Notes to Consolidated Financial Statements
1. Business and Organization
Description of the Business
Welbilt, Inc. ("Welbilt" or the "Company") is one of the world's leading commercial foodservice equipment companies leveraging a full suite of equipment capable of storing, cooking, holding, displaying, dispensing and serving in both hot and cold foodservice categories. The Company is headquartered in New Port Richey, Florida, and operates 19 manufacturing facilities globally. The Company designs, manufactures and supplies best-in-class equipment for the global commercial foodservice market, consisting of commercial and institutional foodservice operators represented by full-service restaurants, quick-service restaurant chains, hotels, resorts, cruise ships, caterers, supermarkets, convenience stores, hospitals, schools and other institutions. The Company sells its products through a global network of over 5,000 distributors, dealers, buying groups and manufacturers' representatives.
Welbilt was incorporated in Delaware in 2015 and became publicly traded in March 2016 under the New York Stock Exchange ("NYSE") ticker symbol "MFS" after the Company completed its spin-off from The Manitowoc Company, Inc. ("MTW") (the "Spin-Off"). On March 6, 2017, shares of the Company commenced trading under a new NYSE ticker symbol, "WBT", when the Company effected its name change from "Manitowoc Foodservice, Inc." to "Welbilt, Inc."
The Company manages its business in three geographic business segments: Americas, EMEA and APAC. The Americas segment includes the United States ("U.S."), Canada and Latin America. The EMEA segment consists of markets in Europe, including Middle East, Russia, Africa and the Commonwealth of Independent States. The APAC segment consists primarily of markets in China, India, Australia, South Korea, Singapore, Philippines, Japan, Indonesia, Malaysia, Thailand, Hong Kong, Taiwan, New Zealand and Vietnam.
Merger with Ali Holding S.r.l.
On July 14, 2021, the Company and Ali Holding S.r.l. (“Ali Group”), a significant and diversified global foodservice equipment manufacturer and distributor, entered into a merger agreement under which Ali 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 on September 30, 2021, was approved by the Company's 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 $24.00 per share consideration,
Upon completion of the transaction, the Company's shares will no longer trade on The New York Stock Exchange.
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 Ali Group due to a breach of a covenant or agreement by the Company that causes the failure of a condition to closing, or
(b) by either party if the Merger has not been consummated prior to July 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 the Company enters into a definitive agreement with respect to, or consummates, an alternative proposal.
Welbilt and Ali Group have submitted regulatory filings in all required jurisdictions, including the U.S., United Kingdom, and European Union. The companies have decided that they will proceed with divesting the Company's Manitowoc ice brand ( the "Ice Business,") and the companies are confident that this step will ensure regulatory approval.
In October 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. The Company's outside consultants, with the assistance of management, have initiated the marketing and due diligence process for the divestiture. The companies expect to complete the Ice divestiture in the first half of 2022, with the acquisition of Welbilt by Ali Group shortly thereafter.
As of December 31, 2021, the Company has concluded that the Ice Business does not meet the criteria to be classified as an asset held for sale or its operations to be classified as discontinued operations in accordance with the applicable accounting literature.
2. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of Welbilt and its wholly-owned subsidiaries and have been prepared by the Company, pursuant to the rules and regulations of the SEC. The Company prepares its financial statements in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP"). All intercompany balances and transactions between the Company and its affiliates have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant items subject to such estimates and assumptions include inventory obsolescence costs, fair value of goodwill and indefinite lived intangible assets, warranty costs, product liability costs, employee benefit programs, sales rebates and the measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On an ongoing basis, the Company evaluates these assumptions, judgments and estimates. Actual results may differ from these estimates.
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 the Company's 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, the Company expects there would be further disruptions to its operations, such as inability to maintain adequate staffing at the Company's 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 the Company's future sales levels and ongoing customer relationships.
The ongoing global COVID-19 pandemic has created and may continue to create significant uncertainty in the macroeconomic environment which, in addition to other unforeseen effects of this pandemic, may adversely impact the Company's future operating results. As a result, many of the Company's estimates and assumptions may require increased judgment and involve a higher degree of variability and volatility. As the impacts of the pandemic continue and additional information becomes available, these estimates may change materially in future periods.
In the opinion of management, the consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations and comprehensive income for the years ended December 31, 2021, 2020 and 2019, the financial position as of December 31, 2021 and 2020 and the cash flows for the years ended December 31, 2021, 2020 and 2019, and except as otherwise discussed herein, such adjustments consist only of those of a normal recurring nature.
All dollar amounts, except share and per share amounts, are in millions of dollars unless otherwise indicated.
Significant Accounting Policies
Cash and Cash Equivalents All short-term investments purchased with an original maturity of three months or less are considered cash equivalents. The Company's policy is to classify operating demand deposit accounts with high credit quality financial institutions, the balances of which at times may exceed federally insured limits.
Restricted Cash Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements, such as letters of credit or bank guarantees, are recorded separately on the Consolidated Balance Sheets.
Short-Term Investments The Company considers all investments purchased with an original maturity of more than three months but not greater than one year to be short-term investments.
Accounts Receivable Accounts receivable consist primarily of trade receivables due from customers, consisting of distributors, dealers, buying groups and manufacturers' representatives, and are stated net of allowance for amounts that may become uncollectible in the future. The Company's estimate for the allowance for doubtful accounts related to trade receivables includes an evaluation of specific accounts where it has information that the customer may have an inability to meet its financial obligations together with a general provision for unknown but existing doubtful accounts based on historical experience, which are subject to change if experience improves or deteriorates. Accounts receivable are written off once the account is significantly past due and the Company's collection efforts are unsuccessful.
Inventories Inventories are valued at the lower of cost or net realizable value. Approximately 94.2% and 90.2% of the Company's inventories were valued using the first-in, first-out ("FIFO") method as of December 31, 2021 and 2020, respectively. The remaining inventories were valued using the last-in, first-out ("LIFO") method. If the FIFO inventory valuation method had been used exclusively, inventories would have increased by $7.6 million and $4.3 million as of December 31, 2021 and 2020, respectively. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs.
All inventories are reduced by a reserve for excess and obsolete inventories. The estimated reserve is based upon specific identification of excess or obsolete inventories based on historical usage, estimated future usage, sales requiring the inventory and on historical write-off experience, and is subject to change if the actual experience deteriorates. The inventories' obsolescence reserves are reported as a reduction of the "Inventories — net" balance in the Consolidated Balance Sheets.
Property, Plant and Equipment Property, plant and equipment are stated at cost. Expenditures for maintenance, repairs and minor renewals are charged against earnings as incurred. Expenditures for major renewals and improvements that substantially extend the capacity or useful life of an asset are capitalized and are then depreciated. The Company capitalizes certain internal and external costs incurred to acquire or develop software for internal use. Costs incurred during the preliminary project stage and the post-implementation stage are expensed as incurred. All direct costs incurred to develop internal-use software during the development stage are capitalized. The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are relieved from the accounts, and resulting gains or losses are reflected in earnings.
Property, plant and equipment are depreciated over the estimated useful lives or lease periods of the assets using the straight-line depreciation method for financial reporting and on accelerated methods for income tax purposes. Depreciation for internally developed software commences when the software is available for its intended use. The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. The Company periodically reviews these lives relative to physical factors, economic factors and industry trends. If there are changes in the planned use of property or equipment or if technological changes were to occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of accelerated depreciation expense in future periods.
Property, plant and equipment are primarily depreciated over the following estimated useful lives:
| | | | | |
| Years |
Building and improvements | 2 — 40 |
Machinery, equipment and tooling | 2 — 20 |
Furniture and fixtures | 3 — 15 |
Computer hardware and software for internal use | 2 — 10 |
Leases Effective January 1, 2019, the Company adopted the provisions of Accounting Standards Update ("ASU") ASU 2016-02, "Leases (Topic 842)" including subsequent amendments issued thereafter (collectively, "ASC Topic 842"), which requires lessees to recognize a right-of-use asset and corresponding lease liability on the balance sheet for operating leases while the accounting for finance leases remains substantially unchanged. Under ASC Topic 842, a lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (i.e., an identified asset) for a period of time in exchange for consideration. The Company determines if an arrangement is a lease at inception. For a contract to be determined to be a lease or contain a lease, it must include explicitly or implicitly identified assets where the Company has the right to substantially all of the economic benefits of the assets and has the ability to direct how and for what purpose the assets are used during the lease term. Leases are classified as either operating or financing. For operating leases, the Company recognizes a lease liability equal to the present value of the remaining lease payments, and a right-of-use asset equal to the lease liability, subject to certain adjustments, such as prepaid rents. The right-of-use asset represents the right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company uses its incremental borrowing rate to determine the present value of the lease payments. The Company’s incremental borrowing rate is the rate of interest that it would have to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company determines the incremental borrowing rates for its leases by applying its applicable borrowing rate, with adjustment, as appropriate, for instruments with similar characteristics. The lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option and periods covered by an option to extend (or not to terminate) the lease in which the exercise of the option is controlled by the lessor. The Company considers a number of factors when evaluating whether the options in its lease contracts are reasonably certain of exercise, such as length of time before an option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to the Company's operations, costs to negotiate a new lease and any contractual or economic penalties.
In connection with the adoption of ASU Topic 842, prior period results have not been adjusted and continue to be reported under the accounting standards in effect for such period. The Company elected the package of practical expedients available within the standard and as a result, did not reassess the lease classification of existing contracts or leases or the initial direct costs associated with existing leases. The Company also made an accounting policy election not to recognize right-of-use assets and lease liabilities for leases with a lease term of 12 months or less, including leases with renewal options that are reasonably certain to be exercised, and do not include an option to purchase the underlying asset that is reasonably certain of exercise. Instead, lease payments for these leases are recognized as lease expense on a straight-line basis over the lease term. In addition, the Company did not elect the hindsight practical expedient and has elected not to separate the accounting for lease components and non-lease components, for all classes of leased assets. Certain of the Company’s leases included variable lease costs consisting primarily of reimbursement to the lessor for taxes and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as maintenance services and usage charges. See additional disclosure of leases in Note 16, "Leases."
Business Combinations The Company allocates the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth rates and margins, customer attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
Goodwill and Other Intangible Assets Goodwill and indefinite lived intangibles are not amortized, but are tested for impairment annually, or more frequently, as events dictate. The Company's 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. The Company's other intangible assets with finite lives are subject to amortization and are tested for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. For additional discussion of impairment testing related to long-lived assets, refer to "Impairment of Long-Lived Assets," below.
The Company capitalizes certain internal and external costs to develop technology classified as software to be sold or otherwise marketed to customers. Capitalization of these costs begins when a product's technological feasibility has been established and ends when a product is available for general release to customers. Amortization commences when the software is ready for general release to customers with useful lives estimated on a product-by-product basis.
Other intangible assets with finite lives are amortized on a straight-line basis over the following estimated useful lives:
| | | | | |
| Years |
Customer relationships | 10 — 20 |
Engineering drawings | 15 |
Design libraries | 7 — 20 |
Software to be sold | 3 — 4 |
Patents | 10 — 20 |
The Company's annual impairment tests of goodwill and intangible assets with indefinite lives are performed as of June 30 of each fiscal year and whenever a triggering event occurs between annual impairment tests. The indefinite-lived intangible asset impairment test is performed at the Company's unit of account level, which is the Americas, EMEA and APAC. The goodwill impairment test is performed for the Company's reporting units, which are the Americas, EMEA and APAC.
When performing the annual test for impairment, the Company has 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, the Company evaluates the totality of relevant events and circumstances that affect the fair value of the reporting units or indefinite-lived intangible assets. These events and circumstances include, but are not limited to, macroeconomic conditions (including the impacts of the COVID-19 pandemic on the Company's operations), industry and competitive environment conditions, overall financial performance, business specific events and market considerations. In those instances where the Company concludes 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 the Company concludes 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 or unit of account level, as applicable. The Company estimates the fair value of the relevant indefinite lived intangible asset based on an income approach using the relief-from-royalty method. The quantitative impairment test identifies both the existence of impairment and the amount of the impairment loss. In conducting the quantitative analysis, the Company compares the estimated fair value to the carrying values of the relevant indefinite-lived intangible asset. When the carrying amount of the indefinite-lived intangible asset exceeds its estimated fair value, the Company recognizes an impairment loss to the extent the carrying value exceeds the estimated fair
value; however, the impairment loss for goodwill is limited to the total amount of the goodwill allocated to the reporting unit. The fair value is determined based on an income approach using the relief-from-royalty method. This approach is dependent upon several factors, including estimates of future revenue growth rates and trends, long term growth rates, weighted average cost of capital, royalty rates, discount rates and other variables. Management bases its fair value estimates on assumptions believed to be reasonable, but which are inherently uncertain and could materially affect the valuations. See Note 5, "Goodwill and Other Intangible Assets — Net", for further details on the Company's impairment assessments.
Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the assets’ carrying amount may not be recoverable. When reviewing its long-lived assets, other than goodwill and other intangible assets with indefinite lives, the Company groups its assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluates the asset group against the sum of the undiscounted future cash flows to determine impairment. If an impairment is determined to exist, the impairment loss is calculated based upon comparison of the fair value to the net book value of the assets. Impairment losses on assets held for sale are based on the estimated proceeds to be received, less costs to sell. The Company had no assets held for sale as of December 31, 2021 or 2020.
Product Warranties Estimated warranty costs are recorded in cost of sales at the time of sale of the products based on historical warranty experience for the related product or estimates of projected costs due to specific warranty issues on new products. These estimates are reviewed periodically and are adjusted based on changes in facts, circumstances or actual experience. See Note 12, "Product Warranties", for further details.
Product Liabilities The Company records product liability reserves for its self-insured portion of any pending or threatened product liability actions. The reserve is based upon two estimates. First, the Company tracks the population of all outstanding pending and threatened product liability cases to determine an appropriate case reserve for each based upon the Company's best judgment and the advice of legal counsel. These estimates are continually evaluated and adjusted based upon changes to facts and circumstances surrounding the individual cases. Second, the Company determines the amount of additional reserve required to cover product liability claims anticipated to have occurred but have not yet been reported and to account for possible adverse development of the established case reserves. This analysis is performed by the Company two times per year.
Foreign Currency Translation and Transactions For most of the Company's foreign operations, local currencies are considered the functional currency. Assets and liabilities of non-U.S. dollar functional currency entities are translated to U.S. dollars at year-end exchange rates and the resulting gains and losses arising from the translation of assets and liabilities located outside the U.S. and are recorded as a component of "Accumulated other comprehensive loss" ("AOCI") in the Consolidated Balance Sheets. Income and expense items are translated at average exchange rates in effect during the period and are recorded as a component of "Other expense (income) — net" in the Consolidated Statements of Operations.
Derivative Financial Instruments and Hedging Activities The Company enters into derivative instruments to hedge interest rate risk, commodity exposure associated with aluminum, copper and steel prices and foreign currency exchange risk.
The Company has adopted written policies and procedures that place all financial instruments under the direction of corporate treasury and restrict all derivative transactions to those intended for hedging purposes. The use of financial instruments for trading purposes is strictly prohibited. The Company records the fair values of all derivatives in the Consolidated Balance Sheets. The Company does not offset the fair values of derivative contract assets and liabilities. The change in a derivative’s fair value is recorded each period in current earnings or comprehensive income, depending on whether the derivative is designated and qualifies as part of a hedge transaction and if so, the type of hedge transaction. The amount of the derivative instrument fair market value adjustments for cash flow hedges and net investment hedges are reported in the Company's Consolidated Statements of Comprehensive Income, net of taxes. The Company recognizes fair market value adjustments for fair value hedges, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk in current earnings within the same line item associated with the hedged item.
Stock-Based Compensation The Company's 2016 Omnibus Incentive Plan (the "2016 Plan") permits the granting of stock options, restricted stock awards and units, performance share awards and units, and other types of stock-based and cash awards. Stock-based compensation is measured at the fair value of the stock-based award as of the date of grant and is expensed over the vesting period of the award. The expense, net of forfeitures, is recognized using the straight-line method. Stock-based compensation is recognized only for those stock-based awards expected to vest. Refer to Note 17, "Stock-Based Compensation", for additional discussion regarding details of the Company's stock-based compensation plan.
Defined Benefit Plans The Company provides a range of benefits to its employees and retired employees, including, for certain employees, pensions and postretirement health care coverage. The Company records Defined Benefit Plan assets and obligations using amounts calculated annually as of the Company's measurement date utilizing various actuarial assumptions such as discount rates, expected return on plan assets, compensation increases, retirement and mortality rates, and health care cost trend rates as of that date. The approaches used to determine the annual assumptions are as follows:
•Discount Rate - The discount rate assumptions are based on the interest rate of non-callable high-quality corporate bonds, with appropriate consideration demographics of the participants in the Company's pension plans and benefit payment terms.
•Expected Return on Plan Assets - The expected return on plan assets assumptions are based on the Company's expectation of the long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds.
•Retirement and Mortality Rates - The retirement and mortality rate assumptions are based primarily on actual plan experience and actuarial mortality tables.
•Health Care Cost Trend Rates - The health care cost trend rate assumptions are developed based on historical cost data, near-term outlook and an assessment of likely long-term trends.
Measurements of net periodic benefit cost are based on the assumptions used for the previous year-end measurements of assets and obligations. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions when appropriate. In accordance with U.S. GAAP, the effects of the modifications are recorded in current periods or amortized over future periods. The Company has developed the assumptions with the assistance of its independent actuaries and other relevant sources, and believes that the assumptions used are reasonable; however, changes in these assumptions could impact the Company's financial position, results of operations or cash flows. See Note 13, "Employee Benefit Plans", for further details.
Deferred Compensation Plan The Welbilt Deferred Compensation Plan is an unfunded, non-tax-qualified deferred compensation plan for highly compensated and key management employees and for directors that allows participants to defer a portion of their compensation. The Plan permits the Company, at its option, to make matching contributions to the participants' accounts. The Company utilizes a rabbi trust to hold assets intended to satisfy the Company's obligations under the deferred compensation plan. The trust restricts the Company's use and access to the assets held but is subject to the claims of the Company's general creditors. Plan participants are able to direct deferrals and Company matching contributions into two separate investment programs, Program A and Program B. Program A invests solely in the Company’s stock; dividends paid on the Company’s stock, if any, are automatically reinvested, and all distributions must be made in Company stock. Program A is accounted for as a plan that does not permit diversification. The Company's stock held by Program A, carried at cost, and the corresponding deferred compensation liability are net within equity in the Company's Consolidated Balance Sheets. Program B offers a variety of investment options but does not include Company stock as an investment option. All distributions from Program B must be made in cash. Participants cannot transfer assets between programs. Program B is accounted for as a plan that permits diversification. Changes in the fair value of the assets are recognized in earnings. The deferred compensation obligation is adjusted, with a charge or credit to compensation cost, to reflect changes in the fair value of the obligation. The assets are included in "Other non-current assets", and the related obligations are included in "Other long-term liabilities" in the Consolidated Balance Sheets.
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 the Company's net sales continue to be recognized at the point in time when products are shipped from its manufacturing facilities. The Company records deferred revenue when payment for products is received or due prior to the shipment of products to a customer. Shipping and handling revenues continue to be included as a component of "Net sales" and shipping and handling costs continue to be included in "Cost of sales" in the Consolidated Statements of Operations. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenues.
For the majority of foodservice equipment and aftermarket parts and support, the transfer of control and revenue recognition materializes when the products are shipped from the manufacturing facility or the service is provided to the customer. The Company typically invoices its customers with payment terms of 30 days and the Company's average collection cycle is generally less than 60 days and the Company has determined these payment terms do not contain a significant financing component. Costs to obtain a customer contract are expensed as incurred as the Company's contract periods are generally one year or less. The amount of consideration received and revenue recognized varies with marketing incentives such as annual customer rebate programs and returns that are offered to customers. Variable consideration as a result of customer rebate programs is typically based on calendar-year purchases and is determined using the expected value method in interim periods as prescribed in the guidance. Customers have the right to return eligible equipment and parts. The expected returns are based on an analysis of historical experience. The estimate of revenue is adjusted at the earlier of when the most likely amount of the expected consideration changes or when the consideration becomes fixed. The impact of such adjustments was not material in the years ended December 31, 2021, 2020 and 2019, respectively. The Company utilizes the practical expedient to not adjust the amount of consideration for the effects of a significant financing component for all instances in which the period between the transfer of goods and payment is one year or less. The Company also utilizes the practical expedient to recognize the costs of obtaining a contract as an expense for contracts with an original expected length of one year or less.
Substantially all of the Company's revenues consist of revenues from contracts with customers. These revenues are disaggregated by major source and geographic location and included in Note 20, "Business Segments." The Company believes this disaggregation best depicts the nature, amount, timing and uncertainty of its revenue and cash flows that are affected by economic factors.
To a much lesser extent, the Company also recognizes other sources of revenue from both specific foodservice-based projects and subscriptions. The foodservice-based project revenues are recognized at either the point-in-time in which control transfers to the customer or may be recognized over time, depending on the nature of the performance obligations in the contract. Subscription revenues, which consist of subscription fees from customers accessing the Company's cloud-based application, are recognized ratably over the customer's subscription term.
The Company sells separately-priced extended warranties that extend coverage beyond the standard product warranty by 12 to 60 months. Payments are made at the inception of the contract and revenue is recognized over the term of the warranty agreement on a straight-line basis, which the Company believes approximates the timing of costs expected to be incurred in satisfying the obligations of the contract.
Government Assistance The Company's policy for government assistance is to recognize the assistance when there is reasonable assurance that the Company has met the substantive conditions of and requirements for receiving the assistance. The government assistance is recorded as a reduction to the related expense to which the assistance relates. Beginning in the second quarter of 2020, as a result of the COVID-19 pandemic, governments in various jurisdictions in which the Company operates have provided financial assistance designed to offset salary expenditures associated with companies maintaining their pre-pandemic employee headcount levels. The Company has applied and will continue to apply for such assistance programs where relevant requirements and conditions have been met.
For the years ended December 31, 2021, the Company believes the requirements were met to receive $3.2 million of government assistance in the form of cash and cost abatements. For the year ended December 31, 2020, the Company met the requirements to receive $14.6 million of government assistance in the form of cash, cost abatements and retention credits. As of December 31, 2021 and December 31, 2020, the Company had receivables of $1.6 million and $2.4 million related to government assistance, respectively.
Government assistance has been reflected as a reduction to the related expense for which the assistance relates as follows:
| | | | | | | | | | | | | | | |
(in millions) | | Year ended | | Year ended | |
| December 31, 2021 | | December 31, 2020 | |
Reduction to related expense(1): | | | | | |
Cost of sales | | $ | 2.0 | | | $ | 7.1 | | |
Selling, general and administrative expenses | | 1.2 | | | 5.6 | | |
Total | | $ | 3.2 | | | $ | 12.7 | | |
(1) There was no government assistance included as a reduction of capitalized labor as of December 31, 2021. As of December 31, 2020, $1.9 million of government assistance was included as a reduction in capitalized labor, which is a component of "Inventories — net".
Research and Development Research and development costs are charged to expense as incurred and are included within "Selling, general and administrative expenses" in the Consolidated Statements of Operations. Research and development expenses totaled $42.5 million, $36.1 million and $41.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. Research and development costs include employee-related costs, materials, outsourced services and other administrative costs.
Restructuring Charges Restructuring charges for exit and disposal activities are recognized when the liability is incurred. The liability for the restructuring charge associated with an exit or disposal activity is measured initially at its fair value.
Income Taxes The Company is subject to income taxes in the U.S. and various foreign jurisdictions. The determination of the Company's income tax positions involves consideration of uncertainties, changing fiscal policies, tax laws, court rulings, regulations and related legislation. The Tax Cuts and Jobs Act ("Tax Act"), enacted on December 22, 2017, introduced comprehensive and complex tax legislation, including a provision designed to tax global intangible low-taxed income (“GILTI”), foreign-derived intangible income, and other items that are subject to continuous guidance and interpretations. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 and includes several 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 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 relevant jurisdiction. The Company will 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.
The Company also recognizes 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. As of each balance sheet date, unrecognized tax benefits are reassessed and adjusted if the Company's judgment changes as a result of new information.
The Company adopted the period cost method for the computation of GILTI, that was introduced in the Tax Act.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Advertising Costs Advertising costs are expensed as incurred and included in "Selling, general and administrative expenses." These costs were $10.8 million, $8.5 million and $17.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Comprehensive Income Comprehensive income includes, in addition to net earnings, other items that are reported as direct adjustments to equity. Currently, these items are foreign currency translation adjustments, the change in fair value of certain derivative instruments and employee pension and postretirement benefit adjustments.
Concentration of Credit Risk Credit extended to customers through trade accounts receivable potentially subjects the Company to risk. This risk is limited due to the large number of customers and their dispersion across various industries and many geographical areas. However, a significant amount of the Company's receivables are with distributors, dealers and large companies in the foodservice and beverage industry. Management currently does not foresee a significant credit risk associated with these individual groups of receivables, but continues to monitor the exposure, if any.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which amends, and is intended to simplify, existing guidance related to the accounting for income taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. This guidance is effective for the Company beginning January 1, 2021. The Company adopted ASU 2019-12 prospectively as of January 1, 2021 and has determined it did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2021, the FASB issued ASU 2021-10, “Disclosures by Business Entities about Government Assistance”. This ASU provided guidance to increase the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. Under the new guidance, an entity is required to provide the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy: (1) information about the nature of the transactions and the related accounting policy used to account for the transactions, (2) the line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item and, (3) significant terms and conditions of the transactions, including commitments and contingencies. This guidance is effective for fiscal years beginning after December 15, 2021. The adoption of ASU 2021-10 is not expected to have a material impact on the Company's consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04") to provide temporary optional expedients and exceptions to U.S. GAAP guidance on contract modifications, hedge accounting and other transactions affected by the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. ASU 2020-04 is effective upon issuance and the Company may elect to apply the standard through December 31, 2022. This guidance primarily impacts the interest expense under the Company's 2016 Credit Facility which utilized LIBOR as a basis and may adopt the provisions of this guidance during the year ending December 31, 2022, should the expected transition from LIBOR to alternative reference rates occur.
Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact on the Company.
3. Inventories — Net
The components of "Inventories — net" are as follows:
| | | | | | | | | | | | | | |
(in millions) | | As of December 31, |
| 2021 | | 2020 |
Inventories — net: | | | | |
Raw materials | | $ | 141.5 | | | $ | 85.6 | |
Work-in-process | | 18.4 | | | 13.9 | |
Finished goods | | 142.1 | | | 85.4 | |
Total inventories at FIFO cost | | 302.0 | | | 184.9 | |
LIFO Reserve | | (7.6) | | | (4.3) | |
Total inventories — net | | $ | 294.4 | | | $ | 180.6 | |
4. Property, Plant and Equipment — Net
The components of "Property, plant and equipment — net" are as follows:
| | | | | | | | | | | | | | |
(in millions) | | As of December 31, |
| 2021 | | 2020 |
Property, plant and equipment — net: | | | | |
Land | | $ | 9.6 | | | $ | 9.7 | |
Building and improvements | | 109.7 | | | 99.8 | |
Machinery, equipment and tooling | | 228.6 | | | 231.7 | |
Furniture and fixtures | | 7.4 | | | 8.1 | |
Computer hardware and software for internal use | | 70.8 | | | 66.8 | |
Construction in progress | | 11.6 | | | 14.1 | |
Total cost | | 437.7 | | | 430.2 | |
Less accumulated depreciation | | (302.1) | | | (301.1) | |
Total property, plant and equipment — net | | $ | 135.6 | | | $ | 129.1 | |
5. Goodwill and Other Intangible Assets — Net
During the first quarter of 2020, as a result of the decrease in demand for commercial foodservice equipment and aftermarket parts resulting from the COVID-19 pandemic and impacts on the Company's current and estimated future operating cash flows, management performed a review of the Company's goodwill and indefinite-lived intangible assets to determine whether it was more-likely-than-not that the fair value of such assets was less than their carrying amount as of March 31, 2020.
Management's review concluded for each of its reporting units and for the Americas indefinite-lived intangible assets that it was not more-likely-than-not that the fair value was less than the carrying amount based on the preponderance of evidence. Therefore, no impairment was indicated and no impairment test was required to be performed as of March 31, 2020. However, for both the EMEA and APAC indefinite-lived intangible assets, the review indicated, based on limited fair value cushion and overall financial performance expectations, that it was more-likely-than-not that the fair value of the indefinite-lived intangible assets was less than the carrying amount and, therefore, a quantitative impairment test was performed as of March 31, 2020.
The Company estimated the fair value of the EMEA and APAC indefinite-lived intangible assets which were then compared to the carrying values of the relevant indefinite-lived intangible asset and to the extent the carrying value exceeded the estimated fair value, an impairment loss was recognized in the amount by which the carrying amount of the asset exceeded the estimated fair value of the asset.
As of March 31, 2020, the Company determined that the carrying value of the indefinite-lived intangible assets in the EMEA region exceeded their estimated fair value and as a result, an impairment charge of $11.1 million was recorded for the first quarter of 2020. This impairment charge has been reflected as a component of "Loss from impairment and loss on disposal of assets — net" for the year ended December 31, 2020. Management determined that the fair value of the indefinite-lived intangible assets in the APAC region exceeded the carrying value of these assets and, therefore, concluded there was no impairment of these assets as of March 31, 2020.
As of June 30, 2021, the Company performed the annual impairment testing for its goodwill reporting units, and its indefinite-lived intangible assets, and based on those results, no impairment was indicated. Consistent with the annual impairment testing performed as of June 30, 2021, the Company estimated the fair value of the indefinite-lived intangible assets based on an income approach using the relief-from-royalty method. For each of the Company's regions, the estimated fair values of the relevant indefinite-lived intangible assets was greater than the carrying values, resulting in no impairment of the relevant assets.
The Company determined that no events occurred or circumstances changed during the six months ended December 31, 2021 that would indicate that it is more likely than not that its goodwill was impaired. To the extent that business conditions deteriorate or if changes in key assumptions and estimates differ significantly from management's expectations, it may be necessary to record impairment charges in the future.
The changes in the carrying amount of goodwill by business segment for the years ended December 31, 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Americas | | EMEA | | APAC | | Total |
Goodwill balance at December 31, 2019 (1) | | $ | 832.6 | | | $ | 80.6 | | | $ | 19.9 | | | $ | 933.1 | |
Foreign currency impact | | — | | | 8.7 | | | 1.1 | | | 9.8 | |
Goodwill balance at December 31, 2020 | | $ | 832.6 | | | $ | 89.3 | | | $ | 21.0 | | | $ | 942.9 | |
Foreign currency impact | | — | | | (6.9) | | | 0.3 | | | (6.6) | |
Goodwill balance at December 31, 2021 | | $ | 832.6 | | | $ | 82.4 | | | $ | 21.3 | | | $ | 936.3 | |
(1) Goodwill is net of accumulated impairment losses of $515.7 million: $312.2 million recorded for the Americas and $203.5 million recorded for EMEA, both of which were recorded prior to December 31, 2019.
The gross carrying amounts and accumulated amortization of the Company's intangible assets, other than goodwill, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | As of December 31, |
| 2021 | | 2020 |
| Gross Carrying Amount | | Accumulated Amortization Amount | | Net Book Value | | Gross Carrying Amount | | Impairment Charges | | Accumulated Amortization Amount | | Net Book Value |
Customer relationships | | $ | 475.1 | | | $ | (297.0) | | | $ | 178.1 | | | $ | 479.1 | | | — | | | $ | (271.6) | | | $ | 207.5 | |
Trademarks and trade names | | 206.9 | | | — | | | 206.9 | | | 223.1 | | | (11.1) | | | — | | | 212.0 | |
Other intangibles | | 170.6 | | | (138.1) | | | 32.5 | | | 173.1 | | | — | | | (126.6) | | | 46.5 | |
Patents | | 5.8 | | | (2.5) | | | 3.3 | | | 5.8 | | | — | | | (2.2) | | | 3.6 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total | | $ | 858.4 | | | $ | (437.6) | | | $ | 420.8 | | | $ | 881.1 | | | $ | (11.1) | | | $ | (400.4) | | | $ | 469.6 | |
As of December 31, 2021, trademarks and trade names by business segment are: $130.6 million in the Americas, $68.9 million in EMEA and $7.4 million in APAC. As of December 31, 2020, trademarks and trade names by business segment are: $130.6 million in the Americas, $73.6 million in EMEA and $7.8 million in APAC.
Amortization expense for the years ended December 31, 2021, 2020 and 2019 was $40.9 million, $40.6 million and $39.8 million, respectively. Amortization expense related to software to be sold classified as a component of "Cost of sales" in the Consolidated Statements of Operations amounted to $1.5 million, $1.5 million, and $1.1 million for the years ended December 31, 2021, 2020, and 2019 respectively. As of December 31, 2021, the weighted average remaining useful lives of the definite-lived intangible assets for customer relationships, patents, and other intangibles was 7 years, 13 years and 7 years, respectively, and the weighted average remaining useful life of all definite-lived intangible assets was approximately 7 years.
As of December 31, 2021, the estimated future amortization for the Company's definite lived intangible assets for each of the five succeeding years is as follows:
| | | | | | | | |
(in millions) | | |
Year ending December 31: | | |
2022 | | $ | 36.1 | |
2023 | | $ | 29.4 | |
2024 | | $ | 28.8 | |
2025 | | $ | 28.7 | |
2026 | | $ | 28.6 | |
| | |
| | |
6. Accrued Expenses and Other Liabilities
The components of "Accrued expenses and other liabilities" are as follows:
| | | | | | | | | | | | | | |
(in millions) | | As of December 31, |
| 2021 | | 2020 |
| | | | |
| | | | |
| | | | |
Accrued expenses and other liabilities: | | | | |
Miscellaneous accrued expenses | | $ | 40.6 | | | $ | 37.5 | |
Employee related expenses | | 51.9 | | | 35.6 | |
Accrued rebates and commissions | | 58.0 | | | 40.1 | |
Current portion of operating lease liabilities | | 9.1 | | | 9.7 | |
Interest payable | | 15.9 | | | 16.1 | |
Customer deposits | | 12.3 | | | 3.9 | |
Non-income taxes payable | | 4.9 | | | 3.6 | |
Restructuring liabilities | | 1.7 | | | 4.0 | |
Deferred revenues | | 4.2 | | | 2.9 | |
Pension and postretirement health liabilities | | 2.1 | | | 2.1 | |
Business Transformation Program related expenses | | — | | | 0.8 | |
Product liabilities | | 3.4 | | | 1.7 | |
Income and other taxes payable | | 6.6 | | | 5.6 | |
Derivative liabilities | | — | | | 0.6 | |
| | | | |
| | | | |
| | | | |
Total accrued expenses and other liabilities | | $ | 210.7 | | | $ | 164.2 | |
7. Income Taxes
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 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") for the year ended December 31, 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 the Company's effective tax rate in future periods.
"Earnings (loss) before income taxes " in the Consolidated Statements of Operations consists of the following:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Domestic | | $ | (13.5) | | | $ | (73.6) | | | $ | (35.8) | |
Foreign | | 112.7 | | | 59.9 | | | 111.5 | |
Total earnings (loss) before income taxes | | $ | 99.2 | | | $ | (13.7) | | | $ | 75.7 | |
"Income tax (benefit) expense" in the Consolidated Statements of Operations consists of the following:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Current: | | | | | | |
Federal and state | | $ | 8.2 | | | $ | (14.7) | | | $ | 9.0 | |
Foreign | | 29.6 | | | 16.6 | | | 30.4 | |
Total current tax expense | | 37.8 | | | 1.9 | | | 39.4 | |
Deferred: | | | | | | |
Federal and state | | (7.4) | | | (1.8) | | | (15.0) | |
Foreign | | (1.5) | | | (6.4) | | | (4.6) | |
Total deferred tax benefit | | (8.9) | | | (8.2) | | | (19.6) | |
Total: | | | | | | |
Federal and state | | 0.8 | | | (16.5) | | | (6.0) | |
Foreign | | 28.1 | | | 10.2 | | | 25.8 | |
Income tax expense (benefit) | | $ | 28.9 | | | $ | (6.3) | | | $ | 19.8 | |
A reconciliation of the U.S. federal statutory income tax rate to the Company's effective tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Federal income tax at statutory rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income expense (benefit) | | 0.4 | | | 1.3 | | | (0.2) | |
Manufacturing and research incentives | | (1.2) | | | 7.1 | | | (1.2) | |
Taxes on foreign income | | 4.6 | | | (6.6) | | | 8.4 | |
| | | | | | |
| | | | | | |
Global intangible low taxed income - Tax Act | | 1.8 | | | — | | | 2.0 | |
Foreign derived intangible income | | (1.1) | | | — | | | (1.0) | |
CARES Act net operating loss carryback | | (0.2) | | | 51.2 | | | — | |
Adjustments for valuation allowances | | 0.7 | | | 1.5 | | | (2.1) | |
Unrecognized tax benefits | | (0.1) | | | (19.1) | | | (1.9) | |
| | | | | | |
| | | | | | |
| | | | | | |
US permanent adjustments - Non Tax Act (1) | | 3.0 | | | (8.8) | | | 0.5 | |
Other items (1) | | 0.2 | | | (1.6) | | | 0.7 | |
Effective tax rate | | 29.1 | % | | 46.0 | % | | 26.2 | % |
(1) Reclassified amounts from "Other items" of 0.5% for the year ended December 31, 2019 to "US Permanent adjustments - Non Tax Act."
As a result of the loss before income taxes for the year ended December 31, 2020, a positive percentage change in the effective tax rate table reflects a favorable income tax benefit, whereas a negative percentage change in the effective tax rate table reflects an unfavorable income tax expense.
For the year ended December 31, 2021, the Company's effective tax rate was 29.1%, compared to an effective tax rate of 46.0% for the year ended December 31, 2020. The decrease in effective tax rate for the year ended December 31, 2021 is primarily the result of a decrease in income tax benefit of 51.4% for CARES Act net operating loss carryback provisions, and a decrease of 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% for U.S. permanent adjustments - Non Tax Act and 11.2% for taxes on foreign income. Taxes on foreign income unfavorably impacted the effective tax rate for both of the years ended December 31, 2021 and 2020 primarily as a result of earnings in high-tax jurisdictions, including Germany, China, and Canada whose statutory rates range from 25% to 30%.
For the year ended December 31, 2020, the Company's effective tax rate was 46.0%, compared to an effective tax rate of 26.2% for the year ended December 31, 2019. The increase in the effective tax rate was primarily the result of a 51.2% income tax benefit for CARES Act net operating loss carryback provisions, in addition to increased income tax benefit percentage changes of 3.6% for changes in valuation allowances of foreign entities related to loss carryforwards and 8.3% for manufacturing and research incentive credits. These increases are partially offset by 17.2% of income tax expense percentage changes for unrecognized tax benefits related to taxes on foreign income and the Tax Act regulations, 9.3% for U.S. permanent adjustments - Non Tax Act and 15.0% for taxes on foreign income. Taxes on foreign income unfavorably impacted the effective tax rate for both the years ended December 31, 2020 and 2019 primarily as a result of earnings in high-tax jurisdictions, including Germany, China, and Canada whose statutory rates range from 25% to 30%.
As of December 31, 2021, the Company intends to continue reinvesting foreign earnings indefinitely outside the U.S. with certain limited exceptions and has not recorded a deferred tax liability for U.S. state income taxes, foreign withholding or other foreign income taxes that would be due if cash is repatriated to the U.S. because those foreign earnings are considered permanently reinvested or may be remitted substantially free of any additional income or withholding taxes. While the Company does not anticipate a need to repatriate funds to the U.S. to satisfy domestic liquidity needs, management reviews cash positions regularly and, to the extent it is determined that all or a portion of foreign earnings will not remain indefinitely reinvested, the Company will record a liability for the additional taxes, if applicable, including foreign withholding taxes and U.S. state income taxes. Further, the determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.
Deferred income tax assets and liabilities are provided for the impact of temporary differences between amounts of assets and liabilities recognized for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. These temporary differences result in taxable or deductible amounts in future years.
Significant components of the Company’s non-current deferred tax assets and liabilities are as follows:
| | | | | | | | | | | | | | |
(in millions) | | As of December 31, |
| 2021 | | 2020 |
Non-current deferred tax assets (liabilities): | | | | |
Inventories | | $ | 4.2 | | | $ | 4.3 | |
Accounts receivable | | 1.1 | | | 0.5 | |
Property, plant and equipment | | (10.8) | | | (9.0) | |
Intangible assets | | (112.6) | | | (123.1) | |
Deferred employee benefits | | 13.5 | | | 14.8 | |
Product warranty reserves | | 7.6 | | | 7.5 | |
Product liability reserves | | 1.8 | | | 1.7 | |
Operating lease right-of-use assets | | (9.8) | | | (11.8) | |
Operating lease liabilities | | 9.8 | | | 11.7 | |
Interest carryforwards | | 24.9 | | | 16.2 | |
Loss carryforwards | | 51.9 | | | 43.4 | |
Credit carryforwards | | 1.8 | | | 6.5 | |
| | | | |
Other | | 5.2 | | | 6.8 | |
Non-current deferred tax liabilities | | (11.4) | | | (30.5) | |
Less valuation allowance | | (40.7) | | | (30.9) | |
Net non-current deferred tax liabilities | | $ | (52.1) | | | $ | (61.4) | |
Current and long-term tax assets and liabilities included in the Company's Consolidated Balance Sheets consist of the following:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | As of December 31, | | Consolidated Balance Sheets Line Item Location |
| 2021 | | 2020 | |
Income tax receivable | | $ | 25.6 | | | $ | 27.4 | | | Prepaids and other current assets |
Deferred tax assets | | $ | 12.1 | | | $ | 15.1 | | | Other non-current assets |
Income taxes payable | | $ | (6.6) | | | $ | (5.6) | | | Accrued expenses and other liabilities |
Income taxes payable | | $ | (0.1) | | | $ | (0.1) | | | Other long-term liabilities |
Deferred tax liabilities | | $ | (64.2) | | | $ | (76.5) | | | Deferred income taxes |
As of December 31, 2021, the Company has approximately $198.4 million of pre-tax foreign loss carryforwards, which are available to reduce future foreign taxable income. Substantially all of these foreign loss carryforwards are not subject to any time restrictions on their use. Pre-tax loss carryforwards of $142.1 million resulted in deferred tax assets that were fully offset by a valuation allowance, after considering the weight of all available evidence and determination that it was more-likely-than-not that such deferred tax assets will not be realized.
As of each reporting date, the Company's management considers new evidence, both positive and negative, that could impact management's view regarding the future realization of deferred tax assets. The Company will continue to evaluate its valuation allowance requirements, including the U.S. interest expense limitation of the Tax Act.
As of December 31, 2021, the Company has determined that a valuation allowance is not required for the deferred tax asset associated with U.S. interest expense. The Company may adjust its deferred tax asset valuation allowances accordingly 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, the Company may also adjust its deferred tax asset valuation allowances accordingly. Such changes in the deferred tax asset valuation allowances would be reflected in current operations through the Company’s income tax provision and could have a material effect on the Company’s operating results for the respective period.
A reconciliation of the Company's gross change in unrecognized tax benefits, excluding interest and penalties, is as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Balance at beginning of year | | $ | 8.4 | | | $ | 2.9 | | | $ | 11.5 | |
Additions based on tax positions related to the current year | | — | | | 2.7 | | | — | |
Additions for tax positions of prior years | | — | | | 2.9 | | | — | |
| | | | | | |
Reductions based on settlements with taxing authorities | | — | | | — | | | (1.3) | |
Reductions for lapse of statute of limitations | | (0.3) | | | (0.1) | | | (7.3) | |
Balance at end of year | | $ | 8.1 | | | $ | 8.4 | | | $ | 2.9 | |
The Company's unrecognized tax benefits, including interest and penalties, were $9.6 million and $9.9 million as of December 31, 2021, and December 31, 2020, respectively. The Company’s unrecognized tax benefits as of December 31, 2021, 2020 and 2019 if recognized, would impact the effective tax rate. During the next twelve months, it is reasonably possible that unrecognized tax benefits could change in the range of $0.1 million to $1.6 million due to the expiration of relevant statutes of limitations and federal, state and foreign tax audit resolutions. In addition, as of December 31, 2021, and December 31, 2020, the Company's Consolidated Balance Sheets includes $25.6 million and $27.4 million, respectively, of income tax receivables, classified within "Prepaids and other current assets."
The Company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities globally. The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves.
As of December 31, 2021, the Company believes that it is more-likely-than-not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position, results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company's estimates and/or from its historical income tax provisions and accruals and could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties and/or interest assessments.
The Company is currently under audit by the tax authorities in Germany for the years 2015-2018 and in the U.S. for the 2017-2018 federal income tax returns, as well as various other state income tax and jurisdictional audits. The Company's separate federal and state tax returns for tax years 2017 through 2020 and 2016 through 2020, respectively, remain subject to examination by U.S. federal and various state taxing authorities. The tax years 2016 - 2020 remain subject to examination in Canada and Germany, and tax years 2011 - 2020 remain subject to examination in China.
8. Debt
The carrying value of the Company's outstanding debt consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 | | As of December 31, 2020 |
(in millions, except percentage data) | | Carrying value | | Weighted Average Interest Rate | | Carrying value | | Weighted Average Interest Rate |
Long-term debt and finance leases: | | | | | | | | |
| | | | | | | | |
Revolving Credit Facility | | $ | 120.0 | | | 4.50 | % | | $ | 143.0 | | | 4.21 | % |
Term Loan B Facility | | 855.0 | | | 2.93 | % | | 855.0 | | | 3.45 | % |
9.50% Senior Notes due 2024 | | 425.0 | | | 9.76 | % | | 425.0 | | | 9.72 | % |
Finance leases | | 1.6 | | | 4.42 | % | | 2.2 | | | 4.80 | % |
Total debt and finance leases, including current portion | | 1,401.6 | | | | | 1,425.2 | | | |
Less current portion: | | | | | | | | |
| | | | | | | | |
Finance leases | | (0.9) | | | | | (1.0) | | | |
Unamortized debt issuance costs (1) | | (12.9) | | | | | (16.7) | | | |
Hedge accounting fair value adjustment (2) | | 0.2 | | | | | 0.3 | | | |
Total long-term debt and finance leases | | $ | 1,388.0 | | | | | $ | 1,407.8 | | | |
(1) Total debt issuance costs, net of amortization as of December 31, 2021 and 2020 were $15.3 million and $20.3 million, respectively, of which $2.4 million and $3.6 million are related to the Revolving Credit Facility and recorded in "Other non-current assets" in the Consolidated Balance Sheets.
(2) Balance represents deferred gains from the terminations of interest rate swaps designated as fair value hedges.
2016 Credit Agreement
In March 2016, the Company entered into a credit agreement, as amended, restated, supplemented or otherwise modified from time to time (the "2016 Credit Agreement") for a $1,300.0 million Senior Secured Credit Facility (the "Senior Secured Credit Facility") consisting of (i) a senior secured Term Loan B facility in an aggregate principal amount of $900.0 million (the "Term Loan B Facility") and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400.0 million (the "Revolving Credit Facility"). The 2016 Credit Agreement also provides for a (i) sublimit for the issuance of letters of credit under the revolving commitments to $30.0 million and (ii) aggregate principal amount of allowed incremental revolving or term loan facilities thereunder in an amount not to exceed the sum of (a) $275.0 million plus (b) an additional amount, as long as after giving effect to the incurrence of such additional amount, the proforma secured leverage ratio does not exceed 3.75:1.00. The maturity of the Term Loan B Facility and Revolving Credit Facility is October 2025 and October 2023, respectively. Each of the terms above were applicable with the latest amendment completed in April 2020, as further discussed below.
The 2016 Credit Agreement contains financial covenants including, but not limited to (a) a Consolidated Interest Coverage Ratio, which measures the ratio of (i) Consolidated EBITDA to (ii) Consolidated Interest Expense, and (b) a Consolidated Total Leverage Ratio, which measures the ratio of (i) Consolidated Indebtedness to (ii) Consolidated EBITDA for the most recent four fiscal quarters, in each case, as defined in the 2016 Credit Agreement.
The 2016 Credit Agreement and indenture governing the Senior Secured Credit Facility contains limitations on the Company's 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 the Company's subsidiaries to pay dividends or other payments, (v) transactions with affiliates and (vi) sales of assets.
The Company’s obligations under the 2016 Credit Agreement are jointly and severally guaranteed by certain of its existing and future direct and indirectly wholly owned U.S. subsidiaries (but excluding (i) unrestricted subsidiaries, (ii) immaterial subsidiaries, (iii) special purpose securitization vehicles and (iv) controlled foreign corporations (“CFCs”) or any subsidiary substantially all the assets of which consist of equity interests of one or more CFCs or other CFC holding companies).
At inception, borrowings under the Senior Secured Credit Facility bore interest at a rate per annum equal to, at the option of the Company, (i) LIBOR plus the applicable margin of 4.75% (reduced in connection with amendments to 3.00% in March 2017, to 2.75% in September 2017 and to 2.50% in October 2018) for the Term Loan B Facility and 1.50% - 2.75% for the Revolving Credit Facility, based on consolidated total leverage, or (ii) an alternate base rate plus the applicable margin, which was 1.00% lower than for LIBOR loans.
During the fourth quarter of 2018 and through the first half of 2019, borrowings under the 2016 Credit Agreement bore interest at a rate per annum equal to, at the Company's option, either (i) LIBOR plus an applicable margin of 2.50% for the Term Loan B Facility and a range from 1.50% to 2.50% for the Revolving Credit Facility (depending on the Company's Consolidated Total Leverage Ratio) or (ii) an alternate base rate plus an applicable margin which was 1.00% less than the LIBOR-based applicable margin. Beginning in the third quarter of 2019, the spreads for LIBOR and alternate base rate borrowings were 2.25% and 1.25%, respectively.
In April 2020, the Company entered into Amendment No. 7 ("Amendment No. 7") to the 2016 Credit Agreement, to amend the financial covenants of the Revolving Credit Facility to prevent non-compliance with these financial covenants for the quarter ended June 30, 2020 resulting from the impact of the COVID-19 pandemic on the commercial foodservice industry and the resulting decrease in demand for the Company's products. The terms of Amendment No. 7, among other items, (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 until March 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 effective through June 30, 2021.
Beginning in the second quarter of 2020, the spreads for LIBOR and alternate base rate borrowings for the Revolving Credit Facility were 2.25% and 1.25%, respectively, as a result of a change in the Company's Consolidated Total Leverage Ratio as of March 31, 2020.
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 beginning June 30, 2020 and phased-in to the pre-amendment covenant levels in the fourth quarter of 2021.
Amendment No. 7 prohibits draws under the Revolving Credit Facility (i) if the Company has not evidenced compliance with the financial covenants for the year ended December 31, 2021 by delivery of a compliance certificate within 90 days, and (ii) to the extent the draw would result in a consolidated cash balance of $100.0 million or greater (excluding cash held in China) through December 31, 2021, with the exception of draws to meet cash uses anticipated in the ordinary course of business that are expected to be paid within 10 days of the draw. Amendment No. 7 also includes additional limitations on restricted payments, investments and other actions that are otherwise allowed under the 2016 Credit Agreement, with a $25.0 million carve-out for general investments. These limitations expired on December 31, 2021.
Amendment No. 7 also included a quarterly fee 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. The Company incurred total debt issuance costs in connection with Amendment No. 7 of $2.1 million, which were capitalized and included as a component of "Other non-current assets" on the Company's Consolidated Balance Sheets and will be amortized through the maturity of the Revolving Credit Facility.
As of December 31, 2021, the Company had $6.6 million in outstanding stand-by letters of credit and $273.4 million available for additional borrowings under the Revolving Credit Facility to the extent the Company's compliance with financial covenants permits such borrowings. As of December 31, 2021, the Company also had $1.0 million in other outstanding letters of credit or guarantees of payment to certain third-parties in accordance with commercial terms and conditions and which do not reduce the amount available for additional borrowings under the Revolving Credit Facility.
In October 2021, the Company entered into a Suspension of Rights Agreement to the 2016 Credit Agreement, effective December 31, 2021, which: (i) suspends the 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 before December 31, 2021 and (iii) eliminates the option to select an interest period of 2 months for any borrowings in USD without the lenders' consent. The Company does not expect that the execution of this agreement will have a material impact on the Company's future liquidity or consolidated results of operations.
As of December 31, 2021, the Company was in compliance with all affirmative and negative covenants, including any financial covenants, pertaining to its financing arrangements. The Company continually monitors its compliance with the covenants in its Revolving Credit Facility, and in doing so has made estimates of the negative impact of the COVID-19 pandemic on its financial position, results of operations and cash flows. The Company believes it will remain in compliance with all such covenants for the next 12 months; however, due to the inherent uncertainty of the severity and duration of the COVID-19 pandemic on the Company's business, management's estimates of the achievement of its financial covenants may change in the future.
Senior Notes
In February 2016, the Company issued 9.50% Senior Notes due 2024 in an aggregate principal amount of $425.0 million (the "Senior Notes") under an indenture with Wells Fargo Bank, National Association, as trustee (the "Trustee"). The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of the Company's domestic restricted subsidiaries that is a borrower or guarantor under the Senior Secured Credit Facilities. The Senior Notes and the subsidiary guarantees are unsecured, senior obligations. Effective February 15, 2022, the Senior Notes are redeemable, at the Company's option, in whole or in part from time to time, at a redemption price equal to 100.0% of the principal amount.
The Senior Notes were initially sold to qualified institutional buyers pursuant to Rule 144A (and outside the U.S. in reliance on Regulation S) under the Securities Act of 1933 ("Securities Act"). In September 2016, the Company completed an exchange offer pursuant to which all of the initial Senior Notes were exchanged for new Senior Notes, the issuance of which was registered under the Securities Act.
The Company 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 the Company's ability to effect mergers and change of control events as well as other limitations, including limitations on: the declaration and payment of dividends or other restricted payments; incurring additional indebtedness or issuing preferred stock; the creation or existence of certain liens; incurring restrictions on the ability of certain of the Company's subsidiaries to pay dividends or other payments; transactions with affiliates; and sales of assets.
As of December 31, 2021, the Company was in compliance with all affirmative and negative covenants pertaining to the Senior Notes.
Future Debt Maturities
Future debt maturities, excluding finance leases, as of December 31, 2021 and for succeeding years are as follows:
| | | | | | | | |
(in millions) | | |
Year ending December 31: | | |
2022 | | $ | — | |
2023 | | 120.0 | |
2024 | | 434.0 | |
2025 | | 846.0 | |
2026 | | — | |
Thereafter | | — | |
Total | | $ | 1,400.0 | |
9. Derivative Financial Instruments
The Company's risk management objective is to ensure that business exposures to risks that have been identified and measured and are capable of being controlled are minimized or managed using what the Company believes to be the most effective and efficient methods to eliminate, reduce or transfer such exposures. Operating decisions consider these associated risks and the Company structures transactions to minimize or manage these risks whenever possible.
The primary risks the Company manages using derivative instruments are interest rate risk, commodity price risk and foreign currency exchange risk. The Company has historically entered into interest rate swap agreements to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings. Cross-currency interest rate swaps are entered into to protect the value of the Company’s investments in its foreign subsidiaries. Swap contracts on various commodities are used to manage the price risk associated with forecasted purchases of materials used in the Company's manufacturing process. The Company also enters into various foreign currency derivative instruments to manage foreign currency risk associated with its projected purchases and sales and foreign currency denominated receivable and payable balances.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets. Commodity swaps and foreign currency exchange contracts are designated as cash flow hedges of forecasted purchases of commodities and currencies, certain interest rate swaps are designated as cash flow hedges of floating-rate borrowings, and the remainder of the instruments are designated as fair value hedges of fixed-rate borrowings, and a cross-currency interest rate swap as a hedge of net investments in its foreign subsidiaries.
Cash flow hedging strategy
For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Loss ("AOCI") in the Company's Consolidated Balance Sheets and is subsequently reclassified into earnings in the periods in which the hedged transaction affects earnings. During the next twelve months, the Company estimates no unrealized gains or losses, net of tax, related to currency rate and commodity price hedging that will be reclassified from AOCI into earnings. Foreign currency and commodity hedging, prior to de-designation, is generally completed prospectively on a rolling basis for 15 and 36 months, respectively, depending on the type of risk being hedged.
Prior to 2020, the Company entered into interest rate swap agreements, to manage interest rate risk exposure by converting the Company’s floating-rate debt to a fixed-rate basis, thus reducing the impact on future interest expense from fluctuations in future interest rates. These interest rate swap agreements involved the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal. The Company's remaining interest rate swap agreement with a notional amount of $425.0 million matured during the first quarter of 2020.
The outstanding currency forward contracts, which were entered into as hedges of forecasted transactions and continue to qualify for hedge accounting, are as follows:
| | | | | | | | | | | | | | | | | | | | |
Currency | | Units Hedged (in millions) |
| As of December 31, |
| 2021 | | 2020 | | 2019 |
Canadian Dollar | | 3.8 | | | 6.4 | | | 8.0 | |
Euro | | — | | | 3.3 | | | 7.6 | |
British Pound | | — | | | 6.1 | | | 8.0 | |
Mexican Peso | | — | | | 92.8 | | | 111.3 | |
| | | | | | |
| | | | | | |
Singapore Dollar | | — | | | 2.3 | | | 2.0 | |
The effects of Company's derivative instruments on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Operations for gains or losses initially recognized in AOCI in the Consolidated Balance Sheets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in cash flow hedging relationships | | Pretax gain/(loss) recognized in AOCI | | Pretax gain/(loss) reclassified from AOCI into income | | | | |
(in millions) | | Years Ended December 31, | | Location | | Years Ended December 31, | | | | | | | | |
| 2021 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2019 | | | | | | | | |
Foreign currency exchange contracts | | $ | — | | | $ | 0.5 | | | $ | 0.4 | | | Cost of sales | | $ | 1.1 | | | $ | (0.4) | | | $ | (0.9) | | | | | | | | | |
Commodity contracts | | — | | | — | | | (1.2) | | | Cost of sales | | — | | | (1.0) | | | (1.3) | | | | | | | | | |
Interest rate swap contracts | | — | | | — | | | (1.7) | | | Interest expense | | — | | | — | | | 2.6 | | | | | | | | | |
Total | | $ | — | | | $ | 0.5 | | | $ | (2.5) | | | | | $ | 1.1 | | | $ | (1.4) | | | $ | 0.4 | | | | | | | | | |
Fair value hedging strategy
For derivative instruments that qualify and are designated as a fair value hedge (i.e. hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item in the Company's Consolidated Statements of Operations.
Effect of Fair Value and Cash Flow Derivative Instruments on Consolidated Statements of Operations
The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Location and amount of gain/(loss) recognized on effect of fair value and cash flow derivative instruments |
| | | | | |
| Years Ended December 31, | | |
| 2021 | | | | 2020 | | 2019 | | |
| Cost of Sales | | Interest Expense | | | | Cost of Sales | | Interest Expense | | Cost of Sales | | Interest Expense | | |
Total amounts of expense line items presented in the Consolidated Statements of Operations in which effects of fair value and cash flow hedges are recorded | | $ | 987.3 | | | $ | 74.9 | | | | | $ | 743.4 | | | $ | 81.4 | | | $ | 1,027.0 | | | $ | 97.3 | | | |
The effects of fair value and cash flow hedging: | | | | | | | | | | | | | | | | |
Gain/(loss) on fair value hedging relationship: | | | | | | | | | | | | | | | | |
Interest rate contract: | | | | | | | | | | | | | | | | |
Hedged item | | $ | — | | | $ | 0.1 | | | | | $ | — | | | $ | 0.1 | | | $ | — | | | $ | (14.2) | | | |
Derivative designated as hedging instrument | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | $ | — | | | $ | 13.3 | | | |
| | | | | | | | | | | | | | | | |
Gain/(loss) on cash flow hedging relationships: | | | | | | | | | | | | | | | | |
Foreign currency exchange contracts: | | | | | | | | | | | | | | | | |
Amount of gain/(loss) reclassified from AOCI into income | | $ | 1.1 | | | $ | — | | | | | $ | (0.4) | | | $ | — | | | $ | (0.9) | | | $ | — | | | |
Commodity contracts: | | | | | | | | | | | | | | | | |
Amount of gain/(loss) reclassified from AOCI into income | | $ | — | | | $ | — | | | | | $ | (1.0) | | | $ | — | | | $ | (1.3) | | | $ | — | | | |
Interest rate contracts: | | | | | | | | | | | | | | | | |
Amount of gain/(loss) reclassified from AOCI into income | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | $ | — | | | $ | 2.6 | | | |
Hedge of net investment in foreign operations strategy
For derivative instruments that qualify and are designated as a hedge of a net investment in a foreign currency, the gain or loss is reported in AOCI as a component of the cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.
In March 2017, the Company entered into a three-year cross-currency interest rate swap contract ("CCS") for a notional value of €50.0 million to protect the value of its net investment in Euros. Prior to the expiration of the CCS in March 2020, the carrying value of the net investment in Euros was designated as a hedging instrument is remeasured at each reporting date to reflect the changes in the foreign currency exchange spot rate, with changes since the last remeasurement date recorded in AOCI. Upon expiration of the CCS in March 2020, the Company paid $4.1 million representing the final notional exchange at the expiration date spot exchange rate, which has been classified as an investing activity in the Company's Consolidated Statements of Cash Flows.
The location and effects of the net investment hedge on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in net investments hedging relationships | | Pretax gain/(loss) recognized in AOCI | | Gain/(loss) reclassified from AOCI into income | | Gain/(loss) recognized in income (amount excluded from effectiveness testing) |
(in millions) | | Years Ended December 31, | | Location | | Years Ended December 31, | | Location | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2019 |
Interest rate swap contract | | $ | — | | | $ | (0.8) | | | $ | 2.8 | | | N/A | | $ | — | | | $ | — | | | $ | — | | | Other expense (income) — net | | $ | — | | | $ | 0.3 | | | $ | 1.6 | |
| | | | | | | | | | | | | | | | | | | | | | |
N/A = Not applicable
Derivatives Not Designated as Hedging Instruments
The Company enters into commodity and foreign currency exchange contracts that are not designated as hedge relationships to offset, in part, the impact of certain intercompany transactions and to further mitigate certain other short-term commodity and currency impacts, as identified. For derivative instruments that are not designated as hedging instruments, the gains or losses on the derivatives are recognized in current earnings within "Other expense (income) — net" in the Consolidated Statements of Operations.
As of December 31, 2021, the Company had no outstanding commodity contracts which were not designated as hedging instruments. As of December 31, 2020, the Company had 35 and 18 metric tons of aluminum and copper, respectively, in outstanding commodity contracts that were not designated as hedging instruments. As of December 31, 2019, the Company had 524 and 269 metric tons, and 1,778 short tons of aluminum, copper and steel, respectively, in outstanding commodity contracts that were not designated as hedging instruments.
| | | | | | | | | | | | | | | | | | | | |
Currency | | Contracted Units (in millions) |
| As of December 31, |
| 2021 | | 2020 | | 2019 |
Canadian Dollar | | 1.8 | | | 1.1 | | | 1.3 | |
Euro | | — | | | 84.2 | | | 75.6 | |
Swiss Franc | | — | | | 7.0 | | | 7.0 | |
British Pound | | — | | | 1.0 | | | 20.3 | |
Singapore Dollar | | — | | | 0.3 | | | 28.4 | |
Mexican Peso | | — | | | 13.8 | | | 11.8 | |
For the year ended December 31, 2021, 2020, and 2019 the Company recognized income of $5.5 million, an expense of $2.6 million, and income of $6.6 million, respectively, related to foreign currency exchange contracts. For the year ended December 31, 2020, and 2019, the Company also recognized an expense of $0.2 million and income of $0.1 million, respectively, related to commodity contracts. The gains and losses related to derivative instruments not designated as hedging instruments are included in Other expense (income) — net in the Company's Consolidated Statements of Operations.
The fair value of outstanding derivative contracts recorded as assets in the Consolidated Balance Sheets are as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Balance Sheet Location | | Asset Derivatives |
| | Fair Value |
| | As of December 31, |
| | 2021 | | 2020 |
Derivatives designated as hedging instruments: | | | | | | |
Foreign currency exchange contracts | | Prepaids and other current assets | | $ | 0.1 | | | $ | 1.1 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Total derivatives designated as hedging instruments | | | | $ | 0.1 | | | $ | 1.1 | |
| | | | | | |
Derivatives NOT designated as hedging instruments: | | | | | | |
Foreign currency exchange contracts | | Prepaids and other current assets | | $ | — | | | $ | 0.9 | |
| | | | | | |
| | | | | | |
| | | | | | |
Total derivatives NOT designated as hedging instruments | | | | $ | — | | | $ | 0.9 | |
| | | | | | |
Total asset derivatives | | | | $ | 0.1 | | | $ | 2.0 | |
The fair value of outstanding derivative contracts recorded as liabilities in the Consolidated Balance Sheets are as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Balance Sheet Location | | Liability Derivatives |
| | Fair Value |
| | As of December 31, |
| | 2021 | | 2020 |
Derivatives designated as hedging instruments: | | | | | | |
Foreign currency exchange contracts | | Accrued expenses and other liabilities | | $ | — | | | $ | 0.2 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Total derivatives designated as hedging instruments | | | | $ | — | | | $ | 0.2 | |
| | | | | | |
Derivatives NOT designated as hedging instruments: | | | | | | |
Foreign currency exchange contracts | | Accrued expenses and other liabilities | | $ | — | | | $ | 0.4 | |
| | | | | | |
| | | | | | |
| | | | | | |
Total derivatives NOT designated as hedging instruments | | | | $ | — | | | $ | 0.4 | |
| | | | | | |
Total liability derivatives | | | | $ | — | | | $ | 0.6 | |
10. Fair Value of Financial Instruments
In accordance with the Company's policy, fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The policy classifies the inputs used to measure fair value into the following hierarchy:
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities, or
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
Inputs other than quoted prices that are observable for the asset or liability
Level 3 Unobservable inputs for the asset or liability
Disclosures About Fair Value of Financial Instruments
The Company utilizes the best available information in measuring fair value. The carrying values of cash, restricted cash and cash equivalents, accounts receivable and trade accounts payable approximate fair value, without being discounted, as of December 31, 2021 and 2020, due to the short-term nature of these instruments.
The Company's Revolving Credit Facility Term Loan B Facility and Senior Notes are recorded at their carrying values on the Company's Consolidated Balance Sheets, as disclosed in Note 8, "Debt." The carrying value of the Revolving Credit Facility approximates its fair value due to the short-term variable interest rates of the borrowings. The Company estimates the fair value of the Term Loan B Facility and the Senior Notes based on quoted market prices of the instruments. Because these instruments are typically thinly traded, the assets and liabilities are classified as Level 2 of the fair value hierarchy. The fair value of the Company's Term Loan B Facility was approximately $853.9 million and $814.9 million as of December 31, 2021 and 2020, respectively. The fair value of the Company's Senior Notes was approximately $429.7 million and $439.9 million as of December 31, 2021 and 2020, respectively.
Fair Value Measurements on a Recurring Basis
The following tables set forth financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2021 and 2020 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Fair Value as of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Current assets: | | | | | | | | |
| | | | | | | | |
Foreign currency exchange contracts | | $ | — | | | $ | 0.1 | | | $ | — | | | $ | 0.1 | |
| | | | | | | | |
| | | | | | | | |
Total current assets at fair value | | — | | | 0.1 | | | — | | | 0.1 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total assets at fair value | | $ | — | | | $ | 0.1 | | | $ | — | | | $ | 0.1 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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| | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Fair Value as of December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Current assets: | | | | | | | | |
| | | | | | | | |
Foreign currency exchange contracts | | $ | — | | | $ | 2.0 | | | $ | — | | | $ | 2.0 | |
| | | | | | | | |
| | | | | | | | |
Total current assets at fair value | | — | | | 2.0 | | | — | | | 2.0 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total assets at fair value | | $ | — | | | $ | 2.0 | | | $ | — | | | $ | 2.0 | |
| | | | | | | | |
Current liabilities: | | | | | | | | |
Foreign currency exchange contracts | | $ | — | | | $ | 0.6 | | | $ | — | | | $ | 0.6 | |
| | | | | | | | |
| | | | | | | | |
Total current liabilities at fair value | | — | | | 0.6 | | | — | | | 0.6 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total liabilities at fair value | | $ | — | | | $ | 0.6 | | | $ | — | | | $ | 0.6 | |
Fair Value Measurements on a Nonrecurring Basis
The Company's assets and liabilities that are measured at fair value on a nonrecurring basis are primarily property, plant and equipment, operating lease right-of-use assets, goodwill and other intangible assets. These fair value measurements are generally determined when there is a transaction involving those assets and liabilities, such as a purchase transaction, a business combination or an adjustment for impairment.
See Note 5, "Goodwill and Other Intangible Assets — Net", for information regarding the impairment charge resulting from the fair value measurement of the Company's indefinite-lived intangible assets in the EMEA region performed on a nonrecurring basis during the year ended December 31, 2020. The Company determined that the majority of the inputs used to value its EMEA region indefinite-lived intangible assets are unobservable inputs that fall within Level 3 of the fair value hierarchy and include the following assumptions for the impairment charge recorded during the year ended December 31, 2020:
| | | | | | | | |
Long Term Growth Rate | | 2.0% |
Discount Rate | | 12.0% |
Pre-Tax Royalty Rate | | 1.50% - 2.25% |
11. Contingencies and Significant Estimates
Product-Related and Environmental Matters
As of December 31, 2021 and 2020, the Company had reserved $42.7 million and $39.9 million, respectively, for product-related warranty claims expected to be paid. Certain of these warranty and other related claims involve matters in dispute that will ultimately be resolved by negotiations, arbitration or litigation. See Note 12, "Product Warranties", for further information.
As of December 31, 2021, the Company has various product liability lawsuits pending. For products sold outside of the U.S. and Canada, the Company is insured by third-party insurance companies. For products sold in the U.S. and Canada, the Company is insured, to the extent permitted under applicable law, with self-insurance retention levels. The Company's self-insurance retention levels vary by business and fluctuate with the Company's risk management practices.
Product liability reserves are included in "Accrued expenses and other liabilities" in the Consolidated Balance Sheets and totaled $3.4 million and $1.7 million as December 31, 2021 and 2020, respectively, consisting of $1.5 million and $0.9 million, respectively, reserved for specific cases and $1.9 million and $0.8 million, respectively, reserved using actuarial methods and anticipated to have occurred but are not yet reported as of December 31, 2021 and 2020. Based on the Company's experience in defending product liability claims, management believes the reserves are adequate for estimated case resolutions on aggregate self-insured claims and third-party insured claims. Any recoveries from insurance carriers are dependent upon the legal sufficiency of claims and solvency of insurance carriers. Such recoveries are not recorded until the associated contingencies are resolved and the recoveries are realizable.
As of December 31, 2021 and 2020, the Company held reserves for environmental matters related to certain of its current and former facilities of approximately $0.5 million and $0.8 million, respectively, which are included in "Accrued expenses and other liabilities" in the Company's Consolidated Balance Sheets. As of December 31, 2021, there have been no other claims asserted for soil or groundwater contamination at any of the Company’s other facilities, but there can be no assurance that such claims will not arise in the future. The ultimate cost of any required remediation will depend upon the results of future investigation and is not reasonably estimable. Based upon available information, the Company does not expect the ultimate costs of any required remediation at any of these facilities will have a material adverse effect on its financial condition, results of operations or cash flows individually or in the aggregate.
It is reasonably possible that the estimates for product warranty, product liability and environmental remediation costs may change based upon new information that may arise or matters that are beyond the scope of the Company's historical experience. Presently, there are no reliable methods to estimate the amount of any such potential changes.
Other Contingencies
The Company is subject to litigation, government inquiries, audits, commercial disputes, claims and other legal proceedings arising in the ordinary course of business. From time to time, the Company may be subject to audits by tax, export, customs and other governmental authorities or incur routine and non-routine fees, expenses or penalties relating to compliance with complex laws and regulations impacting the Company's business. The Company records accruals for anticipated losses related to legal and other matters, which are both probable and reasonably estimable, as well as for related legal costs as incurred. The Company believes that it has adequately accrued for such matters as of December 31, 2021 and 2020 based on the best available information. In the opinion of management, the ultimate resolution of such legal and other matters is not expected to have, individually or in the aggregate, a material adverse effect on the Company's financial condition, results of operations or cash flows.
As previously disclosed, the Company voluntarily disclosed to U.S. Customs and Border Protection ("CBP") certain errors in the declaration of imported products relating to quantity, value, classification, North American Free Trade Agreement eligibility and other matters, as well as potential violations of antidumping and countervailing duties. Following such disclosures, the Company began a comprehensive review of its import practices in order to quantify the loss of revenue to CBP. In April 2020, the Company determined based on its continued analysis and testing of relevant records of import activity, a potential range of loss was both probable and reasonably estimable. As no amount within the range of loss was more likely than any other, the Company recorded a $3.1 million charge as of March 31, 2020, representing the low end of the range of potential loss. The Company continued its analysis and testing of import activity and relevant records throughout 2020 and updated the range of loss to reflect the status of the analysis and testing results as of each of the quarters ended June 30 and September 30, 2020. As of December 31, 2020, the Company concluded its analysis and testing of import activity and determined that an amount of $3.1 million due to the CBP.
In February 2021, the Company submitted the completed analysis to CBP and remitted the aforementioned amount due. Significant judgment was required in determining the amounts due to the CBP and although the Company believes its estimate to be reasonable, no assurance can be given that the final outcome of this matter will be consistent with what has been recorded and remitted by the Company. To the extent that the final outcome of this matter is different than the amounts recorded, such differences will be recorded in the period in which such determination is made.
On January 27, 2022, one of the Company’s Mexican subsidiaries received a notification from the Mexican taxing authority of the preliminary findings identified during a tax audit for the period April 1, 2016 – February 27, 2018. The preliminary findings stated the Mexican subsidiary did not evidence the export of goods temporarily imported under Mexico’s Manufacturing, Maquila and Export Services Industries Program (“IMMEX Program”), therefore triggering the obligation for payment of import duties, fines and surcharges. In response to the notification, on February 1, 2022, the Company filed a petition outlining the Company’s disagreement with the preliminary findings as the Company believes that appropriate documentation evidencing the export of the goods has been provided to the taxing authority. To date, the Company has not received a response to its petition.
While the Company cannot predict with certainty the outcome of this tax audit, based on current known information, the Company does not believe a loss contingency is either probable or estimable. Accordingly, no loss contingency has been recorded in the Company’s financial statements as of December 31, 2021 related to this matter. However, if the final resolution of the tax matter is not favorable to the Company, a charge will be recorded in the Company’s consolidated financial statements at such time as the range of loss becomes both probable and estimable.
12. Product Warranties
In the normal course of business, the Company provides its customers with product warranties covering workmanship, and in some cases materials, on products manufactured by the Company. Such product warranties generally provide that products will be free from defects for periods ranging from 12 to 60 months, with certain equipment having longer-term warranties. If a product fails to comply with the Company’s warranty, the Company may be obligated, at its expense, to correct any defect by repairing or replacing such defective products. The Company accrues an estimate of costs that may be incurred under the product warranty at the time the product revenue is recognized. These costs include estimates of labor and materials, as necessary, associated with repair or replacement of the products. The primary factors which impact the warranty liability include the number of units shipped and historical and anticipated warranty claims. As these factors are impacted by actual experience and future expectations, the Company assesses the adequacy of its recorded warranty liability on an ongoing basis and adjusts the liability as determined necessary.
The product warranty liability activity is as follows:
| | | | | | | | | | | | | | |
(in millions) | | As of December 31, |
| 2021 | | 2020 |
Balance at the beginning of the period | | $ | 39.9 | | | $ | 43.9 | |
Additions for issuance of warranties | | 31.1 | | | 27.7 | |
Settlements (in cash or in kind) | | (28.3) | | | (32.2) | |
Currency translation impact | | — | | | 0.5 | |
Balance at the end of the period (1) | | $ | 42.7 | | | $ | 39.9 | |
(1) Long-term product warranty liabilities are included in "Other long-term liabilities" and totaled $11.8 million and $10.0 million at December 31, 2021 and 2020, respectively.
The Company also sells extended warranties, which are recorded as deferred revenue and are amortized to "Net sales" on a straight-line basis over the extended warranty period. The short-term portion of deferred revenue on extended warranties, included in "Accrued expenses and other liabilities" in the Consolidated Balance Sheets at December 31, 2021 and 2020, was $2.1 million and $1.9 million, respectively. The long-term portion of deferred revenue on warranties included in "Other long-term liabilities" in the Consolidated Balance Sheets as of both December 31, 2021 and 2020 was $3.5 million.
13. Employee Benefit Plans
The Company maintains several retirement plans for certain employees in each of its geographic business segments. The Company has established a Retirement Plan Committee to manage the operations and administration of all retirement plans and related trusts. The details of these retirement plans are included below.
Defined Benefit Plans
The Company sponsors and maintains defined benefit retirement plans ("Pension Plans") and postretirement health and other plans ("Postretirement Health and Other Plans") (collectively "Defined Benefit Plans") for certain retired and current employees at the time of their retirement. Benefits under the employee retirement plans are primarily based on years of service and compensation during the years immediately preceding retirement. The current plans are based largely upon benefit plans in place prior to the Spin-off and have been subsequently maintained by the Company and are generally closed to new participants.
The funded and unfunded positions of the Company's Defined Benefit Plans are recorded in the Consolidated Balance Sheets and the related income and expenses are recorded in the Consolidated Statements of Operations. Actuarial gains and losses that have not yet been recognized in income are recorded in AOCI until such amounts are amortized as a component of the net periodic benefit cost. The determination of the benefit obligations and the recognition of expenses related to each of the Defined Benefit Plans are dependent on various assumptions. The most significant assumptions are the discount rates and long-term expected rates of return on each of the plan's assets. Management develops each assumption using relevant Company experience in conjunction with market-related data for each individual country in which the plans exist. There have been no changes made to the valuation techniques and inputs used to measure the fair values of the Defined Benefit Plans assets and liabilities from the prior year.
The components of periodic benefit costs for the Company's Defined Benefit Plans are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except percentage data) | | Pension Plans | | Postretirement Health and Other Plans |
| Years Ended December 31, | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
Service cost - benefits earned during the year | | $ | — | | | $ | 0.1 | | | $ | 0.1 | | | $ | — | | | $ | — | | | $ | — | |
Interest cost of projected benefit obligation | | 2.5 | | | 3.8 | | | 5.2 | | | 0.1 | | | 0.2 | | | 0.2 | |
Expected return on assets | | (3.2) | | | (4.1) | | | (4.7) | | | — | | | — | | | — | |
Amortization of prior service cost | | — | | | — | | | — | | | (0.2) | | | (0.2) | | | (0.2) | |
Amortization of actuarial net loss | | 2.6 | | | 2.4 | | | 2.5 | | | 0.7 | | | 0.7 | | | 0.3 | |
| | | | | | | | | | | | |
Settlement loss recognized | | — | | | — | | | 1.2 | | | — | | | — | | | — | |
| | | | | | | | | | | | |
Net periodic benefit cost | | $ | 1.9 | | | $ | 2.2 | | | $ | 4.3 | | | $ | 0.6 | | | $ | 0.7 | | | $ | 0.3 | |
Weighted average assumptions: | | | | | | | | | | | | |
Discount rate | | 1.6 | % | | 2.4 | % | | 3.3 | % | | 2.0 | % | | 2.6 | % | | 3.8 | % |
Expected return on plan assets | | 1.8 | % | | 2.5 | % | | 3.1 | % | | N/A | | N/A | | N/A |
Rate of compensation increase | | N/A | | 1.8 | % | | 2.0 | % | | 3.0 | % | | 3.0 | % | | 3.0 | % |
Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants.
To develop the expected long-term rate of return on assets assumptions, the Company considers the historical returns and future expectations for returns in each asset class, as well as targeted asset allocation percentages within the asset portfolios.
During the first quarter of 2019, the Company took various actions to settle a portion of its pension obligations in the United Kingdom. These actions resulted in a reduction in accrued pension obligations of approximately $5.5 million and a non-cash loss of approximately $1.2 million for the accelerated recognition of unamortized losses, which is included in "Other expense (income) — net" in the Consolidated Statements of Operations for the year ended December 31, 2019.
In March 2021, the American Rescue Plan Act of 2021 (the “Act”) was signed into law. The Act provides additional relief to companies and individuals impacted by the COVID-19 pandemic and includes a reduction of the required minimum contributions to U.S. pension plans for 2021. As a result of the Act, the Company's updated required minimum contributions for the year ended December 31, 2021 for the Company's Pension Plans were $6.5 million, with no planned discretionary or non-cash contributions. The minimum contribution for the year ending December 31, 2022 for the Pension Plans is $5.7 million with no planned discretionary or non-cash contributions. The expected Company paid claims for the Postretirement Health and Other Plans are $1.2 million for the year ending December 31, 2022.
The following is a reconciliation of the changes in benefit obligation, the changes in plan assets and the funded status of the Company's Defined Benefit Plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except percentage data) | | Pension Plans | | Postretirement Health and Other Plans |
| As of December 31, | | As of December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Change in Benefit Obligations: | | | | | | | | |
Benefit obligation, beginning of year | | $ | 207.2 | | | $ | 193.4 | | | $ | 7.6 | | | $ | 7.6 | |
Service cost | | — | | | 0.1 | | | — | | | — | |
Interest cost | | 2.5 | | | 3.8 | | | 0.1 | | | 0.2 | |
Participant contributions | | — | | | — | | | 0.2 | | | 0.3 | |
| | | | | | | | |
Plan curtailments | | — | | | (0.2) | | | — | | | — | |
Plan settlements | | — | | | (0.4) | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Actuarial (gain) loss | | (8.1) | | | 18.7 | | | (0.6) | | | 0.5 | |
Currency translation adjustment | | (1.4) | | | 4.7 | | | — | | | — | |
Benefits paid | | (12.0) | | | (12.9) | | | (1.2) | | | (1.0) | |
Benefit obligation, end of year | | $ | 188.2 | | | $ | 207.2 | | | $ | 6.1 | | | $ | 7.6 | |
Change in Plan Assets: | | | | | | | | |
Fair value of plan assets, beginning of year | | $ | 184.8 | | | $ | 166.3 | | | $ | — | | | $ | — | |
Actual return on plan assets | | (1.9) | | | 18.0 | | | — | | | — | |
Employer contributions | | 6.5 | | | 9.3 | | | 1.0 | | | 0.7 | |
Participant contributions | | — | | | — | | | 0.2 | | | 0.3 | |
| | | | | | | | |
Plan settlements | | — | | | (0.4) | | | — | | | — | |
| | | | | | | | |
Currency translation adjustment | | (1.3) | | | 4.5 | | | — | | | — | |
| | | | | | | | |
Benefits paid | | (12.0) | | | (12.9) | | | (1.2) | | | (1.0) | |
Fair value of plan assets, end of year | | $ | 176.1 | | | $ | 184.8 | | | $ | — | | | $ | — | |
Unfunded status (1) | | $ | (12.1) | | | $ | (22.4) | | | $ | (6.1) | | | $ | (7.6) | |
Weighted-Average Assumptions: | | | | | | | | |
Discount rate | | 2.1 | % | | 1.6 | % | | 2.4 | % | | 2.0 | % |
Rate of compensation increase | | N/A | | N/A | | 3.0 | % | | 3.0 | % |
(1) As of both December 31, 2021 and 2020, the short-term portion of the Company's Pension Plans obligation totaled $0.9 million. The short-term portion of the Company's Postretirement Health and Other Plans obligation totaled $1.2 million, as of both December 31, 2021 and 2020. These short-term obligations are included in "Accrued expenses and other liabilities" in the Consolidated Balance Sheets.
The primary driver of the actuarial gain in the Company's Pension Plans in the year ended December 31, 2021 within the change in the benefit obligation is a result of an increase in the discount rate assumption. The primary driver of the actuarial loss in the Company's Pension Plans in the year ended and December 31, 2020 within the change in benefit obligation is a result of a decrease in the discount rate assumption.
Amounts recognized in AOCI consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Pension Plans | | Postretirement Health and Other |
| As of December 31, | | As of December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net actuarial loss | | $ | (36.9) | | | $ | (43.0) | | | $ | (2.7) | | | $ | (4.0) | |
Prior service credit | | 0.5 | | | 0.6 | | | 1.0 | | | 1.2 | |
Total amount recognized | | $ | (36.4) | | | $ | (42.4) | | | $ | (1.7) | | | $ | (2.8) | |
Assumed health care cost trend rates have a significant effect on the amounts reported for the Company's Postretirement Health and Other Plans. For measurement purposes, a 5.4% annual rate of increase in the per capita cost of covered health care benefits was assumed for the year ended December 31, 2021. The rate was assumed to decrease gradually to 4.0% for 2046 and remain at that level thereafter.
The following table summarizes the sensitivity of the Company's retirement obligations as of December 31, 2021 for retirement benefit costs of the Defined Benefit Plans and the impact of changes to key assumptions used to determine those results (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in assumption: | | Estimated increase (decrease) in pension cost for the year ended December 31, 2022 | | Estimated increase (decrease) in projected benefit obligation for the year ended December 31, 2021 | | Estimated increase (decrease) in other postretirement benefit costs for the year ended December 31, 2022 | | Estimated increase (decrease) in other postretirement benefit obligations for the year ended December 31, 2021 |
0.5% increase in discount rate | | $ | (0.5) | | | $ | (10.5) | | | $ | — | | | $ | (0.2) | |
0.5% decrease in discount rate | | $ | 0.6 | | | $ | 12.8 | | | $ | — | | | $ | 0.2 | |
0.5% increase in long-term return on assets | | $ | (0.9) | | | N/A | | N/A | | N/A |
0.5% decrease in long-term return on assets | | $ | 0.9 | | | N/A | | N/A | | N/A |
| | | | | | | | |
| | | | | | | | |
The weighted-average asset allocations of the Pension Plans asset portfolios by category are as follows:
| | | | | | | | | | | | | | |
| | As of December 31, |
| 2021 | | 2020 |
Equity | | 10.6 | % | | 11.1 | % |
Debt securities | | 50.0 | % | | 46.4 | % |
Other | | 39.4 | % | | 42.5 | % |
| | | | |
Investment Strategy
The overall objective of the Company's Pension Plans asset portfolios is to earn a rate of return over time to satisfy the benefit obligations of the Pension Plans and to maintain sufficient liquidity to pay benefits and address other cash requirements of the Pension Plans. Specific investment objectives for the Company's long-term investment strategy include reducing the volatility of pension assets relative to pension liabilities, achieving a competitive total investment return, achieving diversification between and within asset classes and managing other risks. Investment objectives for each asset class are determined based on specific risks and investment opportunities identified.
The Company reviews its long-term, strategic asset allocations annually. The Company uses various analytics to determine the optimal asset mix and considers plan liability characteristics, liquidity characteristics, funding requirements, expected rates of return and the distribution of returns. The Company identifies investment benchmarks for the asset classes in the strategic asset allocation that are market-based and viable where possible.
Actual allocations to each asset class vary from target allocations due to periodic investment strategy changes, market value fluctuations, the length of time it takes to fully implement investment allocation positions and the timing of benefit payments and contributions. The asset allocation is monitored and rebalanced on a monthly basis.
The actual allocations for the Pension Plans asset portfolios and target allocations by asset class as of December 31, 2021, are as follows:
| | | | | | | | | | | | | | |
| | Target Allocations | | Weighted Average Asset Allocations |
Equity securities | | 11.8 | % | | 10.6 | % |
Debt securities | | 49.7 | % | | 50.0 | % |
Other | | 38.5 | % | | 39.4 | % |
Risk Management
In managing the Pension Plans portfolio of plan assets, the Company reviews and manages risk associated with funded status risk, interest rate risk, market risk, counterparty risk, liquidity risk and operational risk. Liability management and asset class diversification are central to the Company's risk management approach and are integral to the overall investment strategy. Further, asset classes are constructed to achieve diversification by investment strategy, by investment manager, by industry or sector and by holding. Investment manager guidelines for publicly traded assets are specified and are monitored regularly.
Fair Value Measurements
The following tables present the Company's Pension Plans asset portfolios using the three levels of the fair value hierarchy which are based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs. The fair values are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets (in millions) | | As of December 31, 2021 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total |
Cash and cash equivalents | | $ | 2.8 | | | $ | — | | | $ | — | | | $ | 2.8 | |
Insurance group annuity contracts | | — | | | — | | | 66.7 | | | 66.7 | |
| | | | | | | | |
| | | | | | | | |
Common/collective trust funds — Government, corporate and other non-government debt | | — | | | 87.9 | | | — | | | 87.9 | |
Common/collective trust funds — Corporate equity | | — | | | 18.7 | | | — | | | 18.7 | |
| | | | | | | | |
Total | | $ | 2.8 | | | $ | 106.6 | | | $ | 66.7 | | | $ | 176.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets (in millions) | | As of December 31, 2020 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total |
Cash and cash equivalents | | $ | 0.7 | | | $ | — | | | $ | — | | | $ | 0.7 | |
Insurance group annuity contracts | | — | | | — | | | 73.8 | | | 73.8 | |
| | | | | | | | |
| | | | | | | | |
Common/collective trust funds — Government, corporate and other non-government debt | | — | | | 85.9 | | | — | | | 85.9 | |
Common/collective trust funds — Corporate equity | | — | | | 20.4 | | | — | | | 20.4 | |
Common/collective trust funds — Customized strategy | | — | | | 4.0 | | | — | | | 4.0 | |
Total | | $ | 0.7 | | | $ | 110.3 | | | $ | 73.8 | | | $ | 184.8 | |
Cash equivalents and other short-term investments, which are used to pay benefits, are primarily held in registered money market funds and are valued using a market approach based on the quoted market prices of identical instruments. Other cash equivalent and short-term investments are valued daily using a market approach with inputs that include quoted market prices for similar instruments.
Insurance group annuity contracts are valued at the present value of the future benefit payments owed by the insurance company to the plans’ participants.
Common/collective trust funds are valued at their net asset values calculated by the investment manager or sponsor of the fund and have daily or monthly liquidity.
A reconciliation of the fair value measurements of the Pensions Plans portfolio of assets using significant unobservable inputs (Level 3) from the beginning of the year to the end of the year is as follows:
| | | | | | | | | | | | | | |
(in millions) | | Insurance Contracts Years Ended December 31, |
| 2021 | | 2020 |
Beginning Balance | | $ | 73.8 | | | $ | 69.0 | |
| | | | |
Contributions | | — | | | 0.1 | |
Plan settlements | | — | | | (0.4) | |
Actual return on assets | | (1.9) | | | 7.3 | |
Benefit payments | | (4.6) | | | (4.5) | |
Foreign currency impact | | (0.6) | | | 2.3 | |
Ending Balance | | $ | 66.7 | | | $ | 73.8 | |
Projected benefit payments from the Defined Benefit Plans as of December 31, 2021 are estimated as follows:
| | | | | | | | | | | | | | |
(in millions) | | Pension Plans | | Postretirement Health and Other |
Year ending December 31: | | | | |
2022 | | $ | 11.1 | | | $ | 1.2 | |
2023 | | 11.0 | | | 1.0 | |
2024 | | 11.0 | | | 0.9 | |
2025 | | 10.8 | | | 0.6 | |
2026 | | 10.6 | | | 0.5 | |
2027-2031 | | 49.3 | | | 1.4 | |
Total | | $ | 103.8 | | | $ | 5.6 | |
The fair value of the Pension Plans' portfolio of assets for which the accumulated benefit obligation is in excess of the assets is as follows:
| | | | | | | | | | | | | | |
(in millions) | | Pension Plans |
| As of December 31, |
| 2021 | | 2020 |
Projected benefit obligation | | $ | 188.2 | | | $ | 207.2 | |
Accumulated benefit obligation | | $ | 188.2 | | | $ | 207.2 | |
Fair value of plan assets | | $ | 176.1 | | | $ | 184.8 | |
The measurement date for the Defined Benefit Plans is December 31, 2021.
The Company, through its former Lincoln Foodservice operation, participated in a multiemployer defined benefit plan under a collective bargaining agreement that covered certain of its union-represented employees. During the year ended December 31, 2013, in conjunction with the finalization of the reorganization and plant restructuring of the Lincoln Foodservice operation, the Company was deemed to have effectively withdrawn its participation in the multiemployer defined benefit plan. This withdrawal obligation is included as a component of the restructuring liability in the Consolidated Balance Sheets as described in Note 14, "Business Transformation Program and Restructuring." At inception of the withdrawal, the obligation totaled $17.5 million, of which $7.2 million and $8.6 million were outstanding as of December 31, 2021 and 2020, respectively. The remaining withdrawal obligation is payable in quarterly installments of principal and accrued interest totaling $0.5 million through April 2026. As the Company was deemed to have effectively withdrawn its participation in this plan during the year ended December 31, 2013, no further contributions have been made to the plan since that date.
Defined Contribution Plans
The Company maintains and sponsors three defined contribution retirement plans for its eligible employees and retirees: (1) the Welbilt 401(k) Retirement Plan; (2) the Welbilt Retirement Savings Plan and (3) the Welbilt Deferred Compensation Plan, each of which is further discussed below.
Welbilt 401(k) Retirement Plan
The Welbilt 401(k) Retirement Plan is a tax-qualified retirement plan available to substantially all non-union U.S. employees of the Company.
Welbilt Retirement Savings Plan
The Welbilt Retirement Savings Plan is a tax-qualified retirement plan available to certain collectively bargained U.S. employees of Welbilt, its subsidiaries and related entities.
For both the Welbilt 401(k) Retirement Plan and the Welbilt Retirement Savings Plan, the Company's portion of total expenses incurred for these plans was $3.3 million, $1.6 million, and $4.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. In March 2020, the Welbilt 401(k) Retirement Plan was amended to remove the safe harbor matching employer contributions, and effective April 2020, the Company suspended the matching contributions to participant accounts. In January 2021, the Company reinstated the matching contributions to participant accounts at the pre-suspension levels prior to April 2020.
Welbilt Deferred Compensation Plan
The Welbilt Deferred Compensation Plan is an unfunded, non-tax-qualified supplemental deferred compensation plan for highly compensated and key management employees and directors which allows participants to defer a portion of their compensation. The Company utilizes a rabbi trust to hold assets intended to satisfy the Company's obligations under the deferred compensation plan. The rabbi trust restricts the Company's use and access to the assets held but is subject to the claims of the Company's general creditors. As of December 31, 2021, the fair value of the investments held in the rabbi trust was $3.8 million and the related liability was $3.2 million. As of December 31, 2020, the fair value of the investments held in trust was $3.6 million, Company stock held in the rabbi trust was $0.4 million, at cost, and the related liability was $4.0 million.
14. Business Transformation Program and Restructuring
Business Transformation Program
During the first quarter of 2019, the Company initiated a comprehensive operational review to validate its long-term growth and margin targets and to refine its execution plans, which culminated into the launch of the Business Transformation Program ("Transformation Program") in May 2019. The Transformation Program is structured in multiple phases and is focused on specific areas of opportunity including strategic sourcing, manufacturing facility workflow redesign, distribution and administrative process efficiencies and optimizing the Company's global brand platforms.
The Company completed its Transformation Program during the quarter ended December 31, 2021. For the years ended December 31, 2021 and 2020, the Transformation Program costs consist primarily of fees for consulting services.
The Transformation Program expenses are classified as follows:
| | | | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2021 | | 2020 |
Transformation Program expense: | | | | |
Cost of sales | | $ | 1.8 | | | $ | 2.0 | |
Selling, general and administrative expenses | | 2.8 | | | 21.3 | |
Total | | $ | 4.6 | | | $ | 23.3 | |
Restructuring
The Company takes actions to improve operating efficiencies, typically in connection with recognizing cost synergies and rationalizing the cost structure of the Company, including actions associated with the Transformation Program. These actions generally include facility rationalization, headcount reductions and organizational integration activities resulting from discrete restructuring events, which are supported by approved plans for workforce reductions.
The Company's restructuring activity and balance of the restructuring liability is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | 2021 Plans | | | 2020 Plans | | 2019 Plans | | 2018 and Previous Plans | | |
| Workforce reductions | | | Workforce reductions | | Workforce reductions | | Other | | Workforce reductions | | Pension withdrawal obligation | | Total |
Restructuring liability as of December 31, 2019 | | $ | — | | | | $ | — | | | $ | 4.8 | | | $ | — | | | $ | 0.2 | | | $ | 9.9 | | | $ | 14.9 | |
Restructuring activities | | — | | | | 5.6 | | | 1.2 | | | 1.4 | | | — | | | — | | | 8.2 | |
Cash payments | | — | | | | (3.1) | | | (5.8) | | | — | | | (0.2) | | | (1.3) | | | (10.4) | |
Non-cash adjustments (1) | | — | | | | (0.1) | | | — | | | (1.4) | | | — | | | — | | | (1.5) | |
Restructuring liability as of December 31, 2020 | | — | | | | 2.4 | | | 0.2 | | | — | | | — | | | 8.6 | | | 11.2 | |
Restructuring activities | | 0.8 | | | | (0.1) | | | 0.7 | | | — | | | — | | | — | | | 1.4 | |
Cash payments | | (0.8) | | | | (2.2) | | | (0.7) | | | — | | | — | | | (1.4) | | | (5.1) | |
| | | | | | | | | | | | | | | |
Restructuring liability as of December 31, 2021 | | $ | — | | | | $ | 0.1 | | | $ | 0.2 | | | $ | — | | | $ | — | | | $ | 7.2 | | | $ | 7.5 | |
(1) Non-cash adjustments primarily consist of stock-based compensation resulting from the accelerated vesting of certain stock awards, inventory write-downs and accelerated depreciation.
As of December 31, 2021 and 2020, the current portion of the restructuring liability was $1.7 million and $4.0 million, respectively, and was included in "Accrued expenses and other liabilities" in the Consolidated Balance Sheets. As of December 31, 2021 and 2020, the long-term portion of the restructuring liability was $5.8 million and $7.2 million, respectively, and was included in "Other long-term liabilities" in the Consolidated Balance Sheets. As of both December 31, 2021 and 2020, the long-term portion of the restructuring liability is for a pension withdrawal obligation incurred in connection with the reorganization and plant restructuring of one of the Company's former operating entities and is expected to be satisfied in April of 2026 when the pension withdrawal obligation is scheduled to have been satisfied.
The Company's restructuring expense by segment is as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | December 31, |
| 2021 | | 2020 | | 2019 |
Americas | | $ | — | | | $ | 2.3 | | | $ | 3.4 | |
EMEA | | 0.8 | | | 2.4 | | | 2.6 | |
APAC | | 0.7 | | | 2.2 | | | 0.6 | |
Corporate | | (0.1) | | | 1.3 | | | 3.2 | |
Total restructuring activities | | $ | 1.4 | | | $ | 8.2 | | | $ | 9.8 | |
The Company's restructuring expense is reported in the Consolidated Statements of Operations as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Cost of sales | | $ | 0.6 | | | $ | 0.4 | | | $ | 0.4 | |
Restructuring and other expense | | 0.8 | | | 7.8 | | | 9.4 | |
Total restructuring activities | | $ | 1.4 | | | $ | 8.2 | | | $ | 9.8 | |
2019 Restructuring Activities
During the first and second quarters of 2019, the Company recognized $4.2 million and $1.2 million, respectively, totaling $5.4 million of severance and related costs resulting from a global workforce reduction and limited executive management and restructuring actions initiated during the first quarter of 2019. The severance and related costs are included in "Restructuring and other expense" in the Company's Consolidated Statements of Operations for the year ended December 31, 2019.
During the second quarter of 2019, the Company completed the closure and plant consolidation of a small manufacturing facility in Baltimore, Maryland and recognized total costs of $0.6 million, consisting of $0.2 million of inventory write-downs and $0.2 million of accelerated depreciation included in "Cost of sales" and $0.2 million of severance and related costs, which are included in "Restructuring and other expense" in the Company's Consolidated Statements of Operations for the year ended December 31, 2019.
During the fourth quarter of 2019, the Company approved restructuring actions in the Americas and APAC regions in conjunction with the Transformation Program and a restructuring action to reduce overhead in the EMEA region. As a result of these actions, the Company recorded $4.1 million of severance and related costs, consisting of $1.1 million in the Americas, $2.5 million in EMEA and $0.5 million in APAC, which are included in "Restructuring and other expense" in the Consolidated Statements of Operations for the year ended December 31, 2019. Because the restructuring actions were not fully completed at the end of 2019, the Company also incurred severance and related costs of $0.8 million in the APAC region and $0.4 million in the EMEA region and $1.0 million of accelerated depreciation in the APAC region, each of which are included in "Restructuring and other expense" for the year ended December 31, 2020. The Company also recognized $0.4 million of inventory write-down in the APAC region which is included in "Cost of sales" for the year ended December 31, 2020.
2020 Restructuring Activities
Beginning in the first quarter of 2020, the Company continued to initiate restructuring actions intended to reduce operating expenses resulting from improved efficiencies gained from the execution of the Transformation Program. During the year ended December 31, 2020, the Company recognized $3.6 million of severance and related costs resulting from workforce reductions in the Americas region and Corporate as well as limited management restructurings. For the year ended December 31, 2020, these severance and related costs, consisting of $2.3 million in the Americas region and $1.3 million in the Corporate division, are included in "Restructuring and other expense" in the Company's Consolidated Statements of Operations.
During the fourth quarter of 2020, the Company completed a workforce reduction in the EMEA region in an effort to improve the Company's cost structure and optimize operational efficiency. In connection with this action the Company recognized $2.0 million of severance and related costs which are included in "Restructuring and other expense" for the year ended December 31, 2020.
2021 Restructuring Activities
During the first quarter of 2021, the Company initiated the consolidation of a manufacturing facility in EMEA. As a result of this facility consolidation, the Company expects to incur total costs of $1.4 million to $1.6 million associated with employee retention and contract agreements and related costs and inventory write-downs. The Company recognized $0.8 million, of expenses related to employee retention and contract agreements, included in "Restructuring and other expense" in the Company's Consolidated Statements of Operations for the year ended December 31, 2021. As of December 31, 2021, the Company expects to incur remaining costs to complete the facility consolidation of $0.6 million to $0.8 million throughout the year ending December 31, 2022.
During the first quarter of 2021, the Company completed the restructuring actions in the APAC region initiated during the fourth quarter of 2019 and incurred $0.1 million of severance and related costs, included in "Restructuring and other expense" and $0.6 million of inventory write-downs included in "Cost of sales", which are both included in the Company's Consolidated Statements of Operations for the year ended December 31, 2021.
During the second quarter of 2021, the Company also completed the restructuring actions initiated during the third quarter of 2020 in the Corporate division and recognized a $0.1 million recovery included in "Restructuring and other expense" in the Company's Consolidated Statements of Operations for the year ended December 31, 2021.
As the Company completes payments on each of its approved plans, the remaining restructuring liability is adjusted for the actual amounts incurred. No material adjustments for prior period restructuring liabilities were incurred during the years ended December 31, 2021, 2020 and 2019.
15. Accumulated Other Comprehensive Loss
Comprehensive income includes foreign currency translation adjustments, changes in the fair value of certain financial derivative instruments that quality for hedge accounting and actuarial gains and losses arising from the Company's employee pension and postretirement benefit obligations.
The components of the Company's AOCI are as follows:
| | | | | | | | | | | | | | |
(in millions) | | As of December 31, |
| 2021 | | 2020 |
Accumulated other comprehensive loss: | | | | |
Foreign currency translation, net of income tax benefit of $1.4 million and $1.4 million, respectively | | $ | 9.5 | | | $ | 19.1 | |
Derivative instrument fair market value, net of income tax benefit of $1.3 million and $1.1 million, respectively | | (0.9) | | | — | |
Employee pension and postretirement benefit adjustments, net of income tax benefit of $4.9 million and $6.6 million, respectively | | (33.2) | | | (38.6) | |
Total accumulated other comprehensive loss | | $ | (24.6) | | | $ | (19.5) | |
The summary of changes in AOCI for the years ended December 31, 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation Adjustments (1) | | Gains and Losses on Cash Flow Hedges | | Pension & Postretirement | | Total |
Balance as of December 31, 2018 | | $ | (6.5) | | | $ | 0.8 | | | $ | (35.9) | | | $ | (41.6) | |
Other comprehensive income (loss) before reclassifications | | 2.7 | | | (2.5) | | | (3.7) | | | (3.5) | |
Reclassifications | | — | | | (0.4) | | | 3.8 | | | 3.4 | |
Tax effect of reclassifications | | (0.5) | | | 0.5 | | | 0.2 | | | 0.2 | |
Net current period other comprehensive income (loss) | | 2.2 | | | (2.4) | | | 0.3 | | | 0.1 | |
Balance as of December 31, 2019 | | (4.3) | | | (1.6) | | | (35.6) | | | (41.5) | |
Other comprehensive income (loss) before reclassifications | | 23.6 | | | 0.5 | | | (6.0) | | | 18.1 | |
Reclassifications | | — | | | 1.4 | | | 2.9 | | | 4.3 | |
Tax effect of reclassifications | | (0.2) | | | (0.3) | | | 0.1 | | | (0.4) | |
Net current period other comprehensive income (loss) | | 23.4 | | | 1.6 | | | (3.0) | | | 22.0 | |
Balance as of December 31, 2020 | | 19.1 | | | — | | | (38.6) | | | (19.5) | |
Other comprehensive (loss) income before reclassifications | | (9.6) | | | — | | | 4.0 | | | (5.6) | |
Reclassifications | | — | | | (1.1) | | | 3.1 | | | 2.0 | |
| | | | | | | | |
Tax effect of reclassifications | | — | | | 0.2 | | | (1.7) | | | (1.5) | |
Net current period other comprehensive (loss) income | | (9.6) | | | (0.9) | | | 5.4 | | | (5.1) | |
Balance as of December 31, 2021 | | $ | 9.5 | | | $ | (0.9) | | | $ | (33.2) | | | $ | (24.6) | |
(1) Income taxes are not provided for foreign currency translation relating to indefinite investments in foreign subsidiaries, although the income tax effects within cumulative translation does include the impact of the net investment hedge transaction. Reclassification adjustments are made to avoid including items in both comprehensive income (loss) and net earnings (loss).
Reclassifications from AOCI, net of tax, to income were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Years Ended December 31, | | Location in Consolidated Statements of Operations |
| 2021 | | 2020 | | 2019 | |
Gains (losses) on cash flow hedges: | | | | | | | | |
Foreign currency exchange contracts | | $ | 1.1 | | | $ | (0.4) | | | $ | (0.9) | | | Cost of sales |
Commodity contracts | | — | | | (1.0) | | | (1.3) | | | Cost of sales |
Interest expense | | — | | | — | | | 2.6 | | | Interest expense |
Gains (losses) on cash flow hedges, before tax | | 1.1 | | | (1.4) | | | 0.4 | | | |
Tax effect | | (0.2) | | | 0.3 | | | 0.1 | | | Income taxes |
Gains (losses) on cash flow hedges, net of tax | | $ | 0.9 | | | $ | (1.1) | | | $ | 0.5 | | | |
| | | | | | | | |
Amortization of pension and postretirement items: | | | | | | | | |
Amortization of prior service cost | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | | | Other expense (income) — net |
Actuarial losses | | (3.3) | | | (3.1) | | | (2.8) | | | Other expense (income) — net |
Pension settlement | | — | | | — | | | (1.2) | | | Other expense (income) — net |
Amortization of pension and postretirement items, before tax | | (3.1) | | | (2.9) | | | (3.8) | | | |
Tax effect | | 0.7 | | | 0.7 | | | 0.4 | | | Income tax (benefit) expense |
Amortization of pension and postretirement items, net of tax | | $ | (2.4) | | | $ | (2.2) | | | $ | (3.4) | | | |
| | | | | | | | |
Total reclassifications, net of tax | | $ | (1.5) | | | $ | (3.3) | | | $ | (2.9) | | | |
16. Leases
The Company enters into contracts to lease real estate, manufacturing and office equipment and vehicles. Operating leases result in a straight-line lease expense, while the accounting for finance leases results in a front-loaded expense pattern. The Company’s most significant leases are for real estate and have remaining contract lease terms ranging from less than one to 20 years.
The Company does not have any contracts where it is the lessor, does not sublease any of its leased assets to third-parties and is not party to any lease contracts with related parties. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. As a lessee, the Company periodically reassesses and remeasures its leases based on certain triggering events or conditions, including whether a contract is or contains a lease, assessment of lease term and purchase options, measurement of lease payments, assessment of lease classification and discount rate. No impairment indicators were identified as of or during the year ended December 31, 2021.
As discussed in Note 2, "Basis of Presentation and Summary of Significant Accounting Policies", effective January 1, 2019, the Company adopted the provisions of Accounting Standards Update ("ASU") ASU 2016-02, "Leases (Topic 842)", and changed its policy for lease accounting prospectively for lease agreements entered into or reassessed from the date of the adoption.
The components of the Company's lease expense are as follows:
| | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
(in millions) | | | | 2021 | | 2020 |
Operating lease expense | | | | $ | 12.7 | | | $ | 14.9 | |
Finance lease expense: | | | | | | |
Depreciation of assets | | | | 1.1 | | | 1.2 | |
Interest on lease liabilities | | | | 0.1 | | | 0.1 | |
Short-term lease expense | | | | 2.5 | | | 2.4 | |
Variable lease expense | | | | 0.5 | | | 0.5 | |
Total lease expense | | | | $ | 16.9 | | | $ | 19.1 | |
The supplemental balance sheet information for the Company's leases is as follows:
| | | | | | | | | | | | | | |
| | As of December 31, |
(in millions, except lease term and discount rate) | | 2021 | | 2020 |
Operating leases: | | | | |
| | | | |
Operating lease right-of-use assets | | $ | 44.2 | | $ | 47.5 |
| | | | |
Current operating lease liabilities | | $ | 9.1 | | $ | 9.7 |
Non-current operating lease liabilities | | 35.3 | | 37.7 |
Total operating lease liabilities | | $ | 44.4 | | $ | 47.4 |
| | | | |
Finance leases: | | | | |
Property, plant and equipment, at cost | | $ | 4.5 | | $ | 5.4 |
Accumulated depreciation | | (3.0) | | (2.8) |
Total finance leases - property and equipment — net | | $ | 1.5 | | $ | 2.6 |
| | | | |
Current obligations of finance leases | | $ | 0.9 | | $ | 1.0 |
Non-current finance lease liabilities | | 0.7 | | 1.2 |
Total finance lease liabilities | | $ | 1.6 | | $ | 2.2 |
| | | | |
Weighted average remaining lease term (in years): | | | | |
Operating leases | | 6.7 | | 6.8 |
Finance leases | | 2.3 | | 2.8 |
| | | | |
Weighted average discount rate: | | | | |
Operating leases | | 7.0 | % | | 7.1 | % |
Finance leases | | 4.4 | % | | 4.8 | % |
The assets associated with operating leases are included in "Operating lease right-of-use assets" with the current and non-current liabilities included in "Accrued expenses and other liabilities" and "Operating lease liabilities," respectively, in the Company's Consolidated Balance Sheets. The assets associated with finance leases are included in "Property, plant and equipment — net" with the current and non-current liabilities recognized in "Current portion of long-term debt and finance leases" and "Long-term debt and finance leases," respectively, in the Company's Consolidated Balance Sheets.
The supplemental cash flow information for the Company's leases is as follows:
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in millions) | | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows used in operating leases | | $ | 13.3 | | | $ | 14.2 | |
Operating cash flows used in financing leases | | $ | 0.1 | | | $ | 0.1 | |
Financing cash flows used in financing leases | | $ | 1.2 | | | $ | 1.3 | |
Right-of-use assets obtained in exchange for lease obligations: | | | | |
Operating Leases | | $ | 7.9 | | | $ | 19.8 | |
Finance Leases | | $ | 0.5 | | | $ | 0.9 | |
The following table presents the future maturities of the Company's lease liabilities as of December 31, 2021:
| | | | | | | | | | | | | | |
(in millions) | | Operating | | Financing |
Year ending December 31: | | | | |
2022 | | $ | 11.6 | | | $ | 1.0 | |
2023 | | 9.9 | | | 0.3 | |
2024 | | 8.2 | | | 0.2 | |
2025 | | 6.3 | | | 0.1 | |
2026 | | 4.6 | | | 0.1 | |
Thereafter | | 16.1 | | | — | |
Total lease payments | | 56.7 | | | 1.7 | |
Less: imputed interest | | (12.3) | | | (0.1) | |
Total lease obligations | | $ | 44.4 | | | $ | 1.6 | |
| | | | |
| | | | |
17. Stock-Based Compensation
The Company's 2016 Plan authorizes the Company to grant officers, employees and non-employee members of the Company's Board of Directors stock options awards, restricted stock awards and units, performance share awards and units, and other types of stock-based and cash awards. All awards are recorded at the fair market value of the Company's common stock on the date of grant. In addition, the 2016 Plan provides for an adjustment and replacement of certain awards of MTW common stock that were outstanding immediately prior to the Spin-Off through the issuance of replacement awards from the Company. As of December 31, 2021, the maximum number of shares of common stock available for issuance pursuant to the 2016 Plan was 9.7 million.
The Company's stock-based compensation expense is included in the following financial statement line items:
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | Years Ended December 31, |
| | | | | 2021 | | 2020(1) | | 2019 |
Stock-based compensation expense: | | | | | | | | | | |
Selling, general and administrative expenses | | | | | | $ | 15.0 | | | $ | 5.1 | | | $ | 6.4 | |
| | | | | | | | | | |
Restructuring and other expense | | | | | | — | | | (0.4) | | | 0.9 | |
Total stock-based compensation expense | | | | | | $ | 15.0 | | | $ | 4.7 | | | $ | 7.3 | |
(1) Stock-based compensation expense for the year ended December 31, 2020 is inclusive of a $1.2 million and $0.3 million of contra-expense included in "Selling, general and administrative expenses" and "Restructuring and other expense", respectively, which is representative of an adjustment to the expected achievement percentage of the Company's 2019 tranche of performance share units from 100% to 0%.
Stock-based compensation expense included in "Restructuring and other expense" in the Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 is the result of the accelerated vesting of certain equity awards in connection with various restructuring events and adjustments to expected achievement percentages of performance share units for employees impacted by restructuring actions. These events are described in Note 14, "Business Transformation Program and Restructuring."
Stock-based compensation expense by award type is as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Stock-based compensation expense: | | | | | | |
Stock options | | $ | 3.0 | | | $ | 1.8 | | | $ | 1.5 | |
Restricted stock awards and units | | 6.8 | | | 4.0 | | | 3.8 | |
Performance share units | | 5.2 | | | (1.1) | | | 2.0 | |
Total stock-based compensation expense | | $ | 15.0 | | | $ | 4.7 | | | $ | 7.3 | |
Stock Options
Stock option awards to officers and employees become exercisable in 25% increments annually over a four-year period beginning on the first anniversary of the grant date and expire ten years from the date of grant.
A summary of the Company's stock option activity for the year ended December 31, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except weighted average exercise price and contractual life) | | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
Options outstanding as of January 1, 2021 | | 2.1 | | | $ | 15.85 | | | 6.2 | | $ | — | |
Granted | | 0.3 | | | $ | 14.78 | | | | | |
Exercised | | (1.2) | | | $ | 15.52 | | | | | |
Forfeited | | — | | | $ | 14.86 | | | | | |
Canceled | | (0.2) | | | $ | 15.85 | | | | | |
Options outstanding as of December 31, 2021 (1) | | 1.0 | | | $ | 16.01 | | | 6.4 | | $ | 7.3 | |
| | | | | | | | |
Options vested or expected to vest as of December 31, 2021 (2) | | 0.9 | | | $ | 16.03 | | | 6.4 | | $ | 7.2 | |
| | | | | | | | |
Options exercisable as of December 31, 2021 | | 0.4 | | | $ | 17.68 | | | 4.5 | | $ | 2.6 | |
(1) The outstanding stock options as of December 31, 2021 have exercise prices ranging from $6.91 to $23.14 per share.
(2) The number of options expected to vest is total unvested options less estimated forfeitures.
The Company uses the Black-Scholes valuation model to value stock options. The volatility assumptions are based on a weighting of a peer group of publicly-traded companies and the Company's life-to-date historical volatility since the Spin-off. The risk-free rates are based on ten-year U.S. Treasury rates in effect at the time of the stock grant. The expected stock option life represents the period of time that the stock options granted are expected to be outstanding and is based on historical experience.
The assumptions used in the Black-Scholes option pricing model and the weighted average fair value of option awards granted are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Expected life (years) | | 6.0 | | 6.0 | | 6.0 |
Risk-free interest rate | | 0.8 | % | | 1.3 | % | | 2.5 | % |
Expected volatility | | 48.6 | % | | 31.9 | % | | 31.0 | % |
Expected dividend yield | | — | % | | — | % | | — | % |
The following represents stock option compensation information:
| | | | | | | | | | | | | | | | | | | | |
(in millions, except weighted average grant date fair value per option granted) | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Weighted average grant date fair value | | $ | 6.84 | | | $ | 4.66 | | | $ | 5.27 | |
Fair value of options vested | | $ | 3.8 | | | $ | 1.6 | | | $ | 1.5 | |
Intrinsic value of options exercised | | $ | 9.2 | | | $ | 0.7 | | | $ | 2.8 | |
Excess tax benefit for tax deductions related to the exercise of stock options | | $ | 2.6 | | | $ | 0.1 | | | $ | 0.9 | |
Cash received from option exercises, net of tax withholding | | $ | 16.2 | | | $ | 0.9 | | | $ | 2.5 | |
Tax benefits for stock-option compensation expense | | $ | 1.5 | | | $ | 0.4 | | | $ | 0.3 | |
As of December 31, 2021, the Company had $1.5 million of unrecognized compensation expense before tax related to stock options, which is expected to be recognized over a weighted average period of 1.8 years.
Restricted Stock Awards and Units
Beginning in 2019, restricted stock granted to employees generally cliff vest after three years or vest equally over three years beginning on the first anniversary from the date of grant. For awards granted in 2018 and 2017, restricted stock granted to employees generally vests equally over three years beginning on the first anniversary from the date of grant. Restricted stock granted to the Company's directors, generally cliff vests after one year from the date of grant for awards made during the years ended December 31, 2019 and 2018 and two years from the date of grant for awards made during the year ended December 31, 2017. Restricted stock awards made to the chairperson of the Board of Directors vest immediately.
The Company's restricted stock activity for the year ended December 31, 2021 is as follows:
| | | | | | | | | | | | | | |
(in millions, except weighted average grant date fair value) | | Restricted Stock | | Weighted Average Grant Date Fair Value |
Unvested as of January 1, 2021 | | 0.8 | | | $ | 11.41 | |
Granted | | 0.4 | | | $ | 16.21 | |
Vested (1) | | (0.6) | | | $ | 12.40 | |
| | | | |
Unvested as of December 31, 2021 | | 0.6 | | | $ | 13.95 | |
(1) During the year ended December 31, 2021, the vesting of 0.3 million shares were accelerated.
The Company's restricted stock expense is as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions, except weighted average grant date fair value per award granted) | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Weighted average grant date fair value | | $ | 16.21 | | | $ | 10.36 | | | $ | 15.29 | |
Fair value of awards vested | | $ | 11.5 | | | $ | 1.3 | | | $ | 5.4 | |
Tax benefits for restricted stock compensation expense | | $ | 2.4 | | | $ | 0.7 | | | $ | 0.7 | |
As of December 31, 2021, the Company had $4.4 million of unrecognized compensation expense before tax related to restricted stock, which is expected to be recognized over a weighted average period of 1.9 years.
Performance Share Units
The Company's performance share units ("PSUs") cliff vest after three years. The number of PSUs that vest is determined for each grant based on the achievement of certain Company performance criteria over the 3-year period, as set forth in the award agreement, and may range from zero to 200% of the target shares granted. The PSUs are settled in shares of the Company's common stock, with holders receiving one share of common stock for each PSU that vests. Compensation expense for PSUs is recognized over the vesting period when it is probable the performance criteria will be achieved.
As of December 31, 2021, the following PSU programs were ongoing:
| | | | | | | | | | | | | | |
Award Date | | PSUs Outstanding (in millions) | | Expected Vesting Threshold |
| | | | |
2020 Program | | 0.1 | | | 53 | % |
2021 Program | | 0.3 | | | — | % |
Total PSUs outstanding | | 0.4 | | | |
A summary of activity for the Company's PSUs for the year ended December 31, 2021 is as follows:
| | | | | | | | | | | | | | |
(in millions, except weighted average grant date fair value) | | Performance Share Units | | Weighted Average Grant Date Fair Value |
Unvested as of January 1, 2021 | | 0.5 | | | $ | 14.53 | |
Granted | | 0.2 | | | $ | 14.77 | |
Vested (1) | | (0.3) | | | $ | 15.12 | |
| | | | |
Unvested as of December 31, 2021 | | 0.4 | | | $ | 14.49 | |
(1) The vested PSUs are based on the target amount of the award for the 2019 Program. In accordance with the terms of the underlying award agreements, the actual shares earned and distributed for the three-year performance period ended December 31, 2021 was 1% of the target shares granted, rounded up the nearest whole share. Additionally, the vesting of 0.2 million shares were accelerated during the year ended December 31, 2021.
The following represents PSU information for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
(in millions, except weighted average grant date fair value per award granted) | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Weighted average grant date fair value | | $ | 14.77 | | | $ | 13.94 | | | $ | 15.11 | |
Fair value of awards vested | | $ | 0.1 | | | $ | 0.2 | | | $ | 2.0 | |
Tax benefits (expenses) for PSU compensation expense | | $ | 1.6 | | | $ | (0.3) | | | $ | 0.5 | |
As of December 31, 2021, the Company had $0.3 million of unrecognized compensation expense before tax related to PSUs, which is expected to be recognized over a weighted average period of 1.7 years.
18. Other Expense (Income) — Net
The components of "Other (income) expense — net" in the Consolidated Statements of Operations are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | | |
| | | | | | |
Pension and post-retirement expense | | $ | 2.5 | | | $ | 2.8 | | | $ | 4.6 | |
Foreign currency transaction losses (gains) | | 6.0 | | | (5.7) | | | 0.7 | |
| | | | | | |
Other | | (1.0) | | | (1.7) | | | (4.4) | |
Other expense (income) — net | | $ | 7.5 | | | $ | (4.6) | | | $ | 0.9 | |
19. Earnings (Loss) Per Share
The Company presents earnings (loss) per share on a basic and diluted basis. Basic earnings (loss) per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the reported period. Diluted earnings per share includes the dilutive effect of common stock equivalents consisting of stock options, restricted stock units and performance share units, using the treasury stock method. Performance share units, which are considered contingently issuable, are considered dilutive when the related performance criterion has been met.
As the Company reported net earnings for the year ended December 31, 2021 and December 31, 2019, basic and diluted earnings per share are calculated as outlined above. As the Company reported a net loss for the year ended December 31, 2020, the weighted average shares outstanding is the same for both the basic loss per share and diluted loss per share calculations as the inclusion of potential shares of common stock equivalents would be antidilutive.
The components of weighted average basic and diluted shares outstanding are as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions, except share and per share data) | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net earnings (loss) | | $ | 70.3 | | | $ | (7.4) | | | $ | 55.9 | |
| | | | | | |
Weighted average shares outstanding — Basic | | 142,089,570 | | | 141,491,326 | | | 140,953,496 | |
| | | | | | |
Effect of dilutive securities: | | | | | | |
Stock options | | 426,895 | | | — | | | 224,860 | |
Unvested restricted stock units | | 573,561 | | | — | | | 245,416 | |
Unvested performance share units | | 44,434 | | | — | | | 144,013 | |
Effect of dilutive securities | | 1,044,890 | | | — | | | 614,289 | |
| | | | | | |
Weighted average shares outstanding — Diluted | | 143,134,460 | | | 141,491,326 | | | 141,567,785 | |
| | | | | | |
Earnings (loss) per share — Basic | | $ | 0.49 | | | $ | (0.05) | | | $ | 0.40 | |
Earnings (loss) per share — Diluted | | $ | 0.49 | | | $ | (0.05) | | | $ | 0.39 | |
For the years ended December 31, 2021 and December 31, 2019, there were 0.1 million and 1.2 million securities, respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive. In addition, certain performance share units whose conditions were not met at the end of the reporting periods have also been excluded from the computation of earnings per share.
The Company did not declare or pay dividends to its stockholders during the years ended December 31, 2021, 2020 and 2019.
The following table summarizes the total number of shares of common stock issuable pursuant to the Company's outstanding stock-based compensation awards. As a result of the Company's net loss for the year ended December 31, 2020, all of the potentially issuable common stock was excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive, even though the exercise price could be less than the average market price of the common shares.
As of December 31, 2020, potentially issuable shares of common stock consisted of the following:
| | | | | | | | |
| | |
Potential issuable shares of common stock: | | |
Stock options | | 2,136,827 | |
Unvested restricted stock units | | 808,363 | |
Unvested performance share units(1) | | 648,590 | |
Total potential shares of common stock | | 3,593,780 | |
(1) The number of performance share units that vest is determined for each grant based on the achievement of certain Company performance criteria over the 3 year period, as set forth in each respective award agreement, and may range from zero to 200% of the target shares granted. The unvested performance share units are presented at 100% achievement of the performance target for determination of potential issuable shares of common stock.
20. Business Segments
The Company identifies its geographic business segments using the "management approach," which designates the internal organization used by management for making operating decisions and assessing performance as the source for determining the Company's geographic business segments. Management organizes and manages the business based on three geographic business segments: the Americas, EMEA, and APAC. The accounting policies of the Company's geographic business segments are the same as those described in Note 2, "Basis of Presentation and Summary of Significant Accounting Policies."
The Company evaluates segment performance based on an "Adjusted Operating EBITDA" metric. Adjusted Operating EBITDA, a non-GAAP financial measure, 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, separation expense, loss on modification or extinguishment of debt, acquisition-related transaction and integration costs, Transformation Program expense and certain other items. In addition, certain corporate-level expenses and eliminations are not allocated to the segments. These unallocated expenses include corporate overhead, stock-based compensation expense and certain other non-operating expenses. The Company's presentation of Adjusted Operating EBITDA may not be comparable to similar measures used by other companies and are not necessarily indicative of the results of operations that would have occurred had each operating business segment been an independent, stand-alone entity during the periods presented.
During the first quarter of 2020, the Company revised the allocation of certain of its functional expenses between the corporate-level and the geographic business segments. Management believes the revised allocation methodology better aligns the operating results of the geographic business segments with how management assesses performance and makes operating decisions. The prior periods segment results and related disclosures have been recast to conform to the current period presentation. These changes did not impact the Company's previously reported consolidated financial results.
The following table presents financial information relating to the Company's geographic business segments, reconciled to "Net sales" and "Earnings (loss) before income taxes " included in the Company's Consolidated Statements of Operations presented in accordance with U.S. GAAP as follows:
| | | | | | | | | | | | | | | | | | | | | | |
(in millions, except percentage data) | | Years Ended December 31, | | |
| 2021 | | 2020 | | 2019 | | |
Net sales: | | | | | | | | |
Americas | | $ | 1,185.8 | | | $ | 867.0 | | | $ | 1,208.4 | | | |
EMEA | | 447.1 | | | 292.6 | | | 392.7 | | | |
APAC | | 261.1 | | | 202.1 | | | 252.3 | | | |
Elimination of intersegment sales | | (347.1) | | | (208.3) | | | (259.5) | | | |
Total net sales | | $ | 1,546.9 | | | $ | 1,153.4 | | | $ | 1,593.9 | | | |
| | | | | | | | |
Segment Adjusted Operating EBITDA: | | | | | | | | |
Americas | | $ | 219.7 | | | $ | 155.5 | | | $ | 237.6 | | | |
EMEA | | 86.7 | | | 46.2 | | | 70.6 | | | |
APAC | | 40.7 | | | 31.2 | | | 40.7 | | | |
Total Segment Adjusted Operating EBITDA | | 347.1 | | | 232.9 | | | 348.9 | | | |
Corporate and unallocated expenses | | (71.7) | | | (62.0) | | | (62.7) | | | |
Depreciation expense | | (22.2) | | | (20.7) | | | (21.1) | | | |
Amortization expense | | (40.9) | | | (40.6) | | | (39.8) | | | |
Transaction costs (1) | | (26.4) | | | (0.2) | | | (1.1) | | | |
Other items (2) | | 2.1 | | | (3.2) | | | (4.5) | | | |
Transformation Program expense (3) | | (4.6) | | | (23.3) | | | (35.3) | | | |
| | | | | | | | |
Restructuring activities (4) | | (1.4) | | | (8.2) | | | (9.8) | | | |
Loss from impairment and disposal of assets — net | | (0.4) | | | (11.6) | | | (0.7) | | | |
Earnings from operations | | 181.6 | | | 63.1 | | | 173.9 | | | |
Interest expense | | (74.9) | | | (81.4) | | | (97.3) | | | |
| | | | | | | | |
| | | | | | | | |
Other (expense) income — net | | (7.5) | | | 4.6 | | | (0.9) | | | |
Earnings (loss) before income taxes | | $ | 99.2 | | | $ | (13.7) | | | $ | 75.7 | | | |
(1) Transaction costs are associated with acquisition and integrated-related activities. Transaction costs for the year ended December 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 ended December 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 ended December 31, 2020 and 2019, respectively. |
(2) Other items are costs which are not representative of the Company's operational performance. For the year ended December 31, 2021, other items consist primarily of a partial recovery of $2.0 million from the diversion of funds in 2018 from one of the Company's EMEA locations and is included in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. For the year ended December 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 expenses" 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 ended December 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. |
(3) Transformation Program expense includes consulting and other costs associated with executing the Company's Transformation Program initiatives. Refer to Note 14, "Business Transformation Program and Restructuring", for discussion of the impact on the Consolidated Statements of Operations. |
(4) Restructuring activities include costs associated with actions to improve operating efficiencies and rationalization of the Company's cost structure. Refer to Note 14, "Business Transformation Program and Restructuring", for discussion of the impact on the Consolidated Statements of Operations. |
| | | | | | | | |
Adjusted Operating EBITDA % by segment (5): | | | | | | | | |
Americas | | 18.5 | % | | 17.9 | % | | 19.7 | % | | |
EMEA | | 19.4 | % | | 15.8 | % | | 18.0 | % | | |
APAC | | 15.6 | % | | 15.4 | % | | 16.1 | % | | |
(5) Adjusted Operating EBITDA % is calculated by dividing Adjusted Operating EBITDA by net sales for each respective segment. | | |
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Third-party net sales by geographic area (6): | | | | | | |
United States | | $ | 973.4 | | | $ | 725.0 | | | $ | 991.8 | |
Other Americas | | 87.8 | | | 60.4 | | | 97.8 | |
EMEA | | 294.3 | | | 217.5 | | | 308.9 | |
APAC | | 191.4 | | | 150.5 | | | 195.4 | |
Total net sales by geographic area | | $ | 1,546.9 | | | $ | 1,153.4 | | | $ | 1,593.9 | |
(6) Net sales presented in this table are attributed to geographic regions based on location of customer. |
| | | | | | |
Capital expenditures: | | | | | | |
Americas | | $ | 12.8 | | | $ | 14.5 | | | $ | 24.3 | |
EMEA | | 8.1 | | | 1.5 | | | 2.9 | |
APAC | | 1.2 | | | 1.6 | | | 2.6 | |
Corporate | | 3.8 | | | 2.5 | | | 4.1 | |
Total capital expenditures | | $ | 25.9 | | | $ | 20.1 | | | $ | 33.9 | |
| | | | | | |
Depreciation: | | | | | | |
Americas | | $ | 12.9 | | | $ | 11.5 | | | $ | 14.1 | |
EMEA | | 3.2 | | | 3.1 | | | 3.2 | |
APAC | | 2.0 | | | 3.4 | | | 2.7 | |
Corporate | | 4.1 | | | 3.6 | | | 1.3 | |
Total depreciation | | $ | 22.2 | | | $ | 21.6 | | | $ | 21.3 | |
| | | | | | | | | | | | | | |
(in millions) | | As of December 31, |
| 2021 | | 2020 |
Property, plant and equipment — net by geographic area: | | | | |
United States | | $ | 77.3 | | | $ | 79.0 | |
Other Americas | | 26.6 | | | 24.9 | |
EMEA | | 18.6 | | | 11.3 | |
APAC | | 13.1 | | | 13.9 | |
Total property, plant and equipment | | $ | 135.6 | | | $ | 129.1 | |
| | | | |
Assets by geographic business segment: | | | | |
Americas | | $ | 1,587.1 | | | $ | 1,488.0 | |
EMEA | | 362.3 | | | 347.6 | |
APAC | | 218.8 | | | 209.0 | |
Corporate | | 109.4 | | | 97.0 | |
Total assets | | $ | 2,277.6 | | | $ | 2,141.6 | |
Net sales by product class and geographic business segment are as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Year Ended December 31, 2021 |
| Commercial Foodservice Equipment | | Aftermarket Parts and Support | | Total |
Americas | | $ | 869.9 | | | $ | 179.6 | | | $ | 1,049.5 | |
EMEA | | 253.9 | | | 51.3 | | | 305.2 | |
APAC | | 161.0 | | | 31.2 | | | 192.2 | |
Total net sales | | $ | 1,284.8 | | | $ | 262.1 | | | $ | 1,546.9 | |
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Year Ended December 31, 2020 |
| Commercial Foodservice Equipment | | Aftermarket Parts and Support | | Total |
Americas | | $ | 656.1 | | | $ | 118.5 | | | $ | 774.6 | |
EMEA | | 180.0 | | | 43.5 | | | 223.5 | |
APAC | | 130.2 | | | 25.1 | | | 155.3 | |
Total net sales | | $ | 966.3 | | | $ | 187.1 | | | $ | 1,153.4 | |
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Year Ended December 31, 2019 |
| Commercial Foodservice Equipment | | Aftermarket Parts and Support | | Total |
Americas | | $ | 896.3 | | | $ | 179.0 | | | $ | 1,075.3 | |
EMEA | | 265.2 | | | 48.0 | | | 313.2 | |
APAC | | 174.3 | | | 31.1 | | | 205.4 | |
Total net sales | | $ | 1,335.8 | | | $ | 258.1 | | | $ | 1,593.9 | |