Welbilt Reports 2021 Third Quarter Operating Results

Welbilt, Inc. (NYSE:WBT), today announced financial results for its 2021 third quarter.

2021 Third Quarter Highlights ⁽¹⁾

• Net sales were $411.5 million, an increase of 37.9 percent from the prior year; Organic Net Sales (a non-GAAP measure) increased 36.1 percent from the prior year
• Earnings from operations were $52.6 million compared to $21.2 million in the prior year; as a percentage of net sales, earnings from operations were 12.8 percent compared to 7.1 percent in the prior year
• Adjusted Operating EBITDA (a non-GAAP measure) was $75.1 million compared to $45.6 million in the prior year; Adjusted Operating EBITDA margin was 18.3 percent compared to 15.3 percent in the prior year
• Net earnings were $24.9 million compared to net earnings of $4.9 million in the prior year; Adjusted Net Earnings (a non-GAAP measure) were $29.9 million compared to Adjusted Net Earnings of $9.9 million in the prior year
• Diluted net earnings per share was $0.17 compared to diluted net earnings per share of $0.03 in the prior year; Adjusted Diluted Net Earnings Per Share (a non-GAAP measure) was $0.21 compared to Adjusted Diluted Net Earnings Per Share of $0.07 in the prior year
• Net cash provided by operating activities was $13.5 million, compared to net cash provided by operating activities of $37.5 million in last year's third quarter; Free Cash Flow (a non-GAAP measure) was $6.2 million compared to $32.1 million in last year's third quarter

2021 Third Quarter Year-to-date Highlights ⁽¹⁾

• Net sales were $1,123.9 million, an increase of 34.9 percent from the prior year; Organic Net Sales (a non-GAAP measure) increased 31.8 percent from the prior year
• Earnings from operations were $134.3 million compared to $22.5 million in the prior year; as a percentage of net sales, earnings from operations were 11.9 percent compared to 2.7 percent in the prior year
• Adjusted Operating EBITDA (a non-GAAP measure) was $198.4 million compared to $110.9 million in the prior year; Adjusted Operating EBITDA margin was 17.7 percent compared to 13.3 percent in the prior year
• Net earnings were $56.5 million compared to a net loss of $27.6 million in the prior year; Adjusted Net Earnings (a non-GAAP measure) were $73.5 million compared to Adjusted Net Earnings of $1.4 million in the prior year
• Diluted net earnings per share was $0.40 compared to diluted net loss per share of $0.20 in the prior year; Adjusted Diluted Net Earnings Per Share (a non-GAAP measure) was $0.52 compared to Adjusted Diluted Net Earnings Per Share of $0.01 in the prior year
• Net cash provided by operating activities was $34.2 million, compared to net cash used in operating activities of $26.9 million in the prior year; Free Cash Flow (a non-GAAP measure) was $17.0 million compared to a use of $42.8 million in the prior year

⁽¹⁾ Definitions and reconciliations of the non-GAAP measures used herein are included in the schedules accompanying this release.

Summarizing Welbilt's third quarter performance, Bill Johnson, Welbilt's President and CEO, stated, "Third-party Net Sales and Organic Net Sales grew substantially this quarter compared to last year's third quarter, which was materially impacted by the COVID-19 pandemic. We are very pleased with our strong Adjusted Operating EBITDA and Adjusted Operating EBITDA margin performance despite the inflationary impacts from our supply chain and logistics providers. We successfully offset these headwinds with the beneficial impact from increased volume, positive net pricing, and improved productivity attributable to the progress we have made to date as part of our Business Transformation Program ("Transformation Program") and through the cost containment actions we put in place last year that are continuing to benefit us. Industry conditions have improved with the rollout of COVID-19 vaccines and the lifting of restrictions in some locations, although improvements are uneven globally. In response to ongoing supply chain challenges, we built inventory of critical components to help alleviate manufacturing disruptions and shorten order lead times to support our customers. While the investment in higher inventory reduced Free Cash Flow in the quarter, we ended the third quarter with our highest liquidity level since 2018."

Net sales increased 37.9 percent in the third quarter compared to last year's third quarter. Excluding the impact from foreign currency translation, Organic Net Sales increased 36.1 percent, with strong growth coming from large chain customers, general market dealers and distributors, and KitchenCare^® master parts distributors and factory-authorized service dealers. Over 90 percent of the growth in the third quarter was from higher volume versus increased pricing. This growth is compared against last year's weak third quarter which was highly impacted by the COVID-19 pandemic.

The third quarter Adjusted Operating EBITDA margin of 18.3 percent was 300 basis points higher than last year's third quarter driven by the incremental impact on margins from higher volume, positive net pricing and lower manufacturing costs partially offset by increased selling, general and administrative expenses (net of adjustments for the Transformation Program expenses and other adjustments to SG&A that are included in our Adjusted Operating EBITDA reconciliation ("Net SG&A")) and higher materials costs. Net SG&A costs increased primarily due to higher compensation expense and commissions reflecting higher incentives, the non-recurrence of government subsidies and other measures taken in the prior year in response to the impact from the pandemic, and increased travel and marketing expenses to support the sales growth in the quarter. The prior year period included government subsidies in various countries, temporary salary reductions, furloughs, reductions in incentive compensation and lower commissions due to the large sales decrease in the quarter.

We continued to make progress on the Transformation Program during the third quarter. We continued to execute on our planned procurement activities related to materials spend and on executing incremental cost savings opportunities through the implementation of Value Analysis Value Engineering ("VAVE") initiatives, although we faced challenges in balancing progress on these activities with the need for resources to address component supply issues. We benefited from productivity improvements in our manufacturing plants which provided additional savings in the quarter, even as some plants were impacted by parts shortages that occasionally disrupted production schedules. In summary, the improvements we have made to date with our Transformation Program helped offset a meaningful portion of the inflationary headwinds we experienced in the third quarter.

Liquidity and Debt

Net cash provided by operating activities in the third quarter was $13.5 million compared to $37.5 million in last year's third quarter. Net cash used in investing activities in the third quarter was $7.3 million compared to $5.4 million of net cash used in investing activities in last year's third quarter. Free Cash Flow (a non-GAAP measure) was $6.2 million in the quarter compared to $32.1 million in last year's third quarter. The decrease in Free Cash Flow in the third quarter versus last year's third quarter reflects an increase in cash used in operating assets and liabilities, primarily to support higher inventory levels to help mitigate ongoing supply chain disruptions, partially offset by increased net earnings. Capital spending was $7.3 million in the third quarter compared to $5.4 million in last year's third quarter.

During the quarter, total debt and finance leases (including the current portion) decreased by $47.4 million. Our ending cash and cash equivalents was $111.9 million, a decrease of $41.9 million in the quarter. During the quarter, we repatriated $43.0 million of cash from international subsidiaries to the U.S., or $40.9 million net of withholding taxes, that contributed to the third quarter's debt reduction. Total global liquidity was $397.3 million as of September 30, 2021, which consisted of the $111.9 million of cash and cash equivalents and $285.4 million of availability on our Revolving Credit Facility. Total global liquidity increased by $5.1 million in the quarter from $392.2 million as of June 30, 2021.

Guidance

On July 8, 2021, we issued a Form 8-K that included Updated Welbilt Management Forecasted Financial Information for 2021 net sales of $1,482 million and 2021 Adjusted Operating EBITDA of $267 million. We are reiterating this forecast today.

Additional Management Commentary

"We are pleased with our third quarter results in light of ongoing supply chain disruptions and inflationary pressure on materials and logistics costs," said Bill Johnson. "In the Americas, sales to strategic QSRs and fast casual operators increased over last year with improved demand for replacement equipment and stronger rollout activity by large chains across many of our brands. General market sales and KitchenCare aftermarket sales increased in the Americas. Both EMEA and APAC also saw year-over-year growth from strategic QSRs, general market dealers and KitchenCare aftermarket customers. We believe overall demand will remain strong for the next several quarters as our commercial foodservice end markets continue their gradual recovery."

"The combination of continued aggressive discretionary cost management, improving absorption of fixed costs due to higher volumes, improved net pricing and benefits from our Transformation Program, allowed us to deliver an Adjusted Operating EBITDA margin of 18.3 percent in the third quarter. With the tools we have developed as part of our Transformation Program, the productivity levels in our plants are improved compared to prior year levels, despite some production disruption due to parts shortages from our supply chain. We are continuing to experience rising commodity prices, longer lead times and inflation from our parts suppliers, and continued logistics inefficiencies. We were able to offset some, but not all, of the effect of these pressures in the third quarter with our Transformation Program procurement activities through negotiated price reductions with new and existing suppliers and by executing VAVE initiatives. We implemented additional price increases in the quarter which will also help us offset the effect of these inflationary pressures as we move through the fourth quarter and into early 2022," concluded Johnson.

About Welbilt, Inc.

Welbilt, Inc. provides the world's top chefs, premier chain operators and growing independents with industry-leading equipment and solutions. Our innovative products and solutions are powered by our deep knowledge, operator insights, and culinary expertise. Our portfolio of award-winning product brands includes Cleveland™, Convotherm^®, Crem^®, Delfield^®, Frymaster^®, Garland^®, Kolpak^®, Lincoln^®, Manitowoc^® Ice, Merco^®, Merrychef^® and Multiplex^®. These product brands are supported by three service brands: KitchenCare^®, our aftermarket parts and service brand, FitKitchen^®, our fully-integrated kitchen systems brand, and KitchenConnect^®, our cloud-based digital platform brand. Headquartered in the Tampa Bay region of Florida and operating 19 manufacturing facilities throughout the Americas, Europe and Asia, we sell through a global network of over 5,000 distributors, dealers, buying groups and manufacturers' representatives in over 100 countries. We have approximately 4,700 employees and generated sales of $1.2 billion in 2020. For more information, visit www.welbilt.com.

Forward-looking Statements

Certain statements in this press release constitute "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Statements contained in this press release that are not historical facts are forward-looking statements and include, for example, our expectations regarding the potential future impacts from the COVID-19 pandemic, including with respect to vaccine availability and effectiveness, effects of inflation and disruption to the supply chain, overall demand and consumer confidence on our business, results of operations, financial condition and cash flows (including demand, sales, operating expenses, Adjusted Operating EBITDA, net income (loss), operating cash flows, intangible assets, staffing levels, supply chain, government assistance, compliance with financial covenants); our ability to meet working capital needs and cash requirements over the next 12 months; our ability to realize savings from reductions in force and other cost saving measures; compliance with the financial covenants under our credit facility; our ability to obtain financial and tax benefits from the CARES Act; our ability to consummate the recently announced transaction with Ali Holdings S.r.l. ("Ali Group") and realize the anticipated benefits thereof; our expectations regarding future results; descriptions of the Transformation Program, including related costs, completion dates and targeted annualized savings and the expected impact on productivity levels; descriptions of our VAVE initiatives; expected impact of restructuring and other plans and objectives for future operations; assumptions on which all such projects, plans or objectives are based; and discussions of conditions and demand in the global foodservice market and foodservice equipment industry. Certain of these forward-looking statements can be identified by using words such as "anticipates," "believes," "intends," "estimates," "targets," "expects," "endeavors," "forecasts," "could," "will," "may," "future," "likely," "on track to deliver," "gaining momentum," "plans," "projects," "assumes," "should" or other similar expressions. Such forward-looking statements involve known and unknown risks and uncertainties, and our actual results could differ materially from future results expressed or implied in these forward-looking statements. The forward-looking statements included in this release are based on our current beliefs and expectations of our management as of the date of this release. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, risks related to the Company's proposed merger with Ali Group, including the risk that the conditions to closing of the transaction are not satisfied, including the risk that required approvals from regulatory authorities are not obtained, the risk of litigation relating to the transaction, uncertainties as to the timing of the consummation of the transaction and the ability of each party to consummate the transaction, risks that the proposed transaction disrupts our current plans or operations, our ability to retain and hire key personnel, competitive responses to the proposed transaction unexpected costs, charges or expenses resulting from the transaction, potential adverse reactions or changes to relationships with our customers, suppliers, distributors and other business partners resulting from the announcement or completion of the transaction; risks from global pandemics including COVID-19, including the emergence of new strains of the virus, measures taken by governmental authorities and third parties in response to pandemics and the efficacy and availability of vaccines; risks of continuing disruptions to our supply chain resulting in delays, difficulties and increased costs of acquiring raw materials; risks related to our ability to timely and efficiently execute on manufacturing strategies; our ability to realize anticipated or targeted earnings enhancements, cost savings, strategic options and other synergies (through the Transformation Program or otherwise) and the anticipated timing to realize those enhancements, savings, synergies, and options; acquisitions, including our ability to realize the benefits of acquisitions in a manner consistent with our expectations and general integration risks; our substantial levels of indebtedness; actions by competitors including competitive pricing; consumer and customer demand for products; the successful development and market acceptance of innovative new products; world economic factors and ongoing economic and political uncertainty; our ability to source raw materials and commodities on favorable terms and successfully respond to and manage related price volatility; our ability to generate cash and manage working capital consistent with our stated goals; costs of litigation and our ability to defend against lawsuits and other claims and to protect our intellectual property rights; unanticipated environmental liabilities; the ability to obtain and maintain adequate insurance coverage; data security and technology systems; risks and uncertainties relating to internal controls over financial reporting; our labor relations and the ability to recruit and retain highly qualified personnel; product quality and reliability, including product liability claims; changes in the interest rate environment and currency fluctuations; compliance with, or uncertainty created by, existing, evolving or new laws and regulations, including recent changes in tax laws, tariffs and trade regulations and enforcement of such laws around the world, and any customs duties and related fees we may be assessed retroactively for failure to comply with U.S. customs regulations; our ability to comply with evolving and complex accounting rules, many of which involve significant judgment and assumptions; the possibility that additional information may arise, that would require us to make further adjustments or revisions to our historical financial statements or delay the filing of our current financial statements; actions of activist shareholders; and those additional risks, uncertainties and factors described in more detail under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020, our Quarterly Report on Form 10-Q for the quarters ended March 31, 2021, June 30, 2021 and September 30, 2021, and in our other filings with the Securities and Exchange Commission. The COVID-19 pandemic amplifies many of these risks, uncertainties and factors. We do not intend, and, except as required by law, we undertake no obligation, to update any of our forward-looking statements after the issuance of this release to reflect any future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Business Segments

NON-GAAP FINANCIAL MEASURES

In this release, we use certain non-GAAP financial measures discussed below to evaluate our results of operations, financial condition and liquidity. We believe that the presentation of these non-GAAP financial measures, when viewed as a supplement to our results prepared in accordance with U.S. GAAP, provides useful information to investors in evaluating the ongoing performance of our operating businesses, provides greater transparency into our results of operations and is consistent with how management evaluates operating performance and liquidity. In addition, these non-GAAP measures address questions we routinely receive from analysts and investors and, in order to ensure that all investors have access to similar data we make this data available to all investors. None of the non-GAAP measures presented should be considered as an alternative to net earnings, earnings from operations, net cash used in operating activities, net sales or any other measures derived in accordance with U.S. GAAP. These non-GAAP measures have important limitations as analytical tools and should not be considered in isolation or as substitutes for financial measures presented in accordance with U.S. GAAP. The presentation of our non-GAAP financial measures may change from time to time, including as a result of changed business conditions, new accounting rules or otherwise. Further, our use of these terms may vary from the use of similarly-titled measures by other companies due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. We do not provide reconciliations of our forward-looking Adjusted Operating EBITDA margin and Adjusted Diluted Net Earnings Per Share guidance, which are presented on a non-GAAP basis, to the most directly comparable GAAP financial measure because the combined impact and timing of certain potential charges or gains is inherently uncertain, outside of our control and difficult to predict. Accordingly, we cannot provide reconciliations without unreasonable effort and are unable to determine the probable significance of the unavailable information.

Free Cash Flow

In this release, we refer to Free Cash Flow, a non-GAAP measure, as our net cash provided by or used in operating activities less capital expenditures. We believe this non-GAAP financial measure is useful to investors in measuring our ability to generate cash internally to fund our debt repayments, acquisitions, dividends and share repurchases, if any. Free Cash Flow reconciles to net cash used in operating activities presented in our Consolidated Statements of Cash Flows presented in accordance with U.S. GAAP as follows:

Adjusted Operating EBITDA

In addition to analyzing our operating results on a U.S. GAAP basis, management also reviews our results on an "Adjusted Operating EBITDA" basis. Adjusted Operating EBITDA is defined as net earnings before interest expense, income taxes, other income or expense, depreciation and amortization expense plus certain other items such as loss from impairment of assets, gain or loss from disposal of assets, restructuring activities, loss on modification or extinguishment of debt, acquisition-related transaction and integration costs, Transformation Program expense and certain other items. Management uses Adjusted Operating EBITDA as the basis on which we evaluate our financial performance and make resource allocations and other operating decisions. Management considers it important that investors review the same operating information used by management.

The Company's Adjusted Operating EBITDA reconciles to net earnings as presented in the Consolidated Statements of Operations in accordance with U.S. GAAP as follows:

Adjusted Net Earnings and Adjusted Diluted Net Earnings Per Share

We define Adjusted Net Earnings as net earnings before the impact of certain items, such as loss on modification or extinguishment of debt, gain or loss from impairment and disposal of assets, restructuring activities, separation expense, Transformation Program expense, acquisition-related transaction and integration costs, certain other items, expenses associated with pension settlements, foreign currency transaction gain or loss and the tax effect of the aforementioned adjustments, as applicable. Adjusted Diluted Net Earnings Per Share for each period represents Adjusted Net Earnings while giving effect to all potentially dilutive shares of common stock that were outstanding during the period. We believe these measures are useful to investors in assessing the ongoing performance of our underlying businesses before the impact of certain items.

The following tables present Adjusted Net Earnings and Adjusted Diluted Net Earnings Per Share reconciled to net earnings and diluted net earnings per share, respectively, presented in accordance with U.S. GAAP:

Third-party Net Sales and Organic Net Sales

In this release, we define Third-party Net Sales as net sales for the segment excluding intersegment sales and Organic Net Sales as net sales before the impacts of acquisitions and foreign currency translations during the period. We believe the Third-party Net Sales and Organic Net Sales measures are useful to investors in assessing the ongoing performance of our underlying businesses. The change in third-party Net Sales and Organic Net Sales reconcile to the change in net sales presented in accordance with U.S. GAAP as follows:

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