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, 2021 . 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 18, "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 the Company's board of directors and onSeptember 30, 2021 , was subsequently 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) byAli Group due to a breach of a covenant or agreement by our company that causes the failure of a condition to closing, or (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 -26- -------------------------------------------------------------------------------- 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. In conjunction with obtaining regulatory approval for the closing of the merger agreement,Welbilt and theAli Group made the decision to divest ofWelbilt's Ice Business ("Ice Business") and onMarch 3, 2022 ,Welbilt entered into a definitive agreement to sell the Ice Business to Pentair plc for approximately$1.6 billion in cash, subject to customary post-closing adjustments. The completion of the sale of the Ice Business is subject to the satisfaction or waiver of customary closing conditions, including (i) receipt of applicable regulatory approvals, and (ii) the substantially concurrent closing of the merger agreement withAli Group discussed above.Welbilt expects to receive regulatory approval for the sale ofWelbilt toAli Group fromthe United States ,United Kingdom , andEuropean Union prior to closing the sale of the Ice Business to Pentair plc. and subsequently close both the merger agreement withAli Group and the sale of the Ice Business to Pentair plc concurrently. The Company currently expects to receive the necessary approvals and complete these transactions in the second or third quarter of 2022. In accordance with applicable accounting guidance, the results of the Ice Business are presented as discontinued operations in the Consolidated Statements of Operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. Further, the Company reclassified the assets and liabilities of the Ice Business and has presented as "Assets of discontinued operations" and "Liabilities of discontinued operations" in the Consolidated Balance Sheets for all periods presented. The Consolidated Statements of Cash Flows are presented on a consolidated basis for both continuing operations and discontinued operations. See Note 3 to the Consolidated Financial Statements for further details.
Financial Results Highlights
Highlights of our financial results from continuing operations as of and for the three months endedMarch 31, 2022 , as compared to the same period of the prior year, are as follows:
•Net sales were
•Organic net sales from continuing operations (a non-GAAP measure) were
•Gross profit (as a percentage of net sales) was 32.9% compared to 35.5% for the same quarter of 2021.
•Earnings from continuing operations were
•Adjusted Operating EBITDA from continuing operations (a non-GAAP measure) was$40.3 million , an increase of 61.8%, while Adjusted Operating EBITDA margin (a non-GAAP measure) was 12.1% compared to 9.8% for the same quarter of 2021.
•Net earnings were
•As ofMarch 31, 2022 , our total liquidity was$342.2 million , consisting of$138.9 million of cash and cash equivalents and$203.3 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. As ofMarch 31, 2022 , cash and cash equivalents includes the cash balances and equivalents from our continuing operations of$108.3 million and$30.6 million of cash from discontinued operations
•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 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. 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.
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Throughout the year ended December 31, 2021 and through the three months ended
March 31, 2022 , we continued to see increases in the cost of specific
commodities, components and parts purchased, 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 throughout the year
ended December 31, 2021 and the three months ended March 31, 2022 . During the
three months ended March 31, 2022 , we continued to expend 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.
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 , and is
currently stayed. 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 other 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,
and increased costs and diminished availability of raw materials 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 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.
Impact of Military Conflict Between Russia and
The current military conflict betweenRussia andUkraine and the deteriorating global political and economic conditions, may adversely affect our business and results of operations. Governments in theU.S. ,United Kingdom , andEuropean Union have each imposed export controls on certain products and financial and economic sanctions on certain industry sectors and parties inRussia . Consequences of the conflict betweenRussia andUkraine may ultimately result in additional international sanctions, embargoes, regional instability, and geopolitical shifts. Further escalation of geopolitical tensions related to theRussia -Ukraine conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, cyberattacks, additional inflation and supply chain disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and results of operations. The extent of any negative effects on the global economy and our business and results of operations, cannot be predicted. As the Company has limited operations and sales inRussia , the impact of this conflict did not have a material impact on our results of operations during the three months endedMarch 31, 2022 . Further escalation of geopolitical tensions related to theRussia -Ukraine conflict, including increased trade barriers or restrictions on global trade could negatively impact our future business and results of operations.
Industry and Business Conditions
Throughout 2020 and 2021 and through the first quarter of 2022, 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 experienced a significant decline in revenues early in the pandemic. The effects on businesses across many industries was pervasive and injected uncertainty into the consumer foodservice industry but it has been improving steadily as most restrictions inNorth America andEurope have been lifted. More recently, the consumer foodservice industry has been impacted by labor shortages and inflationary pressures from rising food, energy and labor costs. This is driving demand for new and more efficient equipment to help offset these cost pressures, which has positively impacted our operating results for the first quarter of 2022. -28- --------------------------------------------------------------------------------
Business Strategies
While our strategic objectives are long-term and remain intact, the uncertainty surrounding the recovery from the 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 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 the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , include: • Achieve profitable growth • Create innovative products and solutions • Enhance customer satisfaction • Drive operational excellence • Develop great people
Results of Operations for the Three Months Ended
As discussed above, the results of the Ice Business are presented as "Earnings from discontinued operations, net of income tax expense" in the Consolidated Statements of Operations and have been excluded from the Company's continuing operations for all periods presented. The following discussion and analysis of financial condition and results of operations are those of our continuing operations unless otherwise indicated. For additional information regarding our discontinued operations, see Note 3 to the Consolidated Financial Statements.
The following table sets forth our consolidated financial results for the periods presented:
Three Months Ended March 31, Change
(in millions, except percentage data) 2022 2021 $ %
Net sales $ 333.0 $ 253.3 $ 79.7 31.5 %
Cost of sales 223.3 163.3 60.0 36.7 %
Gross profit 109.7 90.0 19.7 21.9 %
Gross margin (% of Net sales) 32.9 % 35.5 % (2.7) %
Selling, general and administrative expenses 76.9 72.5 4.4 6.1 %
Amortization expense 9.7 10.1 (0.4) (4.0) %
Restructuring and other expense - 0.2 (0.2) (100.0) %
Earnings from continuing operations 23.1 7.2 15.9 220.8 %
Interest expense 10.5 10.5 - - %
Other expense - net 13.2 2.9 10.3 N/A
Loss from continuing operations before
income taxes (0.6) (6.2) 5.6 (90.3) %
Income tax expense (benefit) on continuing
operations 0.3 (1.7) 2.0 117.6 %
Net loss from continuing operations (0.9) (4.5) 3.6 80.0 %
Earnings from discontinued operations, net
of income tax expense of $0.7 and $3.5 ,
respectively 3.8 12.4 (8.6) (69.4) %
Net earnings $ 2.9 $ 7.9 $ (5.0) (63.3) %
N/A = not meaningful
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Analysis of
"Net sales" for our geographic business segments consist of the following for
the periods presented:
Three Months Ended March 31, Change
(in millions) 2022 2021 $ %
Americas $ 243.1 $ 193.2 $ 49.9 25.8 %
EMEA 122.8 89.8 33.0 36.7 %
APAC 51.1 42.0 9.1 21.7 %
Elimination of intersegment sales (84.0) (71.7) (12.3) (17.2) %
Total net sales $ 333.0 $ 253.3 $ 79.7 31.5 %
Net sales totaled $333.0 million for the three months ended March 31, 2022
representing an increase of $79.7 million , or 31.5%, compared to the same period
of the prior year. The increase in net sales was primarily the result of
increased volumes largely due to an increase in general market demand resulting
from our continued recovery from the 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 March 31, 2022 by $2.3 million
as compared to the three months ended March 31, 2021 .
Net sales in the Americas segment for the three months ended March 31, 2022
increased $49.9 million , or 25.8%, compared to the same period of the prior
year. The increase was primarily driven by increased third-party net sales of
$40.5 million and a $9.4 million increase in intersegment sales. The increase in
third-party net sales was primarily the result of both increased volumes due to
an increase in general market demand, primarily as a result of our continued
recovery from the COVID-19 pandemic in the region, and increased net pricing.
Foreign currency translation positively impacted third-party net sales for the
three months ended March 31, 2022 by $1.3 million as compared to the same period
of the prior year.
Net sales in the EMEA segment for the three months ended March 31, 2022
increased $33.0 million , or 36.7%, compared to the same period of the prior
year. The increase was primarily driven by increased third-party net sales of
$29.7 million and an increase of $3.3 million in intersegment sales. The
increase in third-party net sales was primarily the result of increased volumes
due to the increase in general market demand primarily resulting from our
continued recovery from the ongoing COVID-19 pandemic and to a much lesser
extent, increased net pricing. Foreign currency translation negatively impacted
third-party net sales for the three months ended March 31, 2022 by $0.1 million
as compared to the same period of the prior year.
Net sales in the APAC segment for the three months ended March 31, 2022
increased $9.1 million , or 21.7%, compared to the same period of the prior year.
The increase was primarily driven by increased third-party net sales of $9.5
million offset by a $0.4 million decrease 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 resulting from our continued recovery from
the ongoing COVID-19 pandemic. Foreign currency translation positively impacted
third-party net sales for the three months ended March 31, 2022 by $0.9 million
as compared to the same period of the prior year.
Analysis of Earnings from Operations
Gross profit
"Gross profit" for the three months endedMarch 31, 2022 totaled$109.7 million , an increase of$19.7 million , or 21.9%, compared to the same period of the prior year. The increase in gross profit was primarily driven by a$24.8 million favorable impact from increased net pricing and a$16.9 million favorable impact resulting from increased product volumes and mix. These favorable impacts were partially offset by: (i)$15.9 million of unfavorable material costs, primarily driven by ongoing broad-based inflationary pressures experienced during the first quarter of 2022 and continued macroeconomic impacts of the COVID-19 pandemic on the supply chain, partially offset by the procurement sourcing savings associated with the Transformation Program, (ii)$4.1 million of unfavorable labor and other manufacturing costs, primarily driven by production inefficiencies resulting from supply chain disruptions related to the pandemic and (iii) $ and$2.0 million of negative foreign currency translation impact. -30- --------------------------------------------------------------------------------
Selling, general and administrative expenses
"Selling, general and administrative expenses" for the three months endedMarch 31, 2022 totaled$76.9 million , an increase of$4.4 million , or 6.1%, compared to the same period of the prior year. This increase is primarily due to: (i)$2.7 million of higher marketing and commission costs primarily resulting from increased sales volumes, (ii)$2.0 million of transaction expenses related to the pending merger withAli Group , and (iii) a$1.1 million favorable foreign currency translation impact as compared to the same period of the prior year. The impact of these increases was partially offset by$1.7 million of lower third-party consulting costs incurred in connection with our Transformation Program completed during the quarter endedDecember 31, 2021 .
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 March 31, Change
(in millions, except percentage data) 2022 2021 $ %
Americas $ 31.5 $ 28.8 $ 2.7 9.4 %
EMEA 23.0 12.7 10.3 81.1 %
APAC 7.7 4.8 2.9 60.4 %
Total Segment Adjusted Operating
EBITDA 62.2 46.3 15.9 34.3 %
Less: Corporate and unallocated
expenses (21.9) (21.4) (0.5) (2.3) %
Total Adjusted Operating EBITDA $ 40.3 $ 24.9 $ 15.4 61.8 %
Adjusted Operating EBITDA margin (1) 12.1 % 9.8 % 2.3 %
(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 endedMarch 31, 2022 increased by$2.7 million , or 9.4%. This increase was primarily driven by$24.2 million of favorable impact from net pricing and a$1.6 million favorable impact for product volumes and mix. The impact of these increases was partially offset by: (i)$15.5 million of unfavorable material costs, primarily driven by continued broad-based inflationary pressures experienced during the first quarter of 2022, partially offset by the procurement sourcing savings associated with the Transformation Program, (ii)$3.3 million of unfavorable labor and other manufacturing costs, primarily driven by continued production inefficiencies resulting from supply chain disruptions related to the pandemic and (iii) a$1.1 million unfavorable foreign currency translation impact. Adjusted Operating EBITDA in the EMEA segment for the three months endedMarch 31, 2022 increased by$10.3 million , or 81.1% primarily driven a$15.3 million favorable impact from increased product volumes and mix and$1.1 million favorable impact from net pricing. The impact of these increases was partially offset by: (i) a$2.0 million negative foreign currency translation impact, (ii)$1.5 million of unfavorable labor and manufacturing cost, primarily driven by continued production inefficiencies resulting from supply chain disruptions related to the pandemic and (iii)$0.5 million of higher material costs, primarily driven by continued inflationary pressures experienced during the first quarter of 2022. Adjusted Operating EBITDA in the APAC segment for the three months endedMarch 31, 2022 increased by$2.9 million , or 60.4%. This increase was primarily driven by$1.9 million of favorable product volumes and mix and$0.7 million of favorable impact from net pricing. Corporate and unallocated expenses reflect certain corporate-level expenses and eliminations that are not allocated to the geographic business segments. For the three months endedMarch 31, 2022 , corporate and unallocated expenses remained consistent with the level of corporate and unallocated expenses incurred for the three months endedMarch 31, 2021 .
Analysis of Non-Operating Income Statement Items
For both of the three months endedMarch 31, 2022 and 2021, respectively,, "Interest expense" was$10.5 million , which includes the interest expense on our Senior Notes in continuing operations, while the interest expense on borrowings under our Senior Secured Credit Facility is included as a component of "Earnings from discontinued operations, net of income tax expense". For the three months endedMarch 31, 2022 , "Other expense - net" was an expense of$13.2 million , compared to an expense of$2.9 million for the same period of the prior year. The increase in expense of$10.3 million is primarily the result of higher non-cash foreign currency translation losses on intercompany notes payable compared to the same period of prior year.
Analysis of Income Taxes
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For the three months ended March 31, 2022 , the Company recorded a $0.3 million
income tax expense, reflecting a (50.0)% effective tax rate, compared to a $1.7
million income tax benefit for the three months ended March 31, 2021 , reflecting
a 27.4% effective tax rate. The change in the effective tax rate for the three
months ended March 31, 2022 , compared to the same period of the prior year, is
primarily due to the increase in transaction related costs, repatriation of
foreign earnings, Company's decrease in loss from continuing operations before
income taxes and the relative weighting of jurisdictional income and loss, which
was partially offset by the deferred taxes related to stock compensation. For
the three months ended March 31, 2022 , the income tax provision includes a net
discrete tax expense of $0.4 million primarily related to repatriation of
foreign earnings and changes in deferred taxes related to stock compensation, as
compared to the income tax benefit for the three months ended March 31, 2021 ,
which includes a net discrete benefit of $0.3 million primarily related to
changes for income tax returns filed, and the changes in deferred taxes related
to stock compensation and repatriation of foreign earnings.
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 ofMarch 31, 2022 , our total liquidity was$342.2 million , consisting of$138.9 million of cash and cash equivalents and$203.3 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$407.6 million as ofDecember 31, 2021 . Cash and cash equivalents includes the cash balances and equivalents from our continuing operations of$108.3 million and$91.6 million as ofMarch 31, 2022 andDecember 31, 2021 , respectively, and cash from discontinued operations of$30.6 million and$42.6 million as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Consistent with our historical trends, 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 Company's total liquidity for the quarter endedMarch 31, 2022 was also 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 ofMarch 31, 2022 , approximately 85% 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, 2022 . 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 and the sale of the Ice Business, and competitive, legislative and regulatory factors, among other considerations. 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 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 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. -32- --------------------------------------------------------------------------------
Sources and Uses of Cash
Cash and cash equivalents and restricted cash as ofMarch 31, 2022 totaled$138.9 million , was comprised of$108.8 million included in continuing operations and$30.1 million included as a component of "Current assets from discontinued operations". Cash and cash equivalents and restricted cash as ofDecember 31, 2021 totaled$140.7 million , including$92.0 million in continuing operations and$42.7 included as a component of "Current assets from discontinued operations".
The table below summarizes our cash flows for the three months ended
Three Months Ended March 31,
(in millions) 2022 2021 Change
Cash provided by (used in) continuing operations:
Cash used in operating activities$ (49.9) $ (20.4) $ (29.5) Cash used in investing activities (3.1) (4.0)$ 0.9 Cash provided by financing activities 70.6 37.1$ 33.5 Cash provided by (used in) discontinued operations: Cash (used in) provided by operating activities (11.3) 4.0$ (15.3) Cash used in investing activities (0.8)
(0.7)
Cash provided by (used in) financing activities - - $ - Effect of exchange rate changes on cash (0.8) (0.6)$ (0.2) Net increase in cash and cash equivalents and restricted cash $ 4.7$ 15.4 $ (10.7) Operating Activities Cash used in operating activities of continuing operations for the three months endedMarch 31, 2022 was$49.9 million , consisting primarily of a net loss from continuing operations$0.9 million , adjusted for non-cash charges totaling$17.7 million for depreciation and amortization expense, deferred income taxes and stock-based compensation and cash inflows of$23.4 million related to an increase in trade accounts payable, offset by cash outflows of$46.3 million related to an increase in inventory and$43.8 million associated with the timing of other current and long-term liabilities and other assets. The increase in inventory is due to both a seasonal build and our increased levels of key components as an effort to mitigate future supply disruptions. Cash used in operating activities for the three months endedMarch 31, 2021 was$20.4 million , consisting primarily of a net loss from continuing operations of$4.5 million , adjusted for non-cash charges totaling$18.5 million for depreciation and amortization expense, deferred income taxes and stock-based compensation and cash inflows of$15.0 million related to an increase in trade accounts payable, offset by cash outflows of$20.8 million related to a seasonal build of inventory and$28.6 million associated with the timing of other current and long-term liabilities and other assets, including accounts receivable.
Investing Activities
Cash used in investing activities of continuing operations of$3.1 million for the three months endedMarch 31, 2022 was the result of capital expenditures made during the period.
Cash used in investing activities of continuing operations of
Financing Activities
Cash provided by financing activities of
Cash provided by financing activities for the three months ended
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 ofMarch 31, 2022 are set forth below. -33- --------------------------------------------------------------------------------
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) suspended 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 replaced 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 have been reinstated at modified levels as compared to the covenants that were in effect beginningJune 30, 2020 and phased-in to the pre-amendment covenant levels by 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 company's 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 our future liquidity or consolidated results of operations. As ofMarch 31, 2022 , 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$425.0 million , all of which was outstanding as of bothMarch 31, 2022 andDecember 31, 2021 . The Senior Notes were issued under an indenture withWells Fargo Bank, National Association , as trustee, and are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of our domestic restricted subsidiaries who are a borrower or guarantor under the 2016 Credit Agreement.
Covenant Compliance
The 2016 Credit Agreement and indenture governing the Senior Secured Credit Facility contains limitations on our ability to effect mergers and change of control events as well as certain other limitations, including limitations on: (i) the declaration and payment of dividends or other restricted payments, (ii) incurrence of additional indebtedness or issuing preferred stock, (iii) the creation or existence of certain liens, (iv) incurrence of restrictions on the ability of certain of our subsidiaries to pay dividends or other payments, (v) transactions with affiliates and (vi) sales of assets. We were in compliance with all affirmative and negative covenants, including any financial covenants, pertaining to our financing arrangements, in effect as ofMarch 31, 2022 . A summary of our outstanding financing obligations, excluding finance leases, is as follows: March 31, December 31, (in millions) 2022 2021 Revolving Credit Facility$ 190.0 $ 120.0 Term Loan B Facility 855.0 855.0 9.50% Senior Notes due 2024 425.0 425.0 Total debt$ 1,470.0 $ 1,400.0 Further information regarding our financing resources can be found in Part I, Item I of this Form 10-Q in Note 9, "Debt," of the Notes to the Consolidated Financial Statements. -34- --------------------------------------------------------------------------------
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 our Annual Report on Form 10-K for the year endedDecember 31, 2021 , 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. 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"). In order to present the Guarantor Subsidiaries and Non-Guarantor Subsidiaries summarized financial information in accordance with Rule 3-10 of Regulation S-X, the summarized financial information below is presented as if there were no reclassifications of the Ice Business as "Earnings from discontinued operations, net of income tax expense" in the Company's Consolidated Statement of Operations or as "Current assets of discontinued operations" or "Current liabilities of discontinued operations" in the Company's Consolidated Balance Sheet. The summarized financial information of the Guarantor Subsidiaries in the following tables is also 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.WELBILT, INC. Summarized Consolidating Statement of Operations (Unaudited)
Three Months Ended
Non-
Guarantor Guarantor Consolidating
(in millions) Parent Subsidiaries Subsidiaries Adjustments Consolidated
Net sales $ - $ 286.9 $ 258.2 $ (137.4) $ 407.7
Gross profit $ - $ 58.9 $ 75.8 $ - $ 134.7
(Loss) earnings from operations
$ 41.7 $ -$ 35.9 Net earnings$ 1.5 $ 32.8 $ 12.1 $ (43.0) $ 3.4 -35-
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WELBILT, INC.
Summarized Consolidating Balance Sheet
(Unaudited)
March 31, 2022
Non-
Guarantor Guarantor Consolidating(in millions) Parent Subsidiaries Subsidiaries Adjustments Consolidated Assets Total current assets$ 49.5 $ 292.5 $ 444.9 $ -$ 786.9 Property, plant and equipment - net 14.0 69.3 51.2 - 134.5 Operating lease right-of-use assets 1.8 4.7 35.7 - 42.2 Goodwill - 832.4 101.5 -
933.9
Other intangible assets - net 0.2 280.5 127.0 - 407.7 Due from affiliates - 3,472.5 - (3,472.5) - Investment in subsidiaries 4,513.5 - - (4,513.5) - Other non-current assets 8.1 3.8 20.8 - 32.7 Total assets$ 4,587.1 $ 4,955.7 $ 781.1 $ (7,986.0) $ 2,337.9 Liabilities and equity Total current liabilities$ 17.9 $ 173.3 $ 165.1 $ -$ 356.3 Long-term debt and finance leases 1,458.3 - 0.7 - 1,459.0 Due to affiliates 2,689.4 - 783.2 (3,472.6) - Investment in subsidiaries - 242.8 - (242.8) - Other long-term liabilities 59.8 25.8 67.8 - 153.4 Total non-current liabilities 4,207.5 268.6 851.7 (3,715.4) 1,612.4 Total equity (deficit) 369.2 4,513.4 (242.8) (4,270.6)
369.2
Total liabilities and equity$ 4,594.6 $ 4,955.3 $ 774.0 $ (7,986.0) $ 2,337.9 -36-
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December 31, 2021
Non-
Guarantor Guarantor Consolidating
(in millions) Parent Subsidiaries Subsidiaries Adjustments Consolidated
Assets
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 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 Due to affiliates 2,910.7 - 650.9 (3,561.6) - Investment in subsidiaries - 143.6 - (143.6) - Other long-term liabilities 59.8 27.1 71.2 - 158.1 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 18, "Leases," of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Off-Balance Sheet Arrangements
As of
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 (loss), earnings from operations, net cash provided by (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. As discussed above, in the calculation of the non-GAAP financial measures, we have also excluded the operating results of the Ice Business as a component of continued operations consistent within the Company's Consolidated Statements of Operations. The Ice Business has been included in "Earnings from discontinued operations" for all periods presented in the Company's Consolidated Statements of Operations included in this Quarterly Report on Form 10-Q for the Company's quarter endedMarch 31, 2022 . -37- --------------------------------------------------------------------------------
Free Cash Flow
We refer to "Free Cash Flow", a non-GAAP measure, as our net cash provided by or used in operating activities from continuing operations plus capital expenditures less acquisition-related transaction and integration costs and divestiture-related transaction costs. 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 provided by (used in) operating activities from continuing operations included in our Consolidated Statements of Cash Flows presented in accordance withU.S. GAAP, as follows: Three Months Ended March 31, (in millions) 2022 2021 Net cash used in operating activities from continuing operations (49.9) $ (20.4) Plus: Capital expenditures (3.1) (4.0) Less: Transaction costs (1) 2.1 - Free cash flow from continuing operations $ (50.9) $ (24.4) (1) Transaction costs for the three months endedMarch 31, 2022 are related to the pending sale of the Company and consist primarily of professional services recorded in "Selling, general and administrative expenses".
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 (loss) from continuing operations, 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, divestiture-related transaction costs, Transformation Program 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 earnings as presented in the Consolidated Statements of Operations in accordance withU.S. GAAP as follows: Three Months Ended March 31, (in millions, except percentage data) 2022 2021 Net loss from continuing operations $ (0.9) $ (4.5) Income tax expense (benefit) on continuing operations 0.3 (1.7) Other expense - net (1) 13.2 2.9 Interest expense 10.5 10.5 Earnings from continuing operations 23.1 7.2 Restructuring activities - 0.2 Amortization expense 9.9 10.7 Depreciation expense 5.2 4.6 Transformation Program expense (2) - 2.2 Transaction costs (3) 2.1 - Total Adjusted Operating EBITDA $ 40.3 $ 24.9 Adjusted Operating EBITDA margin (4) 12.1 % 9.8 % (1) Other expense - net consists primarily of$12.5 million and$2.8 million , respectively, of foreign currency transaction losses incurred during the three months endedMarch 31, 2022 and 2021. Foreign currency transaction losses are inclusive of losses on related foreign currency exchange contracts not designated as hedging instruments for accounting purposes. (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 for the three months ended
(4) Adjusted Operating EBITDA margin in the section above is calculated by dividing the dollar amount of Adjusted Operating EBITDA by net sales.
-38-
--------------------------------------------------------------------------------Adjusted Net Earnings and Adjusted Diluted Net Earnings Per Share
We define Adjusted Net Earnings as net earnings before the impact of certain items, such as divestiture-related transaction costs, loss on modification or extinguishment of debt, loss from impairment of assets, gain or loss from disposal of assets, restructuring activities, Transformation Program expense, acquisition-related transaction and integration costs, divestiture-related transaction costs, expenses associated with pension settlements, foreign currency transaction gain or loss, certain other items 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. The following table presents Adjusted 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: Three Months Ended March
31,
(in millions, except per share data) 2022 2021 Net earnings $ 2.9$ 7.9 Restructuring activities - 0.2 Transformation Program expense (1) -
2.2
Transaction costs (2) 2.1
-
Foreign currency transaction loss (3) 12.5
2.8
Tax effect of adjustments (4) (3.1) (1.2) Total Adjusted Net Earnings $ 14.4$ 11.9 Per share basis Diluted net earnings $ 0.02$ 0.06 Restructuring activities - - Transformation Program expense (1) -
0.01
Transaction costs (2) 0.01
-
Foreign currency transaction loss (3) 0.09
0.02
Tax effect of adjustments (4) (0.02)
(0.01)
Total Adjusted Diluted Net Earnings $ 0.10
(1) Transformation Program expense includes consulting and other costs associated with executing our Transformation Program initiatives. Refer to Note 15, "Business Transformation Program and Restructuring," for discussion of the impact to the Consolidated Statements of Operations. (2) Transaction costs for the three months endedMarch 31, 2022 are related to the pending merger of the Company withAli Group and consist primarily of professional services recorded in "Selling, general and administrative expenses" in the Company's Consolidated Statements of Operations. (3) Foreign currency transaction losses are inclusive of losses on related foreign currency exchange contracts not designated as hedging instruments for accounting purposes. Foreign currency transaction losses are included as a component of "Other expense - net" in the Company's Consolidated Statements of Operations.
(4) The tax effect of adjustments is determined using the statutory tax rates for the countries comprising such adjustments.
-39-
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Organic
We define "Organic net sales" as net sales from continuing operations before the impact of foreign currency translations, acquisitions and divestitures 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 from continuing operations reconciles to net sales presented in accordance withU.S. GAAP as follows: Three Months Ended March 31, (in millions) 2022 2021 Consolidated: Net sales$ 417.0 $ 325.0 Less: Intersegment sales (84.0) (71.7) Net sales (as reported) 333.0 253.3 Impact of foreign currency translation(1) (5.4) (7.7) Organic net sales$ 327.6 $ 245.6 Americas: Net sales$ 243.1 $ 193.2 Less: Intersegment sales (34.8) (25.4) Third-party net sales 208.3 167.8 Impact of foreign currency translation(1) (0.1)
(1.4)
Total Americas organic net sales$ 208.2 $ 166.4 EMEA: Net sales$ 122.8 $ 89.8 Less: Intersegment sales (35.7) (32.4) Third-party net sales 87.1 57.4 Impact of foreign currency translation(1) (5.1) (5.2) Total EMEA organic net sales $ 82.0$ 52.2 APAC: Net sales $ 51.1$ 42.0 Less: Intersegment sales (13.5) (13.9) Third-party net sales 37.6 28.1 Impact of foreign currency translation(1) (0.2) (1.1) Total APAC organic net sales $ 37.4$ 27.0
(1) The impact from foreign currency translation is calculated by translating current period activity at the weighted average prior period rates.
Critical Accounting Policies
Our critical accounting policies have not materially changed since we filed our
Annual Report on Form 10-K for the year ended
New Accounting Pronouncements
See Note 2, "Basis of Presentation and Summary of Significant Accounting
Policies," of the Notes to the Consolidated Financial Statements included in
Part I, Item I of this Quarterly Report on Form 10-Q for discussion of recently
issued accounting pronouncements applicable to us and the impact of those
standards on our consolidated financial statements and related disclosures.
-40-
--------------------------------------------------------------------------------Cautionary Statements Regarding Forward-Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q, including matters discussed under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," constitute "forward-looking statements" within the meaning of theU.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts are forward-looking statements and include, for example: statements about the potential future impacts of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows (including demand, sales, operating expenses, Adjusted Operating EBITDA, net income (loss), operating cash flows, intangible assets, staffing levels, supply chain, government assistance and compliance with financial covenants), anticipated effects and timing of the proposed merger withAli Group and divestiture of the Ice Business; future results of operations, financial condition and cash flows (including demand, sales, operating expenses; our ability to meet working capital needs and cash requirements over the next 12 months; our ability to realize savings from reductions in force and other cost saving measures; compliance with the financial covenants under our credit facility; our ability to obtain financial and tax benefits from the CARES Act; expected impact of restructuring and other plans and objectives for future operations; assumptions on which all such projects, plans or objectives are based; and discussions of condition and demand in the global foodservice market and foodservice equipment industry. Certain of these forward-looking statements can be identified by the use of words such as "anticipates," "believes," "intends," "estimates," "targets," "expects," "endeavors," "could," "will," "may," "future," "likely," "on track to deliver," "gaining momentum," "plans," "projects," "assumes," "should" or other similar expressions. Such forward-looking statements involve known and unknown risks and uncertainties, and our actual results could differ materially from future results expressed or implied in these forward-looking statements. The forward-looking statements included in this report are based on the current beliefs and expectations of our management as of the date of this report. These statements are not guarantees or indicators of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those risks, uncertainties and factors described below and in more detail under the caption "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , this Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2022 and in our other filings with theSEC . The ongoing COVID-19 pandemic has amplified many of these risks, uncertainties and factors. We do not intend, and, except as required by law, we undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect any future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Important risks, uncertainties and other factors that could affect our future results and could cause actual results to differ materially from those expressed or implied in the forward-looking statements included in this report include, but are not limited to: •risks related to our proposed merger withAli Group , including the risk that the remaining conditions for the closing of the transaction are not satisfied, including the risk that regulatory approvals are not obtained or require divestitures in addition to the divestiture of the Ice Business, the risk of litigation relating to the merger, uncertainties as to the timing of the consummation of the merger and the ability of each party to consummate the merger, risks that the proposed transaction disrupts our current plans or operations, our ability to retain and hire key personnel, competitive responses to the proposed merger; unexpected costs, charges or expenses resulting from the merger, and potential adverse reactions or changes to relationships with our customers, suppliers, distributors and other business partners resulting from the announcement or completion of the merger; •the impact of the COVID-19 pandemic on the dining and hospitality industries and the measures taken by governmental authorities and third parties in response to the pandemic; •risks of continuing disruptions to our supply chain, resulting in delays, difficulties and increased costs of acquiring raw materials; •our ability to timely and efficiently execute on our manufacturing strategies, including equipment and workflow upgrades in our plants, executing productivity gains and resulting workforce reductions, and/or consolidating existing facilities and operations and achieving procurement savings; •our ability to generate cash and manage working capital consistent with our stated goals; •our ability to realize anticipated or targeted earnings enhancements, cost savings, strategic options and other synergies and the anticipated timing to realize those enhancements, savings, synergies, and options; •the successful development of innovative products and market acceptance of new and innovative products; •risks associated with manufactured products, including issues related to product quality and reliability, our reliance on third-party sourced components and costs associated with product liability and product warranty claims; •unanticipated issues associated with refresh/renovation plans, new product rollouts and/or new equipment by national restaurant accounts and global chains; •risks relating to the acquisition and integration of businesses or products, including: our ability to successfully identify, finance, acquire and integrate acquisition targets; our ability to complete divestitures (including the divestiture of the Ice Business), strategic alliances, joint ventures and other strategic alternatives on favorable terms; and uncertainties and unanticipated costs in completing such strategic transactions; •actions of activist stockholders; •our ability to recruit and retain highly qualified executives and other key personnel; •unanticipated changes in capital and financial markets, including unfavorable changes in the interest rate environment and changes relating to the discontinuation, reform or replacement of LIBOR; •risks related to our indebtedness, including our ability to comply with covenants contained in our debt agreements, generate sufficient cash to comply with principal and interest repayment obligations, meet working capital needs and cash requirements over the next 12 months, and refinance such indebtedness on favorable terms; •our ability to source raw materials and commodities on favorable terms and respond to inflationary pressures, volatility in the price of raw materials and commodities, including through the use of hedging transactions; •our ability to compete against companies that are larger and have greater financial and other resources; -41- -------------------------------------------------------------------------------- •changes in the competitive conditions in the markets and countries in which we operate, including the impact of competitive pricing by our competitors or consolidation of dealers or distributors; •pricing pressure imposed by buying groups with significant purchasing power in our industry; •our ability to retain our independent dealers and distribution partners to sell our products; •adverse changes in domestic or international tax laws, export and import controls or trade regulations, including new tariffs imposed by theU.S. or other governments, the adoption of trade restrictions affecting our products or suppliers, aU.S. withdrawal from, or significant renegotiation of, existing trade agreements without ratification of a replacement trade agreement, or the threat or occurrence of trade wars; •unexpected issues affecting our current and future effective tax rate, including, but not limited to, tariffs, global tax policies, tax reform, tax legislation,Organization for Economic Cooperation and Development ("OECD") initiatives, including the global anti-base erosion ("GloBE") Pillar Two proposal envisaging global minimum taxation; •economic and other consequences associated with theUnited Kingdom's withdrawal from theEuropean Union ; •foreign currency fluctuations and their impact on reported results and hedges in place; •risks associated with data security and technology systems, including our ability to protect information systems against, or effectively respond to, a cybersecurity incident or other disruption, and compliance with complex regulations in the countries in which we operate; •the availability of, and our ability to obtain and maintain, adequate insurance coverage and/or our ability to cover or insure against the total amount of the claims and liabilities we face, whether through third-party insurance or self-insurance; •our ability to adequately prevent or mitigate against increasingly sophisticated methods to engage in illegal or fraudulent activities targeted at large, multi-national companies; •the expense, timing and outcome of legal and regulatory proceedings, arbitrations, investigations, tax audits and other regulatory audits, including without limitation those disclosed in Note 11, "Contingencies and Significant Estimates" of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 ; •the risk that our products could cause, or be alleged to cause, personal injury and adverse effects, leading to an increase in the volume of product liability lawsuits, unfavorable outcomes in such lawsuits and/or withdrawals of products from the market; •unexpected costs incurred in connection with protecting our intellectual property rights and defending against challenges to such rights; •risks associated with our labor relations, including work stoppages, delays in renewing labor agreements and our inability to renegotiate labor rates on favorable terms, as well as the availability of skilled and temporary labor at our manufacturing facilities and other locations; •unanticipated issues associated with the resolution or settlement of unrecognized tax benefits or unfavorable resolution of tax audits; •risks related to unfunded or underfunded pension obligations; •costs associated with unanticipated environmental liabilities; •general worldwide political and economic risks, uncertainties and adverse events resulting in instability, including financial bailouts and defaults of sovereign nations; •risks related to adverse market conditions having the effect of changing one or more of the critical assumptions or estimates, which could change the estimation of fair value and could result in an impairment in the recorded value of our goodwill or intangible assets; •risks that our actual operating performance and cash flows are substantially different from forecasted results impacting our ability to comply with our debt covenants or pursue our strategic objectives, among other things; •factors affecting demand for foodservice equipment, including ongoing impacts of the COVID-19 pandemic on the various economies in which we operate, foodservice equipment replacement cycles in theU.S. and other mature markets; unanticipated changes in consumer spending impacting the foodservice industry; changing consumer tastes and government regulations affecting the quick-service restaurant industry; and population and income growth in emerging markets; •our ability to effectively transfer cash between foreign entities and/or jurisdictions, including in a manner that is consistent with our strategic goals and priorities; •costs associated with compliance with conflict minerals regulations; and •other events outside our control. -42-
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