MANITOWOC FOODSERVICE, INC., S-4 filed on 8/17/2016
Securities Registration: Business Combination
Document and Entity Information
6 Months Ended
Jun. 30, 2016
Document And Entity Information [Abstract]
 
Document Type
S-4 
Amendment Flag
false 
Document Period End Date
Jun. 30, 2016 
Trading Symbol
MFS 
Entity Registrant Name
MANITOWOC FOODSERVICE, INC. 
Entity Central Index Key
0001650962 
Entity Filer Category
Non-accelerated Filer 
Consolidated (Condensed) Statements of Operations (USD $)
In Millions, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Income Statement [Abstract]
 
 
 
 
Net sales
$ 368.4 
$ 407.7 
$ 693.9 
$ 753.1 
Cost of sales
233.7 
280.8 
441.6 
519.6 
Gross profit
134.7 
126.9 
252.3 
233.5 
Costs and expenses:
 
 
 
 
Selling, general and administrative expenses
75.4 
69.2 
147.2 
151.6 
Amortization expense
7.9 
7.9 
15.7 
15.7 
Separation expense
1.3 
0.5 
4.3 
0.5 
Restructuring expense
0.3 
(0.2)
1.6 
0.5 
Earnings from operations
49.8 
49.5 
83.5 
65.2 
Interest expense
27.0 
0.4 
35.5 
0.7 
Interest (income) expense on notes with MTW - net
(4.6)
0.1 
(9.3)
Other (income) expense - net
3.6 
(0.2)
6.0 
(0.6)
Earnings before income taxes
19.2 
53.9 
41.9 
74.4 
Income taxes
4.1 
17.0 
8.7 
23.5 
Discontinued operations:
 
 
 
 
Earnings (loss) from discontinued operations, net of income taxes
 
0.1 
 
 
Loss on sale of discontinued operations, net of income taxes
 
 
 
Net earnings
$ 15.1 
$ 36.9 
$ 33.2 
$ 50.9 
Per Share Data
 
 
 
 
Earnings from continuing operations
 
$ 0.27 
 
 
Earnings from per common share - Basic (in dollars per share)
$ 0.11 
$ 0.27 
$ 0.24 
$ 0.37 
Loss from discontinued operations
 
$ 0 
 
 
Earnings from per common share - Diluted (in dollars per share)
$ 0.11 
$ 0.27 
$ 0.24 
$ 0.37 
Loss on sale of discontinued operations
 
$ 0.00 
 
 
Weighted average shares outstanding - Basic (in shares)
137,131,572 
137,016,712 
137,105,290 
137,016,712 
Weighted average shares outstanding - Diluted (in shares)
138,374,379 
137,016,712 
138,356,213 
137,016,712 
Basic and diluted net earnings per share
 
$ 0.27 1
 
 
Consolidated (Condensed) Statements of Operations (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
0 Months Ended 12 Months Ended
Mar. 4, 2016
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Income Statement [Abstract]
 
 
 
 
Earnings (loss) from discontinued operations, income taxes
 
$ 0.1 
$ (0.3)
$ (1.0)
Loss on sale of discontinued operations, income taxes
 
$ 0 
$ (0.6)
$ 4.4 
Share attributable to Manitowoc common shareholders
137,016,712 
137,016,712 
137,016,712 
137,016,712 
Consolidated (Condensed) Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Statement of Comprehensive Income [Abstract]
 
 
 
 
 
 
 
Net earnings
$ 15.1 
$ 36.9 
$ 33.2 
$ 50.9 
$ 157.1 
$ 159.8 
$ 146.1 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(6.1)
1.3 
11.1 
(9.8)
(25.2)
(16.9)
2.6 
Unrealized gain (loss) on derivatives, net of income taxes
1.5 
0.7 
2.4 
(1.0)
(0.8)
(0.6)
(0.2)
Employee pension and post-retirement benefits, net of income taxes
0.3 
(1.2)
(8.6)
0.5 
2.2 
(4.4)
5.6 
Total other comprehensive income (loss), net of tax
(4.3)
0.8 
4.9 
(10.3)
(23.8)
(21.9)
8.0 
Comprehensive income (loss)
$ 10.8 
$ 37.7 
$ 38.1 
$ 40.6 
$ 133.3 
$ 137.9 
$ 154.1 
Consolidated (Condensed) Statements of Comprehensive Income (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Statement of Comprehensive Income [Abstract]
 
 
 
 
 
 
 
Unrealized gain (loss) on derivatives, taxes
$ 0.3 
$ 0 
$ 0.7 
$ 0.6 
$ 0.5 
$ 0.2 
$ 0 
Employee pension and post retirement benefits, taxes
$ 0.1 
$ (0.5)
$ (5.8)
$ 0 
$ 0 
$ 0.3 
$ (0.6)
Consolidated (Condensed) Balance Sheets (USD $)
In Millions, unless otherwise specified
Jun. 30, 2016
Dec. 31, 2015
Dec. 31, 2014
Current Assets:
 
 
 
Cash and cash equivalents
$ 40.7 
$ 32.0 
$ 16.5 
Restricted cash
0.4 
0.6 
Accounts receivable, less allowances
100.7 
63.8 
71.0 
Inventories - net
163.6 
145.9 
163.2 
Deferred income taxes
 
23.7 
Prepaids and other current assets
10.7 
10.3 
15.1 
Current assets held for sale
6.2 
 
Total current assets
322.3 
252.6 
289.5 
Property, plant and equipment - net
111.4 
116.4 
134.3 
Goodwill
845.9 
845.8 
872.8 
Other intangible assets - net
503.3 
519.6 
584.5 
Other non-current assets
24.1 
15.9 
17.2 
Long-term assets held for sale
3.7 
Total assets
1,807.0 
1,754.0 
1,898.3 
Current Liabilities:
 
 
 
Accounts payable
124.4 
129.0 
166.7 
Accrued expenses and other liabilities
146.3 
157.6 
165.4 
Short-term borrowings
0.1 
 
Current portion of long-term debt and capital leases
1.3 
0.4 
0.5 
Product warranties
31.1 
34.3 
36.0 
Total current liabilities
303.2 
321.3 
368.6 
Long-term debt and capital leases
1,369.9 
2.3 
3.6 
Deferred income taxes
152.8 
167.9 
218.0 
Pension and postretirement health obligations
58.8 
33.3 
36.4 
Other long-term liabilities
33.4 
20.5 
20.3 
Total non-current liabilities
1,614.9 
224.0 
278.3 
Total Equity (Deficit):
 
 
 
Common stock (300,000,000 and 0 shares authorized, 137,221,917 shares and 0 shares issued and 137,182,606 shares and 0 shares outstanding, respectively)
1.4 
 
Additional paid-in capital (deficit)
(90.8)
 
Retained earnings
17.9 
 
Net parent company investment
1,253.2 
1,272.1 
Accumulated other comprehensive loss
(39.6)
(44.5)
(20.7)
Total equity (deficit)
(111.1)
1,208.7 
1,251.4 
Total liabilities and equity
$ 1,807.0 
$ 1,754.0 
$ 1,898.3 
Consolidated (Condensed) Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Jun. 30, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Financial Position [Abstract]
 
 
 
Accounts receivable allowances
$ 3.7 
$ 4.0 
$ 3.9 
Common stock shares authorized (in shares)
300,000,000 
 
Common stock shares issued (in shares)
137,221,917 
 
Common stock shares outstanding (in shares)
137,182,606 
 
Consolidated (Condensed) Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
6 Months Ended 12 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Cash Flows From Operating activities
 
 
 
 
 
Net earnings
$ 33.2 
$ 50.9 
$ 157.1 
$ 159.8 
$ 146.1 
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
 
 
 
 
 
Asset impairments
 
 
9.0 
1.1 
Discontinued operations, net of income taxes
 
 
(0.1)
0.4 
0.5 
Depreciation
8.8 
10.0 
19.6 
21.2 
20.0 
Amortization of intangible assets
15.7 
15.7 
31.4 
31.8 
31.4 
Amortization of deferred financing fees
1.9 
 
 
 
Deferred income taxes
(5.7)
3.5 
(30.0)
(17.5)
(9.6)
Stock-based compensation expense
3.4 
1.6 
 
 
 
Loss on sale of property, plant, and equipment
0.1 
0.3 
0.9 
0.3 
0.7 
Gain on acquisitions and divestitures
 
 
(14.8)
Loss on sale of discontinued operations
 
 
1.1 
2.7 
Other
 
 
2.3 
2.4 
3.6 
Changes in operating assets and liabilities, excluding the effects of business acquisitions or dispositions:
 
 
 
 
 
Accounts receivable
(22.3)
(29.6)
(7.5)
(0.3)
(3.2)
Inventories
(17.7)
(27.0)
4.7 
(23.8)
(8.8)
Other assets
(5.9)
(2.6)
1.4 
(1.3)
(5.7)
Accounts payable
(4.3)
(18.0)
(25.6)
21.2 
17.0 
Accrued expenses and other liabilities
(5.0)
(15.1)
(5.5)
4.2 
9.6 
Net cash provided by (used for) operating activities
2.2 
(10.3)
142.9 
200.6 
204.3 
Net cash provided by (used for) operating activities of discontinued operations
 
 
0.1 
(0.4)
(2.4)
Net cash provided by operating activities
 
 
143.0 
200.2 
201.9 
Net cash provided by (used for) operating activities
2.2 
(10.3)
142.9 
200.6 
204.3 
Cash Flows From Investing activities
 
 
 
 
 
Capital expenditures
(6.2)
(6.7)
(13.2)
(25.3)
(33.6)
Proceeds from sale of property, plant and equipment
 
 
1.6 
Changes in restricted cash
0.2 
(0.3)
(0.6)
Business acquisitions, net of cash acquired
 
 
(5.3)
(12.2)
Proceeds from sale of business
 
 
78.2 
0.7 
Net cash provided by (used for) investing activities of continuing operations
(6.0)
(7.0)
59.1 
(25.3)
(43.5)
Net cash provided by investing activities of discontinued operations
 
 
0.6 
Net cash provided by (used for) investing activities
 
 
59.1 
(25.3)
(42.9)
Cash Flows From Financing activities
 
 
 
 
 
Payments on capital leases
 
 
(0.7)
(3.4)
(2.9)
Proceeds from long-term debt and capital leases
1,457.0 
0.4 
 
 
 
Proceeds from capital leases
 
 
0.5 
3.1 
3.4 
Repayments on long-term debt and capital leases
(49.6)
(0.2)
 
 
 
Debt issuance costs
(40.9)
 
 
 
Changes in short-term borrowings
0.1 
 
 
 
Dividend paid to MTW
(1,362.0)
 
 
 
Net transactions with MTW
7.6 
16.3 
(182.9)
(166.7)
(171.5)
Exercises of stock options
0.4 
 
 
 
Net cash provided by (used for) financing activities
12.6 
16.5 
(183.1)
(167.0)
(171.0)
Effect of exchange rate changes on cash
(0.1)
(0.9)
(3.5)
(1.0)
(0.6)
Net increase (decrease) in cash and cash equivalents
8.7 
(1.7)
15.5 
6.9 
(12.6)
Balance at beginning of period
32.0 
16.5 
16.5 
9.6 
22.2 
Balance at end of period
40.7 
14.8 
32.0 
16.5 
9.6 
Supplemental Cash Flow Information
 
 
 
 
 
Income taxes paid
 
 
$ 13.2 
$ 13.2 
$ 15.9 
Combined Statements of Equity (USD $)
In Millions
Total
Net Parent Company Investment
Accumulated Other Comprehensive (Loss) Income
Beginning balance at Dec. 31, 2012
 
$ 1,303.5 
$ (6.8)
Net earnings
146.1 
146.1 
 
Other comprehensive (loss) income
8.0 
 
8.0 
Net decrease in net parent company investment
 
(182.4)
 
Ending balance at Dec. 31, 2013
1,268.4 
1,267.2 
1.2 
Net earnings
159.8 
159.8 
 
Other comprehensive (loss) income
(21.9)
 
(21.9)
Net decrease in net parent company investment
 
(154.9)
 
Ending balance at Dec. 31, 2014
1,251.4 
1,272.1 
(20.7)
Net earnings
14.0 
 
 
Other comprehensive (loss) income
 
 
(11.1)
Ending balance at Mar. 31, 2015
 
 
(31.8)
Beginning balance at Dec. 31, 2014
1,251.4 
1,272.1 
(20.7)
Net earnings
50.9 
50.9 
 
Other comprehensive (loss) income
(10.3)
 
0.8 
Ending balance at Jun. 30, 2015
1,322.3 
1,353.3 
(31.0)
Beginning balance at Dec. 31, 2014
1,251.4 
1,272.1 
(20.7)
Net earnings
157.1 
157.1 
 
Other comprehensive (loss) income
(23.8)
 
(23.8)
Net decrease in net parent company investment
 
(176.0)
 
Ending balance at Dec. 31, 2015
1,208.7 
1,253.2 
(44.5)
Other comprehensive (loss) income
 
 
9.2 
Ending balance at Mar. 31, 2016
 
 
(35.3)
Beginning balance at Dec. 31, 2015
1,208.7 
1,253.2 
(44.5)
Net earnings
33.2 
15.3 
 
Other comprehensive (loss) income
4.9 
 
(4.3)
Ending balance at Jun. 30, 2016
$ (111.1)
 
$ (39.6)
Description of the Business and Basis of Presentation
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Description of the Business and Basis of Presentation

1. Description of the Business and Basis of Presentation

The Spin-Off

On January 29, 2015, The Manitowoc Company, Inc. (“MTW”) announced plans to create two independent public companies to separately operate its two businesses: its Cranes business and its Foodservice business. To effect the separation, MTW first undertook an internal reorganization, following which MTW held the Cranes business, and Manitowoc Foodservice, Inc. (“MFS”) held the Foodservice business. Then on March 4, 2016, MTW distributed all the MFS common stock to MTW’s shareholders on a pro rata basis, and MFS became an independent publicly traded company (the “Distribution”). As used in this Quarterly Report on Form 10-Q, “Spin-Off” refers to both the above described internal reorganization and Distribution, collectively.

In these consolidated (condensed) financial statements, unless the context otherwise requires:

 

    “MFS” and the “Company” refer to Manitowoc Foodservice, Inc. and its consolidated subsidiaries, after giving effect to the internal reorganization and the distribution, or, in the case of information as of dates or for periods prior to its separation from MTW, the combined entities of the Foodservice business, and certain other assets and liabilities that were historically held at the MTW corporate level, but were specifically identifiable and attributable to the Foodservice business; and

 

    “MTW” refers to The Manitowoc Company, Inc. and its consolidated subsidiaries, other than, for all periods following the Spin-Off, MFS.

 

    “Spin-Off” refers to both the above described internal reorganization and distribution, collectively.

Description of the Business

The Company is among the world’s most preferred and innovative commercial foodservice equipment companies. It designs, manufactures, and services an integrated portfolio of hot and cold category products. It has one of the industry’s broadest portfolios of products that create optimal value for its channel partners while delivering superior performance, quality, reliability, and durability for its customers. The Company’s capabilities span refrigeration, ice-making, cooking, holding, food-preparation, and beverage-dispensing technologies, and allow it to equip entire commercial kitchens and serve the world’s growing demand for food prepared away from home. The Company supplies foodservice equipment to commercial and institutional foodservice operators such as full-service restaurants, quick-service restaurant chains, hotels, caterers, supermarkets, convenience stores, business and industry, hospitals, schools and other institutions.

Basis of Presentation

The accompanying unaudited consolidated (condensed) 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.

During the periods presented prior to the Spin-Off on March 4, 2016, the Company’s financial statements were prepared on a combined standalone basis derived from the consolidated financial statements and accounting records of MTW. The Company functioned as part of the larger group of companies controlled by MTW. Accordingly, MTW performed certain corporate overhead functions for the Company. Therefore, certain costs related to the Company have been allocated from MTW for the portion of the three months ended March 31, 2016 up to the Spin-Off on March 4, 2016 and for the entirety of the three months ended March 31, 2015. These allocated costs are primarily related to: 1) corporate officers, 2) employee benefits and compensation, 3) share-based compensation, and 4) certain administrative functions, which are not provided at the business level including, but not limited to, finance, treasury, tax, audit, legal, information technology, human resources, and investor relations. Where possible, these costs were allocated based on direct usage, with the remainder allocated on a basis of revenue, headcount, or other measures the Company determined as reasonable.

Management of the Company believes the assumptions underlying the unaudited consolidated (condensed) financial statements, including the assumptions regarding the allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by the Company during the periods presented. Nevertheless, the accompanying unaudited consolidated (condensed) financial statements may not be indicative of the Company’s future performance, and do not necessarily include all of the actual expenses that would have been incurred by the Company and may not reflect the results of operations, financial position, and cash flows had the Company been a standalone company during the entirety of the periods presented.

Accounting Policies

In the opinion of management, the accompanying unaudited consolidated (condensed) financial statements contain all adjustments necessary for a fair statement of the results of operations and comprehensive income for the three and six months ended June 30, 2016 and 2015, the cash flows for the six months ended June 30, 2016 and 2015, and the balance sheet at June 30, 2016 and December 31, 2015, and except as otherwise discussed such adjustments consist of only those of a normal recurring nature. The interim results are not necessarily indicative of results for a full year and do not contain information included in the Company’s annual consolidated financial statements and notes for the year ended December 31, 2015. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with U.S. GAAP, have been condensed or omitted pursuant to the SEC’s rules and regulations dealing with interim financial statements. However, the Company believes that the disclosures made in the unaudited consolidated (condensed) financial statements included herein are adequate to make the information presented not misleading. It is suggested that these unaudited financial statements be read in conjunction with the financial statements and the notes to the financial statements included in the Company’s latest annual report on Form 10-K.

Certain prior period amounts have been reclassified to conform to the current period presentation. All dollar amounts, except share and per share amounts, are in millions of dollars throughout the tables included in these notes unless otherwise indicated.

Recent Accounting Changes and Pronouncements

On March 30, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Stock Compensation (Topic 718)” which simplifies several aspects of the accounting for share-based payment award transactions. This ASU requires that all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit on the income statement. The excess tax items should be classified with other income tax cash flows as an operating activity. This ASU also allows an entity to account for forfeitures when they occur rather than the current U.S. GAAP practice where an entity makes an entity-wide accounting policy election to estimate the number of awards that are expected to vest. This ASU is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.

On February 25, 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. ASU 2016-02 requires a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, and provides certain practical expedients that companies may elect. This ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments (Subtopic 825-10)—Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes (Subtopic 740-10).” ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the requirement for companies to present deferred tax liabilities and assets as current and non-current on the balance sheet. Instead, companies will be required to classify all deferred tax assets and liabilities as non-current. This guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The Company early adopted this ASU on a prospective basis as of December 31, 2015. Prior periods were not retrospectively adjusted.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805)—Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in this ASU require that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than as retrospective adjustments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. The Company adopted this accounting guidance in the first quarter of fiscal year 2016. The adoption of this ASU did not have a material impact on the Company’s consolidated (condensed) financial statements.

In August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” This ASU clarifies the guidance related to accounting for debt issuance costs related to line-of-credit arrangements. In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. With the issuance of ASU 2015-15, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted this accounting guidance in the first quarter of fiscal year 2016 and its impact is presented in the consolidated (condensed) financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” This ASU changes the guidance on accounting for inventory accounted for on a first-in first-out basis (FIFO). Under the revised standard, an entity should measure FIFO inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured on a last-in, first-out basis (LIFO). The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. The Company believes the adoption of this ASU will not have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance on accounting for a software license in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Further, all software licenses are within the scope of Accounting Standards Codification (“ASC”) Subtopic 350-40 and will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted this accounting guidance in the first quarter of fiscal year 2016. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 820)—Amendments to the Consolidation Analysis.” This ASU amends the current consolidation guidance for both the variable interest entity (VIE) and voting interest entity (VOE) consolidation models. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted this accounting guidance in the first quarter of fiscal year 2016. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items.” This update eliminates from U.S. GAAP the concept of extraordinary items. This ASU is effective for the first interim period within fiscal years beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods presented in the financial statements. The Company adopted this accounting guidance in the first quarter of fiscal year 2016. The adoption of this ASU did not have a material impact on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern.” This update provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. This ASU is effective in the first annual period ending after December 15, 2016, with early adoption permitted. The Company believes the adoption of this ASU will not have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU provides a principles-based approach to revenue recognition to record the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU provides a five-step model to be applied to all contracts with customers. The five steps are to identify the contract(s) with the customer, identify the performance obligations in the contact, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when each performance obligation is satisfied. The revenue standard is effective for the first interim period within fiscal years beginning after December 15, 2017 (as finalized by the FASB in August 2015 in ASU 2015-14 and as updated by ASUs 2016-10, 2016-11 and 2016-12), and can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of initial application along with additional disclosures. Early adoption is permitted as of the original effective date—the first interim period within fiscal years beginning after December 15, 2016. The Company is evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

Description of the Business and Basis of Presentation

1. Description of the Business and Basis of Presentation

The Spin-Off

On January 29, 2015, The Manitowoc Company, Inc. (“MTW”) announced plans to create two independent public companies to separately operate its two businesses: its Crane business and its Foodservice business. To effect the separation, MTW first undertook an internal reorganization, following which MTW held the Crane business, and Manitowoc Foodservice, Inc. (“MFS”) held the Foodservice business. Then on March 4, 2016, MTW distributed all of our common stock to MTW’s shareholders on a pro rata basis, and MFS became an independent publicly traded company (the “Distribution”). As used in this prospectus, “Spin-Off” refers to both the above described internal reorganization and Distribution, collectively.

In these combined financial statements, unless the context otherwise requires:

 

    “MFS,” the “Company,” “we,” “our” and “us” refer to Manitowoc Foodservice, Inc. and its combined subsidiaries, after giving effect to the internal reorganization and the distribution, or, in the case of information as of dates or for periods prior to our separation from MTW, the combined entities of the Foodservice business, and certain other assets and liabilities that were historically held at the MTW corporate level, but were specifically identifiable and attributable to the Foodservice business; and

 

    “MTW” refers to The Manitowoc Company, Inc. and its consolidated subsidiaries, other than, for all periods following the Spin-Off, MFS.

 

    “Spin-Off” refers to both the above described internal reorganization and distribution, collectively.

Nature of the Business

MFS is among the world’s most preferred and innovative commercial foodservice equipment companies. It designs, manufactures, and services an integrated portfolio of hot and cold category products. We have one of the industry’s broadest portfolios of products that create optimal value for our channel partners while delivering superior performance, quality, reliability, and durability for our customers. Our capabilities span refrigeration, ice-making, cooking, holding, food-preparation, and beverage-dispensing technologies, and allow us to equip entire commercial kitchens and serve the world’s growing demand for food prepared away from home. We supply foodservice equipment to commercial and institutional foodservice operators such as full-service restaurants, quick-service restaurant chains, hotels, caterers, supermarkets, convenience stores, business and industry, hospitals, schools and other institutions.

Basis of Presentation

The accompanying combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), and derived from the consolidated financial statements and accounting records of MTW. The accompanying combined financial statements include the historical cost basis of assets, liabilities, revenues, and expenses of the individual entities that comprise MTW’s historical Foodservice segment, in addition to a corporate entity which historically supported Foodservice operations. All intercompany balances and transactions within MFS and its affiliates have been eliminated. However, interest income and expense related to the notes with MTW have been reflected on a net basis within the combined statement of operations as described in Note 23, “Net Parent Company Investment and Related Party Transactions.”

As the separate legal entities that comprise MFS were not historically held by a single legal entity, Net Parent Company Investment is shown in lieu of shareholder’s equity in these combined financial statements. Balances between MFS and MTW (including its Crane business) that were not historically settled in cash are included in Net Parent Company Investment. Net Parent Company Investment represents MTW’s interest in the recorded assets of MFS and represents the cumulative investment by MTW in MFS through the dates presented, inclusive of operating results.

During the periods presented, MFS functioned as part of the larger group of companies controlled by MTW, accordingly, MTW performed certain corporate overhead functions for MFS. Therefore, certain costs related to MFS have been allocated from MTW. These allocated costs are primarily related to: 1) corporate officers, 2) employee benefits and compensation, 3) share-based compensation, and 4) certain administrative functions, which are not provided at the business level including, but not limited to, finance, treasury, tax, audit, legal, information technology, human resources, and investor relations. Where possible, these costs were allocated based on direct usage, with the remainder allocated on a basis of revenue, headcount, or other measures we have determined as reasonable.

Management of MFS believes the assumptions underlying the combined financial statements, including the assumptions regarding the allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by MFS during the periods presented. Nevertheless, the accompanying combined financial statements may not be indicative of MFS’ future performance, and do not necessarily include all the of the actual expenses that would have been incurred by MFS and may not reflect the results of operations, financial position, and cash flows had MFS been a standalone company during the periods presented.

Cash was managed centrally and flowed through centralized bank accounts controlled and maintained by MTW. Accordingly, cash and cash equivalents held by MTW at the corporate level were not attributable to MFS for any of the periods presented. Only cash amounts specifically attributable to MFS are reflected in the combined balance sheets. Transfers of cash, both to and from MTW’s centralized cash management system, are reflected as a component of Net Parent Company Investment in the combined balance sheets and as a financing activity on the accompanying combined statements of cash flows. Additionally, none of MTW’s debt has been allocated to the combined financial statements as MFS has no legal obligation for any of the debt agreements. MFS received or provided funding as part of MTW’s centralized treasury program.

Income tax expense in the combined statement of operations is computed on a separate return basis, as if MFS was operating as a separate consolidated group and filed separate tax returns in the jurisdictions in which it operates. As a result of potential changes to our business model and potential past and future tax planning, income tax expense included in the combined financial statements may not be indicative of MFS’ future expected tax rate. In addition, cash tax payments and items of current and deferred taxes may not be reflective of MFS’ actual tax balances prior to or subsequent to the Spin-Off.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Cash, Cash Equivalents, and Restricted Cash All short-term investments purchased with an original maturity of three months or less are considered cash equivalents. All cash was managed centrally by MTW and cash held by MTW at the corporate level was not attributed to MFS for any periods presented. Only cash amounts specifically attributable to MFS are reflected in the combined balance sheet.

Inventories Inventories are valued at the lower of cost or market value. Approximately 90.3% and 88.6% of MFS’ inventories at December 31, 2015 and 2014, respectively, were valued using the first-in, first-out (FIFO) method. 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 $3.4 million and $3.1 million at December 31, 2015 and 2014, respectively. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs.

 

Goodwill and Other Intangible Assets MFS accounts for its goodwill and other intangible assets under the guidance of ASC Subtopic 350-10, “Intangibles — Goodwill and Other.” Under ASC Subtopic 350-10, goodwill is not amortized, but it is tested for impairment annually, or more frequently, as events dictate. See additional discussion of impairment testing under “—Impairment of Long-Lived Assets,” below. MFS’ other intangible assets with indefinite lives, including trademarks and tradenames and in-place distributor networks, are not amortized, but are also tested for impairment annually, or more frequently, as events dictate. MFS’ other intangible assets subject to amortization are tested for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Other intangible assets are amortized straight-line over the following estimated useful lives:

 

     Useful lives  

Patents

     10-20 years   

Engineering drawings

     15 years   

Customer relationships

     10-20 years   

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 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 of the assets using the straight-line depreciation method for financial reporting and on accelerated methods for income tax purposes.

Property, plant and equipment are 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

   2 - 7

Impairment of Long-Lived Assets MFS reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the assets’ carrying amount may not be recoverable. MFS conducts its long-lived asset impairment analyses in accordance with ASC Subtopic 360-10-5. ASC Subtopic 360-10-5 requires the Company to group 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 to evaluate the asset group against the sum of the undiscounted future cash flows.

For property, plant and equipment and other long-lived assets, other than goodwill and other indefinite lived intangible assets, MFS performs undiscounted operating cash flow analyses to determine impairments. If an impairment is determined to exist, any related 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.

Each year, as of June 30, MFS tests for impairment of goodwill according to a two-step approach. In the first step, MFS estimates the fair values of its reporting units using the present value of future cash flows approach. If the carrying amount exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. In the second step, the implied fair value of the goodwill is estimated as the fair value of the reporting unit used in the first step less the fair values of all other net tangible and intangible assets of the reporting unit. If the carrying amount of the goodwill exceeds its implied fair market value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. In addition, goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. For other indefinite lived intangible assets, the impairment test consists of a comparison of the fair value of the intangible assets to their carrying amount. See Note 9, “Goodwill and Other Intangible Assets,” for further details on our impairment assessments.

Warranties Estimated warranty costs are recorded in cost of sales at the time of sale of the warranted 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.

Environmental Liabilities MFS accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Such accruals are adjusted as information develops or circumstances change. Costs of long-term expenditures for environmental remediation obligations are discounted to their present value when the timing of cash flows are estimable.

Product Liabilities MFS 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, MFS tracks the population of all outstanding pending and threatened product liability cases to determine an appropriate case reserve for each based upon Foodservice’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 case. Second, MFS determines the amount of additional reserve required to cover incurred but not reported product liability obligations and to account for possible adverse development of the established case reserves. This analysis is performed at least once annually.

Foreign Currency Translation The financial statements of MFS’ non-U.S. subsidiaries are translated using the current exchange rate for assets and liabilities and the average exchange rate for the year for income and expense items. Resulting translation adjustments are recorded to Accumulated Other Comprehensive Income (AOCI) as a component of equity.

Derivative Financial Instruments and Hedging Activities MTW entered into derivative instruments, on MFS’ behalf, to hedge MFS’ foreign exchange and commodity exposure associated with aluminum, copper, steel, and natural gas prices.

MTW has and MFS has adopted substantially similar 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. MTW used and MFS continues to use financial instruments to manage the market risk from changes in foreign exchange rates, commodities and interest rates. MFS follows the guidance in accordance with ASC Subtopic 815-10, “Derivatives and Hedging.” The fair values of all derivatives are recorded in the combined balance sheets. The change in a derivative’s fair value is recorded each period in current earnings or AOCI depending on whether the derivative is designated and qualifies as part of a hedge transaction and if so, the type of hedge transaction. During 2015, 2014 and 2013, minimal amounts were recognized in earnings due to ineffectiveness of certain commodity hedges. The amount reported as derivative instrument fair market value adjustment in the AOCI account within the combined statements of comprehensive income (loss) represents the net gain (loss) on foreign currency exchange contracts and commodity contracts designated as cash flow hedges, net of income taxes.

Cash Flow Hedges MTW, on MFS’ behalf, selectively hedged anticipated transactions that were subject to foreign exchange exposure and commodity price exposure, primarily using foreign currency exchange and commodity contracts. These instruments were designated as cash flow hedges in accordance with ASC Subtopic 815-10 and hedged specifically attributable to MFS are recorded in the combined balance sheets at fair value. The effective portion of the contracts’ gains or losses due to changes in fair value are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions, typically sales and costs related to sales occur and affect earnings. These contracts are highly effective in hedging the variability in future cash attributable to changes in currency exchange rates or commodity prices.

Stock-Based Compensation MFS employees have historically participated in MTW’s stock-based compensation plans. Stock-based compensation expense has been allocated to the MFS business based on the awards and terms previously granted to its employees. Until consummation of the Spin-Off, the MFS business continued to participate in MTW’s stock-based compensation plans and record stock-based compensation expense based on the stock-based awards granted to the MFS employees. Accounting guidance requires that the cost resulting from all stock-based payment transactions be recognized in the financial statements. Guidance establishes fair value as the measurement objective in accounting for stock-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting generally for all stock-based payment transactions with employees. Stock based compensation expense related to MFS employees of $2.3 million, $2.4 million and $3.5 million has been recorded in the combined statement of operations for the years ended December 31, 2015, 2014, and 2013, respectively.

Revenue Recognition Revenue is generally recognized and earned when all the following criteria are satisfied with regard to a specific transaction: persuasive evidence of a sales arrangement exists; the price is fixed or determinable; collectability of cash is reasonably assured; and delivery has occurred or services have been rendered. Shipping and handling fees are reflected in net sales and shipping and handling costs are reflected in cost of sales in the combined statements of operations.

Research and Development Research and development costs are charged to expense as incurred and amounted to $26.1 million, $31.0 million and $28.7 million for the years ended December 31, 2015, 2014, and 2013, respectively. Research and development costs include salaries, materials, contractor fees and other administrative costs.

Income Taxes In MFS’ combined financial statements, income tax expense and deferred tax balances have been calculated on a separate return basis although MFS’ operations have historically been included in the tax returns filed by the respective MTW entities. In the future, as a standalone entity, MFS will file tax returns on its own behalf and its deferred taxes and effective tax rate may differ from those in historical periods.

MFS recognizes deferred tax assets and liabilities for the expected future income tax consequences of events that have been recognized in MFS’ financial statements. Deferred tax assets and liabilities are determined based on the temporary difference between financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. Valuation allowances are provided for deferred tax assets where it is considered more likely than not that the Company will not realize the benefit of such assets. MFS evaluates its uncertain tax positions as new information becomes available. Tax benefits are recognized to the extent a position is more likely than not to be sustained upon examination by the taxing authority.

With the exception of certain separate filing Foodservice U.S. and non-U.S. entities that will transfer to MFS after the Spin-Off, current income tax liabilities were deemed to settle immediately with MTW tax paying entities in the respective jurisdictions. These settlements were reflected as changes in the net parent company investment account.

Comprehensive Income (Loss) Comprehensive income (loss) includes, in addition to net earnings, other items that are reported as direct adjustments to equity. Currently, these items are foreign currency translation adjustments, employee postretirement benefit adjustments and the change in fair value of certain derivative instruments.

Concentration of Credit Risk Credit extended to customers through trade accounts receivable potentially subjects MFS 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 MFS’ receivables are with distributors and large companies in the foodservice and beverage industry. MFS currently does not foresee a significant credit risk associated with these individual groups of receivables, but continues to monitor the exposure, if any.

 

Recent accounting changes and pronouncements

On February 25, 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. ASU 2016-02 requires a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, and provides certain practical expedients that companies may elect. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the effects that the adoption of ASU 2016-02 will have on our consolidated financial statements.

In January 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-01, “Financial Instruments (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.” This update provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. The Company is evaluating the impact, if any, the adoption of this ASU will have on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes (Subtopic 740-10).” ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the requirement for companies to present deferred tax liabilities and assets as current and non-current on the balance sheet. Instead, companies will be required to classify all deferred tax assets and liabilities as non-current. This guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. We early adopted this ASU on a prospective basis as of December 31, 2015. Prior periods were not retrospectively adjusted.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805) - Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in this ASU require that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than as retrospective adjustments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. We believe the adoption of this ASU will not have a material impact on our combined financial statements.

In August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” This ASU clarifies the guidance related to accounting for debt issuance costs related to line-of-credit arrangements. In April 2015, the FASB issued ASU 2015-03 which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability; see further discussion of ASU 2015-03 below. The guidance in ASU 2015-03 did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This ASU will be effective beginning in the interim period ended March 31, 2016 and will not affect the prior periods presented.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” This ASU changes the guidance on accounting for inventory accounted for on a first-in first-out basis (FIFO). Under the revised standard, an entity should measure FIFO inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured on a last-in, first-out basis (LIFO). The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. We believe the adoption of this ASU will not have a material impact on our combined financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This update provides guidance on accounting for a software license in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Further, all software licenses are within the scope of Accounting Standards Codification Subtopic 350-40 and will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We believe the adoption of this ASU will not have a material impact on our combined financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” To simplify the presentation of debt issuance costs, this update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than as a deferred asset. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early application permitted. This ASU will be effective beginning in the interim period ended March 31, 2016 and will not affect the prior periods presented.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 820)—Amendments to the Consolidation Analysis.” This update amends the current consolidation guidance for both the variable interest entity (VIE) and voting interest entity (VOE) consolidation models. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. MFS believes the adoption of this ASU will not have a material impact on its combined financial statements.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items.” This update eliminates from GAAP the concept of extraordinary items. ASU 2015-01 is effective for the first interim period within fiscal years beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods presented in the financial statements. MFS believes the adoption of this ASU will not have a material impact on its combined financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern.” This update provided guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective in the first annual period ending after December 15, 2016, with early adoption permitted. MFS believes the adoption of this ASU will not have a material impact on its combined financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This update provided a principles-based approach to revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU provides a five-step model to be applied to all contracts with customers. The five steps are to identify the contract(s) with the customer, identify the performance obligations in the contact, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when each performance obligation is satisfied. The revenue standard is effective for the first interim period within fiscal years beginning after December 15, 2017 (as finalized by the FASB in August 2015 in ASU 2015-14), and can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of initial application along with additional disclosures. Early adoption is permitted as of the original effective date—the first interim period within fiscal years beginning after December 15, 2016. MFS is evaluating the impact, if any, the adoption of this ASU will have on its combined financial statements.

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the requirements for reporting discontinued operations in Accounting Standards Codification Subtopic 205-20, and now requires a disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. There will also be additional disclosures required. The amendments in this ASU are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2014. The significance of this guidance for MFS is dependent on any future disposals.

Acquisitions
Acquisitions

3. Acquisitions

On October 1, 2013, MFS acquired all remaining shares of Inducs, AG (“Inducs”) for a purchase price, net of cash acquired, of approximately $12.2 million. MFS previously held a minority interest in Inducs. Inducs is a leader in induction cooking technology. Allocation of the purchase price resulted in $5.0 million of goodwill and $7.0 million of intangible assets. The results of Inducs have been included in these combined financial statements since the date of the acquisition.

On October 21, 2015, MFS acquired the remaining 50% of outstanding shares of a joint venture in Thailand. Welbilt Thailand is a leading manufacturer of kitchen equipment in South East Asia. The purchase price, net of cash acquired, was approximately $5.3 million. The gain of $4.9 million recognized on the acquisition was a component of Other income (expense) - net in the Combined Statements of Operations for the year ended December 31, 2015. The gain related to the difference between the book value and the fair value of our previously held passive 50% equity interest in the joint venture. Allocation of the purchase price resulted in $1.4 million of goodwill and $4.2 million of intangible assets. The results of Welbilt Thailand have been included in these combined financial statements since the date of the acquisition.

Discontinued Operations and Divestitures
Discontinued Operations and Divestitures

4. Discontinued Operations and Divestitures

On December 7, 2015, we announced the completion of the sale of Kysor Panel Systems, a manufacturer of wood frame and high-density rail panel systems for walk-in freezers and coolers for the retail and convenience-store markets, to an affiliate of D Cubed Group LLC. The sale price for the transaction was approximately $85 million, with cash proceeds received of approximately $78 million. In December 2015, the proceeds from the sale were used to reduce outstanding debt under MTW’s then-outstanding credit facility. This divestiture does not qualify for discontinued operations; therefore the results of the business are included in the operating results from continuing operations.

During the fourth quarter of 2012, MTW decided to divest our warewashing equipment business, which operated under the brand name Jackson, and classified this business as discontinued operations in the Company’s financial statements. On January 28, 2013, we sold the Jackson warewashing equipment business to Hoshizaki USA Holdings, Inc. for approximately $39.2 million and a post-closing working capital adjustment of approximately $0.7 million. The transaction resulted in a $2.7 million loss on sale, which included $4.4 million of income tax expense. The results of these operations have been classified as discontinued operations.

 

The following selected financial data of the Jackson business for the years ended December 31, 2015, 2014, and 2013, is presented for informational purposes only and does not necessarily reflect what the results of operations would have been had the business operated as a stand-alone entity. There was no general corporate expense or interest expense allocated to discontinued operations for this business during the periods presented.

 

(in millions)

   2015      2014      2013  

Net sales

   $ —         $ —         $ 2.5   

Pretax earnings from discontinued operation

     —           —           0.1   

Benefit for taxes on earnings

     —           —           (0.4
  

 

 

    

 

 

    

 

 

 

Net earnings from discontinued operation

   $ —         $ —         $ 0.5   
  

 

 

    

 

 

    

 

 

 

The following selected financial data of various businesses disposed of prior to 2012, primarily consisting of administrative costs, for the years ended December 31, 2015, 2014, and 2013, is presented for informational purposes only and does not necessarily reflect what the results of operations would have been had the businesses operated as stand-alone entities. There was no general corporate expense or interest expense allocated to discontinued operations for these businesses during the periods presented.

 

(in millions)

   2015      2014      2013  

Net sales

   $ —         $ —         $ —     

Pretax earnings (loss) from discontinued operations

   $ 0.2       $ (0.7    $ (1.6

Provision (benefit) for taxes on earnings

     0.1         (0.3      (0.6
  

 

 

    

 

 

    

 

 

 

Net earnings (loss) from discontinued operations

   $ 0.1       $ (0.4    $ (1.0
  

 

 

    

 

 

    

 

 

 

During the third quarter of 2014, we settled a pension obligation related to a previously disposed entity, which resulted in a $1.1 million loss on sale of discontinued operations, net of income tax benefit of $0.6 million, during the period.

Fair Value of Financial Instruments
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Fair Value of Financial Instruments

2. Fair Value of Financial Instruments

The following tables set forth financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 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 June 30, 2016  

(in millions)

   Level 1      Level 2      Level 3      Total  

Current assets:

           

Foreign currency exchange contracts

   $ —         $ 1.3       $ —         $ 1.3   

Commodity contracts

     —           0.1         —           0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets at fair value

   $ —         $ 1.4       $ —         $ 1.4   

Non-current Assets:

           

Commodity contracts

     —           0.1         —           0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current assets at fair value

     —           0.1         —           0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —         $ 1.5       $ —         $ 1.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Current Liabilities:

           

Foreign currency exchange contracts

   $ —         $ 0.9       $ —         $ 0.9   

Commodity contracts

     —           0.7         —           0.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities at fair value

   $ —         $ 1.6       $ —         $ 1.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ 1.6       $ —         $ 1.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value as of December 31, 2015  

(in millions)

   Level 1      Level 2      Level 3      Total  

Current Assets:

           

Foreign currency exchange contracts

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Current Liabilities:

           

Foreign currency exchange contracts

   $ —         $ 0.1       $ —         $ 0.1   

Commodity contracts

     —           3.1         —           3.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities at fair value

   $ —         $ 3.2       $ —         $ 3.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-current Liabilities:

           

Commodity contracts

   $ —         $ 0.4       $ —         $ 0.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current liabilities at fair value

   $ —         $ 0.4       $ —         $ 0.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ 3.6       $ —         $ 3.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of the Company’s 9.50% Senior Notes due 2024 (the “Senior Notes”) and Term Loan B under its Senior Secured Credit Facilities was approximately $477.3 million and $960.7 million, respectively, as of June 30, 2016. Neither the Senior Notes nor the Term Loan B existed as of December 31, 2015. See Note 9, “Debt,” for a description of the debt instruments and their related carrying values.

 

ASC Subtopic 820-10, “Fair Value Measurement,” defines fair value 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. ASC Subtopic 820-10 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 endeavors to utilize the best available information in measuring fair value. The Company estimates the fair value of its Senior Notes and Term Loan B based on quoted market prices of the instruments. Because these markets are typically thinly traded, the assets and liabilities are classified as Level 2 within the valuation hierarchy. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and deferred purchase price notes on receivables sold (see Note 8, “Accounts Receivable Securitization”), approximate fair value, without being discounted as of June 30, 2016 and December 31, 2015 due to the short-term nature of these instruments.

As a result of its global operating and financing activities, the Company is exposed to market risks from changes in foreign currency exchange rates, and commodity prices, which may adversely affect its operating results and financial position. When deemed appropriate, the Company minimizes these risks through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes, and the Company does not use leveraged derivative financial instruments. The foreign currency exchange and commodity contracts are valued through an independent valuation source which uses an industry standard data provider, with resulting valuations periodically validated through third-party or counterparty quotes. As such, these derivative instruments are classified within Level 2.

Fair Value of Financial Instruments

5. Fair Value of Financial Instruments

The following tables sets forth financial assets and liabilities which were attributable to MFS and were accounted for at fair value on a recurring basis as of December 31, 2015 and 2014 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 December 31, 2015  

(in millions)

   Level 1      Level 2      Level 3      Total  

Current Assets:

           

Foreign currency exchange contracts

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Current Liabilities:

           

Foreign currency exchange contracts

   $ —         $ 0.1       $ —         $ 0.1   

Commodity contracts

     —           3.1         —           3.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities at fair value

   $ —         $ 3.2       $ —         $ 3.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-current Liabilities:

           

Commodity contracts

   $ —         $ 0.4       $ —         $ 0.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current liabilities at fair value

   $ —         $ 0.4       $ —         $ 0.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ 3.6       $ —         $ 3.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value as of December 31, 2014  

(in millions)

   Level 1      Level 2      Level 3      Total  

Current Assets:

           

Foreign currency exchange contracts

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Current Liabilities:

           

Foreign currency exchange contracts

   $ —         $ 0.7       $ —         $ 0.7   

Commodity contracts

     —           0.7         —           0.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities at fair value

   $ —         $ 1.4       $ —         $ 1.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-current Liabilities:

           

Interest rate swap contracts: Fixed-to-float

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current liabilities at fair value

   $ —         $ 0.3       $ —         $ 0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ 1.7       $ —         $ 1.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

ASC Subtopic 820-10, “Fair Value Measurement,” defines fair value 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. ASC Subtopic 820-10 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

MFS endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and deferred purchase price notes on receivables sold (see Note 11, “Accounts Receivable Securitization”), approximate fair value, without being discounted as of December 31, 2015 and December 31, 2014 due to the short-term nature of these instruments.

As a result of its global operating and financing activities, MFS is exposed to market risks from changes in foreign currency exchange rates, and commodity prices, which may adversely affect its operating results and financial position. When deemed appropriate, MFS minimizes these risks through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes, and MFS does not use leveraged derivative financial instruments. The foreign currency exchange and commodity contracts are valued through an independent valuation source which uses an industry standard data provider, with resulting valuations periodically validated through third-party or counterparty quotes. As such, these derivative instruments are classified within Level 2.

Derivative Financial Instruments
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Derivative Financial Instruments

3. Derivative Financial Instruments

The Company uses derivative instruments to manage business risk exposures that have been identified through the risk identification and measurement process, provided they clearly qualify as “hedging” activities as defined in its risk policy. It is the Company’s policy to enter into derivative transactions only to the extent true exposures exist; the Company does not enter into derivative transactions for trading or other speculative purposes.

The primary risks the Company manages using derivative instruments are commodity price risk and foreign currency exchange risk. 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 designates commodity swaps and foreign currency exchange contracts as cash flow hedges of forecasted purchases of commodities and currencies.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. In the next twelve months the Company estimates $0.3 million of unrealized gain, net of tax, related to commodity price and currency rate hedging will be reclassified from other comprehensive (loss) income into earnings. Foreign currency and commodity hedging is generally completed prospectively on a rolling basis for twelve and twenty-four months, respectively, depending on the type of risk being hedged.

 

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 (condensed) statement of operations.

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying consolidated (condensed) balance sheet as of June 30, 2016 and December 31, 2015 are included within accounts payable, accrued expenses and other long-term liabilities and were not material in the periods presented.

Derivative Financial Instruments

6. Derivative Financial Instruments

MFS’ 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 structure transactions to minimize or manage these risks whenever possible.

 

Use of derivative instruments is consistent with the overall business and risk management objectives of MFS. Derivative instruments may be used to manage business risk within limits specified by our risk policies and manage exposures that have been identified through the risk identification and measurement process, provided that they clearly qualify as “hedging” activities as defined in the risk policy. Use of derivative instruments is not automatic, nor is it necessarily the only response to managing pertinent business risk. Use is permitted only after the risks that have been identified are determined to exceed defined tolerance levels and are considered to be unavoidable.

The primary risks we manage using derivative instruments are commodity price risk and foreign currency exchange risk. Swap contracts on various commodities are used to manage the price risk associated with forecasted purchases of materials used in MFS’ manufacturing process. We also enter into various foreign currency derivative instruments to help manage foreign currency risk associated with MFS’ projected purchases and sales and foreign currency denominated receivable and payable balances.

ASC Subtopic 815-10, “Derivatives and Hedges,” requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with ASC Subtopic 815-10, MFS designates commodity swaps and foreign currency exchange contracts as cash flow hedges of forecasted purchases of commodities and currencies.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. In the next twelve months we estimate $0.8 million of unrealized losses, net of tax, related to commodity price and currency rate hedging will be reclassified from other comprehensive income (loss) into earnings. Foreign currency and commodity hedging is generally completed prospectively on a rolling basis for twelve and twenty-four months, respectively, depending on the type of risk being hedged.

As of December 31, 2015, MFS had the following outstanding commodity and currency forward contracts that were entered into as hedge forecasted transactions:

 

Commodity

   Units Hedged     

 

     Type

Aluminum

     1,215         MT       Cash flow

Copper

     472         MT       Cash flow

Natural gas

     49,396         MMBtu       Cash flow

Steel

     11,073         Short Tons       Cash flow

Currency

   Units Hedged                                 Type

Canadian Dollar

     587,556          Cash flow

European Euro

     231,810          Cash Flow

Great British Pound

     113,115          Cash Flow

Mexican Peso

     28,504,800          Cash flow

For derivative instruments that are not designated as hedging instruments under ASC Subtopic 815-10, the gains or losses on the derivatives are recognized in current earnings within other (expense) income, net in the combined statement of operations. As of December 31, 2015, MFS had the following outstanding currency forward contracts that were not designated as hedging instruments:

 

Currency

  Units Hedged    

Recognized Location

 

Purpose

Canadian Dollar

    1,117,850      Other (expense) income, net   Accounts payable and receivable settlement

 

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying combined balance sheet as of December 31, 2015 was as follows:

 

    LIABILITY DERIVATIVES  

(in millions)

  Balance Sheet Location     Fair Value  

Derivatives designated as hedging instruments

   

Foreign exchange contracts

    Accounts payable and accrued expenses      $ 0.1   

Commodity contracts

    Accounts payable and accrued expenses        2.4   

Commodity contracts

    Other non-current liabilities        0.3   
   

 

 

 

Total derivatives designated as hedging instruments

    $ 2.8   
   

 

 

 

 

    LIABILITY DERIVATIVES  

(in millions)

  Balance Sheet Location     Fair Value  

Derivatives NOT designated as hedging instruments

   

Commodity Contracts

    Accounts payable and accrued expenses      $ 0.7   

Commodity Contracts

    Other non-current liabilities        0.1   
   

 

 

 

Total derivatives NOT designated as hedging instruments

    $ 0.8   
   

 

 

 
   
   

 

 

 

Total liability derivatives

    $ 3.6   
   

 

 

 

The effect of derivative instruments on the combined statement of operations for the year ended December 31, 2015 and gains or losses initially recognized in AOCI in the combined balance sheet were as follows:

 

Derivatives in Cash Flow Hedging

Relationships (in millions)

  Amount of Gain or
(Loss) Recognized in
AOCI on Derivative
(Effective  Portion,
net of tax)
   

Location of Gain or

(Loss) Reclassified

from AOCI into Income

(Effective Portion)

  Amount of Gain or
(Loss) Reclassified from
AOCI into
Income  (Effective
Portion)
 

Foreign exchange contracts

  $ 0.3      Cost of sales   $ (1.4

Commodity contracts

    (1.1   Cost of sales     (3.4
 

 

 

     

 

 

 

Total

  $ (0.8     $ (4.8
 

 

 

     

 

 

 

 

Derivatives Relationships (in
millions)

  

Location of Gain or (Loss)

Recognized in Income on

Derivative (Ineffective Portion

and Amount Excluded from

Effectiveness Testing)

   Amount of Gain or (Loss)
Recognized in Income on
Derivative (Ineffective  Portion
and Amount Excluded from
Effectiveness Testing)
 

Commodity contracts

   Cost of sales    $ 0.1   
     

 

 

 

Total

      $ 0.1   
     

 

 

 

 

Derivatives Not Designated as

Hedging Instruments (in millions)

 

Location of Gain or (Loss)

Recognized in Income on

Derivative

  Amount of Gain or (Loss)
Recognized in Income on
Derivative
 

Foreign exchange contracts

  Other (expense) income, net   $ 0.1   
   

 

 

 

Commodity contracts - ST

  Other (expense) income, net     (0.7
   

 

 

 

Commodity contracts - LT

  Other (expense) income, net     (0.1
   

 

 

 

Total

    $ (0.7
   

 

 

 

 

As of December 31, 2014, MFS had the following outstanding commodity and currency forward contracts that were entered into as hedge forecasted transactions:

 

Commodity

   Units Hedged     

 

  

Type

Aluminum

     1,657       MT    Cash flow

Copper

     820       MT    Cash flow

Natural gas

     56,792       MMBtu    Cash flow

Steel

     12,634       Short Tons    Cash flow

 

Currency

   Units Hedged     

Type

Canadian Dollar

     7,984,824       Cash Flow

Mexican Peso

     52,674,383       Cash Flow

For derivative instruments that are not designated as hedging instruments under ASC Subtopic 815-10, the gains or losses on the derivatives are recognized in current earnings within other (expense) income, net in the combined statement of operations. As of December 31, 2014, MFS had the following outstanding currency forward contracts that were not designated as hedging instruments:

 

Currency

  Units Hedged    

Recognized Location

 

Purpose

European Euro

    2,172,068      Other (expense) income, net   Accounts payable and receivable settlement

Mexican Peso

    3,151,000      Other (expense) income, net   Accounts payable and receivable settlement

Canadian Dollar

    2,516      Other (expense) income, net   Accounts payable and receivable settlement

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying combined balance sheet as of December 31, 2014 was as follows:

 

   

LIABILITIES DERIVATIVES

 

(in millions)

 

Balance Sheet Location

  Fair Value  

Derivatives designated as hedging instruments

   

Foreign exchange contracts

  Accounts payable and accrued expenses   $ 0.6   

Commodity contracts

  Accounts payable and accrued expenses     0.7   

Commodity contracts

  Other non-current liabilities     0.3   
   

 

 

 

Total derivatives designated as hedging instruments

    $ 1.6   
   

 

 

 

 

    LIABILITY DERIVATIVES  

(in millions)

  Balance Sheet Location     Fair Value  

Derivatives NOT designated as hedging instruments

   

Foreign exchange contracts

    Accounts payable and accrued expenses      $ 0.1   
   

 

 

 

Total derivatives NOT designated as hedging instruments

    $ 0.1   
   

 

 

 
   
   

 

 

 

Total liability derivatives

    $ 1.7   
   

 

 

 

 

The effect of derivative instruments on the combined statement of operations for the year ended December 31, 2014, and gains or losses initially recognized in AOCI in the combined balance sheet were as follows:

 

Derivatives in Cash Flow Hedging

Relationships (in millions)

  Amount of Gain or
(Loss) Recognized in
AOCI on Derivative
(Effective  Portion,
net of tax)
   

Location of Gain or

(Loss) Reclassified

from AOCI into Income

(Effective Portion)

  Amount of Gain or
(Loss) Reclassified from
AOCI into
Income  (Effective
Portion)
 

Foreign exchange contracts

  $ (0.1   Cost of sales   $ (0.9

Commodity contracts

    (0.5   Cost of sales     (0.3
 

 

 

     

 

 

 

Total

  $ (0.6     $ (1.2
 

 

 

     

 

 

 

 

Derivatives Relationships (in
millions)

  

Location of Gain or (Loss)

Recognized in Income on

Derivative (Ineffective Portion

and Amount Excluded from

Effectiveness Testing)

   Amount of Gain or (Loss)
Recognized in Income on
Derivative (Ineffective  Portion
and Amount Excluded from

Effectiveness Testing)
 

Commodity contracts

   Cost of sales    $ 0.1   
     

 

 

 

Total

      $ 0.1   
     

 

 

 

 

Derivatives Not Designated as

Hedging Instruments (in millions)

 

Location of Gain or (Loss)

Recognized in Income on

Derivative

  Amount of Gain or (Loss)
Recognized in Income on
Derivative
 

Foreign exchange contracts

  Other (expense) income, net   $ —     
   

 

 

 

Total

    $ —     
   

 

 

 

As of December 31, 2013, MFS had the following outstanding commodity and currency forward contracts that were entered into as hedge forecasted transactions:

 

Commodity

   Units Hedged     

 

   Type

Aluminum

     1,622       MT    Cash flow

Copper

     382       MT    Cash flow

Natural gas

     149,994       MMBtu    Cash flow

Steel

     8,806       Short Tons    Cash flow

 

Currency

  

Units Hedged

   Type

Canadian Dollar

   10,422,932    Cash Flow

European Euro

   13,447,750    Cash Flow

United States Dollar

   2,100,000    Cash Flow

For derivative instruments that are not designated as hedging instruments under ASC Subtopic 815-10, the gains or losses on the derivatives are recognized in current earnings within other (expense) income, net in the combined statement of operations. As of December 31, 2013, MFS had no outstanding currency forward contracts that were not designated as hedging instruments.

The fair value of outstanding derivative contracts recorded as assets in the accompanying combined balance sheet as of December 31, 2013, was as follows:

 

   

ASSET DERIVATIVES

 

(in millions)

 

Balance Sheet Location

  Fair Value  

Derivatives designated as hedging instruments

   

Foreign exchange contracts

  Other current assets   $ —     

Commodity contracts

  Other current assets     0.1   
   

 

 

 

Total derivatives designated as hedging instruments

    $ 0.1   
   

 

 

 

 

   

ASSET DERIVATIVES

 

(in millions)

 

Balance Sheet Location

  Fair Value  

Derivatives NOT designated as hedging instruments

   

Foreign exchange contracts

  Other current assets   $ —     
   

 

 

 

Total derivatives NOT designated as hedging instruments

    $ —     
   

 

 

 
   
   

 

 

 

Total asset derivatives

    $ 0.1   
   

 

 

 

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying combined balance sheet as of December 31, 2013, was as follows:

 

   

LIABILITIES DERIVATIVES

 

(in millions)

 

Balance Sheet Location

  Fair Value  

Derivatives designated as hedging instruments

   

Foreign exchange contracts

  Accounts payable and accrued expenses   $ 0.4   

Commodity contracts

  Accounts payable and accrued expenses     0.4   
   

 

 

 

Total derivatives designated as hedging instruments

    $ 0.8   
   

 

 

 

 

   

LIABILITY DERIVATIVES

 

(in millions)

 

Balance Sheet Location

  Fair Value  

Derivatives NOT designated as hedging instruments

   

Foreign exchange contracts

  Accounts payable and accrued expenses   $ —     
   

 

 

 

Total derivatives NOT designated as hedging instruments

    $ —     
   

 

 

 
   
   

 

 

 

Total liability derivatives

    $ 0.8   
   

 

 

 

The effect of derivative instruments on the combined statement of operations for the year ended December 31, 2013, and gains or losses initially recognized in AOCI in the combined balance sheet were as follows:

 

Derivatives in Cash Flow Hedging

Relationships (in millions)

  Amount of Gain or
(Loss) Recognized in
AOCI on Derivative
(Effective  Portion,
net of tax)
   

Location of Gain or

(Loss) Reclassified

from AOCI into Income

(Effective Portion)

  Amount of Gain or
(Loss) Reclassified from
AOCI into
Income  (Effective
Portion)
 

Foreign exchange contracts

  $ (0.3   Cost of sales   $ (0.4

Commodity contracts

    0.3      Cost of sales     (1.5
 

 

 

     

 

 

 

Total

  $ —          $ (1.9
 

 

 

     

 

 

 

 

Derivatives Relationships (in
millions)

  

Location of Gain or (Loss)

Recognized in Income on

Derivative (Ineffective Portion

and Amount Excluded from

Effectiveness Testing)

   Amount of Gain or (Loss)
Recognized in Income on
Derivative (Ineffective  Portion
and Amount Excluded from

Effectiveness Testing)
 

Commodity contracts

   Cost of sales    $ 0.1   
     

 

 

 

Total

      $ 0.1   
     

 

 

 

Inventories
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Inventories

4. Inventories

The components of inventories at June 30, 2016 and December 31, 2015 are summarized as follows:

 

(in millions)

   June 30,
2016
     December 31,
2015
 

Inventories — gross:

     

Raw materials

   $ 74.1       $ 70.7   

Work-in-process

     19.4         18.7   

Finished goods

     98.2         83.4   
  

 

 

    

 

 

 

Total inventories — gross

     191.7         172.8   

Excess and obsolete inventory reserve

     (24.7      (23.5
  

 

 

    

 

 

 

Net inventories at FIFO cost

     167.0         149.3   

Excess of FIFO costs over LIFO value

     (3.4      (3.4
  

 

 

    

 

 

 

Inventories — net

   $ 163.6       $ 145.9   
  

 

 

    

 

 

 
Inventories

7. Inventories

The components of inventories at December 31, 2015 and December 31, 2014 are summarized as follows:

 

(in millions)

   2015      2014  

Inventories — gross:

     

Raw materials

   $ 70.7       $ 77.2   

Work-in-process

     18.7         21.5   

Finished goods

     83.4         87.9   
  

 

 

    

 

 

 

Total inventories — gross

     172.8         186.6   

Excess and obsolete inventory reserve

     (23.5      (20.3
  

 

 

    

 

 

 

Net inventories at FIFO cost

     149.3         166.3   

Excess of FIFO costs over LIFO value

     (3.4      (3.1
  

 

 

    

 

 

 

Inventories — net

   $ 145.9       $ 163.2   
  

 

 

    

 

 

 
Property, Plant and Equipment
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Property, Plant and Equipment

5. Property, Plant and Equipment

The components of property, plant and equipment at June 30, 2016 and December 31, 2015 are summarized as follows:

 

(in millions)

   June 30,
2016
     December 31,
2015
 

Land

   $ 7.3       $ 7.3   

Building and improvements

     91.8         94.3   

Machinery, equipment and tooling

     213.2         216.0   

Furniture and fixtures

     6.0         6.2   

Computer hardware and software

     53.8         51.2   

Construction in progress

     10.2         9.8   
  

 

 

    

 

 

 

Total cost

     382.3         384.8   

Less accumulated depreciation

     (270.9      (268.4
  

 

 

    

 

 

 

Property, plant and equipment — net

   $ 111.4       $ 116.4   
  

 

 

    

 

 

 
Property, Plant and Equipment

8. Property, Plant and Equipment

The components of property, plant and equipment at December 31, 2015 and December 31, 2014 are summarized as follows:

 

(in millions)

   2015      2014  

Land

   $ 7.3       $ 6.6   

Building and improvements

     94.3         100.1   

Machinery, equipment and tooling

     216.0         237.0   

Furniture and fixtures

     6.2         6.6   

Computer hardware and software

     51.2         58.5   

Construction in progress

     9.8         12.7   
  

 

 

    

 

 

 

Total cost

     384.8         421.5   

Less accumulated depreciation

     (268.4      (287.2
  

 

 

    

 

 

 

Property, plant and equipment - net

   $ 116.4       $ 134.3   
  

 

 

    

 

 

 
Goodwill and Other Intangible Assets
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Goodwill and Other Intangible Assets

6. Goodwill and Other Intangible Assets

The Company has three reportable segments: Americas, EMEA, and APAC. The Americas segment includes the U.S., Canada and Latin America. The EMEA segment is made up of markets in Europe, Middle East and Africa, including Russia and the commonwealth of independent states. The APAC segment is principally comprised of markets in China, Singapore, Australia, India, Malaysia, Indonesia, Thailand and Philippines. The changes in the carrying amount of goodwill by reportable segment for the six months ended June 30, 2016, were as follows:

 

(in millions)

   Americas      EMEA      APAC      Total  

Balance as of December 31, 2015

   $ 832.6       $ 4.8       $ 8.4       $ 845.8   

Foreign currency impact

     —           0.1         —           0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2016

   $ 832.6       $ 4.9       $ 8.4       $ 845.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company accounts for goodwill and other intangible assets under the guidance of ASC Topic 350, “Intangibles — Goodwill and Other.” The Company performs an annual impairment test or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company tests its reporting units and indefinite-lived intangible assets using a fair-value method based on the present value of future cash flows, which involves management’s judgments and assumptions about the amounts of those cash flows and the discount rates used. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill, or indefinite-lived intangible asset. The intangible asset is then subject to risk of write-down to the extent that the carrying amount exceeds the estimated fair value.

As of June 30, 2016, the Company performed the annual impairment test for its reporting units, which were Americas, EMEA, and APAC, as well as its indefinite-lived intangible assets, and based on those results, the fair value of each of the Company’s reporting units exceeded their respective carrying values and no impairment was indicated.

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill are as follows as of June 30, 2016 and December 31, 2015:

 

     June 30, 2016      December 31, 2015  

(in millions)

   Gross
Carrying
Amount
     Accumulated
Amortization
Amount
    Net
Book
Value
     Gross
Carrying
Amount
     Accumulated
Amortization
Amount
    Net
Book
Value
 

Trademarks and tradenames

   $ 174.8       $ —        $ 174.8       $ 175.1       $ —        $ 175.1   

Customer relationships

     415.3         (161.0     254.3         415.2         (150.4     264.8   

Patents

     1.7         (1.7     —           1.7         (1.6     0.1   

Other intangibles

     142.6         (68.4     74.2         143.2         (63.6     79.6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 734.4       $ (231.1   $ 503.3       $ 735.2       $ (215.6   $ 519.6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for the three months ended June 30, 2016 and 2015 was $7.9 million.

Amortization expense for the six months ended June 30, 2016 and 2015 was $15.7 million.

Goodwill and Other Intangible Assets

9. Goodwill and Other Intangible Assets

MFS has three reportable segments: Americas, EMEA, and APAC. The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2015, 2014 and 2013 were as follows:

 

(in millions)

   Americas      EMEA      APAC      Total  

Gross balance as of January 1, 2013

   $ 1,172.8       $ 204.5       $ 7.4       $ 1,384.7   

Acquisition of Inducs

     —           5.0         —           5.0   

Restructuring reserve adjustment

     (0.7      —           —           (0.7

Foreign currency impact

     0.6         (0.6      0.1         0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross balance as of December 31, 2013

     1,172.7         208.9         7.5         1,389.1   

Accumulated asset impairments

     (312.2      (203.5      —           (515.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Net balance as of December 31, 2013

     860.5         5.4         7.5         873.4   

Foreign currency impact

     —           (0.5      (0.1      (0.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross balance as of December 31, 2014

     1,172.7         208.4         7.4         1,388.5   

Accumulated asset impairments

     (312.2      (203.5      —           (515.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Net balance as of December 31, 2014

     860.5         4.9         7.4         872.8   

Foreign currency impact

     —           (0.1      (0.4      (0.5

Impact of acquisitions and divestitures

     (27.9      —           1.4         (26.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross balance as of December 31, 2015

     1,144.8         208.3         8.4         1,361.5   

Accumulated asset impairments

     (312.2      (203.5      —           (515.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Net balance as of December 31, 2015

   $ 832.6       $ 4.8       $ 8.4       $ 845.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

MFS accounts for goodwill and other intangible assets under the guidance of ASC Topic 350, “Intangibles - Goodwill and Other.” MFS performs an annual impairment test at June 30 of every year or more frequently if events or changes in circumstances indicate that the asset might be impaired. MFS tests its reporting units and indefinite-lived intangible assets using a fair-value method based on the present value of future cash flows, which involves management’s judgments and assumptions about the amounts of those cash flows and the discount rates used. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill, or indefinite-lived intangible asset. The intangible asset is then subject to risk of write-down to the extent that the carrying amount exceeds the estimated fair value.

As of June 30, 2015, 2014, and 2013, MFS performed the annual impairment test for its reporting units, which were Americas; EMEA; and APAC, as well as its indefinite-lived intangible assets, and based on those results, no impairment was indicated in any of those periods.

As discussed in Note 3, “Acquisitions,” on October 1, 2013, MFS acquired all remaining shares of Inducs in which it previously held a minority interest. The aggregate purchase price of $12.2 million, net of cash, resulted in $7.0 million of identifiable intangible assets and $5.0 million of goodwill. Of the $7.0 million of acquired intangible assets, $0.7 million was assigned to trademarks that are not subject to amortization, $1.2 million was assigned to customer relationships with a useful life of 19 years, and $5.1 million was assigned to developed technology with a useful life of 12 years. On October 21, 2015, the Company acquired the remaining 50% of outstanding shares of a joint venture in Thailand. The purchase price, net of cash acquired, was approximately $5.3 million. Allocation of the purchase price resulted in $1.4 million of goodwill and $4.2 million of intangible assets.

 

The gross carrying amount and accumulated amortization of MFS’ intangible assets other than goodwill are as follows as of December 31, 2015 and December 31, 2014:

 

     December 31, 2015      December 31, 2014  

(in millions)

   Gross
Carrying
Amount
     Accumulated
Amortization
Amount
    Net
Book
Value
     Gross
Carrying
Amount
     Accumulated
Amortization
Amount
    Net
Book
Value
 

Trademarks and tradenames

   $ 175.1       $ —        $ 175.1       $ 199.4       $ —        $ 199.4   

Customer relationships

     415.2         (150.4     264.8         415.0         (129.5     285.5   

Patents

     1.7         (1.6     0.1         1.7         (1.4     0.3   

Other intangibles

     143.2         (63.6     79.6         160.7         (61.4     99.3   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 735.2       $ (215.6   $ 519.6       $ 776.8       $ (192.3   $ 584.5   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for the years ended December 31, 2015, 2014 and 2013 was $31.4 million, $31.8 million and $31.4 million, respectively. Excluding the impact of any future acquisitions or divestitures, MFS anticipates amortization will be approximately $32 million per year for the next five years.

Accounts Payable and Accrued Expenses and Other Liabilities
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
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 June 30, 2016 and December 31, 2015 are summarized as follows:

 

(in millions)

   June 30,
2016
     December 31,
2015
 

Accounts payable:

     

Trade accounts payable and interest payable

   $ 123.1       $ 121.7   

Income taxes payable

     1.3         7.3   
  

 

 

    

 

 

 

Total accounts payable

   $ 124.4       $ 129.0   
  

 

 

    

 

 

 

Accrued expenses and other liabilities:

     

Employee related expenses

   $ 31.9       $ 24.5   

Restructuring expenses

     4.5         16.8   

Profit sharing and incentives

     10.9         3.9   

Accrued rebates

     41.6         51.6   

Deferred revenue - current

     3.6         3.8   

Dividend payable to MTW

     —           10.2   

Customer advances

     5.8         2.9   

Product liability

     3.1         2.6   

Miscellaneous accrued expenses

     44.9         41.3   
  

 

 

    

 

 

 

Total accrued expenses and other liabilities

   $ 146.3       $ 157.6   
  

 

 

    

 

 

 
Accounts Payable and Accrued Expenses and Other Liabilities

10. Accounts Payable and Accrued Expenses and Other Liabilities

Accounts payable and Accrued expenses and other liabilities at December 31, 2015 and December 31, 2014 are summarized as follows:

 

(in millions)

   2015      2014  

Accounts payable:

     

Trade accounts payable and interest payable

   $ 121.7       $ 161.5   

Income taxes payable

     7.3         5.2   
  

 

 

    

 

 

 

Total accounts payable

   $ 129.0       $ 166.7   
  

 

 

    

 

 

 

Accrued expenses and other liabilities:

     

Employee related expenses

     24.5         31.1   

Restructuring expenses

     16.8         15.6   

Profit sharing and incentives

     3.9         4.1   

Accrued rebates

     51.6         52.3   

Deferred revenue - current

     3.8         3.8   

Dividend payable to MTW

     10.2         6.2   

Customer advances

     2.9         3.9   

Product liability

     2.6         2.2   

Miscellaneous accrued expenses

     41.3         46.2   
  

 

 

    

 

 

 

Total accrued expenses and other liabilities

   $ 157.6       $ 165.4   
  

 

 

    

 

 

 
Accounts Receivable Securitization
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Accounts Receivable Securitization

8. Accounts Receivable Securitization

Prior to the Spin-Off, MFS sold accounts receivable through an accounts receivable securitization facility, (“the Prior Securitization Program”), comprised of two funding entities: Manitowoc Funding, LLC (“U.S. Seller”) and Manitowoc Cayman Islands Funding Ltd. (“Cayman Seller”). The U.S. Seller historically serviced domestic entities of both the Foodservice and Cranes segments of MTW and remitted all funds received directly to MTW. The Cayman Seller historically serviced solely MFS foreign entities and remitted all funds to MFS entities. The U.S. Seller entity remained with MTW subsequent to the Spin-Off, while the Cayman Seller was transferred to MFS subsequent to the Spin-Off. As the U.S. Seller is not directly attributable to MFS, only the receivables which were transferred to the U.S. Seller but not sold are reflected in MFS’ consolidated (condensed) balance sheet. A portion of the U.S. Seller’s historical expenses related to bond administration fees and settlement fees are allocated to MFS. As the Cayman Seller is directly attributable to MFS, the assets, liabilities, income and expenses of the Cayman Seller are included in MFS’ consolidated (condensed) statement of operations and balance sheet. MFS’ cost of funds under the facility used a LIBOR index rate plus a 1.25% fixed spread.

On March 3, 2016, the Company entered into a new $110.0 million accounts receivable securitization program (the “2016 Securitization Facility”) among the Cayman Seller, as seller, MFS, Garland Commercial Ranges Limited, Convotherm Elektrogeräte GmbH, Manitowoc Deutschland GmbH, Manitowoc Foodservice UK Limited, Manitowoc Foodservice Asia Pacific Private Limited, and the other persons who may be from time to time, a party thereto, as servicers, with Wells Fargo Bank, National Association, as purchaser and agent, whereby MFS will sell 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 entity in turn, will sell, convey, transfer and assign to a third-party financial institution (a “Purchaser”), all of the right, title and interest in and to its pool of receivables. The Purchaser will receive ownership of the pool of receivables. The Company, along with certain of its subsidiaries, act as servicers of the receivables and as such administer, collect and otherwise enforce the receivables. The servicers will be compensated for doing so on terms that are generally consistent with what would be charged by an unrelated servicer. As servicers, they will initially receive payments made by obligors on the receivables but will be required to remit those payments in accordance with a receivables purchase agreement. The Purchaser will have no recourse for uncollectible receivables. The 2016 Securitization Facility also contains customary affirmative and negative covenants. Among other restrictions, these covenants require the Company to meet specified financial tests, which include a Consolidated Interest Coverage Ratio and a Consolidated Total Leverage Ratio that are the same as the covenant ratios required per the 2016 Credit Agreement.

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 deferred purchase price notes approximated book value. The fair value of the deferred purchase price notes recorded at June 30, 2016 and December 31, 2015 was $75.9 million and $48.4 million, respectively, and is included in accounts receivable in the accompanying consolidated (condensed) balance sheets.

Trade accounts receivables sold to the Purchaser and being serviced by the Company totaled $90.7 million at June 30, 2016 and $100.9 million at December 31, 2015. Of this decrease, approximately $15.9 million was attributable to the balance being allocated from MTW from a combined securitization facility on a carve out basis at December 31, 2015 as compared to the specific deferred purchase price notes on a standalone basis at June 30, 2016 and is reflected in Net Transactions with MTW in the Cash Flows from Financing activities section of the consolidated (condensed) statement of cash flows.

Transactions under the 2016 Securitization Facility and the Prior Securitization Program were accounted for as sales in accordance with ASC Topic 860, “Transfers and Servicing.” Sales of trade receivables to the Purchaser are reflected as a reduction of accounts receivable in the accompanying consolidated (condensed) balance sheets and the proceeds received, including collections on the deferred purchase price notes, are included in cash flows from operating activities in the accompanying consolidated (condensed) statements of cash flows. The Company deems the interest rate risk related to the deferred purchase price notes to be de minimis, primarily due to the short average collection cycle of the related receivables (i.e., 60 days) as noted above.

Accounts Receivable Securitization

11. Accounts Receivable Securitization

Historically MFS sold accounts receivable through an accounts receivable securitization facility, (“The Securitization Program”), comprised of two funding entities: Manitowoc Funding, LLC (“U.S. Seller”) and Manitowoc Cayman Islands Funding Ltd. (“Cayman Seller”). The U.S. Seller historically serviced domestic entities of both the Foodservice and Crane segments of MTW and remitted all funds received directly to MTW. The Cayman Seller historically serviced solely MFS foreign entities and remitted all funds to MFS entities. The U.S. Seller entity remained with MTW subsequent to the Spin-Off, while the Cayman Seller was transferred to MFS subsequent to the Spin-Off. As the U.S. Seller is not directly attributable to MFS, only the receivables which were transferred to the U.S. Seller but not sold are reflected in MFS combined balance sheet. A portion of the U.S. Seller’s historical expenses related to bond administration fees and settlement fees are allocated to MFS. As the Cayman Seller is directly attributable to MFS, the assets, liabilities, income, and expenses of the Cayman Seller are included in MFS’ consolidated statement of earnings and balance sheet.

On December 15, 2014, MTW executed a Fifth Amended and Restated Receivables Purchase Agreement (the “Receivables Purchase Agreement”) among the U.S. Seller and Cayman Seller, as sellers, MTW, Garland Commercial Ranges Limited (“Garland”), Convotherm Elektrogeräte GmbH (“Convotherm”), Manitowoc Deutschland GmbH (“MTW Deutschland”), Manitowoc Foodservice UK Limited (“Foodservice UK”), and the other persons from time to time party thereto, as servicers, and Wells Fargo Bank, N.A. (“Wells Fargo” or “Purchaser”), as purchaser and agent. Pursuant to this amendment, a German subsidiary (MTW Deutschland) and a United Kingdom subsidiary (Foodservice UK) were added as “originators” under the facility. Under the Receivables Purchase Agreement (and the related Purchase and Sale Agreements referenced in the Receivables Purchase Agreement), certain of MFS’ non-U.S. trade accounts receivable were sold to Cayman Seller which, in turn, were sold to Purchaser, all of the Cayman Seller’s right, title and interest in and to a pool of receivables to the Purchaser.

The Purchaser received ownership of the pool of receivables, in each instance. New receivables are purchased by Cayman Seller and resold to the Purchaser as cash collections reduce previously sold investments. Garland, Convotherm, MTW Deutschland, and Foodservice UK acted as the servicers of the receivables and as such administered, collected and otherwise enforced the receivables. The servicers were compensated for doing so on terms generally consistent with what would be charged by an unrelated servicer. As servicers, they initially received payments made by obligors on the receivables but were required to remit those payments to the Purchaser in accordance with the Receivables Purchase Agreement. The Purchaser has no recourse for uncollectible receivables. MTW finalized changes to its accounts receivable securitization program. Among other actions, MTW entered into an amendment to the Receivables Purchase Agreement, the results of which were that (i) Manitowoc Foodservice Asia Pacific Private Limited (“Foodservice Asia”) was added as an originator and as a servicer under the facility; and (ii) MFS’ domestic originators were effectively released from their obligations under the related purchase and sale agreement and will now sell their accounts receivable to the Cayman Seller (prior to these changes, these receivables were sold to the U.S. Seller). The maximum commitment size of the securitization facility did not change and, therefore, remains at $185.0 million. MFS’ cost of funds under the facility continues to use a LIBOR index rate plus a 1.25% fixed spread.

Under the Receivables Purchase Agreement (and the related Purchase and Sale Agreements referenced in the Receivables Purchase Agreement), certain of MFS’ non-U.S. trade accounts receivable are sold to Cayman Seller which, in turn, will sell, convey, transfer and assign to Purchaser, all of the Cayman Seller’s right, title and interest in and to a pool of receivables to the Purchaser.

Due to a short average collection cycle of less than 60 days for such accounts receivable as well as MFS’ collection history, the fair value of MFS’ deferred purchase price notes approximated book value. The fair value of the deferred purchase price notes recorded at December 31, 2015 and 2014 was $48.4 million and $33.1 million, respectively, and is included in accounts receivable in the accompanying combined balance sheets.

Trade accounts receivables sold to the Purchaser and being serviced by the Company totaled $100.9 million at December 31, 2015 and $21.1 million at December 31, 2014.

Transactions under the Securitization Program were accounted for as sales in accordance with ASC Topic 860, “Transfers and Servicing.” Sales of trade receivables to the Purchaser are reflected as a reduction of accounts receivable in the accompanying combined balance sheets and the proceeds received, including collections on the deferred purchase price notes, are included in cash flows from operating activities in the accompanying combined statements of cash flows. MFS deems the interest rate risk related to the deferred purchase price notes to be de minimis, primarily due to the short average collection cycle of the related receivables (i.e., 60 days) as noted above.

Income Taxes
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Income Taxes

10. Income Taxes

For the three months ended June 30, 2016, the Company recorded a $4.1 million income tax provision, compared to a $17.0 million income tax provision for the three months ended June 30, 2015. The decrease in the Company’s tax provision for the three months ended June 30, 2016, relative to the three months ended June 30, 2015, resulted primarily from a $34.7 million reduction in earnings from operations before income taxes and the relative weighting of foreign earnings before income taxes in the respective periods.

For the six months ended June 30, 2016, the Company recorded an $8.7 million income tax provision, compared to a $23.5 million income tax provision for the six months ended June 30, 2015. The decrease in the Company’s tax provision for the six months ended June 30, 2016, relative to the prior year resulted primarily from $2.9 million in tax-related out-of-period balance sheet adjustments related to the Spin-Off that were recognized as discrete adjustments in the income tax provision for the first quarter of 2016. The Company does not believe these adjustments are material to its unaudited consolidated (condensed) financial statements for the six months ended June 30, 2016, or its comparative annual or quarterly financial statements. These adjustments were coupled with a $32.5 million reduction in earnings from operations before income taxes for the six month period ended June 30, 2016 compared to the first six months of 2015.

The Company’s effective tax rate varies from the 35% U.S. federal statutory rate due to the relative weighting of foreign earnings before income taxes and foreign effective tax rates that are generally lower than the U.S. federal statutory rate. Foreign earnings are generated from operations in the three reportable segments of Americas, EMEA, and APAC.

 

The Company will continue to periodically evaluate its valuation allowance requirements in light of changing facts and circumstances, and 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 the 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 $12.1 million and $16.6 million as of June 30, 2016 and December 31, 2015, respectively. The decrease for the six months ended June 30, 2016 related to the portion of the unrecognized tax benefits allocable to the Company that were included in equity and a second quarter reduction in unrecognized tax benefits of $0.4 million. During the next twelve months, it is reasonably possible that unrecognized tax benefits will decrease by $1.2 million due to expiration of statute of limitation periods for the related items.

The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of June 30, 2016, 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 and the 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.

Income Taxes

12. Income Taxes

In the combined financial statements, income tax expense and deferred tax balances have been calculated on a separate return basis although the MFS operations have historically been included in the tax returns filed by the respective MTW entities. With the exception of certain separate filing Foodservice entities that will transfer to MFS after the Spin-Off, current income tax liabilities were deemed to settle immediately with MTW tax paying entities in the respective jurisdictions. These settlements were reflected as changes in the net parent company investment account. In the future, as a standalone entity, MFS will file tax returns on its own behalf and its deferred taxes and effective tax rate may differ from those in historical periods.

Earnings from continuing operations are summarized below:

 

(in millions)

   2015      2014      2013  

Earnings from continuing operations before income taxes:

        

Domestic

   $ 121.2       $ 123.3       $ 157.2   

Foreign

     75.1         63.9         47.4   
  

 

 

    

 

 

    

 

 

 

Total

   $ 196.3       $ 187.2       $ 204.6   
  

 

 

    

 

 

    

 

 

 

Provision for income taxes from continuing operations is summarized below:

 

(in millions)

   2015      2014      2013  

Current:

        

Federal and state

   $ 51.1       $ 28.3       $ 51.9   

Foreign

     18.2         15.1         13.0   
  

 

 

    

 

 

    

 

 

 

Total current

   $ 69.3       $ 43.4       $ 64.9   
  

 

 

    

 

 

    

 

 

 

Deferred:

        

Federal and state

   $ (27.9    $ (12.0    $ (9.0

Foreign

     (2.1      (5.5      (0.6
  

 

 

    

 

 

    

 

 

 

Total deferred

   $ (30.0    $ (17.5    $ (9.6
  

 

 

    

 

 

    

 

 

 

Provision for taxes on earnings

   $ 39.3       $ 25.9       $ 55.3   
  

 

 

    

 

 

    

 

 

 

The differences between the U.S. federal statutory income tax rate and MFS’ effective tax rate were as follows:

 

     2015     2014     2013  

Federal income tax at statutory rate

     35.0     35.0     35.0

State income provision

     1.4        1.4        1.9   

Manufacturing and research incentives

     (1.7     (1.7     (2.9

Taxes on foreign income which differ from the U.S. statutory rate

     (3.9     (2.4     (3.2

Adjustments for unrecognized tax benefits

     0.1        4.3        (3.5

Adjustments for valuation allowances

     (13.8     21.5        (0.3

Capital loss generation

     —          (41.4     —     

Business acquisitions & divestitures

     4.1        —          —     

Other items

     (1.1     (2.9     —     
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     20.1     13.8     27.0
  

 

 

   

 

 

   

 

 

 

The 2015, 2014 and 2013 effective tax rates were favorably impacted by income earned in jurisdictions where the statutory rate was less than 35%.

 

The 2015 tax provision benefited by $17.8 million related to the divestiture of Kysor Panel Systems business resulting in a favorable impact to the effective tax rate. The benefit was primarily due to the write-off of $13.8 million of an unamortized deferred tax liability that was recorded in purchase accounting and as a result of the utilization of a capital loss carryforward to offset the tax gain.

In the third quarter of 2014, MFS made an election with the IRS to treat Enodis Holdings, Ltd, MFS’ UK Holding Company, as a partnership for U.S. income tax purposes. As a result of this status change, MFS realized a $25.6 million capital loss tax benefit. This transaction resulted in an effective tax rate benefit of 13.7% unique to 2014.

The 2013 effective tax rate benefited from the release of uncertain tax position reserves related to favorable audit settlements.

The significant components of deferred tax assets and deferred tax liabilities were as follows:

 

(in millions)

   2015      2014  

Current deferred tax assets (liabilities):

     

Inventories

   $ —         $ 5.1   

Accounts receivable

     —           1.2   

Product warranty reserves

     —           10.9   

Product liability reserves

     —           0.8   

Deferred revenue, current portion

     —           (0.2

Deferred employee benefits

     —           4.7   

Other reserves and allowances

     —           5.4   

Less valuation allowance

     —           (8.3
  

 

 

    

 

 

 

Net deferred tax assets, current (1)

   $ —         $ 19.6   
  

 

 

    

 

 

 

Non-current deferred tax assets (liabilities):

     

Inventories

   $ 7.6       $ —     

Accounts receivable

     1.2         —     

Property, plant and equipment

     (2.8      (8.3

Intangible assets

     (218.9      (242.4

Deferred employee benefits

     15.7         12.7   

Product warranty reserves

     14.4         3.9   

Product liability reserves

     1.0         —     

Loss carryforwards

     84.9         119.1   

Deferred revenue

     1.1         1.5   

Other

     16.9         9.7   
  

 

 

    

 

 

 

Total non-current deferred tax liabilities

     (78.9      (103.8

Less valuation allowance

     (80.1      (104.9
  

 

 

    

 

 

 

Net deferred tax liabilities, non-current

   $ (159.0    $ (208.7
  

 

 

    

 

 

 

(1) - In 2015, MFS early adopted ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” which eliminated the requirement to present deferred tax liabilities and assets as current and non-current on the balance sheet. Prior periods were not retrospectively adjusted.

 

Current and long-term tax assets and liabilities included in the combined balance sheets were as follows:

 

(in millions)

   2015      2014  

Current income tax asset

   $ —         $ 23.7   

Long-term income tax assets, included in other non-current assets

     8.9         9.3   

Current deferred income tax liability, included in accounts payable and accrued expenses

     —           (4.1

Long-term deferred income tax liability

     (167.9      (218.0
  

 

 

    

 

 

 

Net deferred income tax liability

   $ (159.0    $ (189.1
  

 

 

    

 

 

 

MFS has not provided for additional U.S. income taxes on approximately $79.5 million of undistributed earnings of combined non-U.S. subsidiaries as of December 31, 2015 because the Company intends to reinvest such earnings indefinitely outside of the United States. Such earnings could become taxable upon sale or liquidation of these non-U.S. subsidiaries or upon dividend repatriation of cash balances. It is not practicable to estimate the amount of the unrecognized tax liability on such earnings

As of December 31, 2015, MFS has approximately $340.7 million of foreign loss carryforwards, which are available to reduce future foreign tax liabilities. Substantially all of the foreign loss carryforwards are not subject to any time restrictions on their future use, and $328.0 million are offset by a valuation allowance. MFS also has approximately $63.3 million of U.S. capital loss carryforwards which expire in 2019 and are offset by a valuation allowance.

MFS continues to record valuation allowances on the deferred tax assets in the United Kingdom, as it remains more likely than not that they will not be utilized.

MFS will continue to periodically evaluate its valuation allowance requirements in light of changing facts and circumstances, and may adjust its deferred tax asset valuation allowances accordingly. It is reasonably possible that MFS 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 the current operations through MFS’ income tax provision, and could have a material effect on operating results.

A reconciliation of MFS’ unrecognized tax benefits is as follows:

 

(in millions)

   2015      2014      2013  

Balance at beginning of year

   $ 16.6       $ 7.8       $ 17.1   

Additions based on tax positions related to the current year

     0.2         14.1         1.0   

Additions for tax positions of prior years

     —           —           0.1   

Reductions based on settlements with taxing authorities

     —           (2.8      (8.0

Reductions for lapse of statute

     (0.2      (2.5      (2.4
  

 

 

    

 

 

    

 

 

 

Balance at end of year

   $ 16.6       $ 16.6       $ 7.8   
  

 

 

    

 

 

    

 

 

 

Substantially all of MFS’ unrecognized tax benefits as of December 31, 2015, 2014 and 2013, if recognized, would affect the effective tax rate.

MFS recognizes interest and penalties related to tax liabilities as a part of income tax expense. As of December 31, 2015 and 2014, MFS has accrued interest and penalties of $0.9 million and $0.8 million, respectively.

MTW concluded an examination of its 2007 through 2009 U.S. tax returns during the third quarter of 2014 as well as an examination its 2010 and 2011 U.S. tax returns in the fourth quarter of 2014. The adjustments did not have a material impact on the financial statements.

 

MTW is under examination by the Internal Revenue Service for calendar year 2014. There have been no significant developments with respect to the Company’s ongoing tax audits in other jurisdictions.

MTW has filed tax returns on behalf of MFS in the U.S. and various state and foreign jurisdictions through tax year 2015. The 2012 through 2015 tax years remain subject to examination by the IRS. The 2011 though 2015 tax years generally remain subject to examination by state authorities, and tax years 2011 through 2015 remain subject to examination in Germany. Tax years 2007 through 2015 remain subject to audit in China.

MFS regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of December 31, 2015, MFS 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 combined financial position and the 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.

During the next twelve months, it is reasonably possible that federal, state and foreign tax audit resolutions could reduce unrecognized tax benefits and income tax expense by up to $0.7 million, either because MFS’ tax positions are sustained on audit or settled, or the applicable statute of limitations closes.

Other Operating and Non-Operating Expenses
Other Operating and Non-Operating Expenses

13. Other Operating and Non-Operating Expenses

The components of the line item ‘Other operating expense’ in the Combined Statements of Operations for the years ended December 31, 2015, 2014, and 2013, are summarized as follows:

 

(in millions)

   2015      2014      2013  

Amortization expense

   $ 31.4       $ 31.8       $ 31.4   

Asset impairments

     9.0         1.1         —     

Restructuring expense

     4.6         2.6         2.9   

Separation expense

     4.3         —           —     

Other expense (income)

     0.9         0.4         (0.8
  

 

 

    

 

 

    

 

 

 

Total other operating expense

   $ 50.2       $ 35.9       $ 33.5   
  

 

 

    

 

 

    

 

 

 

The components of the line item ‘Other income (expense) - net’ in the Combined Statements of Operations for the years ended December 31, 2015, 2014, and 2013, are summarized as follows:

 

(in millions)

   2015      2014      2013  

Gain on sale of Kysor Panel Systems

   $ 9.9       $ —         $ —     

Gain on sale of investment property

     5.4         —           —     

Gain on acquisition of Thailand joint venture

     4.9         —           —     

Other (1)

     1.8         (0.6      0.7   
  

 

 

    

 

 

    

 

 

 

Other income (expense) - net

   $ 22.0       $ (0.6    $ 0.7   
  

 

 

    

 

 

    

 

 

 

 

(1)  Other consists primarily of foreign currency gains and losses.

The sale of Kysor Panel Systems is discussed further in Note 4, “Discontinued Operations and Divestitures.” The acquisition of the Thailand joint venture is discussed further in Note 3, “Acquisitions.”

Accumulated Other Comprehensive Income ("AOCI")
Accumulated Other Comprehensive Income ("AOCI")

14. Accumulated Other Comprehensive Income (“AOCI”)

The components of accumulated other comprehensive income (loss) as of December 31, 2015 and December 31, 2014 are as follows:

 

(in millions)

   2015      2014  

Foreign currency translation

   $ (7.9    $ 17.3   

Derivative instrument fair market value, net of income taxes of $0.9 and $0.4

     (1.8      (1.0

Employee pension and postretirement benefit adjustments, net of income taxes of $0.3 and $0.8

     (34.8      (37.0
  

 

 

    

 

 

 
   $ (44.5    $ (20.7
  

 

 

    

 

 

 

Summaries of the changes in accumulated other comprehensive income (loss), net of tax, by component for the years ended December 31, 2014, and December 31, 2015 are as follows:

 

(in millions)

  Foreign
Currency
Translation
    Gains and
Losses on Cash
Flow Hedges
    Pension &
Postretirement
    Total  

Balance at December 31, 2013

  $ 34.2      $ (0.4   $ (32.6   $ 1.2   

Other comprehensive loss before reclassifications

    (16.9     (1.4     (4.8     (23.1

Amounts reclassified from accumulated other comprehensive income

    —          0.8        0.4        1.2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive loss

    (16.9     (0.6     (4.4     (21.9
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

  $ 17.3      $ (1.0   $ (37.0   $ (20.7
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income before reclassifications

    (25.2     (3.8     1.1        (27.9

Amounts reclassified from accumulated other comprehensive income

    —          3.0        1.1        4.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive (loss) income

    (25.2     (0.8     2.2        (23.8
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

  $ (7.9   $ (1.8   $ (34.8   $ (44.5
 

 

 

   

 

 

   

 

 

   

 

 

 

 

A reconciliation of the reclassifications out of accumulated other comprehensive income, net of tax, for the year ended December 31, 2015 is as follows:

 

(in millions)

  Amount Reclassified from
Accumulated Other
Comprehensive Income
    Recognized Location  

Gains and losses on cash flow hedges

   

Foreign exchange contracts

  $ (1.4     Cost of sales   

Commodity contracts

    (3.4     Cost of sales   
 

 

 

   
    (4.8     Total before tax   
    1.8        Tax expense   
 

 

 

   
  $ (3.0     Net of tax   
 

 

 

   

Amortization of pension and postretirement items

   

Amortization of prior service cost

    —   (a)   

Actuarial losses

    (1.1 )(a)   
 

 

 

   
    (1.1     Total before tax   
    —          Tax benefit   
 

 

 

   
  $ (1.1     Net of Tax   
 

 

 

   
   
 

 

 

   

Total reclassifications for the period

  $ (4.1     Net of Tax   
 

 

 

   

 

(a) These other comprehensive income components are included in the net periodic pension cost (see Note 19, “Employee Benefit Plans,” for further details).

A reconciliation of the reclassifications out of accumulated other comprehensive income, net of tax, for the year ended December 31, 2014 is as follows:

 

(in millions)

  Amount Reclassified from
Accumulated Other
Comprehensive Income
    Recognized Location  

Gains and losses on cash flow hedges

   

Foreign exchange contracts

  $ (0.9     Cost of sales   

Commodity contracts

    (0.3     Cost of sales   
 

 

 

   
    (1.2     Total before tax   
    0.4        Tax expense   
 

 

 

   
  $ (0.8     Net of tax   
 

 

 

   

Amortization of pension and postretirement items

   

Amortization of prior service cost

    0.3 (a)   

Actuarial losses

    (0.8 )(a)   
 

 

 

   
    (0.5     Total before tax   
    0.1        Tax benefit   
 

 

 

   
  $ (0.4     Net of Tax   
 

 

 

   
   
 

 

 

   

Total reclassifications for the period

  $ (1.2     Net of Tax   
 

 

 

   

 

(a) These other comprehensive income components are included in the net periodic pension cost (see Note 19, “Employee Benefit Plans,” for further details).
Stock-Based Compensation
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Stock-Based Compensation

12. Stock-Based Compensation

The Company’s employees have historically participated in MTW’s stock-based compensation plans. Stock-based compensation expense has been allocated to the Company based on the awards and terms previously granted to its employees. Until consummation of the Spin-Off, the Company continued to participate in MTW’s stock-based compensation plans and record stock-based compensation expense based on the stock-based awards granted to the Company’s employees.

The Company adopted the MFS 2016 Omnibus Incentive Compensation Plan (the “2016 Plan”), under which it makes equity-based and cash-based incentive awards to attract, retain, focus and motivate executives and other selected employees, directors, consultants and advisors. The 2016 Plan is intended to accomplish these objectives by offering participants the opportunity to acquire shares of MFS common stock, receive monetary payments based on the value of such common stock or receive other incentive compensation under the 2016 Plan. In addition, the 2016 Plan permits the issuance of awards (“Replacement Awards”) in partial substitution for awards relating to shares of common stock of MTW that were outstanding immediately prior to the Spin-Off.

The Company’s Compensation Committee administers the 2016 Plan (the “Administrator”). The 2016 Plan authorizes the Administrator to interpret the provisions of the 2016 Plan; prescribe, amend and rescind rules and regulations relating to the 2016 Plan; correct any defect, supply any omission, or reconcile any inconsistency in the 2016 Plan, any award or any agreement covering an award; and make all other determinations necessary or advisable for the administration of the 2016 Plan, in each case in its sole discretion.

The 2016 Plan permits the granting of stock options (including incentive stock options), stock appreciation rights, restricted stock awards, restricted stock units, performance shares, performance units, annual cash incentives, long-term cash incentives, dividend equivalent units and other types of stock-based awards. Under the 2016 Plan 16.2 million shares of MFS common stock have been reserved for issuance, all of which may be issued upon the exercise of incentive stock options. These numbers may be adjusted in the event of certain corporate transactions or other events specified in the 2016 Plan.

 

Following the Spin-Off in March 2016, MFS granted long-term stock-based incentive awards under the 2016 Plan to its executive officers. The long-term stock-based incentive awards consisted of stock options with 4-year ratable vesting (25% of the aggregate grant value of the long-term incentive award) and performance shares (75% of the aggregate grant value of the long-term incentive award) that will be earned or forfeited based on performance as measured by cumulative fully diluted earnings per share and return on invested capital over a 3-year performance period. The details of these awards to the Company’s named executive officers will be disclosed as required by applicable SEC regulations in the Company’s proxy statement for its annual meeting in 2017.

Total stock-based compensation expense was $1.8 million and $0.6 million for the three months ended June 30, 2016 and 2015, respectively. The three months ended June 30, 2016 also included $0.3 million of additional separation expense recorded as a result of the modification of certain MTW restricted stock unit awards to pay out at target upon consummation of the Spin-Off. Total stock-based compensation expense was $2.6 million and $1.6 million for the six months ended June 30, 2016 and 2015, respectively. The six months ended June 30, 2016 also included $0.8 million of additional separation expense recorded as a result of the modification of certain MTW restricted stock unit awards to pay out at target upon consummation of the Spin-Off.

The Company recognizes stock-based compensation expense over the stock-based awards’ vesting period.

The Company granted options to acquire 0.3 million and 0.1 million shares of common stock to employees during the six months ended June 30, 2016 and 2015, respectively. In addition, the Company issued a total of 0.3 million restricted stock units to employees and directors during the six months ended June 30, 2016, and 0.2 million restricted stock units to employees and directors during the six months ended June 30, 2015. The restricted stock units granted to employees in 2015 and 2016 vest on the third anniversary of the grant date. The restricted stock units granted to directors in 2015 vest on the second anniversary of the grant date.

Stock-Based Compensation

15. Stock-Based Compensation

During the periods presented certain employees of MFS participated in stock-based compensation plans sponsored by MTW. Under these stock-based compensation plans, MTW provided awards to employees of MFS with restricted common stock, restricted stock units, and stock options to purchase shares of Manitowoc. Because MFS employees provide services in consideration for their participation in MFS’ plans, the stock-based compensation expense for the awards granted to MFS employees has been reflected in the combined financial statements. See Note 23, “Net Parent Company Investment and Related Party Transactions” for further information on corporate allocations.

MFS recognizes expense for all stock-based compensation on a straight-line basis over the vesting period of the entire award.

Total stock-based compensation expense before tax was $2.3 million, $2.4 million and $3.5 million during 2015, 2014, and 2013, respectively. In 2015, the company also recognized $0.5 million of expense before tax related to restricted stock retention awards.

Stock Options

Any option granted to directors of MTW were exercisable immediately upon granting and expire ten years subsequent to the grant date. For all outstanding grants made to officers and employees prior to 2011, options become exercisable in 25% increments annually over a four-year period beginning on the second anniversary of the grant date and expire ten years subsequent to the grant date. Starting with 2011 grants to officers and directors, such options become exercisable in 25% increments annually over a four-year period beginning on the first anniversary of the grant date and expire ten years subsequent to the grant date.

MTW granted options to MFS employees to acquire 0.4 million, 0.1 million and 0.1 million shares of common stock during 2015, 2014, and 2013, respectively. Stock-based compensation expense is calculated by estimating the fair value of incentive and non-qualified stock options at the time of grant and is amortized over the stock options’ vesting period. MFS recognized $0.6 million ($0.4 million after taxes), $0.9 million ($0.5 million after taxes) and $1.7 million ($1.0 million after taxes) of compensation expense associated with stock options during 2015, 2014, and 2013, respectively.

A summary of MFS’ stock option activity is as follows (in millions, except weighted average exercise price per share):

 

     Shares      Weighted
Average
Exercise Price
     Aggregate
Intrinsic
Value
 

Options outstanding as of January 1, 2015

     0.7       $ 15.90      

Additional options transferred and outstanding as of January 1, 2015

     0.5         16.31      
  

 

 

       

Total options outstanding as of January 1, 2015

     1.2         16.31      

Granted

     0.4         19.59      

Exercised

     (0.2      9.08      

Cancelled

     —           22.26      
  

 

 

    

 

 

    

 

 

 

Options outstanding as of December 31, 2015

     1.4       $ 17.70       $ 3.2   
  

 

 

    

 

 

    

 

 

 

Options exercisable as of:

        
  

 

 

    

 

 

    

 

 

 

December 31, 2015

     1.0       $ 16.91       $ 3.2   
  

 

 

    

 

 

    

 

 

 

 

The outstanding stock options at December 31, 2015 have a range of exercise prices from $4.41 to $43.33 per share. The following table shows the options outstanding and exercisable by range of exercise prices at December 31, 2015 (in millions, except range of exercise price per share, weighted average remaining contractual life and weighted average exercise price):

 

Range of Exercise Price per Share

   Outstanding
Options
     Weighted
Average
Remaining
Contractual
Life (Years)
     Weighted
Average
Exercise
Price
     Exercisable
Options
     Weighted
Average
Exercise
Price
 

$  4.41 - $11.34

     0.2         2.9       $ 4.41         0.2       $ 4.41   

$11.35 - $18.13

     0.4         5.4         13.79         0.3         12.72   

$18.14 - $26.09

     0.4         5.2         20.13         0.3         19.70   

$26.10 - $29.06

     0.1         0.3         26.10         —           26.10   

$29.07 - $38.86

     0.2         3.7         29.27         0.1         29.34   

$38.87 - $43.33

     0.1         1.9         39.27         0.1         39.27   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1.4         4.3       $ 17.70         1.0       $ 16.91   

MFS uses the Black-Scholes valuation model to value stock options. MFS used historical stock prices for MTW shares of common stock as the basis for its volatility assumption. The assumed risk-free rates were based on ten-year U.S. Treasury rates in effect at the time of grant. The expected option life represents the period of time that the options granted are expected to be outstanding and is based on historical experience.

As of December 31, 2015, MFS has $1.4 million of unrecognized compensation expense before tax related to stock options, which will be recognized over a weighted average period of 3.3 years.

The weighted average fair value of options granted per share during the years ended December 31, 2015, 2014, and 2013 was $9.71, $14.83, and $9.00, respectively. The fair value of each option grant was estimated at the date of grant using the Black-Scholes option-pricing method with the following assumptions:

 

     2015     2014     2013  

Expected Life (years)

     6.0        6.0        6.0   

Risk-free Interest rate

     1.8     1.9     1.1

Expected volatility

     56.0     55.0     56.0

Expected dividend yield

     0.3     0.4     0.6

For the years ended December 31, 2015, 2014, and 2013 the total intrinsic value of stock options exercised was $1.8 million, $8.0 million, and $1.5 million, respectively.

Restricted Stock Units

MTW granted restricted performance stock units of 0.2 million, 0.1 million and 0.1 million in 2015, 2014, and 2013, respectively. The restricted stock units are earned either based on service over the vesting period, or based on service over the vesting period on the extent to which performance goals are met over the applicable performance period (“performance shares”). The performance goals and the applicable performance period vary for each grant year. MFS recognized $1.7 million ($1.1 million after taxes), $0.9 million ($0.6 million after taxes) and $1.0 million ($0.6 million after taxes) of compensation expense associated with restricted stock units during 2015, 2014 and 2013, respectively.

The restricted stock units granted to employees in 2015 generally vest on the third anniversary of the grant date, assuming continued employment. The restricted stock units granted to directors in 2015 generally vest on the second anniversary of the grant date, assuming continued service. Performance shares were not granted in 2015 due to anticipated separation.

 

The restricted stock units granted to employees in 2014 vest on the third anniversary of the grant date. The restricted stock units granted to directors in 2014 vest on the second anniversary of the grant date. The performance shares granted in 2014 are earned based on the extent to which performance goals are met by MFS over a three-year period from January 1, 2014 to December 31, 2016. The performance goals for the performance shares granted in 2014 are based fifty percent (50%) on total shareholder return relative to a peer group of companies over the three-year period and fifty percent (50%) on EVA® improvement over the three-year period. In view of the Spin-Off, the Board of MTW prior to the Spin-Off agreed that the 2014 performance share award would be paid-out at target at the end of the three-year performance period. Depending on the foregoing factors, the number of shares awarded could range from zero to 0.1 million for the 2014 performance share grants. For these awards, the expense is based on the fair value of MTW’s shares as of the grant date for the EVA® improvement criteria and a Monte Carlo model for the total shareholder return criteria.

The performance shares granted in 2013 were earned based on the extent to which performance goals are met by MFS over a three-year period from January 1, 2013 to December 31, 2015. The performance goals for the performance shares granted in 2013 were based fifty percent (50%) on total shareholder return relative to a peer group of companies over the three-year period and fifty percent (50%) on debt reduction over the three-year period. These awards were earned at 78.6% of target, which resulted in a payout of 0.1 million shares in 2016. For these awards, the expense was based on the fair value of the company’s shares as of the grant date for the debt reduction criteria and a Monte Carlo model for the total shareholder return criteria.

A summary of activity for restricted stock units for the year ended December 31, 2015 is as follows (in millions except weighted average grant date fair value):

 

     Shares      Weighted
Average
Grant Date
Fair Value
 

Unvested as of January 1, 2015

     0.2       $ 30.72   

Granted

     0.2         21.67   

Vested

     (0.1      24.82   

Cancelled

     (0.1      24.11   
  

 

 

    

 

 

 

Unvested as of December 31, 2015

     0.2       $ 24.50   
  

 

 

    

 

 

 

As of December 31, 2015, MFS had $1.7 million of unrecognized compensation expense before tax related to restricted performance stock units which will be recognized over a weighted average period of 1.8 years.

Contingencies and Significant Estimates
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Contingencies and Significant Estimates

13. Contingencies and Significant Estimates

As of June 30, 2016, the Company held reserves for environmental matters related to certain locations of approximately $0.3 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. 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.

The Company believes that it has obtained and is in substantial compliance with those material environmental permits and approvals necessary to conduct its various businesses. Based on the facts presently known, it does not expect environmental compliance costs to have a material adverse effect on its financial condition, results of operations, or cash flows.

As of June 30, 2016, various product-related lawsuits were pending. To the extent permitted under applicable law, all of these are insured with self-insurance retention levels. The Company’s self-insurance retention levels vary by business, and have fluctuated over the last 10 years. The range of the Company’s self-insured retention levels is $0.1 million to $0.3 million per occurrence. As of June 30, 2016, the largest self-insured retention level for new occurrences currently maintained by the Company was $0.3 million per occurrence and applied to product liability claims for the hot category products manufactured in the United States.

Product liability reserves in the consolidated (condensed) balance sheets at June 30, 2016 and December 31, 2015 were $3.1 million and $2.6 million, respectively; $1.2 million and $0.9 million, respectively, was reserved specifically for actual cases, and $1.9 million and $1.7 million, respectively, for claims incurred but not 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 insured claims. Any recoveries from insurance carriers are dependent upon the legal sufficiency of claims and solvency of insurance carriers.

 

At June 30, 2016 and December 31, 2015, the Company had reserved $31.1 million and $34.3 million, respectively, for warranty claims included in product warranties and other non-current liabilities in the consolidated (condensed) balance sheets. Certain of these warranty and other related claims involve matters in dispute that ultimately are resolved by negotiations, arbitration, or litigation. See Note 14, “Product Warranties,” for further information.

It is reasonably possible that the estimates for environmental remediation, product liability and warranty costs may change in the near future based upon new information that may arise or matters that are beyond the scope of its historical experience. Presently, there are no reliable methods to estimate the amount of any such potential changes.

The Company is also involved in various legal actions arising out of the normal course of business, which, taking into account the liabilities accrued and legal counsel’s evaluation of such actions, in the opinion of management, the ultimate resolution of all matters is not expected to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

Contingencies and Significant Estimates

16. Contingencies and Significant Estimates

As of December 31, 2015, MFS held reserves for environmental matters related to Enodis locations of approximately $0.4 million. At certain of MFS’ other facilities, we have identified potential contaminants in soil and groundwater. The ultimate cost of any remediation required will depend upon the results of future investigation. Based upon available information, we do 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.

MFS believes that it has obtained and is in substantial compliance with those material environmental permits and approvals necessary to conduct its various businesses. Based on the facts presently known, we do not expect environmental compliance costs to have a material adverse effect on its financial condition, results of operations, or cash flows.

As of December 31, 2015, various product-related lawsuits were pending. To the extent permitted under applicable law, all of these are insured with self-insurance retention levels. MFS’ self-insurance retention levels vary by business, and have fluctuated over the last ten years. The range of our self-insured retention levels is $0.1 million to $0.25 million per occurrence. As of December 31, 2015, the largest self-insured retention level for new occurrences currently maintained by us is $0.25 million per occurrence and applies to product liability claims for the hot category products manufactured in the United States.

Product liability reserves in the combined balance sheets at December 31, 2015 and December 31, 2014 were $2.6 million and $2.2 million, respectively; $0.9 million and $0.2 million, respectively, was reserved specifically for actual cases, and $1.7 million and $2.0 million, respectively, for claims incurred but not reported, which were estimated using actuarial methods. Based on our experience in defending product liability claims, management believes the current reserves are adequate for estimated case resolutions on aggregate self-insured claims and insured claims. Any recoveries from insurance carriers are dependent upon the legal sufficiency of claims and solvency of insurance carriers.

At December 31, 2015 and December 31, 2014, MFS had reserved $40.0 million and $42.0 million, respectively, for warranty claims included in product warranties and other non-current liabilities in the combined balance sheets. Certain of these warranty and other related claims involve matters in dispute that ultimately are resolved by negotiations, arbitration, or litigation. See Note 17, “Guarantees,” for further information.

It is reasonably possible that the estimates for environmental remediation, product liability and warranty costs may change in the near future based upon new information that may arise or matters that are beyond the scope of our historical experience. Presently, there are no reliable methods to estimate the amount of any such potential changes.

MFS is also involved in various legal actions arising out of the normal course of business, which, taking into account the liabilities accrued and legal counsel’s evaluation of such actions, in the opinion of management, the ultimate resolution of all matters is not expected to have a material adverse effect on MFS’ financial condition, results of operations, or cash flows.

Guarantees
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Guarantees

14. 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 warranties activity for the six months ended June 30, 2016 and for the twelve months ended December 31, 2015:

 

(in millions)

   June 30,
2016
     December 31,
2015
 

Balance at the beginning of the period

   $ 40.0       $ 42.0   

Accruals for warranties issued

     12.3         24.2   

Settlements made (in cash or in kind)

     (15.5      (25.2

Currency translation impact

     (0.2      (1.0
  

 

 

    

 

 

 

Balance at the end of the period

   $ 36.6       $ 40.0   
  

 

 

    

 

 

 

The Company also offers extended warranties, which are recorded as deferred revenue and are amortized to income on a straight-line basis over a period equal to that of the warranty period. The deferred revenue on warranties included in other current and non-current liabilities at June 30, 2016 and December 31, 2015, was $5.5 million and $5.7 million, respectively. Removing deferred revenue from the ending balances detailed above, the total amount of product warranties at June 30, 2016 and December 31, 2015, was $31.1 million and $34.3 million, respectively.

Guarantees

17. Guarantees

In the normal course of business, MFS provides its customers a warranty covering workmanship, and in some cases materials, on products manufactured by the Company. Such warranty generally provides 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 MFS’ warranty, we may be obligated, at our expense, to correct any defect by repairing or replacing such defective products. MFS 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 our 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, we assess the adequacy of our recorded warranty liability and adjust the amounts as necessary. Below is a table summarizing the warranty activity for the years ended December 31, 2015 and 2014:

 

(in millions)

   2015      2014  

Balance at beginning of period

   $ 42.0       $ 38.3   

Accruals for warranties issued during the period

     24.2         27.9   

Divestiture

     —           (23.7

Settlements made (in cash or in kind) during the period

     (25.2      (0.5

Currency translation

     (1.0      —     
  

 

 

    

 

 

 

Balance at end of period

   $ 40.0       $ 42.0   
  

 

 

    

 

 

 

 

MFS also offers extended warranties, which are recorded as deferred revenue and are amortized to income on a straight-line basis over a period equal to that of the warranty period. The deferred revenue on warranties included in other current and non-current liabilities at December 31, 2015 and December 31, 2014, was $5.7 million and $5.4 million, respectively.

Restructuring
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Restructuring

15. Restructuring

In conjunction with the acquisition of Enodis in October 2008, certain restructuring activities were undertaken to recognize cost synergies and rationalize the new cost structure of the Company. The restructuring reserve balance as of June 30, 2016 and December 31, 2015, includes certain of these costs, including a pension withdrawal liability, which are recorded in accrued expenses and other liabilities and other long-term liabilities in the consolidated (condensed) balance sheets. The Company recorded additional amounts in 2016 primarily related to the pension withdrawal liability. The Company recorded additional amounts in 2015 primarily related to a company-wide reduction in force and the proposed closing of the Cleveland facility.

The following is a rollforward of all restructuring activities for the six months ended June 30, 2016 (in millions):

 

Restructuring Reserve

Balance as of

December 31, 2015

   Restructuring
Charges
     Use of Reserve      Restructuring Reserve
Balance as of
June 30, 2016
 

$16.8

   $ 1.6       $ (2.2    $ 16.2   
Restructuring

18. Restructuring and Asset Impairments

In conjunction with the acquisition of Enodis in October 2008, certain restructuring activities were undertaken to recognize cost synergies and rationalize the new cost structure of MFS. The restructuring reserve balance as of December 31, 2015 and December 31, 2014, includes certain of these costs, including a pension withdrawal liability. MFS recorded additional amounts in 2015 primarily related to a company-wide reduction in force and the proposed closing of the Cleveland facility.

The following is a rollforward of all restructuring activities related to MFS for the year ended December 31, 2015 (in millions):

 

Restructuring
Reserve Balance as
of
December 31, 2014
     Restructuring
Charges
     Use of Reserve      Restructuring
Reserve Balance as
of
December 31, 2015
 
$ 15.6       $ 4.6       $ (3.4    $ 16.8   

In conjunction with this restructuring plan, MFS recorded an impairment expense of $9.0 million related to our manufacturing plant in Cleveland that will be closed in 2016.

Restructuring expense of $4.6 million and asset impairment expense of $9.0 million are presented on the Combined Statements of Operations within “Other operating (income) expense - net”.

Employee Benefit Plans
6 Months Ended 12 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Employee Benefit Plans

16. Employee Benefit Plans

The Company maintains several different retirement plans for its operations in the United States, Europe and Asia. This footnote describes those retirement plans that are maintained for the Company’s US-based employees. The current plans are based largely upon benefit plans that MTW maintained prior to the Spin-Off. The Company has established a Retirement Plan Committee to manage the operations and administration of all retirement plans and related trusts.

Defined Benefit Plans

Prior to December 31, 2015, MTW maintained two defined benefit pension plans for its eligible employees and retirees: (1) The Manitowoc Company, Inc. Pension Plan (the “MTW Pension”); and (2) The Manitowoc Company, Inc. Supplemental Executive Retirement Plan (the “MTW SERP”). The MTW Pension Plan and the MTW SERP (together, the “MTW DB Plans”) covered eligible employees of MTW, including MTW’s Cranes business and foodservice business. The MTW Pension Plan is frozen to new participants and future benefit accruals.

Effective January 1, 2016, a portion of each MTW DB Plan was spun off to create separate plans for MTW’s Foodservice business: (1) the Manitowoc Foodservice Pension Plan (the “MFS Pension Plan”); and (2) the Manitowoc Foodservice Supplemental Executive Retirement Plan (the “MFS SERP”). The MFS Pension Plan and the MFS SERP (together, the “MFS DB Plans”) were initially sponsored by Manitowoc FSG U.S. Holding, LLC. MFS assumed sponsorship of the MFS DB Pension Plans on March 4, 2016. MFS no longer participates in the MTW DB Plans. The MFS DB Plans are substantially similar to the former MTW DB Plans.

When comparing the current financial information to financial statements for prior years, it is important to distinguish between: (1) the defined benefit plan that also covered employees of MTW and other MTW subsidiaries (the “Shared Plans”); and (2) the defined benefit plans which are sponsored directly by MFS or its subsidiaries and offered only to MFS employees or retirees (the “Direct Plans”).

MFS accounted for the Shared Plans for the purpose of the consolidated (condensed) financial statements as a multiemployer plan. Accordingly, MFS did not record an asset or liability to recognize the funded status of the Shared Plans. However, the costs associated with these Shared Plans of $0.1 million and $0.8 million for the six months ended June 30, 2016 and 2015, respectively, are reflected on the MFS consolidated (condensed) statement of operations. This expense reflects an approximation of MFS’ portion of the costs of the Shared Plans as well as costs attributable to MTW corporate employees, which have been allocated to the MFS consolidated (condensed) statement of operations based on methodology deemed reasonable by management.

 

During the six months ended June 30, 2016, MFS assumed certain pension obligations of $55.6 million and related plan assets of $34.1 million, and certain postretirement health obligations of $6.8 million, to newly-created single employer plans for MFS employees and certain other MTW-sponsored pension plans, as described above. This net transfer of approximately $28.3 million was treated as a non-cash transaction between the Company and MTW. The Company also assumed after-tax deferred gains of $6.1 million related to these plans, which were recorded in AOCI.

The Direct Plans are accounted for as defined benefit plans. Accordingly, the funded and unfunded position of each Direct Plan is recorded in MFS consolidated (condensed) balance sheets and the income and expenses recorded in the consolidated (condensed) statements of operations. Actuarial gains and losses that have not yet been recognized through income are recorded in accumulated other comprehensive (loss) income net of taxes until they are amortized as a component of net periodic benefit cost. The determination of benefit obligations and the recognition of expenses related to the Direct Plans are dependent on various assumptions. The major assumptions primarily relate to discount rates, long-term expected rates of return on plan assets, and future compensation increases. Management develops each assumption using relevant company experience in conjunction with market-related data for each individual country in which such plans exist.

The components of periodic benefit costs for the Direct Plans for the three and six months ended June 30, 2016 and 2015 are as follows:

 

     Three Months Ended
June 30, 2016
     Six Months Ended
June 30, 2016
 

(in millions)

   Pension Plans     Postretirement
Health and
Other Plans
     Pension Plans     Postretirement
Health and
Other Plans
 

Service cost—benefits earned during the period

   $ 0.1      $ —         $ 0.1      $ —     

Interest cost of projected benefit obligations

     2.1        0.1         4.3        0.2   

Expected return on plan assets

     (1.6     —           (3.2     —     

Amortization of actuarial net loss

     0.7        —           1.3        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit costs

   $ 1.3      $ 0.1       $ 2.5      $ 0.2   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     Three Months Ended
June 30, 2015
     Six Months Ended
June 30, 2015
 

(in millions)

   Pension Plans     Postretirement
Health and
Other Plans
     Pension Plans     Postretirement
Health and
Other Plans
 

Service cost—benefits earned during the period

   $ 0.1      $ —         $ 0.2      $ —     

Interest cost of projected benefit obligations

     1.6        0.1         3.2        0.1   

Expected return on plan assets

     (1.4     —           (2.7     —     

Amortization of actuarial net loss

     0.3        —           0.6        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit costs

   $ 0.6      $ 0.1       $ 1.3