2.0 | ) | | — |
| | — |
| | — |
| | (2.0 | ) |
| Exercises of stock options | | 4.8 |
| | — |
| | — |
| | — |
| | 4.8 |
|
| Payments on tax withholdings for equity awards | | (5.4 | ) | | — |
| | — |
| | — |
| | (5.4 | ) |
| Intercompany financing | | 156.6 |
| | — |
| |
|
| | (156.6 | ) | | — |
|
| Net cash provided by (used in) financing activities | | 105.6 |
| | (0.5 | ) | | (0.2 | ) | | (156.6 | ) | | (51.7 | ) |
| Effect of exchange rate changes on cash | | — |
| | — |
| | (8.1 | ) | | — |
| | (8.1 | ) |
| Net increase in cash and cash equivalents | | 8.4 |
| | (2.3 | ) | | 69.3 |
| | (0.8 | ) | | 74.6 |
|
| Balance at beginning of period | | 0.4 |
| | 2.3 |
| | 51.1 |
| | — |
| | 53.8 |
|
| Balance at end of period | | $ | 8.8 |
| | $ | — |
| | $ | 120.4 |
| | $ | (0.8 | ) | | $ | 128.4 |
|
WELBILT, INC.
Consolidating (Condensed) Statement of Cash Flows
For the year ended December 31, 2016
(As Restated)
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities | |
|
| |
|
| |
|
| |
|
| |
|
|
| Net cash (used in) provided by operating activities | | $ | (100.4 | ) | | $ | 84.0 |
| | $ | 140.7 |
| | $ | — |
| | $ | 124.3 |
|
| Cash flows from investing activities | | | | | | | | | | |
| Capital expenditures | | (1.0 | ) | | (8.0 | ) | | (7.0 | ) | | — |
| | (16.0 | ) |
| Changes in restricted cash | | — |
| | — |
| | (6.0 | ) | | — |
| | (6.0 | ) |
| Proceeds from sale of property, plant and equipment | | — |
| | — |
| | 0.5 |
| | | | 0.5 |
|
| Proceeds from dispositions | | — |
| | — |
| | 1.1 |
| | — |
| | 1.1 |
|
| Intercompany investment | | — |
| | (76.9 | ) | | (106.9 | ) | | 183.8 |
| | — |
|
| Net cash (used in) provided by investing activities | | (1.0 | ) | | (84.9 | ) | | (118.3 | ) | | 183.8 |
| | (20.4 | ) |
| Cash flows from financing activities | | | | | | | | | | |
| Proceeds from long-term debt and capital leases | | 1,499.5 |
| | 0.2 |
| | 1.4 |
| | — |
| | 1,501.1 |
|
| Repayments on long-term debt and capital leases | | (186.0 | ) | | (0.5 | ) | | (0.3 | ) | | — |
| | (186.8 | ) |
| Debt issuance costs | | (41.3 | ) | | — |
| | — |
| | — |
| | (41.3 | ) |
| Dividends Paid to MTW | | (1,362.0 | ) | | — |
| | — |
| | — |
| | (1,362.0 | ) |
| Net Transactions with MTW | | (4.6 | ) | | — |
| | — |
| | — |
| | (4.6 | ) |
| Exercises of Stock Options | | 16.2 |
| | — |
| | — |
| | — |
| | 16.2 |
|
| Payments on tax withholdings for equity awards | | (3.8 | ) | | — |
| | — |
| | — |
| | (3.8 | ) |
| Intercompany financing | | 183.8 |
| | — |
| | — |
| | (183.8 | ) | | — |
|
| Net cash provided by (used in) financing activities | | 101.8 |
| | (0.3 | ) | | 1.1 |
| | (183.8 | ) | | (81.2 | ) |
| Effect of exchange rate changes on cash | | — |
| | — |
| | (0.9 | ) | | — |
| | (0.9 | ) |
| Net increase in cash and cash equivalents | | 0.4 |
| | (1.2 | ) | | 22.6 |
| | — |
| | 21.8 |
|
| Balance at beginning of period | | — |
| | 3.5 |
| | 28.5 |
| | — |
| | 32.0 |
|
| Balance at end of period | | $ | 0.4 |
| | $ | 2.3 |
| | $ | 51.1 |
| | $ | — |
| | $ | 53.8 |
|
WELBILT, INC.
Consolidating (Condensed) Statement of Cash Flows
For the year ended December 31, 2015
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | $ | 376.9 |
| | $ | (137.6 | ) | | $ | (96.3 | ) | | $ | — |
| | $ | 143.0 |
|
| Cash flows from investing activities | | | | | | | | | | |
| Capital expenditures | | (0.8 | ) | | (6.5 | ) | | (5.9 | ) | | — |
| | (13.2 | ) |
| Changes in restricted cash | | — |
| | — |
| | (0.6 | ) | | — |
| | (0.6 | ) |
| Business acquisitions, net of cash acquired | | — |
| | — |
| | (5.3 | ) | | — |
| | (5.3 | ) |
| Proceeds from dispositions | | — |
| | 78.2 |
| | — |
| | — |
| | 78.2 |
|
| Intercompany investment | | (193.2 | ) | | — |
| | — |
| | 193.2 |
| | — |
|
| Net cash (used in) provided by investing activities | | (194.0 | ) | | 71.7 |
| | (11.8 | ) | | 193.2 |
| | 59.1 |
|
| Cash flows from financing activities | | | | | | | | | | |
| Proceeds from long-term debt and capital leases | | — |
| | 0.5 |
| | — |
| | — |
| | 0.5 |
|
| Repayments on long-term debt and capital leases | | — |
| | (0.7 | ) | | — |
| | — |
| | (0.7 | ) |
| Net transactions with MTW | | (182.9 | ) | | — |
| | — |
| | — |
| | (182.9 | ) |
| Intercompany financing | | — |
| | 66.9 |
| | 126.3 |
| | (193.2 | ) | | — |
|
| Net cash (used in) provided by financing activities | | (182.9 | ) | | 66.7 |
| | 126.3 |
| | (193.2 | ) | | (183.1 | ) |
| Effect of exchange rate changes on cash | | — |
| | — |
| | (3.5 | ) | | — |
| | (3.5 | ) |
| Net increase in cash and cash equivalents | | — |
| | 0.8 |
| | 14.7 |
| | — |
| | 15.5 |
|
| Balance at beginning of period | | — |
| | 2.7 |
| | 13.8 |
| | — |
| | 16.5 |
|
| Balance at end of period | | $ | — |
| | $ | 3.5 |
| | $ | 28.5 |
| | $ | — |
| | $ | 32.0 |
|
27. Subsequent Events
On February 23, 2018, the Company, through its wholly-owned subsidiary Manitowoc FSG UK Limited, entered into a Share Sale and Purchase Agreement (the “Purchase Agreement”) with various persons and legal entities (the “Sellers”) representing 100% of the share capital of Avaj International Holding AB (“Avaj”). Subject to the terms and conditions set forth in the Purchase Agreement, the Company has agreed to purchase all of the outstanding share capital of Avaj from the Sellers (the “Acquisition”) for aggregate consideration of approximately 1,800.0 million Swedish Krona (“SEK”) or $224.0 million, comprised of (1) SEK1,314.2 million (or approximately $162.0 million) in cash, plus 5.0% interest on such amount for the period from December 31, 2017 to the closing date of the Acquisition, and (2) the repayment of certain indebtedness owed under third-party borrowings and shareholder loans of approximately SEK485.8 million (or $62.0 million) in the aggregate. The Acquisition will be funded through cash on hand and additional borrowings under existing credit lines and is expected to close in the second quarter of 2018, subject to certain closing conditions and the receipt of necessary clearances and approvals, if applicable, from the Spanish National Markets and Competition Commission (the “Competition Approval Condition”).
Crem International Holding AB (“Crem”), a wholly-owned subsidiary of Avaj, is a global manufacturer of professional coffee machines headquartered in Solna, Sweden. Crem develops, manufactures and markets a full suite of coffee machines under three brands: Coffee Queen®, Expobar® and Spengler for use in offices, restaurants, cafes and coffee shops, catering and convenience stores. Following completion of the Acquisition, the Company will have an established presence in hot beverage equipment, a complementary product category, and expects to realize operational synergies and cross-selling benefits. In addition, the Acquisition supports the Company's strategic objective of increasing its Europe and Asia presence.
The Purchase Agreement contains certain customary warranties and covenants, including, among other things, (1) covenants with respect to the conduct of the business in the ordinary course between the execution of the Purchase Agreement and the completion of the Acquisition, and (2) covenants with respect to the Company taking all commercially reasonable measures to satisfy the Competition Approval Condition. The Purchase Agreement also provides for indemnification rights for the Company with respect to breaches by Sellers of warranties, covenants or other agreements under the Purchase Agreement, and for the Company to purchase warranty and indemnity insurance with respect to such rights.
The Purchase Agreement provides that in the event that the Competition Approval Condition has not been fulfilled within 60 business days (as determined under general Swedish banking practices) or it is clear that the Competition Approval Condition will not be fulfilled on or before such date, then the Sellers shall be entitled to terminate the Purchase Agreement.
Events Subsequent to Original Issuance of Financial Statements (Unaudited)
Acquisition of Crem
On April 19, 2018, the Company completed the acquisition of Crem under substantially similar terms to those described above.
Amendments to 2016 Credit Facility
In April 2018, the Company entered into an Incremental Revolving Facility Amendment to the 2016 Credit Agreement whereby the aggregate revolving commitments were increased by $50.0 million to $275.0 million.
On October 23, 2018 (the “Amendment Effective Date”), the Company entered into Amendment No. 6 (the “Amendment”) to the 2016 Credit Agreement (as amended, amended and restated, modified or supplemented from time to time, the “Credit Agreement”), among the Company, the subsidiary borrowers party thereto, the lenders and other financial parties from time to time party thereto and JPMorgan Chase Bank, N.A., individually and as administrative agent.
The Amendment (i) replaced and refinanced all amounts outstanding and committed under the 2016 Credit Agreement such that, as of the Amendment Effective Date, the aggregate amount of term B loans outstanding was $900.0 million and the aggregate amount of revolving commitments was $400.0 million, of which $90.0 million was drawn, (ii) extended the maturity of the new term B loans to October 2025 and the new revolving commitments to October 2023 and (iii) made certain other changes to the Credit Agreement as set forth therein.
Following the Amendment, borrowings under the Credit Agreement bear interest at a rate per annum equal to, at the Company’s option, either (i) LIBOR plus an applicable margin of, for term loans, 2.50% and, for revolving loans, from 1.50% to 2.50% (depending on the Company’s consolidated total leverage ratio) or (ii) an alternate base rate, plus applicable margins of 1.00% less than in the case of LIBOR-based borrowings.
The Amendment revised the financial covenants under the Credit Agreement to (a) a maximum consolidated total leverage ratio of 5.75 to 1.00, with decreases of 0.25 every fourth fiscal quarter beginning with the fiscal quarter ending December 31, 2019, and decreases of 0.50 every fourth fiscal quarter beginning with the fiscal quarter ending December 31, 2021 until the ratio reaches 4.25 to 1.00 in the fiscal quarter ending December 31, 2022, and (b) a minimum consolidated interest coverage ratio of 2.50 to 1.00, with increases of 0.25 every fourth fiscal quarter beginning with the fiscal quarter ending December 31, 2019 until the ratio reaches 3.00 to 1.00 in the fiscal quarter ending December 31, 2020; provided, however, that during a covenant holiday acquisition transition period, the consolidated total leverage ratio may exceed the applicable maximum by up to and including 0.50 (but in no event shall exceed 5.50 to 1.00).
The Amendment also increased (i) the sublimit for the issuance of letters of credit under the new revolving commitments to $30.0 million and (ii) the aggregate principal amount of allowed incremental revolving or term loan facilities under the Credit Agreement to an amount not to exceed the sum of (a) $275.0 million plus (b) an additional amount, so long as, giving effect to the incurrence of such additional amount, the resulting pro forma senior secured leverage ratio does not exceed 3.75:1.00.
In connection with this Amendment, the Company incurred debt issuance costs, including original issue discount, of approximately $13.0 million. The Company is currently evaluating the accounting treatment for these debt issuance costs as well as the existing unamortized debt issuance costs, which were $19.8 million as of September 30, 2018. If the Amendment constitutes a significant modification to the 2016 Credit Agreement, the Company may be required to expense all or a portion of the existing unamortized debt issuance costs in the fourth quarter of 2018.
Amendments to Accounts Receivable Securitization Agreement
The accounts receivable securitization facility was amended on October 26, 2018 in conjunction with the Amendment to the Credit Agreement to provide for certain conforming changes including amending the maximum consolidated total leverage ratio and minimum consolidated interest coverage ratio required thereunder.
Pension Settlement
In October 2018, the Company completed the purchase of a group annuity contract using assets from the U.S. pension plan. Under the group annuity contract, accrued pension obligations of approximately $8.0 million for certain participants that were receiving payments from the U.S. pension plan were transferred to an insurer. This agreement is an irrevocable action that unconditionally transfers the legal obligation to provide these payments to the insurer, as well as the risks attributable to that obligation. As a result, the Company expects to record a non-cash settlement loss estimated to be approximately $2.0 million, based on current market conditions, related to the accelerated recognition of unamortized losses in the fourth quarter of 2018, which will be recorded in "Other expense — net" in the consolidated statement of operations.
Misappropriation of Funds
On November 14, 2018, management learned of an incident that occurred in early November 2018, which resulted in the diversion of approximately €4.0 million from a subsidiary of the Company’s recently acquired Crem business. The Company is currently investigating this matter, including the potential likelihood of recovery, if any. Based on its preliminary review as of the date of this report, management believes the loss, net of recoveries, to be approximately €1.0 million to €3.0 million, although this amount may change as the Company continues with its investigation. The Company also has disclosed the matter to local authorities and is cooperating with them in their investigation. The Company does not currently expect the impact of this incident to be material to its business, results of operations or financial condition.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company'sOur management has established and maintains disclosure controls and procedures that are designed to ensure that the information required to be disclosed by the Companyus in reports that the Company fileswe file or submitssubmit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, includingManagement carried out an evaluation, under the interimsupervision and with the participation of our Chief Executive Officer and Chief Financial Officer, have conductedof the evaluationeffectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) requiredas of the end of the period covered by Rules 13a-15(b) or 15d-15(b) under the Exchange Act. At the timethis report. Based on such evaluation, our Annual Report on Form 10-K for the year ended December 31, 2017 was filed on March 1, 2018, the Company's Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2019, the Company's disclosure controls and procedures were effective as of December 31, 2017. Subsequent to that evaluation, the Company's interim Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of December 31, 2017 as a result of the material weakness in the Company's internal control over financial reporting discussed below.effective.
Management’s Report on Internal Control Over Financial Reporting (As Restated)
ManagementOur management is responsible for establishing and maintaining adequate internal control over financial reporting as(as such term is defined in RulesExchange Act Rule 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the receipts and expenditures of the Company are being made only in accordance with authorizations of our management and the directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the Company's consolidated financial statements.
Act). The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the Company's interimour Chief Executive Officer and Chief Financial Officer, management carried out an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2017,2019, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013) (the "2013 framework"). Based on that evaluation, management concluded that as of December 31, 2017, the Company’s internal control over financial reporting was not effective as a result of the material weakness described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that material misstatements of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
In light of the errors discussed in Note 1, "Business and Organization," to the Company's consolidated financial statements, the Company has determined that it did not design and maintain effective internal controls over the accounting for income taxes. Specifically, certain control activities over the completeness and accuracy of accounting for the income tax effects of (i) non-routine transactions and (ii) intercompany obligations in accordance with underlying agreements were not performed on a timely basis or at the appropriate level of precision. These control deficiencies resulted in the misstatement of the income tax accounts and related financial disclosures, the restatement of the Company's consolidated financial statements for the year ended December 31, 2016 and the revision of the Company's consolidated financial statements for the years ended December 31, 2017 and 2015 and quarterly periods in 2017 and 2016. Additionally, these control deficiencies could result in additional misstatements of the aforementioned balances and disclosures that would result in a material misstatement to the Company's annual or interim consolidated financial statements that would not be prevented or detected.
In Management’s Report on Internal Control Over Financial Reporting included in the Form 10-K for the year ended December 31, 2017, originally filed with the Securities and Exchange Commission on March 1, 2018, the Company's management concluded that as of December 31, 2017, the Company's internal control over financial reporting was effective. Management has subsequently concluded that the material weakness described above existedeffective as of December 31, 2017. As a result, management has concluded effective internal control over financial reporting was not maintained as of December 31, 2017, based on the criteria in the 2013 framework. Accordingly, management has restated its report on internal control over financial reporting.2019.
The Company's independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of our internal control over financial reporting as of December 31, 2017,2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is set forth in Part II, Item 8 of this Annual Report on Form 10-K/A.10-K.
Remediation Planof Previously Reported Material Weaknesses in Internal Control over Financial Reporting
The Company's management is committedAs disclosed in Part II, Item 9A, Controls and Procedures in our Annual Report on Form 10-K for the year ended December 31, 2018, we did not design and maintain effective risk assessment controls related to maintaining a strongthe design and operating effectiveness of our internal control environment.over financial reporting. This material weakness contributed to additional material weaknesses for (i) the accounting for income taxes, (ii) cash disbursements at Crem and (iii) the presentation of the statements of cash flows, each of which was identified as of December 31, 2018. In response to the identified material weakness,weaknesses, management, with the oversight of the Audit Committee of the Board of Directors, will take comprehensivehas taken the following actions to remediate the material weaknessweaknesses in our internal control over financial reporting, including:reporting.
implementing additional specific enhanced control proceduresAccounting for income taxes
With the review, analysis and reportingassistance of itsan external consulting firm, we completed a detailed risk assessment of our income tax accounts, including control procedures relatinginternal controls. Based on the risk assessment, we identified additional controls or modified existing internal controls necessary to ensure (i) the completeness and accuracy of accounting for the income tax effects of non-routine transactions and intercompany obligations;obligations in accordance with underlying agreements are performed on a timely basis and reviewed with the appropriate level of precision and (ii) the impacts of additional guidance changes to the Tax Cut and Jobs Act are reviewed with the appropriate level of precision.
Cash disbursements at Crem
For cash disbursements at our Crem entities, we designed and implemented internal control activities to require the separation of the execution and approval of payments and have conducted employee training for the Crem business on this policy. In addition, we have updated the authorized signatories over our banking activities to increase oversight of banking and lending relationships for the affected entities to better safeguard our cash.
engaging an external consulting firmPresentation of the statements of cash flows
We designed and implemented internal control activities over the review of the following components within the statements of cash flows: (i) the effect of exchange rate changes on cash, (ii) the completeness and accuracy of the cash receipts on beneficial interest in sold receivables for accurate accounting treatment and presentation and (iii) the classification of transactions between operating, investing and financing activities.
Management has concluded that the internal controls outlined above were in place and operating effectively for a sufficient period of time during 2019 to review and recommend additional control enhancements.
The Companyconclude that the material weaknesses above have been remediated as of December 31, 2019. In addition, management has commenced its remediation plan,also concluded that it has remediated the material weakness associated with the goaldesign and maintenance of remediating this material weakness as soon as possible, subject to the conclusion by management that the enhanced internal controleffective risk assessment controls over financial reporting is operating effectively following appropriate testing. It is unlikely that management will have successfully remediated this material weakness in 2018 in considerationas of the timing of when this material weakness was identified.
The remediation efforts, outlined above, are intended bothDecember 31, 2019 by evidencing our ability to identify, evaluate and monitor risks to financial reporting and designing and implementing controls to address the identified material weakness and to enhance our overall financial control environment. As management continues to evaluate and work to improve the Company's disclosure controls and procedures and internal control over financial reporting, the Company may take additional measures to address these deficiencies or modify certain of the remediation measures describedweaknesses discussed above.
Changes in Internal Control Over Financial Reporting
Prior to the Spin-Off, the Company relied on certain financial information and resources of MTW to provide oversight, such as the Board, to manage aspects of the Company's business and to report financial results. These included corporate support functions that were provided on a centralized basis at a MTW enterprise level including, but not limited to, (1) finance, internal audit, which includes Sarbanes-Oxley compliance, legal, information technology, human resources, tax, treasury, investor relations, and external reporting; (2) stock-based compensation; (3) employee compensation, pension and benefit costs; and (4) securitization financing costs. In connection with the Spin-Off, the Company enhanced its own financial, administrative, and other support systems. The Company has expanded its internal accounting, reporting, legal and internal audit departments and has updated its policies and systems, as needed, to meet all regulatory requirements on a stand-alone basis.
The Company continues to review, document and test its internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the system of control evolve with our business. These efforts may lead to changes in the Company's internal control over financial reporting.
There were no changes in the Company'sour internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarterthree months ended December 31, 20172019 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a written code of conduct, or the "Code of Conduct," that applies to all of our employees. The Code of Conduct reflects our commitment to operate our business in a manner that meets the highest ethical standards. It includes or refers to policies and rules that cover ethical and legal practices for many aspects of our business. A copy of the Code of Conduct is posted on our website at www.welbilt.com.www.welbilt.com. We intend to satisfy any disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Conduct by posting such information on our website at the address specified above.
The remaining information required by this Item 10 will be included in our definitive proxy statement2020 Definitive Proxy Statement for our annual meeting2020 Annual Meeting of stockholdersStockholders (the "Proxy Statement") and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be included in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
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| | | |
| (1) | Consolidated Financial Statements: |
| | | |
| | | The following consolidated financial statements are included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. |
| | | |
| | | Report of Independent Registered Public Accounting Firm |
| | | |
| | | Consolidated Statements of Operations |
| | | |
| | | Consolidated Statements of Comprehensive Income |
| | | |
| | | Consolidated Balance Sheets |
| | | |
| | | Consolidated Statements of Cash Flows |
| | | |
| | | Consolidated Statements of Equity |
| | | |
| | | Notes to Consolidated Financial Statements |
| | | |
| (2) | Financial Statement Schedule: |
| | | |
| | | | Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2017, 2016 and 2015 - Page 123 |
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| | | | |
| Schedule | | Description | | Filed Herewith |
| | | | | |
| II | | Valuation and Qualifying Accounts | | X |
All other financial statement schedules not listed have been omitted since the required information is included in the consolidated financial statements or the Notes thereto, or is not applicable or required under rules of Regulation S-X.
(b) Exhibits:
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| | | | |
| Exhibit No. | | Description | | Filings Referenced for Incorporation by Reference |
| | | | Exhibit 2.1 to Current Report on Form 8-K filed March 9, 2016 |
| | | | Exhibit 3.l to Current Report on Form 8-K filed March 9, 2017 |
| | | | Exhibit 3.2 to Annual Report on Form 10-K filed March 1, 2018 |
| | | | Exhibit 4.1 to Current Report on Form 8-K filed February 24, 2016 |
| | | | Exhibit 4.1 to Current Report on Form 8-K filed March 9, 2016 |
| | | | Exhibit 4.1 to Registration Statement on Form S-3 filed April 27, 2018 |
| | | | Filed herewith |
| | Settlement Agreement, dated February 6, 2015, among The Manitowoc Company, Inc., Carl C. Icahn, Icahn Partners Master Fund LP, Icahn Offshore LP, Icahn Partners LP, Icahn Onshore LP, Beckton Corp., Hopper Investments LLC, Barberry Corp., High River Limited Partnership, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings L.P. and Icahn Enterprises G.P. Inc. | | Exhibit 10.5 to Registration Statement on Form 10 filed September 1, 2015 |
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| | | | |
| | Amendment to Settlement Agreement, dated December 31, 2015, among The Manitowoc Company, Inc., Carl C. Icahn, Icahn Partners Master Fund LP, Icahn Offshore LP, Icahn Partners LP, Icahn Onshore LP, Beckton Corp., Hopper Investments LLC, Barberry Corp., High River Limited Partnership, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings L.P. and Icahn Enterprises G.P. Inc. | | Exhibit 10.8 to Registration Statement on Form 10 filed January 19, 2016 |
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| | Joinder Agreement to Settlement Agreement, dated March 28, 2016 among The Manitowoc Company, Inc., Manitowoc Foodservice, Inc., Carl C. Icahn, Icahn Partners Master Fund LP, Icahn Offshore LP, Icahn Partners LP, Icahn Onshore LP, Beckton Corp., Hopper Investments LLC, Barberry Corp., High River Limited Partnership, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings L.P. and Icahn Enterprises G.P. Inc. | | Exhibit 10.1(c) to Annual Report on Form 10-K filed March 30, 2016 |
| | | | Exhibit 10.2 to Current Report on Form 8-K filed March 9, 2016 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed March 9, 2016 |
| | | | Exhibit 10.3 to Current Report on Form 8-K filed March 9, 2016 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed March 29, 2016 |
| | | | Exhibit 10.4 to Current Report on Form 8-K filed March 9, 2016 |
| | Credit Agreement, dated March 3, 2016, among Manitowoc Foodservice, Inc., the subsidiary borrowers party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Goldman Sachs Bank USA, as syndication agent, HSBC Bank USA, N.A., Citibank, N.A. and Coöperatieve Rabobank U.A., New York Branch, as co-documentation agents and JPMorgan Chase Bank, N.A., Goldman Sachs Bank USA, HSBC Securities (USA) Inc. and Citigroup Global Markets Inc., as joint lead arrangers and joint bookrunners. | | Exhibit 10.6 to Current Report on Form 8-K filed March 9, 2016 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed October 4, 2016 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed March 9, 2017 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed September 13, 2017 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed February 7, 2018 |
| | Sixth Amended and Restated Receivables PurchaseIncremental Revolving Facility Amendment to Credit Agreement, dated March 3, 2016, by andApril 13, 2018, among Manitowoc Cayman Islands Funding LTD.Welbilt, Inc., as seller, Manitowoc Foodservice and certain of its subsidiaries, as servicers, and Wells Fargothe subsidiary borrowers party thereto, JPMorgan Chase Bank, N.A., as purchaserindividually and as agent.administrative agent and the other lenders party thereto | | Exhibit 10.710.1 to Current Report on Form 8-K filed March 9, 2016April 18, 2018 |
| | Amendment No. 16 to Sixth Amended and Restated Receivables PurchaseCredit Agreement, dated March 6, 2017, byOctober 23, 2018, among Welbilt, Inc., the subsidiary borrowers party thereto, the lenders and among Manitowoc Cayman Islands Funding LTD., as seller, the Companyother financial parties from time to time party thereto and certain of its subsidiaries, as servicers, and Wells FargoJPMorgan Chase Bank, N.A., as purchaserindividually and as administrative agent. | | Exhibit 10.1 to Current Report on Form 8-K filed October 29, 2018 |
| | | | Exhibit 10.7(b)10.8 to Annual Report on Form 10-K filed March 1, 2018
2019 |
| | | | Exhibit 10.7(c) to Annual Report on Form 10-K filed March 1, 2018
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| | | | Exhibit 10.7(d) to Annual Report on Form 10-K filed March 1, 2018
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| | | | Exhibit 10.2 to Current Report on Form 8-K filed February 7, 2018 |
| | | | Exhibit 10.7 to Registration Statement on Form 10 filed December 21, 2015 |
| | | | Exhibit 10.8 to Current Report on Form 8-K filed March 9, 2016 |
| | | | Exhibit 10.9 to Current Report on Form 8-K filed March 9, 2016 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed November 7, 2016 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed April 28, 2016 |
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| | | | |
| | | | Exhibit 10.13 to Annual Report on Form 10-K filed March 1, 2018 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed on March 14, 2016 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed February 21, 2017 |
| | | | Exhibit 10.15(b) to Annual Report on Form 10-K filed March 1, 2018
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| | | | Exhibit 10.16 to Annual Report on Form 10-K filed March 30, 2016 |
| | | | Exhibit 10.17 to Annual Report on Form 10-K filed March 30, 2016 |
| | | | Exhibit 10.18 to Annual Report on Form 10-K filed March 30, 2016 |
| | | | Exhibit 10.19 to Annual Report on Form 10-K filed March 30, 2016 |
| | | | Exhibit 10.20 to Annual Report on Form 10-K filed March 30, 2016 |
| | | | Exhibit 10.21 to Annual Report on Form 10-K filed March 30, 2016 |
| | | | Exhibit 10.22 to Annual Report on Form 10-K filed March 30, 2016 |
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| | | | Exhibit 21.110.1 to Current Report on Form 8-K filed August 14, 2018 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed October 29, 2018 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed December 17, 2018 |
| | | | Exhibit 10.28 to Annual Report on Form 10-K filed March 1, 20182019 |
| | | | Exhibit 10.1 to Current Report on Form 8-K filed March 18, 2019 |
| | | | Exhibit 10.3 to Quarterly Report on Form 10-Q filed May 8, 2019 |
| | | | Filed herewith |
| | | | Filed herewith |
| | | | Filed herewith |
| | | | Filed herewith |
| | | | Furnished herewith |
| | | | Furnished herewith |
| | The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 20172019 formatted in Inline Extensible Business Reporting Language (XBRL)("iXBRL"): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Equity and (vi) related notes.notes, tagged as blocks of text and including detailed tags. | | Filed herewith |
| 104 | | Cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2019, formatted in iXBRL (included as Exhibit 101). | | Filed herewith |
** Represents a management contract or compensatory plan, contract or arrangement required to be filed hereto.arrangement.
WELBILT, INC.
Schedule II: Valuation and Qualifying Accounts
For the years ended December 31, 2017, 20162019, 2018 and 20152017
| | | (in millions) | | Balance at
beginning of
period | | Charged to
costs and
expenses | | Utilization of
reserve | | Other (1) | | Balance at end of period | | Balance at beginning of period | | Charges to
(recoveries from)
costs and expenses | | Utilization of reserve | | Other (1) | | Balance at end of period |
| Year End December 31, 2015 | | |
| | |
| | |
| | |
| | |
| |
| Year ended December 31, 2017 | | | |
| | |
| | |
| | |
| | |
|
| Allowance for doubtful accounts | | $ | 3.9 |
| | 2.5 |
| | (2.2 | ) | | (0.2 | ) | | $ | 4.0 |
| | $ | 5.3 |
| | (0.9 | ) | | (0.7 | ) | | 0.3 |
| | $ | 4.0 |
|
| Deferred tax valuation allowance | | $ | 113.1 |
| | (0.5 | ) | | (28.2 | ) | | (4.3 | ) | | $ | 80.1 |
| | $ | 59.9 |
| | 4.8 |
| | (18.9 | ) | | (4.8 | ) | | $ | 41.0 |
|
| Year End December 31, 2016 | | |
| | |
| | |
| | |
| | |
| |
| Year ended December 31, 2018 | | | |
| | |
| | |
| | |
| | |
|
| Allowance for doubtful accounts | | $ | 4.0 |
| | 1.7 |
| | (0.3 | ) | | (0.1 | ) | | $ | 5.3 |
| | $ | 4.0 |
| | 0.6 |
| | (0.6 | ) | | (0.1 | ) | | $ | 3.9 |
|
| Deferred tax valuation allowance | | $ | 80.1 |
| | 2.7 |
| | (18.2 | ) | | (4.7 | ) | | $ | 59.9 |
| | $ | 41.0 |
| | (0.2 | ) | | — |
| | (0.1 | ) | | $ | 40.7 |
|
| Year End December 31, 2017 | | |
| | |
| | |
| | |
| | |
| |
| Year ended December 31, 2019 | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 5.3 |
| | (0.9 | ) | | (0.7 | ) | | 0.3 |
| | $ | 4.0 |
| | $ | 3.9 |
| | (0.1 | ) | | — |
| | 0.2 |
| | $ | 4.0 |
|
Deferred tax valuation allowance (2) | | $ | 59.9 |
| | 4.8 |
| | (18.9 | ) | | (4.8 | ) | | $ | 41.0 |
| |
| Deferred tax valuation allowance | | | $ | 40.7 |
| | (1.6 | ) | | (10.8 | ) | | — |
| | $ | 28.3 |
|
(1) Other changes to the balances for allowance for doubtful accounts and the deferred tax valuation allowance areconsist primarily of the impact of foreign exchange rates in all periods presented except forwith the exception of the year ended December 31, 2017 where the deferred tax valuation allowance is primarily reflective of the impact of the change in the United States corporate statutory tax rate on capital loss carryforwards.
(2) The Company revised the valuation allowance for 2017 as described in Note 1, “Business and Organization,” in the Form 10-K/A.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 19, 2018February 26, 2020
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| |
| Welbilt, Inc. | |
| | |
/s/ Haresh ShahMartin D. Agard | |
Haresh ShahMartin D. Agard | |
| Executive Vice President and Chief Financial Officer | |
| (Principal Financial Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| | |
| /s/ William C. Johnson | | |
| William C. Johnson, President and Chief Executive Officer | | February 26, 2020 |
| (Principal Executive Officer and Director) | | |
| | |
| /s/ Martin D. Agard | | |
| Martin D. Agard, Executive Vice President and Chief Financial Officer | | February 26, 2020 |
| (Principal Financial Officer) | | |
| | |
| /s/ Jamie E. Palm | | |
| Jamie E. Palm, Vice President, Corporate Controller and Chief Accounting Officer | | February 26, 2020 |
| (Principal Accounting Officer) | | |
| | |
| /s/ Cynthia M. Egnotovich | | |
| Cynthia M. Egnotovich, Director and Chairperson of the Board | | February 26, 2020 |
| | |
| /s/ Dino J. Bianco | | |
| Dino J. Bianco, Director | | February 26, 2020 |
| | |
| /s/ Joan K. Chow | | |
| Joan K. Chow, Director | | February 26, 2020 |
| | |
| /s/ Thomas D. Davis | | |
| Thomas D. Davis, Director | | February 26, 2020 |
| | |
| /s/ Janice L. Fields | | |
| Janice L. Fields, Director | | February 26, 2020 |
| | |
| /s/ Brian R. Gamache | | |
| Brian R. Gamache, Director | | February 26, 2020 |
| | |
| /s/ Andrew Langham | | |
| Andrew Langham, Director | | February 26, 2020 |
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