WELBILT, INC. 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 included in Part II, Item 8 of this Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . 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. This Annual Report on Form 10-K, including matters discussed in 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 Statements Regarding Forward-Looking Information" and Item 1A. "Risk Factors" 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. This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . The financial condition and results of operations 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. We 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 20, "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 geographic business segments.
Executive Summary
Merger with
OnJuly 14 , 2021,Welbilt 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 the 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 was unanimously approved by the Company's board of directors and onSeptember 30, 2021 , was approved by our stockholders.
In accordance with the terms of the merger agreement and immediately prior to the merger:
(i) all of the 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 price per share of common stock for the common stock options), and
(ii) all of the 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, the Company's shares will no longer trade on
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The Ali Group merger agreement provides that the Company may be required to pay
Ali 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 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.
InOctober 2021 , the Company's board of directors concluded that outside consultants should be authorized to commence a process that could result in the sale of the Ice business. Our outside consultants, with the assistance of management, have initiated the marketing and due diligence process for the Ice divestiture. The companies expect to complete Ice Divestiture in the first half of 2022 with the acquisition ofWelbilt byAli Group to close shortly thereafter.
As of
Financial Results Highlights
Highlights of our financial results as of and for the year ended
•Net sales were
•Organic net sales (a non-GAAP measure) were
•Gross profit (as a percentage of net sales) was 36.2% compared to 35.5% for the
year ended
•Earnings from operations were
•Adjusted Operating EBITDA (a non-GAAP measure) was$275.4 million , an increase of 61.1%, while Adjusted Operating EBITDA margin (a non-GAAP measure) was 17.8%, compared to 14.8% in 2020.
•Net earnings were
•Diluted net income per share was$0.49 and Adjusted Diluted Net Earnings Per Share (a non-GAAP measure) was$0.69 as ofDecember 31, 2021 . Comparatively, diluted net loss per share was (0.05) and Adjusted Diluted Net Earnings Per Share (a non-GAAP measure) was$0.16 as ofDecember 31, 2020 . •As ofDecember 31, 2021 , our total liquidity was$407.6 million , consisting of$134.2 million of cash and cash equivalents and$273.4 million available for additional borrowing under the senior secured revolving credit facility, to the extent we are compliant with financial covenants that permit such borrowings. This compares to liquidity of$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 year endedDecember 31, 2021 and other notable actions we have taken during the year:
Impact of COVID-19 Pandemic on our Business
Global economic conditions are expected to continue to be volatile as long as
the 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 emergence of 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.
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Our 2021 net sales, earnings from operations and cash flows all improved
significantly in comparison to 2020. While the commercial foodservice industry
has continued to recover from the immediate impacts of the COVID-19 pandemic,
the extent of the ultimate impact of the 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 efficacy, emergence of new strains of the virus, and the
timing of the resumption of economic activity to pre-pandemic levels.
Throughout the year ended December 31, 2021 , we continued to see increases in
the cost of specific commodities, components and parts purchased as compared to
the prior year, including the impact of rising inflation rates and tariffs, as
challenges in the supply chain and shipping and logistics delays continue to
persist. The availability of key electronic components used in embedded
electronic controls worsened in 2021, and we expended significant effort and
resources to redesign controls to utilize available parts and to source these
electronic components on the spot market, often at a large premium to historical
prices.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted
in March 2020 and includes measures intended to assist companies during the
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 Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of
2021 extended eligibility for the employee retention tax credit for qualified
wages paid from January 1, 2021 , through December 31, 2021 . We were not eligible
for this incentive during the year ended December 31, 2021 .
On November 5th, 2021 , the Occupational Safety and Health Administration
announced an emergency temporary standard mandating the COVID-19 vaccine or
weekly testing for most U.S. employees, which includes our employees. That
standard was struck down by the U.S. Supreme Court on January 13, 2022 . However,
the Biden Administration has indicated that it may seek to impose alternative
vaccine mandates and other governmental authorities have imposed more targeted
vaccine and testing orders and regulations, and may continue to do so in the
future. If a mandate is ultimately issued and implemented in some form, 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 any required ongoing
COVID-19 testing, which would result in delays in the manufacturing process,
negatively impact our future sales levels 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.
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 executed the final phases of the
Transformation Program during the quarter ended December 31, 2021 , as originally
planned.
In connection with the execution of the Transformation Program, we incurred $4.6
million of consulting and other related Transformation Program costs for the
year ended December 31, 2021 . We also incurred $1.4 million of restructuring
charges for the year ended December 31, 2021 , 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 $73.4
million from the inception of the Transformation Program through December 31,
2021 and have settled these costs primarily in cash.
Industry and Business Conditions
Through 2020 and 2021, the COVID-19 pandemic created a decline in economic
activity across the globe and many hospitality and restaurant companies were
forced to close either temporarily or permanently, and the vast majority have
experienced a significant decline in revenues. The effects on businesses across
many industries was pervasive and has injected uncertainty into the consumer
foodservice industry. Full-service restaurants continue the trend as being the
most negatively impacted by COVID-19 with limited-service restaurants (which
includes QSR and fast casual restaurants) impacted the least. Many economic
forecasts continue to show the Consumer Foodservice industries sales will not
return to 2019 levels until 2023, maintaining the 3-year recovery period to
reach pre-pandemic 2019 sales.
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--------------------------------------------------------------------------------Business Strategies
While our strategic objectives are long-term and remain intact, the uncertainty surrounding the ongoing COVID-19 pandemic will impact the extent and timing of the execution of these objectives. Our immediate focus remains on ensuring the safety of our stakeholders and the balancing of our Transformation Program and innovation investments with the pace of recovery in our revenues as the industry rebounds. Our specific strategic objectives, which are discussed in further detail in Part I, Item 1 of this Annual Report on Form 10-K, include: • Achieve profitable growth • Create innovative products and solutions • Enhance customer satisfaction • Drive operational excellence • Develop great people
Results of Operations for the Years Ended
The following table sets forth our consolidated financial results for the periods presented:
Years Ended December 31, Change
(in millions, except percentage data) 2021 2020 $ %
Net sales $ 1,546.9 $ 1,153.4 $ 393.5 34.1 %
Cost of sales 987.3 743.4 243.9 32.8 %
Gross profit 559.6 410.0 149.6 36.5 %
Gross margin (% of Net sales) 36.2 % 35.5 %
Selling, general and administrative expenses 337.6 285.3 52.3 18.3 %
Amortization expense 39.4 39.1 0.3 0.8 %
Restructuring and other expense 0.6 10.9 (10.3) (94.5) %
Loss from impairment and disposal of assets -
net 0.4 11.6 (11.2) (96.6) %
Earnings from operations 181.6 63.1 118.5 187.8 %
Interest expense 74.9 81.4 (6.5) (8.0) %
Other expense (income) - net 7.5 (4.6) 12.1 263.0 %
Earnings (loss) before income taxes 99.2 (13.7) 112.9 824.1 %
Income tax expense (benefit) 28.9 (6.3) 35.2 558.7 %
Net earnings (loss) $ 70.3 $ (7.4) $ 77.7 1,050.0 %
Analysis of
"Net sales" for our geographic business segments consist of the following for
the periods presented:
Years Ended December 31, Change
(in millions, except percentage data) 2021 2020 $ %
Americas $ 1,185.8 $ 867.0 $ 318.8 36.8 %
EMEA 447.1 292.6 154.5 52.8 %
APAC 261.1 202.1 59.0 29.2 %
Elimination of intersegment sales (347.1) (208.3) (138.8) 66.6 %
Total net sales $ 1,546.9 $ 1,153.4 $ 393.5 34.1 %
Net sales totaled $1,546.9 million for the year ended December 31, 2021
representing an increase of $393.5 million , or 34.1%, compared to 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 COVID-19 pandemic, and to a much lesser extent, increased net
pricing. Foreign currency translation positively impacted net sales for the year
ended December 31, 2021 by $25.2 million .
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Net sales in the Americas segment for the year ended December 31, 2021 increased
by $318.8 million , or 36.8%, compared to the prior year. The increase was
primarily driven by increased third-party net sales of $274.9 million and a
$43.9 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 COVID-19 pandemic in
the region, and to a much lesser extent, increased net pricing. Foreign currency
translation negatively impacted third-party net sales for the year ended
December 31, 2021 by $7.1 million .
Net sales in the EMEA segment for the year ended December 31, 2021 increased by
$154.5 million , or 52.8%, compared to the prior year. The increase was primarily
the result of increased third-party net sales of $81.7 million and a $72.8
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
COVID-19 pandemic. Foreign currency translation positively impacted third-party
net sales for the year ended December 31, 2021 by $13.4 million .
Net sales in the APAC segment for the year ended December 31, 2021 increased by
$59.0 million , or 29.2%, compared to the prior year. The increase was primarily
the result of increased third-party net sales of $36.9 million and a $22.1
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 COVID-19 pandemic. Foreign currency translation positively
impacted third-party net sales for the year ended December 31, 2021 by $4.7
million .
Analysis of Earnings from Operations
Gross profit
"Gross profit" for the year endedDecember 31, 2021 totaled$559.6 million , an increase of$149.6 million , or 36.5%, compared to the prior year. This increase was primarily driven by: (i) a$130.6 million favorable impact from increased product volumes and mix, (ii) a$29.2 million favorable impact from increased net pricing, (iii)$15.5 million of positive foreign currency translation impact and (iv)$14.0 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. These favorable impacts were partially offset by: (i)$19.2 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)$14.0 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, (iii) a$4.7 million unfavorable impact from increased tariffs and (iv)$1.6 million of higher depreciation costs. We expect that the challenges in the supply chain and shipping and logistics delays will likely have a continued impact, which could possibly be material, on our gross profit throughout fiscal 2022. The availability of key electronic components used in embedded electronic controls, for example, worsened in 2021, and we expended significant effort and resources to redesign controls to utilize available parts and to source these electronic components on the spot market, often at a large premium to historical prices. We expect these challenges to continue. If a COVID-19 vaccine or weekly testing mandate were to be imposed on our manufacturing labor force, this could also impact ability to maintain adequate staffing at our facilities, make it difficult to replace disqualified employees with temporary employees or new hires, and increase costs and compliance burden, which could materially adversely affect our gross profit going forward.
Selling, general and administrative expenses
"Selling, general and administrative expenses" for the year endedDecember 31, 2021 were$337.6 million , an increase of$52.3 million , or 18.3%, compared to the prior year. This increase is primarily driven by: (i)$29.5 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)$26.4 million of increased transaction expenses related to the pending sale of our company, (iii)$9.7 million of higher marketing and commission costs, primarily attributable to increased sales volumes, (iv) a$5.2 million unfavorable foreign currency translation impact as compared to the same period of the prior year and (v)$4.4 million of higher travel and other controllable costs. The impact of these increases was partially offset by: (i)$18.5 million of lower third-party consulting costs incurred in connection with our Transformation Program, (ii)$3.2 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 expense" for the year endedDecember 31, 2021 was$0.6 million primarily as a result of a restructuring plan initiated during the first quarter of 2021 for the consolidation of a manufacturing facility in EMEA. Restructuring and other expense for the year endedDecember 31, 2020 was$10.9 million consisting of$7.8 million of severance and related costs and a$3.1 million loss contingency charge. The severance and related costs were associated with workforce reductions executed throughout 2020 in theAmericas and Corporate regions and a limited management restructuring enabled by the Transformation Program, as well as 2019 actions completed, and 2020 actions initiated 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. -40- --------------------------------------------------------------------------------
Analysis of Segment Adjusted Operating EBITDA
"Adjusted Operating EBITDA" (a non-GAAP measure) for our geographic business segments consists of the following for the periods presented:
Years Ended December 31, Change
(in millions, except percentage data) 2021 2020 $ %
Americas $ 219.7 $ 155.5 $ 64.2 41.3 %
EMEA 86.7 46.2 40.5 87.7 %
APAC 40.7 31.2 9.5 30.4 %
Total Segment Adjusted Operating EBITDA 347.1 232.9 114.2 49.0 %
Less: Corporate and unallocated expenses (71.7) (62.0) (9.7) (15.6) %
Total Adjusted Operating EBITDA $ 275.4 $ 170.9 $ 104.5 61.1 %
Adjusted Operating EBITDA margin (1) 17.8 % 14.8 % 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 year endedDecember 31, 2021 increased by$64.2 million , or 41.3%. This increase was primarily driven by: (i)$74.8 million of favorable product volumes and mix, (ii)$33.4 million of favorable impact from net pricing, (iii)$8.2 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 year endedDecember 31, 2021 , (iv)$3.9 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)$15.4 million of higher employee-related expenses, including higher incentives resulting from improved operating results in 2021, (ii)$14.6 million of unfavorable inbound freight costs resulting from both higher volumes and the continued on the supply chain challenges, (iii)$12.1 million of higher materials costs, primarily driven by continued inflationary pressures experienced during the year endedDecember 31, 2021 , slightly offset by the procurement sourcing savings associated with the Transformation Program, (iv)$9.6 of higher marketing and commissions costs attributable primarily to increased sales, (v)$4.1 million of increased tariffs and (vi)$1.0 million of lower professional fees. Adjusted Operating EBITDA in the EMEA segment for the year endedDecember 31, 2021 increased by$40.5 million , or 87.7%. This increase was primarily driven by: (i)$45.1 million of favorable product volumes and mix, (ii)$4.5 million of favorable foreign currency translation impact, (iii)$2.5 million of favorable labor and other manufacturing costs primarily due to improved operating efficiencies related to higher volumes and equipment investments in our plants, (iv) a$0.7 million decrease in professional fees and (v)$0.5 million of favorable impact from net pricing. The impact of these increases was partially offset by: (i)$4.2 million of unfavorable inbound freight costs resulting from both higher volumes and the continued supply chain challenges, (ii)$3.6 million of higher employee-related, travel and other controllable costs, (iii)$2.6 million of higher materials costs primarily driven by continued inflationary pressures experienced during the year endedDecember 31, 2021 , (iv)$1.7 million of higher research and development costs and (v)$0.6 million of higher marketing and commissions costs attributable primarily to increased sales. Adjusted Operating EBITDA in the APAC segment for the year endedDecember 31, 2021 increased by$9.5 million , or 30.4%. This increase was primarily driven by: (i)$7.9 million of favorable product volumes and mix, (ii)$1.9 million of favorable foreign currency translation impact, (iii)$1.3 million of favorable impact from net pricing, (iv)$1.3 million lower research and development costs, (v)$0.8 million of favorable labor and other manufacturing costs primarily due to improved operating efficiencies related to higher volumes and equipment investments in our plants, (vi)$0.7 million of lower material costs and (vii)$0.7 million of lower marketing and commissions costs. These increases were partially offset by: (i)$4.4 million of higher employee-related, travel and other controllable costs, (ii)$0.6 million of increased tariffs and (iii)$0.4 million of unfavorable inbound freight costs resulting from both higher volumes and the continued supply chain challenges. Corporate and unallocated expenses reflect certain corporate-level expenses and eliminations, which are not allocated to the segments. For the year endedDecember 31, 2021 , corporate and unallocated costs increased by$9.7 million , or 15.6%, compared to the same period of the prior year. This increase was primarily driven by$11.7 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 decreases were partially offset by a$3.1 million decrease in professional fees.
Analysis of Non-Operating Income Statement Items
For the year endedDecember 31, 2021 , "Interest expense" was$74.9 million , a$6.5 million decrease as compared to 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 year endedDecember 31, 2021 . For the year endedDecember 31, 2021 , "Other (income) expense - net" was an expense of$7.5 million , compared to income of$4.6 million in the prior year. The decrease in income of$12.1 million is primarily the result of higher net foreign currency losses compared to 2020. -41- --------------------------------------------------------------------------------
Analysis of Income Taxes
"Income tax (benefit) expense" for the year endedDecember 31, 2021 was an expense of$28.9 million , which was a change of$35.2 million as compared to a benefit of$6.3 million in the prior year. This increase was primarily driven by our increase in earnings and relative weighting of jurisdictional income. For the year endedDecember 31, 2021 , our effective tax rate was 29.1%, compared to an effective tax rate of 46.0% for the prior year. The decrease in effective tax rate for the year endedDecember 31, 2021 was primarily the result of a decrease in income tax benefit of 51.4% for CARES Act net operating loss carryback provisions, and 8.3% for manufacturing and research incentive credits. These decreases were partially offset by 19.0% of income tax expense percentage changes for unrecognized tax benefits related to the Tax Act regulations, 11.8% forU.S. permanent adjustments - Non Tax Act and 11.2% for taxes on foreign income. For the year endedDecember 31, 2021 , the effective tax rate varied from the 21.0% statutory rate primarily due to the result of a 4.6% increase for taxes on foreign income, 3.0% for Non Tax ActU.S. permanent adjustments, and 1.8% for Global Intangible Low-Taxed Income. These increases were partially offset by a 1.2% decrease for the manufacturing and research incentives and a decrease of 1.1% for Foreign Derived Intangible Income. For the year endedDecember 31, 2020 , the effective tax rate varied from the 21.0% statutory rate primarily due to the result of a 51.2% increase for the CARES Act net operating loss carryback provisions, a 7.1% increase for manufacturing and research incentive credits and a 1.5% increase resulting from the adjustment of valuation allowances. These increases were partially offset by a 19.1% decrease for the unrecognized tax benefits and a decrease of 6.6% impact for income earned in foreign jurisdictions. As ofDecember 31, 2021 , we have determined that a valuation allowance is not required for the deferred tax asset associated with theU.S. interest expense. We may adjust the deferred tax asset valuation allowances based on possible sources of taxable income that may be available to realize a tax benefit for deferred tax assets. As facts and circumstances change, we may adjust our deferred tax asset valuation allowances accordingly. Such changes in the deferred tax asset valuation allowances will be reflected in current operations through our income tax provision and could have a material effect on our operating results. -42- --------------------------------------------------------------------------------
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 ofDecember 31, 2021 , our total liquidity was$407.6 million , consisting of$134.2 million of cash and cash equivalents and$273.4 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. This compares to total liquidity of$375.0 million as ofDecember 31, 2020 . On an annual basis, our liquidity generally decreases in the first quarter and increases in the remaining quarters of each calendar year driven by our earnings cycle as well as the timing of large cash disbursements made in the first quarter such as annual rebates, incentive compensation and the build-up of inventory in advance of our historically higher sales period in the spring and early summer months. Although our liquidity atDecember 31, 2021 is consistent with historical year end levels, the components and timing of our liquidity during the current year has been impacted by the effects of the COVID-19 pandemic on our business. AtDecember 31, 2021 , approximately 97% of our cash and cash equivalents 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, 2022 . The amount of actual capital expenditures may be impacted by general economic, financial or operational changes, including the future impact of the COVID-19 pandemic on our operating results, the success and timing of the closing of the merger withAli Group , the anticipated Ice Divestiture, and competitive, legislative and regulatory factors, among other considerations. In response to the 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. We expect that the challenges in the supply chain and shipping and logistics delays will likely have a continued impact on our liquidity throughout fiscal 2022, but are not aware of any known trends, demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in a material increase or decrease in our liquidity. Our access to, and the availability of, financing on acceptable terms in the future may be affected by many factors, including overall liquidity in the financial and capital markets, the state of the economy and our credit rating. The ongoing 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 severity or duration of the impact of the 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. -43- --------------------------------------------------------------------------------
Sources and Uses of Cash
Cash and cash equivalents and restricted cash as ofDecember 31, 2021 totaled$134.7 million , an increase of$9.3 million from theDecember 31, 2020 balance of$125.4 million .
The table below summarizes our consolidated cash flows:
Year Ended December 31,
(in millions) 2021 2020
Cash provided by (used in):
Operating activities $ 56.1 $ 15.0
Investing activities (25.9) (24.2)
Financing activities (21.4) (1.3)
Effect of exchange rate changes on cash 0.5 5.2
Net increase (decrease) in cash and cash equivalents and
restricted cash $ 9.3 $ (5.3)
Operating Activities
Cash provided by operating activities for the year ended December 31, 2021 was
$56.1 million , consisting primarily of net income of $70.3 million , which
included non-cash charges of $74.5 million for depreciation and amortization
expense, amortization of debt issuance costs, stock-based compensation and
deferred income taxes and net cash inflows of $43.4 million related primarily to
an increase in accrued rebates, accrued commissions, employee bonuses and
customer deposits all resulting from the improvement in our operating results
and net cash inflows of $42.9 million related to an increase in trade accounts
payable. These inflows were partially offset by a $116.2 million use of cash
related to an increase in inventory, $57.9 million use of cash related to a net
increase in accounts receivable and a $1.3 million net cash outflow related to
an increase in other assets.
Cash provided by operating activities for the year ended December 31, 2020 was
$15.0 million , consisting primarily of a net loss of $7.4 million , additional
non-cash charges included in the net loss of $72.1 million for depreciation and
amortization expense, amortization of debt issuance costs and stock-based
compensation, a change in deferred income taxes of $8.2 million and an $11.1
million non-cash impairment charge on trademarks in the EMEA segment.
Additionally, there were cash inflows of $21.8 million from a net decrease in
accounts receivable and $10.2 million related to a decrease in inventory balance
during the year, a $16.9 million increase in our current income tax receivable
primarily associated with CARES Act net operating loss carryback provisions,
partially offset by a $15.4 million use of cash for rebate payments to
customers, a $10.4 million use of cash for the settlement of restructuring
activities and $7.5 million of net cash used for professional fees, consisting
primarily of third-party consulting costs incurred in connection with our
Transformation Program and $34.9 million of cash outflows associated with the
timing of other current and long-term liabilities, other assets and trade
accounts payable.
Investing Activities
Cash used in investing activities of
Cash used in investing activities of$24.2 million for the year endedDecember 31, 2020 consisted of capital expenditures of$20.1 million , largely related to improvements of machinery and equipment within our manufacturing plants in conjunction with our Transformation Program and$3.9 million of payments, net of interest received, made in connection with the maturity of our cross-currency swap inMarch 2020 .
Financing Activities
Cash used in financing activities for the year endedDecember 31, 2021 was$21.4 million , consisting primarily of$24.2 million of net payments on long-term debt and finance leases partially offset by$2.8 million of net cash received related to the exercise of stock options. Cash used in financing activities for the year endedDecember 31, 2021 was$1.3 million , consisting primarily of$2.1 million of capitalized costs incurred in connection with theApril 2020 amendment to our 2016 Credit Facility, offset by net borrowings on long-term debt and finance leases of$0.4 million and$0.4 million of net cash received related to the exercise of stock options.
Financing Resources
Our primary financing resources consist 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 ofDecember 31, 2021 are set forth below. -44- --------------------------------------------------------------------------------
2016 Credit Agreement
Our 2016 Credit Agreement provides for a$1,300.0 million Senior Secured Credit Facility consisting of (i) a senior secured Term Loan B Facility for$900.0 million and (ii) a Senior Secured Revolving Credit Facility with aggregate commitments of$400.0 million . The maturities of the Term Loan B Facility and Senior Secured Revolving Credit Facility areOctober 2025 andOctober 2023 , respectively. In April of 2020, we entered into Amendment No. 7 (the "Amendment") to the 2016 Credit Agreement, to amend the financial covenants of the Revolving Credit Facility. The terms of the Amendment, among others as set forth in the Amendment, (i) suspend the Consolidated Total Leverage Ratio and Consolidated Interest Coverage Ratio covenants, in each case, as defined in the 2016 Credit Agreement, for four fiscal quarters untilMarch 31, 2021 ("Suspension Period") and (ii) temporarily replace the suspended covenants with a Minimum Consolidated EBITDA covenant and a Maximum Capital Expenditure covenant, each computed on a trailing four quarters basis and measured quarterly, and a Minimum Liquidity covenant that is measured monthly, each as defined in the Amendment, throughout the Suspension Period, with the Minimum Liquidity covenant extended throughJune 30, 2021 . Beginning in the second quarter of 2021, the Consolidated Total Leverage Ratio and Consolidated Interest Coverage Ratio covenants were reinstated at modified levels as compared to the covenants in effect beginningJune 30, 2020 and phased-in to the pre-amendment covenant levels in the fourth quarter of 2021. InOctober 2021 , we entered into a Suspension of Rights Agreement to the 2016 Credit Agreement, effectiveDecember 31, 2021 , which: (i) suspends our ability to execute non-USD currency draws under the Revolving Facility, (ii) requires all outstanding non-USD currency loans to be repaid on or beforeDecember 31, 2021 and (iii) eliminates the option to select an interest period of 2 months for any borrowings in USD without the lenders' consent. We do not expect that the execution of this agreement will have a material impact on the our future liquidity or consolidated results of operations. As ofDecember 31, 2021 , borrowings under the 2016 Credit Agreement bore interest at a rate per annum equal to, at our option, either (i)London Inter-bank Offered Rate ("LIBOR") plus an applicable margin of 2.50% for the Term Loan B Facility and 1.50% to 2.50%, for the Revolving Credit Facility (depending on our Consolidated Total Leverage Ratio) or (ii) an alternate base rate plus an applicable margin that is 1.00% less than the LIBOR-based applicable margin. The Amendment includes a quarterly fee that was applicable through the fourth quarter of 2021 in an amount equal to a per annum rate of 0.50% on the average outstanding balance of the Revolving Credit Facility, payable on a quarterly basis.
Senior Notes
OnFebruary 18, 2016 , we issued 9.50% Senior Notes due 2024 (the "Senior Notes") in an aggregate principal amount of$425.0 million , all of which was outstanding as ofDecember 31, 2021 . The Senior Notes were issued under an indenture withWells Fargo Bank, National Association , as trustee, and are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of our domestic restricted subsidiaries that is a borrower or guarantor under the 2016 Credit Agreement. Covenant Compliance The 2016 Credit Agreement and indenture governing the Senior Secured Credit Facility contains limitations on our ability to effect mergers and change of control events as well as certain other limitations, including limitations on: (i) the declaration and payment of dividends or other restricted payments, (ii) incurrence of additional indebtedness or issuing preferred stock, (iii) the creation or existence of certain liens, (iv) incurrence of restrictions on the ability of certain of our subsidiaries to pay dividends or other payments, (v) transactions with affiliates and (vi) sales of assets. We were in compliance with all affirmative and negative covenants, including any financial covenants, pertaining to our financing arrangements, in effect as ofDecember 31, 2021 . A summary of our outstanding financing obligations, excluding finance leases, is as follows: December 31, (in millions) 2021 2020 Revolving Credit Facility$ 120.0 $ 143.0 Term Loan B Facility 855.0 855.0 9.50% Senior Notes due 2024 425.0 425.0 Total debt$ 1,400.0 $ 1,423.0 -45-
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Summarized Guarantor Financial Information
In
As discussed above, and in Note 8, "Debt", of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, inFebruary 2016 , we issued Senior Notes under an indenture withWells Fargo Bank, National Association , as trustee (the "Trustee"). The Senior Notes were initially sold to qualified institutional buyers pursuant to Rule 144A (and outside theU.S. in reliance on Regulation S) under the Securities Act of 1933 ("Securities Act"). InSeptember 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. 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, discussed above. The Senior Notes and the subsidiary guarantees are unsecured, senior obligations. We must generally offer to repurchase all 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 sales of assets. EffectiveFebruary 15, 2022 , the Senior Notes are redeemable, at our option, in whole or in part from time to time, at a redemption price equal to 100.0% of the principal amount. In accordance with Rule 3-10 of Regulation S-X, the following tables present consolidating financial information for (a)Welbilt ("Parent"); (b) the guarantors of the Senior Notes, which include substantially all of the domestic, 100% owned subsidiaries ofWelbilt ("Guarantor Subsidiaries"); and (c) the wholly-owned foreign subsidiaries ofWelbilt , which do not guarantee the Senior Notes ("Non-Guarantor Subsidiaries"). The financial information of the Guarantor Subsidiaries in the following table is presented on a combined basis with intercompany balances and transactions between the entities within the Guarantor Subsidiaries eliminated. The information also includes elimination entries necessary to consolidate the Guarantor 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 Guarantor Subsidiaries are not presented because as guarantors, these subsidiaries are fully and unconditionally, jointly and severally liable under the guarantees, except for normal and customary release provisions. As discussed in Note 20, "Business Segments" of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we revised the allocation of certain of our functional expenses between the corporate-level and the geographic business segments during the first quarter of 2020. The impacts of the revised allocation predominantly impacts the Parent and Guarantor Subsidiaries financial information included in the tables below and these changes did not impact our previously reported consolidated financial results. -46- --------------------------------------------------------------------------------
WELBILT, INC.
Consolidating Statement of Operations
For the year ended December 31, 2021
Non-
Guarantor Guarantor Consolidating(in millions) Parent Subsidiaries Subsidiaries Adjustments Consolidated Net sales $ -$ 1,088.7 $ 963.9 $ (505.7)$ 1,546.9 Cost of sales - 827.8 665.2 (505.7) 987.3 Gross profit - 260.9 298.7 - 559.6 Selling, general and administrative expenses 87.7 133.3 116.6 - 337.6 Amortization expense - 28.2 11.2 - 39.4 Restructuring and other (recovery) expense (0.1) (0.1) 0.8 -
0.6
Loss from impairment and disposal of assets - net 0.1 0.2 0.1 - 0.4 (Loss) earnings from operations (87.7) 99.3 170.0 - 181.6 Interest expense 74.4 0.5 - - 74.9 Other (income) expense - net (155.6) (16.2) 31.8 147.5 7.5 Equity in earnings of subsidiaries 207.2 109.1 - (316.3) - Earnings before income taxes 200.7 224.1 138.2 (463.8) 99.2 Income tax (benefit) expense (17.2) 17.0 29.1 - 28.9 Net earnings$ 217.9 $ 207.1 $ 109.1 $ (463.8)$ 70.3 Total other comprehensive loss, net of tax (5.0) (6.5) (173.7) 180.1 (5.1) Comprehensive income (loss)$ 212.9 $ 200.6 $ (64.6) $ (283.7)$ 65.2 -47-
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WELBILT, INC.
Consolidating Balance Sheet
As of December 31, 2021
Non-
Guarantor Guarantor Consolidating
(in millions) Parent Subsidiaries Subsidiaries Adjustments Consolidated
Assets
Current assets:
Cash and cash equivalents $ 1.8 $ 2.2 $ 130.2 $ - $ 134.2
Restricted cash - - 0.5 - 0.5
Accounts receivable - net 0.4 108.1 112.0 - 220.5
Inventories - net - 163.4 131.0 - 294.4
Prepaids and other current assets 27.0 10.4 21.1 - 58.5
Total current assets 29.2 284.1 394.8 - 708.1
Property, plant and equipment - net 14.7 68.0 52.9 - 135.6
Operating lease right-of-use assets 1.9 5.1 37.2 - 44.2
Goodwill - 832.4 103.9 - 936.3
Other intangible assets - net 0.2 287.6 133.0 - 420.8 Due from affiliates - 3,561.5 - (3,561.5) - Investment in subsidiaries 4,694.5 - - (4,694.5) - Other non-current assets 8.6 4.2 19.8 - 32.6 Total assets$ 4,749.1 $ 5,042.9 $ 741.6 $ (8,256.0) $ 2,277.6 Liabilities and equity Current liabilities: Trade accounts payable $ -$ 64.1 $ 66.5 $ -$ 130.6 Accrued expenses and other liabilities 32.8 93.5 84.4 - 210.7 Current portion of long-term debt and finance leases - 0.5 0.4 - 0.9 Product warranties - 19.6 11.3 - 30.9 Total current liabilities 32.8 177.7 162.6 - 373.1 Long-term debt and finance leases 1,387.5 - 0.5 - 1,388.0 Deferred income taxes 37.6 - 26.6 - 64.2 Pension and postretirement health liabilities 9.3 8.5 3.9 - 21.7 Due to affiliates 2,910.7 - 650.9 (3,561.6) - Investment in subsidiaries - 143.6 - (143.6) - Operating lease liabilities 1.7 3.5 30.1 - 35.3 Other long-term liabilities 11.2 15.1 10.6 - 36.9 Total non-current liabilities 4,358.0 170.7 722.6 (3,705.2) 1,546.1 Total equity (deficit) 358.3 4,694.5 (143.6) (4,550.8)
358.4
Total liabilities and equity$ 4,749.1 $ 5,042.9 $ 741.6 $ (8,256.0) $ 2,277.6 Leasing Arrangements We lease various assets under leasing arrangements. The future estimated payments under these arrangements are disclosed in Note 16, "Leases", of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. -48- --------------------------------------------------------------------------------
Contractual Obligations
The following table summarizes our significant contractual obligations as ofDecember 31, 2021 : (in millions) Total 2022 2023 2024 2025 2026 Thereafter Long-term debt$ 1,400.0 $ -$ 120.0 $ 434.0 $ 846.0 $ - $ - Interest obligations 227.1 63.0 63.0 62.9 38.2 - - Finance leases 1.6 1.0 0.3 0.2 0.1 - - Operating lease liabilities 44.4 9.0 7.8 6.5 4.8 3.4 12.9 Income taxes payable 6.7 6.6 - - - 0.1 - Purchase obligations 141.7 122.6 18.0 0.7 0.2 0.1 0.1 Total contractual obligations$ 1,821.5 $ 202.2 $ 209.1 $ 504.3 $ 889.3 $ 3.6 $ 13.0 Unrecognized tax benefits totaling$8.1 million as ofDecember 31, 2021 excluding related interests and penalties, are not included in the table above because the timing of their resolution cannot be estimated. See Note 7, "Income Taxes", of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for disclosures surrounding uncertain income tax positions. We maintain defined benefit plans for certain of our operations in theAmericas and EMEA regions. During the year endedDecember 31, 2021 , cash contributions to all of our defined benefit plans were$7.5 million and we estimate that our defined benefit plan contributions will be approximately$6.9 million for the year endingDecember 31, 2022 . See Note 13, "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 further discussion. See Note 11, "Contingencies and Significant Estimates", of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-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 withU.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 we evaluate our operating performance and liquidity. In addition, these non-GAAP measures address questions we routinely receive from analysts and investors and, in order to ensure that all investors have access to similar data, we make this data available to the public. None of the non-GAAP measures presented should be considered as an alternative to net earnings, earnings from operations, net cash used in operating activities, net sales or any other measures derived in accordance withU.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 withU.S. GAAP. The 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
We refer to "Free Cash Flow", a non-GAAP measure, as our net cash provided by or used in operating activities less capital expenditures 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 our ability to generate cash internally to fund our debt repayments, acquisitions, dividends and share repurchases, if any. Free Cash Flow reconciles to net cash used in operating activities included in our Consolidated Statements of Cash Flows presented in accordance withU.S. GAAP, as follows: Year Ended December 31, (in millions) 2021 2020 2019 Net cash provided by (used in) operating activities$ 56.1 $ 15.0 $ (269.7) Capital expenditures (25.9) (20.1) (33.9) Cash receipts on beneficial interest in sold receivables (1) - - 280.7 Termination of accounts receivable securitization program (2) - - 96.9 Free Cash Flow$ 30.2 $ (5.1) $ 74.0
(1) Represents the cash receipts from the beneficial interest on sold receivables within the accounts receivable securitization program and were classified as "Cash flows from investing activities" in the Consolidated Statements of Cash Flows through final settlement of the program in the second quarter of 2019.
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(2) 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 our operating results on aU.S. GAAP basis, we also review our results on an "Adjusted Operating EBITDA" basis. Adjusted Operating EBITDA is defined as net earnings before interest expense, income taxes, other income or expense, depreciation and amortization expense plus certain other items such as loss from impairment of assets, gain or loss from disposal of assets, restructuring activities, loss on modification or extinguishment of debt, acquisition-related transaction and integration costs, Transformation Program expense, separation expense and certain other items, which are non-operating and unusual in nature. We use Adjusted Operating EBITDA as the basis on which we evaluate our financial performance and make resource allocations and other operating decisions. We consider it important that investors review the same operating information used by us. Our Adjusted Operating EBITDA reconciles to net (loss) earnings as presented in the Consolidated Statements of Operations in accordance withU.S. GAAP as follows: Year Ended December 31, (in millions, except percentage data) 2021 2020 2019 Net earnings (loss)$ 70.3 $ (7.4) $ 55.9 Income tax expense (benefit) 28.9 (6.3) 19.8 Other expense (income) - net 7.5 (4.6) 0.9 Interest expense 74.9 81.4 97.3 Earnings from operations 181.6 63.1 173.9
Loss from impairment and loss on disposal of assets - net
0.4 11.6 0.7
Restructuring activities (1) 1.4 8.2 9.8
Amortization expense 40.9 40.6 39.8
Depreciation expense 22.2 20.7 21.1
Transformation Program expense (2) 4.6 23.3 35.3
Transaction costs (3) 26.4 0.2 1.1
Other items (4) (2.1) 3.2 4.5
Total Adjusted Operating EBITDA $ 275.4 Adjusted Operating EBITDA margin (5) 17.8 % 14.8 % 18.0 % (1) Restructuring activities include costs associated with actions to improve operating efficiencies and rationalization of our cost structure. Refer to Note 14, "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 14, "Business Transformation Program and Restructuring" for discussion of the impact to the Consolidated Statements of Operations. (3) Transaction costs are associated with acquisition and integrated-related activities. Transaction costs for the year endedDecember 31, 2021 are related to the pending sale of the Company and consist primarily of professional services recorded in "Selling, general and administrative expenses." Transaction costs recorded in "Cost of sales" include$0.1 million related to inventory fair value purchase accounting adjustments for the year endedDecember 31, 2019 . Professional services and other direct acquisition and integration costs recorded in "Selling, general and administrative expenses" were$0.2 million and$1.0 million , for the years endedDecember 31, 2020 and 2019, respectively. (4) Other items are costs which are not representative of our operational performance. For the year endedDecember 31, 2021 , other items consist primarily of a partial recovery of$2.0 million from the diversion of funds in 2018 from one of our Company's EMEA locations and is included in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. For the year endedDecember 31, 2020 , other items includes an expense of$3.1 million for amounts due for customs duties, fees and interest on previously imported products, which are included in "Restructuring and other expense" in the Consolidated Statements of Operations and$0.1 million of professional fees for recovery of misappropriated funds within the Crem business related to the 2018 matter. Refer to Note 13, "Contingencies and Significant Estimates" for discussion of the impact on the Consolidated Statements of Operations. For the year endedDecember 31, 2019 , the amount includes certain costs related to concluded litigation and other professional fees. Unless otherwise noted, all such amounts are included within "Selling, general and administrative expenses" in the Consolidated Statements of Operations.
(5) Adjusted Operating EBITDA margin is calculated by dividing the dollar amount of Adjusted Operating EBITDA by net sales.
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--------------------------------------------------------------------------------Adjusted Diluted Net Earnings and Adjusted Diluted Net Earnings Per Share
We define Adjusted Diluted Net Earnings as net earnings before the impact of certain items, such as loss on modification or extinguishment of debt, loss from impairment of assets, gain or loss from disposal of assets, restructuring activities, separation expense, Transformation Program expense, acquisition-related transaction and integration costs, certain other items, expenses associated with pension settlements, foreign currency transaction gain or loss, the Tax Act and the tax effect of 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 stock that were outstanding during the period. We believe these measures are useful to investors in assessing the ongoing performance of our underlying businesses before the impact of certain items which are non-operating and unusual in nature. The following table presents Adjusted Diluted Net Earnings and Adjusted Diluted Net Earnings Per Share reconciled to net earnings and diluted net earnings per share, respectively, presented in accordance withU.S. GAAP: Year Ended December 31, (in millions, except per share data) 2021 2020 2019 Net earnings (loss)$ 70.3
Loss from impairment and loss on disposal of assets - net
0.4 11.6 0.7
Restructuring activities (1) 1.4 8.2 9.8
Transformation Program expense (2) 4.6 23.3 35.3
Transaction costs (3) 26.4 0.2 1.1
Other items (4) (2.1) 3.2 4.5
Pension settlement (5) - - 1.2
Foreign currency transaction loss (gain) (6) 6.0 (5.7) 0.7
Tax effect of adjustments (7) (8.5) (10.3) (12.9)
Total Adjusted Net Earnings $ 98.5 Per Share Basis Diluted net earnings (loss)$ 0.49
Loss from impairment and loss on disposal of assets - net
0.01 0.08 0.01
Restructuring activities (1) 0.01 0.06 0.07
Transformation Program expense (2) 0.03 0.16 0.25
Transaction costs (3) 0.18 - 0.01
Other items (4) (0.01) 0.02 0.03
Pension settlement (5) - - 0.01
Foreign currency transaction loss (gain) (6) 0.04 (0.04) -
Tax effect of adjustments (7) (0.06) (0.07) (0.09)
Total Adjusted Diluted Net Earnings $ 0.69 (1) Restructuring activities include costs associated with actions to improve operating efficiencies and rationalization of our cost structure. Refer to Note 14, "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 14, "Business Transformation Program and Restructuring" for discussion of the impact to the Consolidated Statements of Operations. (3) Transaction costs are associated with acquisition and integrated-related activities. Transaction costs for the year endedDecember 31, 2021 are related to the pending sale of the Company and consist primarily of professional services recorded in "Selling, general and administrative expenses." Transaction costs recorded in "Cost of sales" include$0.1 million related to inventory fair value purchase accounting adjustments for the year endedDecember 31, 2019 . Professional services and other direct acquisition and integration costs recorded in "Selling, general and administrative expenses" were$0.2 million and$1.0 million , for the years endedDecember 31, 2020 and 2019, respectively. (4) Other items are costs which are not representative of our operational performance. For the year endedDecember 31, 2021 , other items consist primarily of a partial recovery of$2.0 million from the diversion of funds in 2018 from one of our Company's EMEA locations and is included in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. For the year endedDecember 31, 2020 , other items includes an expense of$3.1 million for amounts due for customs duties, fees and interest on previously imported products, which are included in "Restructuring and other expense" in the Consolidated Statements of Operations and$0.1 million of professional fees for recovery of misappropriated funds within the Crem business related to the 2018 matter. Refer to Note 13, "Contingencies and Significant Estimates" for discussion of the impact on the Consolidated Statements of Operations. For the year endedDecember 31, 2019 , the amount includes certain costs related to concluded litigation and other professional fees. Unless otherwise noted, all such amounts are included within "Selling, general and administrative expenses" in the Consolidated Statements of Operations.
(5) Pension settlement represents non-cash pension losses resulting from settlement of pension obligations. Refer to Note 13, "Employee Benefit Plans" for discussion of the impact to the Consolidated Statements of Operations.
(6) Foreign currency transaction gains and losses are inclusive of gains and
losses on related foreign currency exchange contracts not designated as hedging
instruments for accounting purposes.
(7) The tax effect of adjustments is determined using the statutory tax rates
for the countries comprising such adjustments.
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Organic
We define "Organic net sales" as net sales before the impacts of acquisitions and foreign currency translations during the period. We believe the Organic net sales measure is useful to investors in assessing the ongoing performance of our underlying businesses. Organic net sales reconcile to net sales presented in accordance withU.S. GAAP as follows: Year Ended December 31, (in millions) 2021 2020 2019 Consolidated: Net sales$ 1,894.0 $ 1,361.7 $ 1,853.4 Less: Intersegment sales (347.1) (208.3) (259.5) Net sales (as reported) 1,546.9 1,153.4 1,593.9 Impact of foreign currency translation(1) (25.2) - - Organic net sales$ 1,521.7 $ 1,153.4 $ 1,593.9 Americas: Net sales$ 1,185.8 $ 867.0 $ 1,208.4 Less: Intersegment sales (136.3) (92.4) (133.1) Third-party net sales 1,049.5 774.6 1,075.3 Impact of foreign currency translation(1) (7.1) -
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Total Americas organic net sales$ 1,042.4 $ 774.6 $ 1,075.3 EMEA: Net sales$ 447.1 $ 292.6 $ 392.7 Less: Intersegment sales (141.9) (69.1) (79.5) Third-party net sales 305.2 223.5 313.2 Impact of foreign currency translation(1) (13.4) - - Total EMEA organic net sales$ 291.8 $ 223.5 $ 313.2 APAC: Net sales$ 261.1 $ 202.1 $ 252.3 Less: Intersegment sales (68.9) (46.8) (46.9) Third-party net sales 192.2 155.3 205.4 Impact of foreign currency translation(1) (4.7) - - Total APAC organic net sales$ 187.5 $ 155.3 $ 205.4
(1) The impact from foreign currency translation is calculated by translating current period activity at the weighted average prior period rates.
Critical Accounting Estimates
The preparation of financial statements in conformity withU.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 accounting estimates involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates, particularly as it relates to forecasts and other assumptions impacted by the uncertainties surrounding the COVID-19 pandemic. The extent to which the economic disruptions of the COVID-19 pandemic impacts our accounting estimates will depend on future developments, including the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact in each of the countries in which we operate globally, the development and global distribution of treatments of COVID-19 vaccines, and the timing of the resumption of economic activity to pre-pandemic levels. A critical accounting estimate is an estimate that (i) is made in accordance with generally accepted accounting principles, (ii) involves a significant level of estimation uncertainty and (iii) has had or is reasonably likely to have a material impact on our financial condition or results of operations. Our critical accounting estimates appear below. We also believe that our accounting policies are important to the reader. -52- -------------------------------------------------------------------------------- Therefore, please refer also to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for more detailed description of these and other accounting policies ofWelbilt . We currently disclose the impact of changes to assumptions in the applicable quarterly or annual filings in which there is a material financial statement impact. Revenue Recognition - 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 are 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 determined 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 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.
In recognizing revenue, we make significant judgments related to identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each performance obligation.
Income Taxes - We are subject to income taxes in theU.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 onDecember 22, 2017 , introduced comprehensive and complex tax legislation, including a provision designed to tax global intangible low-taxed income ("GILTI"), foreign-derived intangible income("FDII"), and other items that are subject to continuous guidance and interpretations. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted onMarch 27, 2020 and includes many measures intended to assist companies during the COVID-19 pandemic including temporary changes to income and non-income-based tax laws, some of which were enacted under the Tax Cuts and Jobs Act ("Tax Act") in 2017. 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 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 applicable jurisdiction. We record 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. We also recognize liabilities for unrecognized tax benefits, which are recognized if the weight 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 appeals or litigation processes, if any. At each reporting period, unrecognized tax benefits are reassessed and adjusted if our judgment changes as 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 is subject to change if actual experience deteriorates.Goodwill , Other Intangible Assets and Other Long-Lived Assets - We perform annual impairment tests of goodwill and intangible assets with indefinite lives atJune 30 of each fiscal year and whenever a triggering event occurs between annual impairment tests. Our trademarks and tradenames are classified as indefinite-lived intangible assets as there are no regulatory, contractual, competitive, economic or other factors which limit the useful lives of these intangible assets. We perform the goodwill impairment test for each of our reporting units which are theAmericas , EMEA and APAC. We perform the indefinite-lived intangible asset impairment test at the unit of account level, which is theAmericas , EMEA and APAC. When testing for impairment, we have the option to first assess qualitative factors to determine whether it is more-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, we 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 we conclude that it is not more-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 we choose not to perform a qualitative assessment, or if, based on the qualitative assessment, we conclude it is more-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 -53- -------------------------------------------------------------------------------- quantitative analysis, we 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, we 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 5, "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 our impairment assessments. When reviewing 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. We 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 Sheets and Consolidated Statements of Operations. 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 for an estimate of costs that we may incur under our warranty at the time of revenue recognition based on historical warranty experience for the related product or estimates of projected losses due to specific warranty issues on new products. These costs primarily include labor and materials, as necessary, associated 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 adequacy of our recorded warranty liability and adjust the amounts as necessary. Product 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 product liability issues and to account for possible adverse development of the established case reserves. 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. 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 regarding 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. Employee Benefit Plans - We provide a range of benefits 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 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 demographics of the participants in our defined benefit plans 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 actuarial mortality tables.
•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.
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Measurements of net periodic benefit cost are based on the assumptions used for
the previous 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 amortized over future periods. We have
developed the assumptions with the assistance of our independent actuaries and
other relevant sources, and we believe that the assumptions used are reasonable;
however, changes in these assumptions could impact our financial position,
results of operations or cash flows. Refer to Note 13, "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.
Recent Accounting Changes and Pronouncements
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 discussion of recently
issued accounting pronouncements applicable to us and the impact of those
standards on our consolidated financial statements and related disclosures.
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