WELBILT, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . The financial position, results of operations, cash flows and other information included herein are not necessarily indicative of the financial position, results of operations and cash flows that may be expected in future periods. See "Cautionary Statements Regarding Forward-Looking Information" below for a discussion of uncertainties and assumptions that may cause actual results to differ materially from those expressed or implied in the 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. The financial condition, results of operations and cash flows discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are those ofWelbilt, Inc. and its consolidated subsidiaries, collectively, the "Company," "Welbilt ," "we," "our" or "us."
Overview
Business Overview
We design, manufacture and supply best-in-class equipment for the global commercial foodservice market with our suite of products capable of storing, cooking, holding, displaying, dispensing and serving in both hot and cold foodservice categories. Our portfolio of products is used by commercial and institutional foodservice operators including full-service restaurants, quick-service restaurant chains, hotels, resorts, cruise ships, caterers, supermarkets, convenience stores, 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 which support our end customers by improving menus, enhancing operations and reducing costs. We manage our business in three geographic business segments:Americas , EMEA and APAC. TheAmericas segment includesthe United States ("U.S."),Canada andLatin America . The EMEA segment consists of markets inEurope , includingMiddle East ,Russia ,Africa and the Commonwealth of Independent States. The APAC segment consists primarily of markets inChina ,India ,Australia ,South Korea ,Singapore ,Philippines ,Japan ,Indonesia ,Malaysia ,Thailand ,Hong Kong ,Taiwan ,New Zealand andVietnam . We are required to prepare and present our consolidated financial statements in accordance with accounting principles generally accepted in theU.S. ("U.S. GAAP" or "GAAP"). These geographic business segments represent the level at which separate financial information is available and which is used by management to assess operating performance and allocate resources. In addition to GAAP financial measures, we also evaluate our segment performance based upon Adjusted Operating EBITDA (a non-GAAP measure). See the definition of Adjusted Operating EBITDA and other non-GAAP measures used by management within the section titled "Non-GAAP Financial Measures" of this Management's Discussion and Analysis of Financial Condition and Results of Operations. In addition, see Note 17, "Business Segments," of the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of our geographic business segments.
Executive Summary
Merger with
OnJuly 14, 2021 , our company andAli Holding S.r .l. ("Ali Group "), a significant and diversified global foodservice equipment manufacturer and distributor, entered into a merger agreement under whichAli Group will acquire our company in an all-cash transaction for$24.00 per share, or approximately$3.5 billion in aggregate equity value and$4.8 billion in enterprise value. The merger agreement has been unanimously approved by our company's board of directors and onSeptember 30, 2021 , was unanimously approved by our stockholders.
In accordance with the terms of the merger agreement and immediately prior to the merger:
(i) all of our company's outstanding and unvested common stock options and restricted stock units will become vested and exchanged for the right to receive cash equal to the$24.00 per share consideration (less the exercise per share of common stock for the common stock options), and
(ii) all of our company's outstanding performance share units will also be
exchanged, as determined assuming the maximum level of performance is achieved,
for the right to receive cash equal to the
Upon completion of the transaction, our company's shares will no longer trade on
The Ali Group merger agreement provides that our company may be required to payAli Group a termination fee equal to$110.0 million if the merger agreement is terminated:
(a) by
(b) by either party if the Merger has not been consummated prior toJuly 14, 2022 (subject to extension if certain approvals have not been obtained by such date) or -44- -------------------------------------------------------------------------------- if, in the case of clauses (a) or (b), an alternative proposal has been publicly disclosed, announced or otherwise made public and has not been withdrawn and within twelve months of such termination our company enters into a definitive agreement with respect to, or consummates, an alternative proposal.Welbilt andAli Group have submitted regulatory filings in all required jurisdictions, including theU.S. ,United Kingdom , andEuropean Union . The companies have decided that they will proceed with divesting the Company's Manitowoc ice brand ("Ice business") and the companies are confident that this step will ensure regulatory approval. The companies expect to complete the sale of the Ice business in early 2022 and then close the acquisition ofWelbilt byAli Group shortly thereafter. As ofSeptember 30, 2021 , our company had not identified a buyer or begun marketing the Ice business for sale and concluded that the Ice business does not meet the criteria to be classified as an asset held for sale or its operations to be classified as discontinued operations.
Financial Results Highlights
Highlights of our financial results as of and for the three months ended
•Net sales were
•Organic net sales (a non-GAAP measure) were
•Gross profit (as a percentage of net sales) was 35.8% compared to 35.3% for the same quarter of 2020.
•Earnings from operations were
•Adjusted Operating EBITDA (a non-GAAP measure) was$75.1 million , an increase of 64.7%, while Adjusted Operating EBITDA margin (a non-GAAP measure) was 18.3% compared to 15.3% for the same quarter of 2020.
•Net earnings were
•Diluted net earnings per share was
•As ofSeptember 30, 2021 , our total liquidity was$397.3 million , consisting of$111.9 million of cash and cash equivalents and$285.4 million available for additional borrowing under our senior secured revolving credit facility, to the extent we are compliant with financial covenants which permit such borrowings. This compares to liquidity of$392.2 million as ofJune 30, 2021 ,$353.7 million as ofMarch 31, 2021 and$375.0 million as ofDecember 31, 2020 .
•Our total outstanding long-term debt, excluding finance leases, as of
The following is a summary of factors that impacted our operating results and
liquidity during the three months ended
Impact of Global COVID-19 Pandemic on our Business
The global economic conditions will continue to be volatile as long as the global COVID-19 pandemic remains a public health threat. The ongoing COVID-19 pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus and new strains of the virus, including quarantines, "shelter in place" and "stay at home" orders, curfews, travel restrictions, border closures, limitations on public gatherings, vaccination mandates, social distancing measures and mandated business limitations and closures. These measures have resulted in a disruption in the foodservice industry, including substantial restaurant closures and, as a result, in commercial foodservice equipment markets across the geographies in which we operate. We expect global economic performance and the performance of our businesses to vary by geography and discipline until the impact of the COVID-19 pandemic on the global economy subsides. Our Company's third quarter 2021 net sales, earnings from operations and cash flows all improved significantly in comparison to the third quarter of 2020. While the commercial foodservice industry has continued to gradually recover from the negative impacts of the COVID-19 pandemic, the extent of the ultimate impact of the COVID-19 pandemic, including supply chain disturbances and shipping and logistics delays, on our operational and financial performance will depend significantly on future developments, including the duration, scope and severity of the pandemic, the actions taken to contain, mitigate or recover from its impact in each of the countries where we operate globally (including actions taken to ease supply chain backlogs), the vaccination rates and the effectiveness of vaccinations, emergence of new strains of the virus, and the timing of the resumption of economic activity to pre-pandemic levels. Throughout each of the three quarters in the periods endedMarch 31 ,June 30 , andSeptember 30, 2021 , we continued to see increases in the cost of specific commodities, components and parts purchased as compared to both the previous quarters of the current year and the same periods of the prior year, including the impact of rising inflation rates and tariffs, as challenges in the supply chain and shipping and logistics -45- -------------------------------------------------------------------------------- delays continue to persist. We expect that the average cost of commodities, components and parts purchased, including the impact of rising inflation and tariffs, for fiscal 2021 will be higher than the costs experienced during the year endedDecember 31, 2020 . The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted inMarch 2020 and includes measures intended to assist companies during the global COVID-19 pandemic, including temporary changes to income and non-income-based tax laws, some of which had been enacted under the Tax Cuts and Jobs Act ("Tax Act") in 2017. As a result of the Tax Act and the CARES Act, additional legislative and regulatory guidance has been and may continue to be issued, including final regulations that could impact our effective tax rate in future periods. The American Rescue Plan Act of 2021 was enacted onMarch 11, 2021 and, among other things, included a second extension, throughJune 30, 2021 , of the payroll support program provided under the CARES Act. We were not eligible for this incentive during the six months endedJune 30, 2021 . OnSeptember 9th, 2021 President Biden announced a proposed new rule which would mandate the COVID-19 vaccine or weekly testing for mostU.S. employees, which would include our employees.This rule is expected be implemented through an Emergency Temporary Standard ("ETS") that will be promulgated by theOccupational Safety and Health Administration . If the ETS is ultimately issued and implemented, we expect there would be further disruptions to our operations, such as inability to maintain adequate staffing at our facilities, difficulties in replacing disqualified employees with temporary employees or new hires, increased costs and diminished availability of raw materials and component parts, and increased compliance burdens, including financial costs, diversion of administrative resources, and increased downtimes to accommodate for weekly COVID-19 testing, resulting in delays in the manufacturing process, which would negatively impact our future sales and ongoing customer relationships. We continue to proactively monitor the developments surrounding COVID-19 and may take additional actions based on the requirements and recommendations of governmental and health authorities around the world in an attempt to protect our stakeholders. Although we are currently unable to quantify with certainty the ultimate severity or duration of the impact of the global COVID-19 pandemic on our business, we expect that the challenges in the supply chain and shipping and logistics delays will likely have a continued impact on our operating results and financial condition in fiscal 2022.
Strategic Objectives
While our strategic objectives are long-term and remain intact, the execution of the merger withAli Group and the uncertainty surrounding the global COVID-19 pandemic will impact the extent and timing of our execution of these objectives. As such, our strategic objectives continue to include achieving sustainable growth globally and increased profitability by leveraging our position as a leading commercial foodservice equipment provider, while selectively pursuing longer-term strategic partnerships, growing our customer base and expanding the frontiers of foodservice innovation, as well as attracting and developing industry-leading talent.
Our specific strategic objectives include:
•Achieve profitable growth: We intend to grow sales organically with our
best-in-class foodservice equipment portfolio of products and an integrated
kitchen solution approach. While organic growth across all three of our regions
is our first priority, we may selectively pursue strategic partnerships as our
capital structure allows in the future. Our industry is fragmented, and we
believe there is significant opportunity for consolidation through partnerships
and other strategic relationships to drive growth.
•Business Transformation Program Update: Our Business Transformation Program
("Transformation Program") focuses on specific areas of opportunity including
strategic sourcing, manufacturing facility workflow redesign, distribution and
administrative process efficiencies and optimizing our global brand platforms.
We are executing the final phases of the Transformation Program and expect to
complete these activities by the end of 2021, as originally planned. Total
consulting costs, restructuring charges, and other related transformation
expenses incurred from the inception of the program through 2021 are expected to
be approximately $73.0 million and we remain confident in our ability to achieve
the $75.0 million of annualized savings previously quantified when our sales and
volume levels return to pre-pandemic levels.
In connection with the ongoing execution of the Transformation Program, we
incurred $0.9 million and $4.4 million of consulting and other related
Transformation Program costs for the three and nine months ended September 30,
2021 , respectively. We also incurred $0.4 million and $0.7 million of
restructuring charges for the three and nine months ended September 30, 2021 ,
respectively, intended to reduce future operating expenses as a result of the
improved efficiencies gained from the execution of the Transformation Program.
We have incurred total costs of $72.5 million from the inception of the
Transformation Program through September 30, 2021 and have settled these costs
primarily in cash. We continue to evaluate the total investment in, and
financial benefits of, the various initiatives associated with the
Transformation Program.
•Create innovative products and solutions: To remain an industry leader and grow
our reputation as an innovative company, we continuously develop dynamic product
and system solutions for the entire kitchen. We invest in our research and
development resources and work with 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 technologies into global platforms in a cost-effective manner and create
cohesive kitchen systems for our customers.
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•Enhance 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.
•Drive operational excellence: We are focused on productivity gains and 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 Transformation Program, focused on
specific areas of opportunity including strategic sourcing, manufacturing
facility workflow redesign, distribution and administrative process efficiencies
and optimizing our global brand platforms.
•Develop great people: We strive to make our company, and our successor company,
an employer of choice in our industry. 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.
Results of Operations for the Three Months Ended
The following table sets forth our consolidated financial results for the periods presented:
Three Months Ended September 30, Change
(in millions, except percentage data) 2021 2020 $ %
Net sales $ 411.5 $ 298.5 $ 113.0 37.9 %
Cost of sales 264.0 193.2 70.8 36.6 %
Gross profit 147.5 105.3 42.2 40.1 %
Gross margin (% of Net sales) 35.8 % 35.3 % 0.5 %
Selling, general and administrative
expenses 84.6 72.3 12.3 17.0 %
Amortization expense 9.9 9.9 - - %
Restructuring and other expense 0.3 1.5 (1.2) (80.0) %
Loss from impairment and disposal of
assets - net 0.1 0.4 (0.3) (75.0) %
Earnings from operations 52.6 21.2 31.4 148.1 %
Interest expense 18.8 19.6 (0.8) (4.1) %
Other expense (income) - net 0.4 (2.1) 2.5 119.0 %
Earnings before income taxes 33.4 3.7 29.7 802.7 %
Income tax expense (benefit) 8.5 (1.2) 9.7 808.3 %
Net earnings $ 24.9 $ 4.9 $ 20.0 408.2 %
Analysis of Net Sales
"Net sales" for our geographic business segments consist of the following for
the periods presented:
Three Months Ended September 30, Change
(in millions) 2021 2020 $ %
Americas $ 318.9 $ 221.8 $ 97.1 43.8 %
EMEA 121.2 73.9 47.3 64.0 %
APAC 68.2 48.0 20.2 42.1 %
Elimination of intersegment sales (96.8) (45.2) (51.6) (114.2) %
Total net sales $ 411.5 $ 298.5 $ 113.0 37.9 %
Net sales totaled $411.5 million for the three months ended September 30, 2021
representing an increase of $113.0 million , or 37.9%, compared to the same
period of the prior year. The increase in net sales was primarily the result of:
(i) increased volumes largely due to an increase in general market demand, (ii)
increased volumes due to rollouts with large chain customers and (iii) increased
KitchenCare aftermarket sales, all of which were the result of our continued
recovery from the global COVID-19 pandemic, and to a much lesser extent,
increased net pricing. Foreign currency translation positively impacted
third-party net sales for the three months ended September 30, 2021 by $5.1
million as compared to the three months ended September 30, 2020 .
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Net sales in the Americas segment for the three months ended September 30, 2021
increased $97.1 million , or 43.8%, compared to the same period of the prior
year. The increase was primarily driven by increased third-party net sales of
$80.3 million and a $16.8 million increase in intersegment sales. The increase
in third-party net sales was primarily the result of: (i) increased volumes
primarily due to an increase in general market demand, (ii) increased volumes
due to rollouts with large chain customers and (iii) increased KitchenCare
aftermarket sales, all of which were the result of our continued recovery from
the global COVID-19 pandemic in the region, and to a much lesser extent,
increased net pricing. Foreign currency translation positively impacted
third-party net sales for the three months ended September 30, 2021 by $1.7
million as compared to the same period of the prior year.
Net sales in the EMEA segment for the three months ended September 30, 2021
increased $47.3 million , or 64.0%, compared to the same period of the prior
year. The increase was primarily driven by increased third-party net sales of
$21.9 million and a $25.4 million increase in intersegment sales. The increase
in third-party net sales was primarily the result of increased volumes primarily
due to the increase in general market demand and the increase in intersegment
sales is primarily due to increases in sales to the America's region related to
rollouts with large chain customers discussed above and an increase in general
market demand, both of which were the result of our continued recovery from the
ongoing global COVID-19 pandemic, and to a much lesser extent, increased net
pricing. Foreign currency translation positively impacted third-party net sales
for the three months ended September 30, 2021 by $2.2 million .
Net sales in the APAC segment for the three months ended September 30, 2021
increased $20.2 million , or 42.1%, compared to the same period of the prior
year. The increase was primarily driven by increased third-party net sales of
$10.8 million and a $9.4 million increase in intersegment sales. The increase in
third-party net sales was primarily driven by increased volumes largely due to
an increase in general market demand and increased KitchenCare aftermarket
sales, both of which were the result of our continued recovery from the ongoing
global COVID-19 pandemic. Foreign currency translation positively impacted
third-party net sales for the three months ended September 30, 2021 by $1.2
million as compared to the same period of the prior year.
Analysis of Earnings from Operations
Gross profit
"Gross profit" for the three months endedSeptember 30, 2021 totaled$147.5 million , an increase of$42.2 million , or 40.1%, compared to the same period of the prior year. This increase in gross profit was primarily driven by: (i) a$43.1 million favorable impact resulting from increased product volumes and mix, (ii) a$8.8 million favorable impact from increased net pricing and (iii)$3.6 million of positive foreign currency translation impact. These favorable impacts were partially offset by: (i)$5.5 million of unfavorable material costs, primarily driven by continued broad-based inflationary pressures experienced during the third quarter of 2021, partially offset by the procurement sourcing savings associated with the Transformation Program, (ii) a$4.9 million unfavorable impact from increased inbound freight costs resulting from both higher volumes and the continued macroeconomic impacts of the COVID-19 pandemic on the supply chain, (iii)$1.2 million of increased tariff costs, (iv)$1.1 million of unfavorable labor and other manufacturing costs, primarily driven by production inefficiencies resulting from supply chain disruptions related to the global pandemic and (v)$0.3 million of higher depreciation costs.
Selling, general and administrative expenses
"Selling, general and administrative expenses" for the three months endedSeptember 30, 2021 totaled$84.6 million , an increase of$12.3 million , or 17.0%, compared to the same period of the prior year. This increase is primarily due to: (i)$5.9 million of increased employee-related costs, reflecting the non-recurrence of government subsidies and other measures taken in 2020 to manage the impact of the COVID-19 pandemic, along with higher incentives related to stronger operational performance in 2021, (ii)$5.2 of transaction expenses related to the pending sale of our company, (iii)$3.8 million of higher travel and other controllable costs, (iv)$3.6 million of higher marketing and commission costs primarily resulting from increased sales volumes and (v) a$0.9 million unfavorable foreign currency translation impact as compared to the same period of the prior year. The impact of these increases was partially offset by:$6.1 million of lower third-party consulting costs incurred in connection with our Transformation Program and$0.9 million of lower professional fees.
Restructuring and other expense
"Restructuring and other expenses" for the three months ended
"Restructuring and other expenses" for the three months endedSeptember 30, 2020 were$1.5 million , consisting of$1.3 million of severance and related costs and a$0.2 million loss contingency charge. The severance and related costs were associated with workforce reductions as a result of the improved efficiencies gained from the execution of the Transformation Program as well as actions initiated during the fourth quarter of 2019 in the EMEA and APAC regions. The loss contingency charge was associated with our voluntary review of certain errors in declarations to theU.S. Customs and Border Protection for customs duties, fees and interest owed for previously imported products. See Note 11, "Contingencies and Significant Estimates," for further information. -48- --------------------------------------------------------------------------------
Analysis of Segment Adjusted Operating EBITDA
"Adjusted Operating EBITDA" (a non-GAAP measure) for our geographic segments consisted of the following for the periods presented:
Three Months Ended September 30, Change
(in millions, except percentage data) 2021 2020 $ %
Americas $ 56.7 $ 34.8 $ 21.9 62.9 %
EMEA 27.6 10.5 17.1 162.9 %
APAC 11.1 8.4 2.7 32.1 %
Total Segment Adjusted Operating
EBITDA 95.4 53.7 41.7 77.7 %
Less: Corporate and unallocated
expenses (20.3) (8.1) (12.2) (150.6) %
Total Adjusted Operating EBITDA $ 75.1 $ 45.6 $ 29.5 64.7 %
Adjusted Operating EBITDA margin (1) 18.3 % 15.3 % 3.0 %
(1) Adjusted Operating EBITDA margin is calculated by dividing the dollar amount of Adjusted Operating EBITDA by net sales.
Adjusted Operating EBITDA in theAmericas segment for the three months endedSeptember 30, 2021 increased by$21.9 million , or 62.9%. This increase was primarily driven by: (i) a$27.9 million favorable impact from increased product volumes and mix, (ii)$10.5 million of favorable impact from net pricing, (iii) a$0.8 million favorable foreign currency translation impact, (iv)$0.6 million of lower research and development fees and (v)$0.2 million of lower professional fees. The impact of these increases was partially offset by: (i)$5.8 million of unfavorable material costs, primarily driven by continued broad-based inflationary pressures experienced during the third quarter of 2021, partially offset by the procurement sourcing savings associated with the Transformation Program, (ii)$4.2 million of higher employee-related expenses, including higher incentives resulting from improved operating results, (iii)$3.2 million of higher marketing and commissions costs, primarily attributable to increased sales, (iv)$3.1 million unfavorable impact from increased inbound freight costs resulting from both higher volumes and the continued macroeconomic impacts of COVID-19 pandemic on the supply chain, (v) a$1.1 million unfavorable impact from increased tariffs and (vi)$0.7 million of unfavorable labor and other manufacturing costs, primarily driven by continued production inefficiencies resulting from supply chain disruptions related to the global pandemic. Adjusted Operating EBITDA in the EMEA segment for the three months endedSeptember 30, 2021 increased by$17.1 million , or 162.9%. This increase was primarily driven by: (i) a$14.3 million favorable impact from increased product volumes and mix, (ii)$2.7 million of favorable labor and other manufacturing costs, (iii)$2.4 million of favorable impact from net pricing, (iv) a$1.2 million favorable foreign currency translation impact and (v)$0.3 million of lower professional fees. The impact of these increases was partially offset by: (i) a$1.7 million unfavorable impact from increased inbound freight costs resulting from both higher volumes and the continued supply chain challenges, (ii)$1.3 million of higher research and development costs, (iii)$0.4 million of higher material costs, primarily driven by continued inflationary pressures experienced during the third quarter of 2021 and (iv)$0.3 million of higher marketing and commissions costs attributable primarily to increased sales. Adjusted Operating EBITDA in the APAC segment for the three months endedSeptember 30, 2021 increased by$2.7 million , or 32.1%. This increase was primarily driven by: (i)$2.3 million of favorable product volumes and mix, (ii)$0.8 million of lower research and development costs, (iii)$0.7 million of lower material costs, (iv) a$0.6 million favorable foreign currency translation impact and (v)$0.6 million of favorable impact from net pricing. These increases were partially offset by: (i)$1.4 million of higher employee-related, costs, (ii)$0.5 million of unfavorable labor and other manufacturing costs, primarily driven by continued broad-based inflationary pressures experienced during the third quarter of 2021 and (iii) a$0.2 million unfavorable impact from increased tariffs. Corporate and unallocated expenses reflect certain corporate-level expenses and eliminations that are not allocated to the geographic business segments. For the three months endedSeptember 30, 2021 , corporate and unallocated expenses increased by$12.2 million , or 150.6%. This increase was primarily driven by a$9.1 million increase in the elimination of profit in inventory resulting from higher intercompany inventory on hand and$3.7 million of increased employee-related expenses, including higher incentives resulting from improved operating results and increased stock compensation expense resulting from an increase in the expected achievement percentage for certain tranches of our performance share units. These increases were partially offset by$0.5 million of lower professional fees.
Analysis of Non-Operating Income Statement Items
For the three months endedSeptember 30, 2021 , "Interest expense" was$18.8 million , a$0.8 million decrease as compared to the same period of the prior year, primarily driven by a decrease in the average borrowings outstanding and an overall decrease in the weighted average interest rates of outstanding debt resulting from a decrease in LIBOR during the current period. For the three months endedSeptember 30, 2021 , "Other expense (income) - net" was an expense of$0.4 million , compared to an income of$2.1 million for the same period of the prior year. The decrease in income of$2.5 million is primarily the result of higher net foreign currency losses compared to the same period of prior year. -49- --------------------------------------------------------------------------------
Analysis of Income Taxes
For the three months endedSeptember 30, 2021 , we recorded an$8.5 million income tax expense, reflecting a 25.4% effective tax rate, compared to a$1.2 million income tax benefit for the three months endedSeptember 30, 2020 , reflecting a (32.4)% effective tax rate. The change in the effective tax rate for the three months endedSeptember 30, 2021 compared to the same period of the prior year is primarily due to our increase in earnings before income taxes and the relative weighting of jurisdictional income and loss, which was partially offset by the CARES Act net operating loss carryback provisions, changes for income tax returns filed, and deferred taxes related to stock compensation and repatriation of foreign earnings. For the three months endedSeptember 30, 2021 , the income tax provision includes a net discrete tax benefit of$0.3 million primarily related to the changes for income tax returns filed, and the changes in deferred taxes related to stock compensation and repatriation of foreign earnings, as compared to the income tax provision for the three months endedSeptember 30, 2020 , which includes a net discrete benefit of$1.2 million primarily related to the uncertain tax position for net interest deduction limitations and the CARES Act net operating loss carryback provisions. -50- --------------------------------------------------------------------------------
Results of Operations for the Nine Months Ended
The following table sets forth our consolidated financial results for the periods presented:
Nine Months Ended September 30, Change
(in millions, except percentage data) 2021 2020 $ %
Net sales $ 1,123.9 $ 833.4 $ 290.5 34.9 %
Cost of sales 713.7 544.9 168.8 31.0 %
Gross profit 410.2 288.5 121.7 42.2 %
Gross margin (% of Net sales) 36.5 % 34.6 % 1.9 %
Selling, general and administrative
expenses 245.6 215.6 30.0 13.9 %
Amortization expense 29.7 29.2 0.5 1.7 %
Restructuring and other expense 0.5 9.5 (9.0) (94.7) %
Loss from impairment and disposal of
assets - net 0.1 11.7 (11.6) (99.1) %
Earnings from operations 134.3 22.5 111.8 496.9 %
Interest expense 56.5 62.4 (5.9) (9.5) %
Other expense (income) - net 6.3 (3.1) 9.4 303.2 %
Earnings (loss) before income taxes 71.5 (36.8) 108.3 294.3 %
Income tax expense (benefit) 15.0 (9.2) 24.2 263.0 %
Net earnings (loss) $ 56.5 $ (27.6) $ 84.1 304.7 %
Analysis of Net Sales
"Net sales" for our geographic business segments consist of the following for
the periods presented:
Nine Months Ended September 30, Change
(in millions) 2021 2020 $ %
Americas $ 870.0 $ 630.9 $ 239.1 37.9 %
EMEA 326.9 209.5 117.4 56.0 %
APAC 180.7 141.5 39.2 27.7 %
Elimination of intersegment sales (253.7) (148.5) (105.2) (70.8) %
Total net sales $ 1,123.9 $ 833.4 $ 290.5 34.9 %
Net sales totaled $1,123.9 million for the nine months ended September 30, 2021
representing an increase of $290.5 million , or 34.9%, compared to the same
period of the prior year. The increase in net sales was primarily the result of:
(i) increased volumes largely due to an increase in general market demand, (ii)
increased volumes related to rollouts with large chain customers, and (iii)
increased KitchenCare aftermarket sales, all of which were the result of our
continued recovery from the global COVID-19 pandemic, and to a much lesser
extent, increased net pricing. Foreign currency translation positively impacted
third-party net sales for the nine months ended September 30, 2021 by $25.7
million as compared to the nine months ended September 30, 2020 .
Net sales in the Americas segment for the nine months ended September 30, 2021
increased $239.1 million , or 37.9%, compared to the same period of the prior
year. The increase was primarily the result of increased third-party net sales
of $209.1 million and a $30.0 million increase in intersegment sales. The
increase in third-party net sales was primarily the result of: (i) increased
volumes largely due to an increase in general market demand, (ii) increased
volumes related to rollouts with large chain customers and (iii) increased
KitchenCare aftermarket sales, all of which were the result of our continued
recovery from the global COVID-19 pandemic, and to a much lesser extent,
increased net pricing. Foreign currency translation positively impacted
third-party net sales for the nine months ended September 30, 2021 by $6.2
million as compared to the same period of the prior year.
Net sales in the EMEA segment for the nine months ended September 30, 2021
increased $117.4 million , or 56.0%, compared to the same period of the prior
year. The increase was primarily the result of increased third-party net sales
of $56.9 million and a $60.5 million increase in intersegment sales. The
increase in third-party net sales was primarily the result of increased volumes
in the general market and the increase in intersegment sales was primarily due
to increases in sales to the America's region related to rollouts with large
chain customers discussed above, both of which were the result of our continued
recovery from the ongoing global COVID-19 pandemic. Foreign currency translation
positively impacted third-party net sales for the nine months ended September
30, 2021 by $15.3 million .
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Net sales in the APAC segment for the nine months ended September 30, 2021
increased $39.2 million , or 27.7%, compared to the same period of the prior
year. The increase was primarily the result of increased third-party net sales
of $24.5 million and a $14.7 million increase in intersegment sales. The
increase in third-party net sales was primarily driven by increased volumes in
the general market and increased KitchenCare aftermarket sales, both of which
were the result of our continued recovery from the global COVID-19 pandemic.
Foreign currency translation positively impacted third-party net sales for the
nine months ended September 30, 2021 by $4.2 million as compared to the same
period of the prior year.
Analysis of Earnings from Operations
Gross profit
"Gross profit" for the nine months endedSeptember 30, 2021 totaled$410.2 million , an increase of$121.7 million , or 42.2%, compared to the same period of the prior year. This increase was primarily driven by: (i) a$100.2 million favorable impact from increased product volumes and mix, (ii) a$16.2 million favorable impact from increased net pricing, (iii)$14.9 million of positive foreign currency translation impact and (iv)$8.8 million of favorable labor and other manufacturing costs, primarily due improved operating efficiencies related to higher volumes and equipment investments in our plants associated with the Transformation Program. These favorable impacts were partially offset by: (i)$11.9 million of increased inbound freight costs resulting from both higher volumes and the continued macroeconomic impacts of the COVID-19 pandemic on the supply chain, (ii) a$3.3 million unfavorable impact from increased tariffs, (iii)$1.8 million of unfavorable material costs, resulting from broad-based inflation along with the continued macroeconomic impacts of the COVID-19 pandemic on the supply chain, partially offset by the procurement sourcing savings associated with the Transformation Program and (iv)$1.3 million of higher depreciation costs.
Selling, general and administrative expenses
"Selling, general and administrative expenses" for the nine months endedSeptember 30, 2021 totaled$245.6 million , an increase of$30.0 million , or 13.9%, compared to the same period of the prior year. This increase is primarily driven by: (i)$24.3 million of increased employee-related costs, reflecting the non-recurrence of government subsidies and other measures taken in 2020 to manage the impact of the COVID-19 pandemic, along with higher incentives related to stronger operational performance in 2021, (ii)$13.5 million of increased transaction expenses related to the pending sale of our Company, (iii)$6.0 million of higher marketing and commission costs, primarily attributable to increased sales volumes, (iv) a$5.3 million unfavorable foreign currency translation impact as compared to the same period of the prior year and (v)$2.5 million of higher travel and other controllable costs. The impact of these increases was partially offset by: (i)$16.8 million of lower third-party consulting costs incurred in connection with our Transformation Program, (ii)$3.1 million of lower professional fees and (iii) a$2.0 million recovery of funds from an incident in 2018, involving one of our EMEA locations .
Restructuring and other expense
"Restructuring and other expenses" for the nine months ended
"Restructuring and other expenses" for the nine months endedSeptember 30, 2020 were$9.5 million , consisting of$5.9 million of severance and related costs and a$3.6 million loss contingency charge. The severance and related costs were associated with workforce reductions executed throughout 2020 in theAmericas region and Corporate and a limited management restructuring to reduce operating expenses as a result of the improved efficiencies gained from the execution of the Transformation Program as well as actions initiated during the fourth quarter of 2019 in the EMEA and APAC regions. The loss contingency charge was associated with our voluntary review of certain errors in declarations to theU.S. Customs and Border Protection for customs duties, fees and interest owed for previously imported products. See Note 11, "Contingencies and Significant Estimates," for further information.
Loss from impairment and disposal of assets - net
Loss from impairment and disposal of assets - net for the nine months endedSeptember 30, 2020 was$11.7 million and consisted primarily of an impairment charge of$11.1 million on trademark and trade names in our EMEA segment. See Note 5, "Goodwill and Other Intangible Assets - Net." of the Notes to the Consolidated Financial Statements for additional details. -52- --------------------------------------------------------------------------------
Analysis of Segment Adjusted Operating EBITDA
"Adjusted Operating EBITDA" (a non-GAAP measure) for our geographic segments consisted of the following for the periods presented:
Nine Months Ended September 30, Change
(in millions, except percentage data) 2021 2020 $ %
Americas $ 166.7 $ 105.8 $ 60.9 57.6 %
EMEA 63.2 29.6 33.6 113.5 %
APAC 26.9 22.3 4.6 20.6 %
Total Segment Adjusted Operating
EBITDA 256.8 157.7 99.1 62.8 %
Less: Corporate and unallocated
expenses (58.4) (46.8) (11.6) (24.8) %
Total Adjusted Operating EBITDA $ 198.4 $ 110.9 $ 87.5 78.9 %
Adjusted Operating EBITDA margin (1) 17.7 % 13.3 % 4.4 %
(1) Adjusted Operating EBITDA margin is calculated by dividing the dollar amount of Adjusted Operating EBITDA by net sales.
Adjusted Operating EBITDA in theAmericas segment for the nine months endedSeptember 30, 2021 increased by$60.9 million , or 57.6%. This increase was primarily driven by: (i)$60.5 million of favorable product volumes and mix, (ii)$18.7 million of favorable impact from net pricing, (iii)$6.9 million of favorable labor and other manufacturing costs, primarily due to improved operating efficiencies related to higher volumes and equipment investments in our plants associated with the Transformation Program, slightly offset by continued inflationary pressures experienced during the first nine months of 2021, (iv)$3.5 million of favorable foreign currency translation impact and (v)$0.4 million of lower research and development costs. The impact of these increases was partially offset by: (i)$10.4 million of higher employee-related expenses, including higher incentives resulting from improved operating results in 2021, (ii)$8.4 million of unfavorable inbound freight costs resulting from both higher volumes and the continued on the supply chain challenges, (iii)$5.9 of higher marketing and commissions costs attributable primarily to increased sales, (iv)$3.2 million of increased tariffs and (v)$1.5 million of higher materials costs, primarily driven by continued inflationary pressures experienced during the first nine months of 2021, slightly offset by the procurement sourcing savings associated with the Transformation Program. Adjusted Operating EBITDA in the EMEA segment for the nine months endedSeptember 30, 2021 increased by$33.6 million , or 113.5%. This increase was primarily driven by: (i)$33.9 million of favorable product volumes and mix, (ii)$4.5 million of favorable foreign currency translation impact, (iii)$3.4 million of favorable labor and other manufacturing costs primarily due to improved operating efficiencies related to higher volumes and equipment investments in our plants, and (iv) a$0.7 million decrease in professional fees. The impact of these increases was partially offset by: (i)$3.5 million of unfavorable inbound freight costs resulting from both higher volumes and the continued supply chain challenges, (ii)$1.6 million of unfavorable impact from net pricing due to transfer pricing, (iii)$1.5 million of higher employee-related, travel and other controllable costs, (iv)$1.4 million of higher materials costs primarily driven by continued inflationary pressures experienced during the first nine months of 2021 and (v)$0.8 million of higher research and development costs. Adjusted Operating EBITDA in the APAC segment for the nine months endedSeptember 30, 2021 increased by$4.6 million , or 20.6%. This increase was primarily driven by: (i)$4.0 million of favorable product volumes and mix, (ii)$1.6 million of favorable foreign currency translation impact, (iii)$1.1 million of lower material costs, (iv)$0.5 million of favorable impact from net pricing and (v)$0.4 million lower research and development costs. These increases were partially offset by$2.9 million of higher employee-related, travel and other controllable costs. Corporate and unallocated expenses reflect certain corporate-level expenses and eliminations that are not allocated to the geographic business segments. For the nine months endedSeptember 30, 2021 , corporate and unallocated expenses increased by$11.6 million , or 24.8%. This increase was primarily driven by$12.6 million of increased employee-related expenses, including higher incentives resulting from improved operating results, and increased stock compensation expense resulting from an increase in the expected achievement percentage for certain tranches of our performance share units, and a$1.3 million increase in the elimination of profit in inventory resulting from higher intercompany inventory on hand. These decreases were partially offset by a$2.4 million decrease in professional fees.
Analysis of Non-Operating Income Statement Items
For the nine months endedSeptember 30, 2021 , "Interest expense" was$56.5 million , a$5.9 million decrease as compared to the same period of the prior year, primarily driven by a decrease in the average borrowings outstanding and an overall decrease in the weighted average interest rate of outstanding debt resulting from a decrease in LIBOR during the current period. For the nine months endedSeptember 30, 2021 , "Other expense (income) - net" was an expense of$6.3 million , compared to income of$3.1 million for the same period of the prior year. The decrease in income of$9.4 million is primarily the result of higher net foreign currency losses compared to the same period of prior year. -53- --------------------------------------------------------------------------------
Analysis of Income Taxes
For the nine months endedSeptember 30, 2021 , we recorded a$15.0 million income tax expense, reflecting a 21.0% effective tax rate, compared to a$9.2 million income tax benefit for the nine months endedSeptember 30, 2020 , reflecting a (25.0)% effective tax rate. The change in the effective tax rate for the nine months endedSeptember 30, 2021 compared to the same period of the prior year is primarily due to the result of our increase in earnings before income taxes and the relative weighting of jurisdictional income and loss, partially offset by the changes in net discrete tax items resulting from recently enacted foreign income tax rates, CARES Act net operating loss carryback provisions and the changes in uncertain tax positions. For the nine months endedSeptember 30, 2021 , the income tax provision includes net discrete benefit of$2.6 million primarily related to the recently enacted tax rate increase in theUK Finance Act 2021 and corresponding increase in jurisdictional net deferred tax assets, as compared to the income tax benefit for the nine months endedSeptember 30, 2020 , which includes a net discrete expenses of$5.0 million primarily related to the provisions of the CARES Act and changes in uncertain tax positions.
Liquidity and Capital Resources
Overview of Factors Affecting our Liquidity
We manage cash centrally, generally reinvest net earnings locally and meet our working capital requirements from cash and cash equivalents, cash flows from operations and capacity under our existing credit facilities. As ofSeptember 30, 2021 , our total liquidity was$397.3 million , consisting of$111.9 million of cash and cash equivalents and$285.4 million available for additional borrowings under our senior secured revolving credit facility ("Revolving Credit Facility"), to the extent our compliance with financial covenants permits such borrowings, compared to total liquidity of$392.2 million as ofJune 30, 2021 ,$353.7 million as ofMarch 31, 2021 and$375.0 million as ofDecember 31, 2020 . Our liquidity generally decreases in the first quarter and increases in the remaining quarters of the year driven by our earnings cycle as well as the timing of large cash payments in the first quarter such as annual rebates, incentive compensation and the build-up of inventory in advance of the historically higher sales period in the spring and early summer months. The improvement in our Company's total liquidity in the quarter endedSeptember 30, 2021 was limited by higher inventory levels of raw materials primarily due to increased purchases of critical components needed to manufacture our commercial foodservice equipment that have been impacted by supply chain disruptions. Inventory of finished goods also increased primarily due to delays from third-party shipping companies picking up equipment from our facilities. As ofSeptember 30, 2021 , approximately 94% of our cash and cash equivalents and restricted cash were held outside of theU.S. The majority of the cash generated in theU.S. is used to fund current and expected future working capital requirements and to fund debt service obligations. We maintain significant operations outside of theU.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 our subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is to maintain cash balances outside of theU.S. and to meet our liquidity needs through ongoing cash flows, external borrowings, or both. We plan to continue reinvesting foreign earnings indefinitely outside of theU.S. with certain limited exceptions. Our future cash needs are currently expected to be primarily related to operating activities, inclusive of capital investments, working capital and debt service. We estimate that our capital expenditures will be between$25.0 million and$30.0 million for the year endingDecember 31, 2021 . The amount of actual capital expenditures may be impacted by general economic, financial or operational changes, including the future impact of the global COVID-19 pandemic on our operating results, the success and timing of the closing of the merger withAli Group , the anticipated sale of our Company's Ice business, and competitive, legislative and regulatory factors, among other considerations. In response to the global COVID-19 pandemic throughout 2020 and the first half of 2021, we implemented contingency plans for our operations and took what we believe were appropriate steps to reduce operating expenses and capital spending, including reductions in the size of our workforce and the temporary furlough of employees during 2020. We expect 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 meet our working capital needs and cash requirements for at least the next 12 months. Our access to, and the availability of, financing on acceptable terms in the future may be affected by many factors including the overall liquidity in the financial and capital markets, the state of the economy, success in closing the merger withAli Group and the timing of such closing, and our credit rating. The ongoing global COVID-19 pandemic, which has continued to cause volatility in the capital markets, could also impact our ability to pursue additional financing opportunities in the future. Moreover, we are unable to quantify the ultimate severity or duration of the impact of the global COVID-19 pandemic on our operational and financial performance, which could have an adverse impact on our results of operations, cash flows and financial position, potentially resulting in a default or an acceleration of indebtedness, and could otherwise negatively impact our liquidity and ability to make additional borrowings under our Revolving Credit Facility. -54-
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