WELBILT, INC., 10-Q filed on 5/8/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2019
May 03, 2019
Document and entity information    
Entity Registrant Name Welbilt, Inc.  
Trading Symbol WBT  
Entity Central Index Key 0001650962  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Document Type 10-Q  
Document Period End Date Mar. 31, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Entity Common Stock, Shares Outstanding   140,998,588
v3.19.1
Consolidated Statements of Operations - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Income Statement [Abstract]    
Net sales $ 375.3 $ 350.4
Cost of sales 248.8 224.2
Gross profit 126.5 126.2
Selling, general and administrative expenses 88.3 76.4
Amortization expense 9.5 7.9
Restructuring expense 4.2 0.4
Gain from disposal of assets — net 0.0 (0.1)
Earnings from operations 24.5 41.6
Interest expense 24.0 20.3
Other expense — net 3.0 8.5
(Loss) earnings before income taxes (2.5) 12.8
Income taxes 0.1 0.4
Net (loss) earnings $ (2.6) $ 12.4
Per share data    
(Loss) earnings per share - Basic (in dollars per share) $ (0.02) $ 0.09
(Loss) earnings per share - Diluted (in dollars per share) $ (0.02) $ 0.09
Weighted average shares outstanding - Basic (in shares) 140,612,213 139,708,723
Weighted average shares outstanding - Diluted (in shares) 140,612,213 140,970,543
v3.19.1
Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Statement of Comprehensive Income [Abstract]    
Net (loss) earnings $ (2.6) $ 12.4
Other comprehensive (loss) income, net of tax:    
Unrealized (loss) gain on derivatives (1.0) 2.0
Employee pension and post-retirement benefits (1.2) 0.5
Total other comprehensive (loss) income, net of tax (2.2) 2.5
Comprehensive (loss) income $ (4.8) $ 14.9
v3.19.1
Consolidated Balance Sheets - USD ($)
$ in Millions
Mar. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 55.3 $ 70.4
Restricted cash 0.0 2.8
Short-term investment 32.8 32.0
Accounts receivable, less allowance of $4.1 and $3.9 at March 31, 2019 and December 31, 2018, respectively 212.8 112.5
Inventories — net 205.7 190.6
Prepaids and other current assets 34.4 32.2
Total current assets 541.0 440.5
Property, plant and equipment — net 119.3 119.0
Operating lease right-of-use assets 35.7 0.0
Goodwill 933.6 935.6
Other intangible assets — net 533.8 546.7
Other non-current assets 28.9 33.2
Total assets 2,192.3 2,075.0
Current liabilities:    
Accounts payable 124.9 151.0
Accrued expenses and other liabilities 155.3 183.7
Short-term borrowings and current portion of finance leases 1.2 16.1
Product warranties 29.7 27.9
Total current liabilities 311.1 378.7
Long-term debt and finance leases 1,493.4 1,321.8
Deferred income taxes 103.4 104.3
Pension and postretirement health obligations 39.8 39.2
Operating lease liabilities 22.1 0.0
Other long-term liabilities 37.2 44.6
Total non-current liabilities 1,695.9 1,509.9
Commitments and contingencies (Note 12)
Total equity:    
Common stock ($0.01 par value, 300,000,000 shares authorized, 140,857,204 shares and 140,252,693 shares issued and 140,857,204 shares and 140,252,693 shares outstanding at March 31, 2019 and December 31, 2018, respectively) 1.4 1.4
Additional paid-in capital (deficit) (38.0) (41.5)
Retained earnings 266.0 268.4
Accumulated other comprehensive loss (43.8) (41.6)
Treasury stock, at cost, 53,015 shares and 53,308 shares, respectively (0.3) (0.3)
Total equity 185.3 186.4
Total liabilities and equity $ 2,192.3 $ 2,075.0
v3.19.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Accounts receivable allowance $ 4.1 $ 3.9
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, authorized (in shares) 300,000,000 300,000,000
Common stock, issued (in shares) 140,857,204 140,252,693
Common stock, outstanding (in shares) 140,857,204 140,252,693
Treasury stock (in shares) 53,015 53,308
v3.19.1
Consolidated Statements of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Cash flows from operating activities    
Net (loss) earnings $ (2.6) $ 12.4
Adjustments to reconcile net (loss) earnings to cash used in operating activities:    
Depreciation 4.9 4.2
Amortization of intangible assets 9.5 7.9
Amortization of debt issuance costs 1.2 1.4
Deferred income taxes 0.0 (1.6)
Stock-based compensation expense 2.9 3.2
Gain from disposal of assets — net 0.0 (0.1)
Pension settlement 1.2 0.0
Gain on remeasurement of debt and other realized foreign currency derivative (0.8) 0.0
Changes in operating assets and liabilities, excluding the effects of the business acquisition:    
Accounts receivable (296.2) (130.9)
Inventories (14.5) (23.0)
Other assets (2.0) (1.5)
Accounts payable (26.7) 8.4
Other current and long-term liabilities (33.9) (39.1)
Net cash used in operating activities (357.0) (158.7)
Cash flows from investing activities    
Cash receipts on beneficial interest in sold receivables 196.0 127.9
Capital expenditures (4.8) (3.7)
Purchase of short-term investment 0.0 (35.0)
Proceeds from maturity of short-term investment 0.0 20.7
Other 0.2 0.3
Net cash provided by investing activities 191.4 110.2
Cash flows from financing activities    
Proceeds from long-term debt 196.5 74.0
Repayments on long-term debt and finance leases (32.8) (19.2)
Debt issuance costs 0.0 (0.1)
Repayment of short-term borrowings (15.0) 0.0
Payment of contingent consideration (0.8) 0.0
Exercises of stock options 0.6 2.5
Payments on tax withholdings for equity awards (1.8) (2.0)
Net cash provided by financing activities 146.7 55.2
Effect of exchange rate changes on cash 1.0 3.6
Net (decrease) increase in cash and cash equivalents and restricted cash (17.9) 10.3
Balance at beginning of period 73.2 108.8
Balance at end of period 55.3 119.1
Supplemental disclosures of cash flow information:    
Cash paid for income taxes, net of refunds 11.0 10.4
Cash paid for interest, net of related hedge settlements 23.3 26.0
Supplemental disclosures of non-cash activities:    
Non-cash financing activity: Equipment acquired through leasing arrangements 0.8 0.0
Non-cash investing activity: Beneficial interest obtained in exchange for securitized receivables $ 238.6 $ 169.2
v3.19.1
Consolidated Statements of Equity - USD ($)
$ in Millions
Total
Common Stock
Additional Paid-In Capital (Deficit)
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Beginning balance (in shares) at Dec. 31, 2017   139,491,860        
Beginning balance at Dec. 31, 2017 $ 103.6 $ 1.4 $ (54.7) $ 189.1 $ (32.0) $ (0.2)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net (loss) earnings 12.4     12.4    
Issuance of common stock, stock-based compensation plans (in shares)   419,109        
Issuance of common stock, stock-based compensation plans 2.5   2.5      
Stock-based compensation expense 3.2   3.2      
Other comprehensive (loss) income 2.5       2.5  
Ending balance (in shares) at Mar. 31, 2018   139,910,969        
Ending balance at Mar. 31, 2018 $ 125.3 $ 1.4 (49.0) 202.6 (29.5) (0.2)
Beginning balance (in shares) at Dec. 31, 2018 140,252,693 140,252,693        
Beginning balance at Dec. 31, 2018 $ 186.4 $ 1.4 (41.5) 268.4 (41.6) (0.3)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net (loss) earnings (2.6)     (2.6)    
Issuance of common stock, stock-based compensation plans (in shares)   604,511        
Issuance of common stock, stock-based compensation plans 0.6   0.6      
Stock-based compensation expense 2.9   2.9      
Other comprehensive (loss) income $ (2.2)       (2.2)  
Ending balance (in shares) at Mar. 31, 2019 140,857,204 140,857,204        
Ending balance at Mar. 31, 2019 $ 185.3 $ 1.4 $ (38.0) $ 266.0 $ (43.8) $ (0.3)
v3.19.1
Description of the Business
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Description of the Business 1. Description of the Business

Welbilt, Inc. and its consolidated subsidiaries (collectively, "Welbilt" or the "Company") is one of the world’s leading commercial foodservice equipment companies. The Company manufactures a full suite of commercial foodservice equipment supporting hot-side, cold-side and beverage dispensing capabilities and operates 21 manufacturing facilities globally. Its suite of products is used by commercial and institutional foodservice operators including full-service restaurants, quick-service restaurant chains, hotels, resorts, cruise ships, caterers, supermarkets, convenience stores, hospitals, schools and other institutions.

The Company reports its operating results through three reportable segments, the Americas (includes markets in United States ("U.S."), Canada and Latin America), EMEA (includes markets in Europe, including Russia and the Commonwealth of Independent States, Middle East and Africa) and APAC (principally comprised of markets in China, Australia, Japan, Philippines, Singapore, South Korea, Thailand, Indonesia, Taiwan, Hong Kong, Malaysia and New Zealand).
v3.19.1
Summary of Significant Accounting Policies and Basis of Presentation
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies and Basis of Presentation 2. Summary of Significant Accounting Policies and Basis of Presentation

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("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, warranty costs, product liability costs, employee benefit programs, sales rebates and the measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On an ongoing basis, the Company evaluates these assumptions, judgments and estimates. Actual results may differ from these estimates.

In 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 three months ended March 31, 2019 and 2018, the financial position at March 31, 2019 and December 31, 2018 and the cash flows for the three months ended March 31, 2019 and 2018, and except as otherwise discussed, such adjustments consist only of those of a normal recurring nature. The interim results are not necessarily indicative of results that may be achieved in a full reporting year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the Securities and Exchange Commission's ("SEC") rules and regulations governing interim financial statements. However, the Company believes that the disclosures made in the unaudited consolidated financial statements and related notes are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

All dollar amounts, except share and per share amounts, are in millions of dollars throughout the tables included in these notes unless otherwise indicated.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation and include:

Reclassification of the current portion of capital leases totaling $1.1 million from "Current portion of capital leases" to "Short-term borrowings and current portion of finance leases" in the consolidated balance sheet for the period ended December 31, 2018 as a result of the adoption of ASU 2016-02, "Leases (Topic 842)."

Reclassification of separation expense for the three months ended March 31, 2018 totaling $0.1 million from "Separation expense" to "Selling, general and administrative expenses."

Revision of Previously Issued Consolidated Financial Statements

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, the Company identified certain errors in its previously issued unaudited consolidated financial statements. The Company assessed the materiality of the errors on all prior period financial statements and concluded they were not material to any prior annual or interim periods. The Company corrected these errors by revising its unaudited interim financial information for the three months ended March 31, 2018 to correct for the impact of such errors. Refer to Note 20, "Revision of Previously Issued Consolidated Financial Statements," for additional discussion of the errors and related error corrections on the unaudited quarterly financial statements. The Company will revise its unaudited financial statements for the three and six months ended June 30, 2018 and three and nine months ended September 30, 2018 in connection with the future filing of the Company's Form 10-Q for the three and six months ended June 30, 2019 and the three and nine months ended September 30, 2019, respectively.

Business Transformation Program

During the first quarter of 2019, the Company launched a business transformation program ("Transformation Program") with a comprehensive operational review to validate the Company's long-term growth and margin targets and to refine the Company's execution plans. The Transformation Program will focus 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. During the three months ended March 31, 2019, the Company incurred costs related to the Transformation Program of $5.8 million that are recorded in "Selling, general and administrative expenses" in the consolidated statement of operations. The Company expects to incur additional costs through mid-2021 as the various elements of the Transformation Program are implemented.

Recently Adopted Accounting Pronouncements

In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes." The amendments in this update permit use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the U.S. Treasury Rate, the London Interbank Offered Rate ("LIBOR") swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association Municipal Swap Rate. The amendments in this update are required to be adopted concurrently with the amendments in ASU 2017-12. This standard became effective for the Company on January 1, 2019. The adoption of this standard did not have an impact on the Company's consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," to provide guidance on the presentation of certain income statement effects from the U.S. Tax Cuts and Jobs Act’s ("the Tax Act") reduction in the corporate statutory tax rate. ASU 2018-02 provides the option of reclassifying what are called the “stranded” tax effects within accumulated other comprehensive income (loss) to retained earnings and requires increased disclosures describing the accounting policy used to release the income tax effects from accumulated other comprehensive income (loss), whether the amounts reclassified are the stranded income tax effects from the Tax Act, and information about the other effects on taxes from the reclassification. ASU 2018-02 may be adopted using one of two transition methods: (1) retrospective to each period (or periods) in which the income tax effects of the Tax Act related to items remaining in accumulated other comprehensive income (loss) are recognized, or (2) at the beginning of the period of adoption. The Company adopted this standard effective January 1, 2019 and elected not to reclassify the "stranded" income tax effects from accumulated other comprehensive loss ("AOCI") to retained earnings. Future income tax effects that are stranded in AOCI will be released using an investment-by-investment approach.  

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities," which improves the financial reporting of hedging relationships to better align risk management activities in financial statements and make certain targeted improvements to simplify the application of current hedge accounting guidance in current GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This standard became effective for the Company on January 1, 2019. The Company adopted this standard on a modified retrospective basis and it did not have a material impact on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. This standard became effective for the Company on January 1, 2019. The adoption of this standard did not have an impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" including subsequent amendments issued thereafter which include ASU 2018-10 "Codification Improvements to Topic 842, Leases," ASU 2018-11 "Leases (Topic 842) Targeted Improvements" and ASU 2019-01 "Leases (Topic 842) Codification Improvements" (collectively, "ASC Topic 842"). ASC Topic 842 requires lessees to recognize the right-of-use assets and lease liabilities on its balance sheet. Accounting for finance leases is substantially unchanged. This standard became effective for the Company on January 1, 2019. ASC Topic 842 permits the Company to elect either a) a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements or b) a modified retrospective approach recognizing the cumulative effect of the initial application of the new leasing standard as an adjustment to the opening balance of retained earnings as of the date of adoption. The Company used the modified retrospective method and recognized the cumulative effect of the initial application of ASC Topic 842 as an adjustment to the opening balance of retained earnings. The adjustment
is principally driven by the recognition of remaining deferred gain associated with a previous sale-leaseback transaction. Prior to the adoption of ASU 2016-02, gains on sale leaseback transactions were generally deferred and recognized in the income statement over the lease term. Prior period results have not been adjusted and continue to be reported under the accounting standards in effect for such period. Upon adoption, the Company recognized right-of-use assets and lease liabilities for operating leases in the amount of $38.0 million and $36.6 million, respectively, with the difference reflective of a reclassification of existing prepaid expense balances to the right-of-use asset.

In connection with the adoption of this guidance, the Company elected the package of practical expedients available in 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 and has 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 renewal options that are reasonably certain to be exercised, that also 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 cost 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 include variable lease costs primarily comprising 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. These variable lease costs are determined based upon the terms of each respective lease contract.

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. The Company’s contracts determined to be or contain a lease 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 has recognized 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 for prepaid rents. 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 determined 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 considered a number of factors when evaluating whether the options in its lease contracts were reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties. See additional discussion of leases in Note 17, "Leases."

Recent Accounting Pronouncements Not Yet Adopted

In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments" which provides narrow-scope amendments designed to assist in the application of ASU 2016-01, 2016-13 and 2017-12 and the relevant accounting standards. This guidance becomes effective for the Company on January 1, 2020 including the interim periods in the year. The Company is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, with amortization expense being recorded in the same income statement expense line as the hosted service costs and over the expected term of the hosting arrangement. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which significantly changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under ASU 2016-13, the Company will be required to use a current expected credit loss model (“CECL”) that will immediately recognize an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. This guidance becomes effective for the Company on January 1, 2020 including the interim periods in the year. The Company is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements and related disclosures.

Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact on the Company.
v3.19.1
Acquisition
3 Months Ended
Mar. 31, 2019
Business Combinations [Abstract]  
Acquisition 3. Acquisition

On April 19, 2018, the Company, through a wholly-owned subsidiary, acquired 100% of the share capital of Avaj International Holding AB ("Avaj") (the "Crem Acquisition") for aggregate consideration of approximately 1,800 million Swedish Krona ("SEK") or $220.3 million based on the exchange rate in effect on the closing date. The consideration comprised $159.8 million in cash, including $2.4 million of interest paid to the seller, and an aggregate $60.5 million for the repayment of certain indebtedness owed under third-party borrowings and shareholder loans. The Crem Acquisition was funded through cash on hand and additional borrowings under existing credit lines.

Crem International Holding AB ("Crem"), a wholly-owned subsidiary of Avaj, is a global manufacturer of professional coffee machines headquartered in Solna, Sweden. Crem develops, manufactures and markets a full suite of coffee machines under three brands: Coffee Queen®, Expobar® and Spengler for use in offices, restaurants, cafes and coffee shops, catering and convenience stores. The Crem Acquisition provides the Company with an established presence in hot beverage equipment, a complementary product category, potential operational synergies and cross-selling benefits and an increased presence in Europe and Asia.

The Crem Acquisition was accounted for under the acquisition method of accounting which requires, among other things, that the assets acquired and the liabilities assumed be measured at their fair values as of the closing date of the transaction. During the three months ended March 31, 2019, the Company finalized its purchase price allocation for the Crem Acquisition without recording any measurement period adjustments subsequent to December 31, 2018.

During the three months ended March 31, 2019 and 2018, the Company incurred approximately $0.1 million and $1.2 million, respectively, of professional services and other direct acquisition and integration costs related to the Crem Acquisition that are included in "Selling, general and administrative expenses" in the consolidated statement of operations. In addition, the Company entered into a foreign currency exchange contract for the purchase price exposure of SEK 1,800 million, which incurred an unrealized loss of $7.8 million in the three months ended March 31, 2018 and is included in the consolidated statement of operations in "Other expense — net."

The operations of Crem contributed approximately $20.8 million to net sales while incurring a loss from operations of approximately $1.1 million for the three months ended March 31, 2019.
v3.19.1
Accounts Receivable Securitization
3 Months Ended
Mar. 31, 2019
Transfers and Servicing [Abstract]  
Accounts Receivable Securitization 4. Accounts Receivable Securitization

Prior to its termination on March 13, 2019, the Company participated in a $110.0 million accounts receivable securitization program whereby the Company sold certain of its domestic trade accounts receivable and certain of its non-U.S. trade accounts receivable to a wholly-owned, bankruptcy-remote, foreign special purpose entity, which would in turn, sell, convey, transfer and assign to a third-party financial institution (the “Purchaser”), all the rights, title and interest in and to its pool of receivables. Under this program, the Company generally received cash consideration up to a certain limit and recorded a non-cash exchange for sold receivables for the remainder of the purchase price ("deferred purchase price"). The sale of these receivables qualified for sale accounting treatment. The Company maintained a "beneficial interest," or right to collect cash, in the sold receivables. During the period of this program, cash receipts from the Purchaser at the time of the sale were classified as operating cash while cash receipts from the beneficial interest on sold receivables were classified as investing activities on the consolidated statements of cash flows.

The Company, along with certain of its subsidiaries, acted as servicers of the sold receivables. The servicers would administer, collect and otherwise enforce these receivables and were compensated for doing so on terms that were generally consistent with what would be charged by an unrelated servicer. The servicers initially received payments made by obligors on the receivables but were required to remit those payments in accordance with the receivables purchase agreement. Upon termination of the program, the Purchaser had no recourse for uncollectible receivables.

Due to a short average collection cycle of less than 60 days for such accounts receivable as well as the Company's collection history, the fair value of its beneficial interest in the sold receivables approximated book value and, as of December 31, 2018, totaled $56.9 million and was recorded in "Accounts receivable, less allowance" in the consolidated balance sheet. The Company deemed the interest rate risk related to this beneficial interest to be de minimis, primarily due to the short average collection cycle of the related receivables. The carrying value of trade receivables removed from the Company's consolidated balance sheet in connection with the accounts receivable securitization program was $96.9 million at December 31, 2018.

In connection with the termination of the accounts receivable securitization program during the first quarter of 2019, approximately $156.9 million of accounts receivable sold under the program were reacquired in exchange for the outstanding deferred purchase price receivable and cash, which was provided by receipts of previously sold trade receivables. Cash proceeds collected on the reacquired receivables were $65.0 million for the three months ended March 31, 2019 and have been classified as investing cash flows in the Company's consolidated statement of cash flows. Non-cash settlements incurred subsequent to the termination, have generally been previously reserved for and have been classified as operating cash flows in the Company's consolidated statement of cash flows. The remaining carrying value of reacquired trade receivables included in the Company's consolidated balance sheet at March 31, 2019 was $90.1 million.
v3.19.1
Inventories - Net
3 Months Ended
Mar. 31, 2019
Inventory Disclosure [Abstract]  
Inventories - Net 5. Inventories — Net

The components of "Inventories — net" at March 31, 2019 and December 31, 2018 are summarized as follows:

 
 
March 31,
 
December 31,
(in millions)
 
2019
 
2018
Inventories — gross:
 
 

 
 

Raw materials
 
$
96.8

 
$
90.4

Work-in-process
 
18.3

 
16.0

Finished goods
 
116.7

 
108.8

Total inventories — gross
 
231.8

 
215.2

Excess and obsolete inventory reserve
 
(21.9
)
 
(20.4
)
Net inventories at FIFO cost
 
209.9

 
194.8

Excess of FIFO costs over LIFO value
 
(4.2
)
 
(4.2
)
Inventories — net
 
$
205.7

 
$
190.6

v3.19.1
Property, Plant and Equipment - Net
3 Months Ended
Mar. 31, 2019
Property, Plant and Equipment [Abstract]  
Property, Plant and Equipment - Net 6. Property, Plant and Equipment — Net

The components of "Property, plant and equipment — net" at March 31, 2019 and December 31, 2018 are summarized as follows:

 
 
March 31,
 
December 31,
(in millions)
 
2019
 
2018
Land
 
$
9.6

 
$
9.8

Building and improvements
 
89.0

 
88.5

Machinery, equipment and tooling
 
228.9

 
226.6

Furniture and fixtures
 
6.6

 
6.5

Computer hardware and software
 
59.1

 
58.3

Construction in progress
 
23.4

 
21.1

Total cost
 
416.6

 
410.8

Less accumulated depreciation
 
(297.3
)
 
(291.8
)
Property, plant and equipment — net
 
$
119.3

 
$
119.0

v3.19.1
Accounts Payable and Accrued Expenses and Other Liabilities
3 Months Ended
Mar. 31, 2019
Payables and Accruals [Abstract]  
Accounts Payable and Accrued Expenses and Other Liabilities 7. Accounts Payable and Accrued Expenses and Other Liabilities

"Accounts payable" and "Accrued expenses and other liabilities" at March 31, 2019 and December 31, 2018 are summarized as follows:

 
 
March 31,
 
December 31,
(in millions)
 
2019
 
2018
Accounts payable:
 
 
 
 
Trade accounts payable
 
$
124.9

 
$
151.0

Total accounts payable
 
$
124.9

 
$
151.0

Accrued expenses and other liabilities:
 
 
 
 
Interest payable
 
$
2.8

 
$
2.2

Income taxes payable
 
0.8

 
10.2

Employee related expenses
 
29.4

 
30.0

Restructuring expenses
 
4.8

 
3.0

Profit sharing and incentives
 
6.4

 
19.9

Accrued rebates
 
33.5

 
50.8

Deferred revenue — current
 
2.6

 
2.7

Customer advances
 
3.5

 
3.1

Product liability
 
1.3

 
1.3

Derivative liability
 
10.7

 
18.4

Current portion of operating lease liabilities
 
12.2

 

Miscellaneous accrued expenses
 
47.3

 
42.1

Total accrued expenses and other liabilities
 
$
155.3

 
$
183.7

v3.19.1
Income Taxes
3 Months Ended
Mar. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes 8. Income Taxes

The Company’s effective tax rates for the three months ended March 31, 2019 and 2018 vary from the 21.0% U.S. federal statutory rate primarily due to the relative weighting of foreign earnings before income taxes, discrete tax items and taxes on foreign income. Foreign earnings are generated from operations in the Company’s three reportable segments of Americas, EMEA and APAC.

For the three months ended March 31, 2019, the Company recorded a $0.1 million income tax provision, reflecting a (4.0)% effective tax rate, which included discrete expenses of $0.8 million related to equity compensation and foreign tax audit adjustments. For the three months ended March 31, 2018, the Company recorded a $0.4 million income tax provision reflecting a 3.1% effective tax rate, which was inclusive of a $3.7 million discrete tax benefit. The discrete tax benefit primarily consisted of tax balances that were adjusted upon filing the U.S. federal and state corporate tax returns. The $0.3 million decrease in the Company's income tax provision for the three months ended March 31, 2019, relative to the three months ended March 31, 2018, was primarily attributable to the reduction of earnings before income taxes and discrete tax items.

As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view regarding future realization of deferred tax assets. The Company will continue to evaluate its valuation allowance requirements via possible sources of taxable income that may be available to realize a tax benefit for deferred tax assets. This evaluation includes U.S. interest expense limitations of the U.S. Tax Cuts and Jobs Act. As facts and circumstances change, the Company may adjust its deferred tax asset valuation allowances accordingly. It is reasonably possible that the Company will either add to or reverse a portion of its existing deferred tax asset valuation allowances in the future. Such changes in the deferred tax asset valuation allowances will be reflected in current operations through the Company’s income tax provision and could have a material effect on operating results.

The Company's unrecognized tax benefits, including interest and penalties, were $13.1 million and $13.0 million as of March 31, 2019, and December 31, 2018, respectively. During the next twelve months, it is reasonably possible that unrecognized tax benefits could change in the range of $0.2 million to $1.7 million due to the expiration of relevant statutes of limitations and federal, state and foreign tax audit resolutions.

The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of March 31, 2019, the Company believes that it is more likely than not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on 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.
v3.19.1
Debt
3 Months Ended
Mar. 31, 2019
Debt Disclosure [Abstract]  
Debt 9. Debt

Outstanding debt at March 31, 2019 and December 31, 2018 is summarized as follows:

(in millions, except percentage data)
 
March 31, 2019
 
Weighted Average Interest Rate
 
December 31, 2018
 
Weighted Average Interest Rate
Revolving loan facility
 
$

 
4.35
%
 
$
15.0

 
4.06
%
Revolving credit facility
 
242.0

 
5.18
%
 
78.0

 
4.70
%
Term Loan B facility
 
855.0

 
5.43
%
 
855.0

 
5.22
%
9.50% Senior Notes due 2024
 
425.0

 
9.87
%
 
425.0

 
9.72
%
Finance leases
 
2.6

 
4.47
%
 
2.8

 
4.50
%
Total debt and finance leases, including current portion
 
1,524.6

 
 
 
1,375.8

 
 
Less:
 
 
 
 
 
 
 
 
Revolving loan facility
 

 
 
 
(15.0
)
 
 
Current portion of finance leases
 
(1.1
)
 
 
 
(1.1
)
 
 
Unamortized debt issuance costs (1)
 
(23.3
)
 
 
 
(24.2
)
 
 
Hedge accounting fair value adjustment (2)
 
(6.8
)
 
 
 
(13.7
)
 
 
Total long-term debt and finance leases
 
$
1,493.4

 
 
 
$
1,321.8

 
 
(1) Total outstanding debt issuance costs, net of amortization as of March 31, 2019 and December 31, 2018 was $26.4 million and $27.3 million, respectively, of which $3.1 million was related to the revolving credit facility and recorded in "Other non-current assets" in the consolidated balance sheets, for both periods respectively.
(2) Represents the change in fair value due to changes in benchmark interest rates related to the Company's Senior Notes due 2024 ("Senior Notes"). Refer to Note 10, "Derivative Financial Instruments," for additional information on the Company's interest rate swap designated as a fair value hedge.

On March 3, 2016, the Company entered into a credit agreement (as amended, restated, supplemented or otherwise modified from time to time the "2016 Credit Agreement") for a $1,300.0 million 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 Facility") and, together with the Term Loan B Facility, the "Senior Secured Credit Facilities"). 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, so long as, after giving effect to the incurrence of such additional amount, the resulting pro forma secured leverage ratio does not exceed 3.75:1.00. The maturity of the Term Loan B and Revolving Facility is October 2025 and October 2023, respectively.

In 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 Facility (depending on the Company's Consolidated Total Leverage Ratio) or (ii) an alternate base rate, plus applicable margins of 1.00% less than in the case of LIBOR-based borrowings.

The Company had $3.7 million in outstanding stand-by letters of credit and $154.3 million available for additional borrowings under the Revolving Facility. As of March 31, 2019, the spreads for LIBOR and alternate base rate borrowings were 2.25% and 1.25%, respectively.

The 2016 Credit Agreement contains financial covenants including, but not limited to (a) a Consolidated Interest Coverage Ratio, which measures the ratio of (i) Consolidated EBITDA, as defined in the 2016 Credit Agreement, to (ii) Consolidated Cash Interest Expense, and (b) a Consolidated Total Leverage Ratio, which measures the ratio of (i) Consolidated Indebtedness to (ii) Consolidated EBITDA for the most recent four fiscal quarters, in each case, as defined in the 2016 Credit Agreement.

In April 2018, the Company, through a wholly-owned subsidiary, entered into a short-term secured $30.0 million revolving loan facility for working capital requirements. This revolving loan facility bore interest at LIBOR plus an applicable margin of 1.90% and matured on April 18, 2019. The Company repaid the outstanding balance of the facility during the three months ended March 31, 2019.

As of March 31, 2019, the Company was in compliance with all affirmative and negative covenants, including financial covenants, pertaining to its financial arrangements.
v3.19.1
Derivative Financial Instruments
3 Months Ended
Mar. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments 10. Derivative Financial Instruments

The Company's risk management objective is to ensure that business exposures to risks that have been identified and measured and are capable of being controlled are minimized or managed using what it believes to be the most effective and efficient methods to eliminate, reduce or transfer such exposures. Operating decisions consider these associated risks and 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. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings. Cross-currency interest rate swaps are entered into to protect the value of the Company’s investments in its foreign subsidiaries. Swap contracts on various commodities are used to manage the price risk associated with forecasted purchases of materials used in the Company's manufacturing process. The Company also enters into various foreign currency derivative instruments to help manage foreign currency risk associated with its projected purchases and sales and foreign currency denominated receivable and payable balances.

The Company recognizes all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. Commodity swaps and foreign currency exchange contracts are designated as cash flow hedges of forecasted purchases of commodities and currencies, certain interest rate swaps as cash flow hedges of floating-rate borrowings, and the remainder as fair value hedges of fixed-rate borrowings, and 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 AOCI in the consolidated balance sheets and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. In the next twelve months, the Company estimates $1.0 million of unrealized gains, net of tax, related to currency rate, commodity price and interest rate risk hedging will be reclassified from AOCI into earnings. Foreign currency and commodity hedging is generally completed prospectively on a rolling basis for 15 and 36 months, respectively, depending on the type of risk being hedged.

In March 2017, the Company entered into two interest rate swap agreements with a total notional amount of $600.0 million to manage interest rate risk exposure by converting the Company’s floating-rate debt to a fixed-rate basis, thus reducing the impact from fluctuations in interest rates on future interest expense. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal. In March 2019, the interest rate swap with a notional amount of $175.0 million matured. The remaining interest rate swap agreement with a notional amount of $425.0 million matures in March 2020. Approximately 27.9% of the Company’s total outstanding long-term debt had its interest payments designated as a cash flow hedge under the remaining interest rate swap agreement as of March 31, 2019.

As of March 31, 2019, and December 31, 2018, the Company had the following outstanding commodity and currency forward contracts that were entered into as hedges of forecasted transactions:

 
 
Units Hedged
 
 
Commodity
 
March 31, 2019
 
December 31, 2018
 
Unit
Aluminum
 
1,302

 
1,446

 
MT
Copper
 
562

 
546

 
MT
Steel
 
7,223

 
7,080

 
Short tons

 
 
Units Hedged
Currency
 
March 31, 2019
 
December 31, 2018
Canadian Dollar
 
22,543,000

 
10,990,000

European Euro
 
19,190,500

 
9,878,000

British Pound
 
12,804,498

 
12,041,770

Mexican Peso
 
255,955,000

 
175,960,000

Singapore Dollar
 
2,128,000

 
1,480,000



The effects of derivative instruments on the consolidated statements of comprehensive income and consolidated statements of operations for the three months ended March 31, 2019 and 2018 for gains or losses initially recognized in AOCI in the consolidated balance sheets were as follows:

Derivatives in cash flow hedging relationships (in millions)
 
Pretax gain/(loss) recognized in AOCI
 
Pretax gain/(loss) reclassified from AOCI into income
 
 
Three Months Ended March 31,
 
Location
 
Three Months Ended March 31,
 
 
2019

2018
 
 
 
2019
 
2018
Foreign currency exchange contracts
 
$
(0.1
)
 
$
0.8

 
Cost of sales
 
$
(0.3
)
 
$
0.5

Commodity contracts
 
0.2

 
(0.5
)
 
Cost of sales
 
(0.1
)
 
0.5

Interest rate swap contracts
 
(0.6
)
 
3.0

 
Interest expense
 
1.1

 
(0.1
)
Total
 
$
(0.5
)
 
$
3.3

 
 
 
$
0.7

 
$
0.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedging strategy

For derivative instruments that are designated and qualify as a fair value hedge (i.e. hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting 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 current earnings.

In October 2017, the Company entered into an interest rate swap agreement with a total notional amount of $425.0 million to manage interest rate risk exposure by converting the Company’s fixed-rate debt to a floating-rate basis. This agreement involves the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal and terminates in February 2024. Approximately 27.9% of the Company’s total outstanding long-term debt had its interest payments designated as a fair value hedge under this interest rate swap agreement as of March 31, 2019.

As of March 31, 2019 and December 31, 2018, the following amounts were recorded on the consolidated balance sheets related to cumulative basis adjustments for the fair value hedge:

Line item in the consolidated balance sheets in which the hedged item is included
(in millions)
 
Carrying amount of the hedged liability
 
Cumulative amount of fair value hedge adjustment included in the carrying amount of the hedged liability (1)
 
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Long-term debt and finance leases
 
$
418.2

 
$
411.3

 
$
(6.8
)
 
$
(13.7
)
Total
 
$
418.2

 
$
411.3

 
$
(6.8
)
 
$
(13.7
)
(1) The balance as of March 31, 2019 and December 31, 2018 includes $0.2 million and $0.3 million of hedging adjustment on a discontinued hedge relationship, respectively.













Statements of Operations Location and Impact of Cash Flow and Fair Value Derivative Instruments
The table below presents the effect of the Company’s derivative financial instruments on the statements of operations for the three months ended March 31, 2019 and 2018:

 
 
Location and amount of gain/(loss) recognized on fair value and cash flow hedging relationships
 
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
 
2019
 
2018
(in millions)
 
Cost of Sales
 
Interest Expense
 
Cost of Sales
 
Interest Expense
Total amounts of expense line items presented in the statements of operations in which effects of fair value and cash flow hedges are recorded
 
$
248.8

 
$
24.0

 
$
224.2

 
$
20.3

The effects of fair value and cash flow hedging:
 
 
 
 
 
 
 
 
Gain/(loss) on fair value hedging relationship:
 
 
 
 
 
 
 
 
Interest rate contract:
 
 
 
 
 
 
 
 
Hedged Item
 
$

 
$
(7.0
)
 
$

 
$
8.8

Derivative designated as hedging instrument
 
$

 
$
6.6

 
$

 
$
(8.5
)

 
 
 
 
 
 
 
 
Gain/(loss) on cash flow hedging relationships:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts:
 
 
 
 
 
 
 
 
Amount of gain/(loss) reclassified from AOCI into income
 
$
(0.3
)
 
$

 
$
0.5

 
$

Commodity contracts:
 
 
 
 
 
 
 
 
Amount of gain/(loss) reclassified from AOCI into income
 
$
(0.1
)
 
$

 
$
0.5

 
$

Interest rate contracts:
 
 
 
 
 
 
 
 
Amount of gain/(loss) reclassified from AOCI into income
 
$

 
$
1.1

 
$

 
$
(0.1
)

Hedge of net investment in foreign operations strategy

For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in AOCI as part 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. The carrying value of the net investment in Euros that is designated as a hedging instrument is remeasured at each reporting date to reflect the changes in the foreign currency exchange spot rate, with changes since the last remeasurement date recorded in AOCI.

Effective January 1, 2019, as a result of the adoption of ASU 2017-12, the Company elected to re-designate the CCS as a net investment hedge under the spot method. Changes in the fair value of the CCS that are included in the assessment of effectiveness due to spot foreign exchange rates are recorded as cumulative translation adjustment within AOCI and will remain in AOCI until either the sale or substantially complete liquidation of the subsidiary. As an additional accounting policy election applied to similar hedges under ASU 2017-12, the initial value of any component excluded from the assessment of effectiveness is recognized in income using a systematic and rational method over the remaining life of the hedging instrument. Any difference between the change in the fair value of the excluded component and amounts recognized in income under that systematic and rational method is recognized in AOCI. The Company has elected to amortize the initial excluded component value as an increase of interest income within “Other expense — net” in the consolidated statement of operations using the straight-line method over the remaining term of the CCS. Additionally, the accrual of periodic U.S. dollar and Euro-denominated interest receipts and payments under the terms of the CCS will also be recognized as interest income within “Other expense — net” in the consolidated statements of operations.
The location and effects of the derivative instrument on the consolidated statements of comprehensive income and consolidated statements of operations for the three months ended March 31, 2019 and 2018 were as follows: 

Derivatives in net investment hedging relationships
(in millions)
 
Pretax gain/(loss) recognized in AOCI
 
Gain/(loss) reclassified from AOCI into income
 
Gain/(loss) recognized in income (amount excluded from effectiveness testing)
 
 
Three Months Ended March 31,
 
Location
 
Three Months Ended March 31,
 
Location
 
Three Months Ended March 31,
 
 
2019

2018
 
 
 
2019
 
2018
 
 
 
2019
 
2018
Interest rate swap contract
 
$
1.6

 
$
(1.7
)
 
N/A
 
$

 
$

 
Other expense — net
 
$
0.4

 
$

Total
 
$
1.6

 
$
(1.7
)
 
 
 
$

 
$

 
 
 
$
0.4

 
$

N/A = Not applicable
 
 
 
 
 
 
 
 
 
 
 

Derivatives Not Designated as Hedging Instruments

The Company enters into foreign currency exchange contracts that are not designated as hedge relationships to offset, in part, the impact of certain intercompany transactions and to further mitigate certain other short-term currency impacts as identified. For derivative instruments that are not designated as hedging instruments, the gains or losses on the derivatives are recognized in current earnings within "Other expense — net" in the consolidated statements of operations.

During the first quarter of 2018, the Company entered into a short-term foreign currency exchange contract to purchase SEK 1,800.0 million and sell $223.8 million with maturity dates ranging from March 1, 2018 to April 5, 2018 ("SEK Contract"). The purpose of this contract was to mitigate the impact of currency price fluctuations on the contracted price of the Crem Acquisition (see Note 3, "Acquisition," for additional discussion of the Crem Acquisition). As of March 31, 2018, the SEK Contract was in a short-term liability position of $7.8 million and was included in "Accrued expenses and other liabilities" in the consolidated balance sheet.

As of March 31, 2019 and December 31, 2018, the Company had the following outstanding currency forward contracts that were not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Units Hedged
Currency
 
March 31, 2019
 
December 31, 2018
Singapore Dollar
 
28,272,000

 
28,447,000

European Euro
 
67,300,000

 
69,700,000

British Pound
 
34,292,568

 
23,704,468

Swiss Franc
 
5,300,000

 
5,300,000



The location and effects on the consolidated statements of operations for the three months ended March 31, 2019 and 2018 for gains or losses related to derivative instruments not designated as hedging instruments were as follows:

Derivatives NOT designated as hedging instruments (in millions)
 
Amount of gain/(loss) recognized in income on derivative
 
Location of gain/(loss) recognized in income on derivative
 
 
Three Months Ended March 31,
 
 
 
 
2019
 
2018
 
 
Foreign currency exchange contracts
 
$
2.8

 
$
(12.9
)
 
Other expense — net
Total
 
$
2.8

 
$
(12.9
)
 
 
 
 
 
 
 
 
 


The fair value of outstanding derivative contracts recorded as assets in the consolidated balance sheets as of March 31, 2019 and December 31, 2018 was as follows:

 
 
 
 
Asset Derivatives
Fair Value
 
 
 
 
(in millions)
 
Balance Sheet Location
 
March 31, 2019
 
December 31, 2018
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency exchange contracts
 
Prepaids and other current assets
 
$
0.4

 
$
0.5

Commodity contracts
 
Prepaids and other current assets
 
0.2

 
0.2

Interest rate swap contracts
 
Prepaids and other current assets
 
2.6

 
4.8

Interest rate swap contracts
 
Other non-current assets
 

 
3.4

Total derivatives designated as hedging instruments
 
 
 
$
3.2

 
$
8.9

 
 
 
 
 
 
 
Derivatives NOT designated as hedging instruments:
 
 
 
 
 
 
Foreign currency exchange contracts
 
Prepaids and other current assets
 
$
1.1

 
$
0.1

Total derivatives NOT designated as hedging instruments
 
 
 
$
1.1

 
$
0.1

 
 
 
 
 
 
 
Total asset derivatives
 
 
 
$
4.3

 
$
9.0



The fair value of outstanding derivative contracts recorded as liabilities in the consolidated balance sheets as of March 31, 2019 and December 31, 2018 was as follows:

 
 
 
 
Liability Derivatives
Fair Value
 
 
 
 
(in millions)
 
Balance Sheet Location
 
March 31, 2019
 
December 31, 2018
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency exchange contracts
 
Accrued expenses and other liabilities
 
$
1.1

 
$
1.5

Commodity contracts
 
Accrued expenses and other liabilities
 
0.8

 
0.9

Interest rate swap contracts
 
Accrued expenses and other liabilities
 
8.8

 
15.7

Commodity contracts
 
Other long-term liabilities
 
0.1

 
0.4

Interest rate swap contracts
 
Other long-term liabilities
 
1.1

 
5.9

Total derivatives designated as hedging instruments
 
 
 
$
11.9

 
$
24.4

 
 
 
 
 
 
 
Derivatives NOT designated as hedging instruments:
 
 
 
 
 
 
Foreign currency exchange contracts
 
Accrued expenses and other liabilities
 
$

 
$
0.3

Total derivatives NOT designated as hedging instruments
 
 
 
$

 
$
0.3

 
 
 
 
 
 
 
Total liability derivatives
 
 
 
$
11.9

 
$
24.7

v3.19.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2019
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments 11. Fair Value of Financial Instruments

In accordance with the Company's policy, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The policy classifies the inputs used to measure fair value into the following hierarchy:

Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities

Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities, or

Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or

Inputs other than quoted prices that are observable for the asset or liability

Level 3
Unobservable inputs for the asset or liability

The Company utilizes the best available information in measuring fair value. The Company estimates the fair value of its Senior Notes and Term Loan B Facility based on quoted market prices of the instruments. Because these markets are typically thinly traded, the assets and liabilities are classified as Level 2 of the fair value hierarchy. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and beneficial interest in sold receivables (see Note 4, "Accounts Receivable Securitization,"), approximate fair value, without being discounted as of March 31, 2019 and December 31, 2018 due to the short-term nature of these instruments. The short-term investment balance as of March 31, 2019 and December 31, 2018 represented a certificate of deposit with an original scheduled maturity of 12 months, which the Company has the intent and ability to hold to maturity. It was, therefore, classified as held-to-maturity and carried at amortized cost. The fair value of this instrument was equal to its amortized cost and, as such, there were no unrealized gains or losses associated with the instrument. There are no indicators of other-than-temporary impairment for this security and the Company has not experienced credit losses during any period.

The fair value of the Company's Senior Notes was approximately $458.3 million and $457.0 million as of March 31, 2019 and December 31, 2018, respectively. The fair value of the Company's Term Loan B Facility was approximately $840.0 million and $815.5 million as of March 31, 2019 and December 31, 2018, respectively. The related carrying values are disclosed in Note 9, "Debt."

The following tables set forth financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 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.

 
 
Fair Value as of
 
 
March 31, 2019
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Current assets:
 
 
 
 
 
 
 
 
Short-term investment
 
$

 
$
32.8

 
$

 
$
32.8

Foreign currency exchange contracts
 

 
1.5

 

 
1.5

Commodity contracts
 

 
0.2

 

 
0.2

Interest rate swap contracts
 

 
2.6

 

 
2.6

Total current assets at fair value
 

 
37.1

 

 
37.1

Total assets at fair value
 
$

 
$
37.1

 
$

 
$
37.1

 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$

 
$
1.1

 
$

 
$
1.1

Commodity contracts
 

 
0.8

 

 
0.8

Interest rate swap contracts
 

 
8.8

 

 
8.8

Total current liabilities at fair value
 

 
10.7

 

 
10.7

Non-current liabilities:
 
 
 
 
 
 
 
 
Commodity contracts
 

 
0.1

 

 
0.1

Interest rate swap contracts
 

 
1.1

 

 
1.1

Total non-current liabilities at fair value
 

 
1.2

 

 
1.2

Total liabilities at fair value
 
$

 
$
11.9

 
$

 
$
11.9


 
 
Fair Value as of
 
 
December 31, 2018
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Current assets:
 
 
 
 
 
 
 
 
Short-term investment
 
$

 
$
32.0

 
$

 
$
32.0

Foreign currency exchange contracts
 

 
0.6

 

 
0.6

Commodity contracts
 

 
0.2

 

 
0.2

Interest rate swap contracts
 

 
4.8

 

 
4.8

Total current assets at fair value
 
$

 
$
37.6

 
$

 
$
37.6

Non-current assets:
 
 
 
 
 
 
 
 
Interest rate swap contracts
 

 
3.4

 

 
3.4

Total non-current assets at fair value
 

 
3.4

 

 
3.4

Total assets at fair value
 
$

 
$
41.0

 
$

 
$
41.0

 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$

 
$
1.8

 
$

 
$
1.8

Commodity contracts
 

 
0.9

 

 
0.9

Interest rate swap contracts
 

 
15.7

 

 
15.7

Total current liabilities at fair value
 
$

 
$
18.4

 
$

 
$
18.4

Non-current liabilities:
 
 
 
 
 
 
 
 
Commodity contracts
 

 
0.4

 

 
0.4

Interest rate swap contracts
 

 
5.9

 

 
5.9

Total non-current liabilities at fair value
 

 
6.3

 

 
6.3

Total liabilities at fair value
 
$

 
$
24.7

 
$

 
$
24.7

v3.19.1
Contingencies and Significant Estimates
3 Months Ended
Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Contingencies and Significant Estimates 12. Contingencies and Significant Estimates

Environmental, Product Liability and Product Warranty Matters

As of March 31, 2019 and December 31, 2018, the Company held reserves for environmental matters related to certain locations of approximately $0.7 million. At certain of the Company's other facilities, it has identified potential contaminants in soil and groundwater. The ultimate cost of any remediation required 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 at any of these locations will have a material adverse effect on its financial condition, results of operations or cash flows individually or in the aggregate.

As of March 31, 2019, various product liability lawsuits were pending. For products sold outside of the United States and Canada, the Company is insured by a third-party insurance company. For products sold in the United States and Canada, the Company is insured, to the extent permitted under applicable law, with self-insurance retention levels. The Company's self-insurance retention levels vary by business and fluctuate with the Company's risk management practices.

In the United States, the Company's current self-insured retention level is $0.3 million per occurrence and $1.0 million in the aggregate for product liability claims. In Canada, the Company's self-insured retention level is $0.1 million per occurrence and $2.0 million in the aggregate for product liability claims. In addition, the Company's self-retention level for commercial general liability is $2.0 million in the aggregate. The Company's self-insurance retention levels vary by business and have fluctuated over the last ten years.

Product liability reserves are included in "Accrued expenses and other liabilities" in the consolidated balance sheets at March 31, 2019 and December 31, 2018 and were $1.3 million; $0.5 million and $0.6 million, respectively, were reserved specifically for actual cases, and $0.8 million and $0.7 million, respectively, for claims anticipated to have occurred but are not yet reported, which were estimated using actuarial methods. Based on the Company's experience in defending product liability claims, management believes the current reserves are adequate for estimated case resolutions on aggregate self-insured claims and third-party insured claims. Any recoveries from insurance carriers are dependent upon the legal sufficiency of claims and solvency of insurance carriers.

At March 31, 2019 and December 31, 2018, the Company had reserved $39.7 million for warranty claims expected to be paid out. Certain of these warranty and other related claims involve matters in dispute that ultimately are resolved by negotiations, arbitration or litigation. See Note 13, "Product Warranties," for further information.

It is reasonably possible that the estimates for environmental remediation, product liability and product warranty 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

On December 13, 2018, a purported securities class action lawsuit was filed in the U.S. District Court for the Middle District of Florida against the Company and certain of its former executive officers. The lawsuit is captioned Schlimm v. Welbilt, Inc., et al., and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making material misstatements or omissions in certain of the Company's periodic reports filed with the SEC relating to, among other things, the Company's business operations and the effectiveness of the Company’s internal control over financial reporting. The lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On March 15, 2019, a purported shareholder derivative action was filed in the U.S. District Court for the District of Delaware against certain of the Company's current and former executive officers and directors, with the Company named as a nominal defendant. The lawsuit is captioned Quinney v. Muehlhaeuser, et al., and alleges violation of Section 14(a) of the Securities Exchange Act of 1934 and breach of fiduciary duty, among other claims, based upon similar underlying allegations as those in the Schlimm lawsuit. The Quinney lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. The Company intends to defend against these lawsuits vigorously. However, litigation is inherently uncertain, and the Company is unable to predict the outcome of these matters and is unable to estimate the range of loss, if any, that could result from an unfavorable outcome. 

The Company has voluntarily disclosed to U.S. Customs & Border Protection certain errors in the declaration of imported products relating to quantity, classification, antidumping and countervailing duties, and other matters. Based on currently known information, it is probable that the Company may be assessed retroactive customs duties and related fees on previous imports but the Company is unable to reasonably estimate the range of loss that may result and unable to determine if any potential liability would be material to the Company’s consolidated financial position, results of operations or cash flows.

The Company is also subject to other 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 our business. The Company records accruals for legal and other matters which are both probable and reasonably estimable and for related legal costs as incurred. The Company believes that it has adequately accrued for such matters as appropriate. 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.
v3.19.1
Product Warranties
3 Months Ended
Mar. 31, 2019
Guarantees and Product Warranties [Abstract]  
Product Warranties 13. Product Warranties

In the normal course of business, the Company provides its customers 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 months to 60 months with certain equipment having longer-term warranties. If a product fails to comply with the Company's warranty, the Company may be obligated, at its expense, to correct any defect by repairing or replacing such defective products. The Company provides for an estimate of costs that may be incurred under its warranty at the time product revenue is recognized. These costs primarily include labor and materials, as necessary, associated with repair or replacement. The primary factors that affect its 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 and adjusts the amounts as necessary.

Below is a table summarizing the product warranty activity for the three months ended March 31, 2019:

(in millions)
 
 
Balance at December 31, 2018(1)
 
$
39.7

Accruals for warranties issued
 
8.7

Settlements made (in cash or in kind)
 
(8.9
)
Currency translation impact
 
0.2

Balance at March 31, 2019(1)
 
$
39.7


(1) Long-term warranty liabilities are included in "Other long-term liabilities" and totaled $10.0 million and $11.8 million at March 31, 2019 and December 31, 2018, 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 a period equal to that of the 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 March 31, 2019 and December 31, 2018 was $2.2 million. The long-term portion of deferred revenue on warranties included in "Other long-term liabilities" in the consolidated balance sheets at March 31, 2019 and December 31, 2018 was $3.8 million, respectively.
v3.19.1
Employee Benefit Plans
3 Months Ended
Mar. 31, 2019
Retirement Benefits [Abstract]  
Employee Benefit Plans 14. Employee Benefit Plans

The components of periodic benefit costs for the defined benefit plans for the three months ended March 31, 2019 and 2018 were as follows:

 
 
Three Months Ended March 31,
 
 
2019
 
2018
(in millions)
 
Pension Plans
 
Postretirement
Health and
Other Plans
 
Pension Plans
 
Postretirement
Health and
Other Plans
Interest cost of projected benefit obligations
 
$
1.3

 
$
0.1

 
$
1.3

 
$
0.1

Expected return on assets
 
(1.2
)
 

 
(1.5
)
 

Amortization of actuarial net loss
 
0.5

 
0.1

 
0.6

 

Settlement loss recognized
 
1.2

 

 

 

Net periodic benefit cost
 
$
1.8

 
$
0.2

 
$
0.4

 
$
0.1

 
 
 
 
 
 
 
 
 

The components of periodic benefit costs are recorded in "Other expense — net" in the consolidated statements of operations.

During the first quarter of 2019, the Company took various actions to settle a portion of its United Kingdom ("U.K.") pension obligations. These actions resulted in a reduction in accrued pension obligations of approximately $5.5 million and a non-cash settlement loss of approximately $1.2 million, related to the accelerated recognition of unamortized losses for the three months ended March 31, 2019, which was recorded in "Other expense - net" in the consolidated statement of operations.
v3.19.1
Restructuring
3 Months Ended
Mar. 31, 2019
Restructuring and Related Activities [Abstract]  
Restructuring 15. Restructuring

The Company periodically takes action to improve operating efficiencies, typically in connection with recognizing cost synergies and rationalizing the cost structure of the Company. The Company's footprint and headcount reductions and organizational integration actions relate to discrete, unique restructuring events, primarily reflected in approved plans for reductions in force ("RIF").

The following is a rollforward of all restructuring activities for the three months ended March 31, 2019:

(in millions)
 
 
Balance at December 31, 2018
 
$
13.1

Restructuring charges
 
4.2

Use of reserve
 
(2.0
)
Non-cash adjustment (1)
 
(0.7
)
Balance at March 31, 2019
 
$
14.6


(1) This non-cash adjustment represents the non-cash stock-based compensation expense recognized during the three months ended March 31, 2019 resulting from the accelerated vesting of certain stock awards in connection with restructuring actions.

As of March 31, 2019 and December 31, 2018, the short-term portion of the liability of $4.8 million and $3.0 million, respectively, was reflected in "Accrued expenses and other liabilities" in the consolidated balance sheets. The long-term portion of the liability of $9.8 million and $10.1 million as of March 31, 2019 and December 31, 2018, respectively, was reflected in "Other long-term liabilities" in the consolidated balance sheets and relates to the long-term portion of the pension withdrawal obligation incurred in connection with the reorganization and plant restructuring of the Company's former Lincoln Foodservice operations.

During the first quarter of 2019, the Company completed a RIF and limited executive management restructuring actions. As a result of these actions, the Company incurred total severance and related costs of $5.5 million including $1.3 million of stock-based compensation resulting from the accelerated vesting of certain awards. Of the total severance and related costs incurred, $4.2 million was recognized in "Restructuring expense" in the consolidated statements of operations during the three months ended March 31, 2019. The remaining $1.3 million will be recorded in the second quarter of 2019 due to continuing service requirements.

The Company completed a limited management restructuring within its EMEA region in March 2018. In connection with this action, the Company incurred severance and related costs of $0.6 million, of which $0.4 million was recognized during the first quarter of 2018 in "Restructuring expense" in the consolidated statement of operations.
v3.19.1
Accumulated Other Comprehensive Loss
3 Months Ended
Mar. 31, 2019
Equity [Abstract]  
Accumulated Other Comprehensive Loss 16. Accumulated Other Comprehensive Loss

The components of "Accumulated other comprehensive loss" as of March 31, 2019 and December 31, 2018 are as follows:
 
(in millions)
 
March 31, 2019
 
December 31, 2018
Foreign currency translation, net of income tax benefit of $1.8 million and $2.1 million at March 31, 2019 and December 31, 2018, respectively
 
$
(6.5
)
 
$
(6.5
)
Derivative instrument fair market value, net of income tax expense of $1.1 million and $1.3 million at March 31, 2019 and December 31, 2018, respectively
 
(0.2
)
 
0.8

Employee pension and postretirement benefit adjustments, net of income tax benefit of $6.2 million and $6.3 million at March 31, 2019 and December 31, 2018, respectively
 
(37.1
)
 
(35.9
)
 
 
$
(43.8
)
 
$
(41.6
)


A summary of the changes in "Accumulated other comprehensive loss," net of tax, by component for the three months ended March 31, 2019 and 2018 are as follows:

(in millions)
 
Foreign Currency Translation(1)
 
Gains and Losses on Cash Flow Hedges
 
Pension & Postretirement
 
Total
Balance at December 31, 2018
 
$
(6.5
)
 
$
0.8

 
$
(35.9
)
 
$
(41.6
)
Other comprehensive income (loss) before reclassifications
 
0.3

 
(0.5
)
 
(2.9
)
 
(3.1
)
Amounts reclassified out
 

 
(0.7
)
 
1.8