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EX-32.2 - EXHIBIT 32.2 - Welbilt, Inc.mfs-20161231x10kxex322.htm
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EX-31.2 - EXHIBIT 31.2 - Welbilt, Inc.mfs-20161231x10kxex312.htm
EX-31.1 - EXHIBIT 31.1 - Welbilt, Inc.mfs-20161231x10kxex311.htm
EX-23.1 - EXHIBIT 23.1 - Welbilt, Inc.mfs-20161231x10kxex231.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to
Commission File Number
1-37548

mfsa14.jpg 
Manitowoc Foodservice, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
47-4625716
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation)
 
Identification Number)
 
 
 
2227 Welbilt Boulevard
 
 
New Port Richey, FL
 
34655
(Address of principal executive offices)
 
(Zip Code)
(727) 375-7010
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.01 Par Value
 
New York Stock Exchange
Common Stock Purchase Rights
 
 
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o  No x



Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of "large accelerated filer, accelerated filer, and smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 (Do not check if a smaller reporting company)
 
Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x
As of June 30, 2016, the last business day of the registrant’s most recently completed second quarter, the aggregate value of the registrant’s common stock held by non-affiliates was approximately $2,417.2 million, based on the number of shares held by non-affiliates as of June 30, 2016 and the closing price of the registrant’s common stock on the New York Stock Exchange on June 30, 2016.
The number of shares outstanding of the registrant’s Common Stock as of February 17, 2017, the most recent practicable date, was 138,661,654.
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the registrant’s 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2016.

See Index to Exhibits immediately following the signature page of this report, which is incorporated herein by reference.




MANITOWOC FOODSERVICE, INC.
Index to Annual Report on Form 10-K
For the Year Ended December 31, 2016
 
 
Page
 
PART I
 
 
 

 
PART II
 
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
 
 
PART IV
 
 
 
 
 
 
 

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PRESENTATION OF INFORMATION

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 the MFS common stock to MTW’s stockholders on a pro rata basis, and MFS became an independent publicly traded company (the "Distribution"). As used in this Annual Report on Form 10-K, "Spin-Off" refers to both the above described internal reorganization and Distribution, collectively.
Unless otherwise expressly stated or the context otherwise requires, references to "we," "our," "us," the "Company" or "MFS," refers to Manitowoc Foodservice, Inc., a Delaware corporation incorporated in 2015, and its consolidated subsidiaries 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.


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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Statements in this Annual Report on Form 10-K and in other Company communications that are not historical facts are forward-looking statements, which are based upon the Company's current expectations, within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements involve risks and uncertainties that could cause actual results to differ materially from what appears within this Annual Report on Form 10-K.
Forward-looking statements include descriptions of plans and objectives for future operations, and the assumptions behind those plans. The words "anticipates," "believes," "intends," "estimates," "targets," "expects," "could," "will," "may" or similar expressions, usually identify forward-looking statements. Any and all projections of future performance are forward-looking statements.
In addition to the assumptions, uncertainties, and other information referred to specifically in the forward-looking statements, a number of factors could cause actual results to be significantly different from what is presented in this Annual Report on Form 10-K. Those factors include, without limitation, the following:
 
unanticipated issues that may arise under the Master Separation and Distribution Agreement, the Transition Services Agreement, the Tax Matters Agreement, the Employee Matters Agreement, the Intellectual Property Matters Agreement and/or any other agreement with MTW in connection with the Spin-Off;

 
efficiencies and capacity utilization of facilities;
 
issues relating to the ability to timely and efficiently execute on manufacturing strategies, including issues relating to new plant start-ups, plant closings, workforce reductions or ramp-ups, and/or consolidations of existing facilities and operations;
 
the Company's ability to retain its executive management team and to attract qualified new personnel;
 
realization of anticipated earnings enhancements, cost savings, strategic options and other synergies, and the anticipated timing to realize those enhancements, savings, synergies, and options;
 
availability of certain raw materials;
 
growth of selling, general and administrative expenses, including health care and postretirement costs;
 
changes in raw material prices, commodity prices and hedges in place;
 
actions of competitors, including competitive pricing;
 
the successful development of innovative products and market acceptance of new and innovative products;
 
quality and reliability issues with manufactured products;
 
unanticipated issues associated with the quality of materials and components sourced from third parties and resolution of those issues;
 
unanticipated issues associated with refresh/renovation plans, new product rollouts and/or new equipment
 by national restaurant accounts and global chains;
 
growth in demand for foodservice equipment by customers in emerging markets;
 
global expansion of customers;
 
changes in the markets the Company serves;
 
unanticipated changes in consumer spending, including consumer demand for products from restaurants;
 
unfavorable outcomes in product liability lawsuits, or an increase in the volume of product liability lawsuits;
 
unexpected costs incurred in protecting its intellectual property;
 
weather;
 
changes in domestic and international economic and industry conditions;
 
work stoppages, labor negotiations and labor rates;
 
the availability of local suppliers and skilled and temporary labor;
 
unanticipated changes in capital and financial markets;
 
the ability to generate cash and manage working capital consistent with our stated goals;
 
changes in the interest rate environment;
 
pressure of financing leverage;
 
compliance with debt covenants and maintenance of credit ratings as well as the impact of interest and principal repayment of its debt obligations;
 
foreign currency fluctuations and their impact on reported results and hedges in place;
 
unexpected issues affecting its effective tax rate, including, but not limited to, tariffs, global tax policies, tax reform, and tax legislation;
 
unanticipated issues associated with the resolution or settlement of uncertain tax positions or unfavorable resolution of tax audits;

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the tax treatment of the Distribution and the restrictions on post-Distribution activities imposed on the Company under the Tax Matters Agreement with MTW in order to preserve the tax-free treatment of the Spin-Off;
 
actions of activist shareholders;
 
costs associated with unanticipated environmental liabilities;
 
risks associated with data security and technology systems and protections;
 
world-wide political risk;
 
health outbreaks or natural disasters disrupting commerce in one or more regions of the world;
 
acts of terrorism;
 
geographic factors and economic risks;
 
potential global events resulting in market instability, including financial bailouts and defaults of sovereign nations;
 
changes in laws and regulations, as well as their enforcement, throughout the world;
 
changes in the costs of compliance with laws regarding trade, export controls and foreign corrupt practices;
 
foodservice equipment replacement cycles in the U.S. and other mature markets;
 
the ability to compete and appropriately integrate, and/or transition, restructure and consolidate acquisitions, divestitures, strategic alliances, joint ventures and other strategic alternatives and otherwise capitalize on key strategic opportunities;
 
in connection with acquisitions, divestitures, strategic alliances and joint ventures, the finalization of the price and other terms, the realization of contingencies consistent with any established reserves, and unanticipated issues associated with transitional services;
 
actions and consolidation of dealers and distributors; and
 
other events outside the Company's control.



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PART I
ITEM 1. BUSINESS
Our Company
Manitowoc Foodservice, Inc., a Delaware corporation incorporated in 2015 (the "Company," "MFS," "we," "our" or "us"), is one of the world's leading commercial foodservice equipment companies. We design, manufacture and supply best-in-class food and beverage equipment for the global commercial foodservice market, offering customers unparalleled operator and patron insights, collaborative kitchen solutions, culinary expertise and world-class implementation support and service.
We intend to achieve sustainable growth globally and drive increased profitability by leveraging our position as a leading commercial foodservice equipment provider, while selectively pursuing strategic acquisitions and partnerships, growing our customer base, expanding the frontiers of foodservice innovation and continuing to attract and grow industry-leading talent.
We are headquartered in New Port Richey, Florida, and operate 18 manufacturing facilities throughout the Americas, Europe and Asia. Our former parent, the Manitowoc Company, Inc ("MTW"), was founded in 1902 and began building commercial ice machines in 1966. Over time, we have become an industry-leading manufacturer of foodservice equipment. On February 6, 2017, we announced that we are rebranding the Company, our logo and our brand identity to Welbilt, Inc., effective March 6, 2017. The new name and brand represent a long-standing commitment to put customers’ needs first. This change is part of our strategic repositioning after we spun off from MTW on March 4, 2016.
Today, we sell through a global network of over 3,000 distributors and dealers in over 100 countries. The Company has approximately 5,500 employees and generated sales of $1.46 billion in 2016. Our portfolio of award-winning brands includes Cleveland™, Convotherm®, Delfield®, fitKitchenSM, Frymaster®, Garland®, Kolpak®, Lincoln™, Manitowoc® Ice, Merco®, Merrychef® and Multiplex®. All of our products are supported by KitchenCare®, our aftermarket parts and repair service business.
Global Foodservice Market and Foodservice Equipment Industry
The increasing demand for affordable dining is expected to continue on a global scale. Consumers in most markets are expected to gravitate towards more informal options, which is a trend seen among both high income consumers looking to save during a slow economic recovery, and lower income consumers looking for accessible entry points for "on the go" food consumption. For foodservice equipment operators in emerging markets, this offers enormous opportunity for innovation, particularly in terms of format, as new restaurant consumers look to experiment with a variety of brands and experiences. Quick-service restaurant ("QSR") chains, in particular, have proved successful at innovation in these markets.
Global and regional markets for food and foodservice are growing. The global foodservice industry was estimated at $2.6 trillion in 2016 according to Euromonitor, and is expected to increase at a compounded annual growth rate ("CAGR") of 5.9% to reach $3.3 trillion in 2020 as demonstrated in the graph below. Global expansion and long-term focus on new emerging markets with new equipment will be driven by chain restaurants in countries such as India, China, parts of the Middle East and Southeast Asia in general. Increased government spending on infrastructure and investments in tourism will support this change.
globalmarketsizegrapha01.jpg

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The main drivers for steady growth on a global basis are:
Population and income growth, especially in emerging markets and less developed regions: Global population is expected to reach 9.7 billion people by 2050 and more than 11 billion people by 2100 according to the United Nations Department of Economic and Social Affairs. Africa is expected to account for more than half of the world’s population growth, followed by India, Pakistan, Indonesia and the United States ("U.S."). Additionally, more hectic lifestyles with an eating culture changing to "on the go" and increasing demand for high-quality food prepared away from home in casual restaurants based on increasing disposable incomes is expected to lead to more and new offerings. Similar to the last five decades, the real (inflation-adjusted) growth rate in the U.S. is expected to be stable at about 2% on average according to the 2016 Restaurant Industry Forecast by the National Restaurant Association.
New dining / restaurant concepts and new markets for chain restaurants are increasing: Demand in the restaurant segment, one of our largest end markets, is driven by consumer disposable income, employment, investment in new establishments, and the underlying trend and demand for increased convenience. In large emerging markets with an increasing middle-class like China, Argentina, Brazil and Nigeria, tremendous opportunity exists to broaden the range of new restaurant concepts and chains.
Health and safety issues: Food safety and sanitation are a top priority first and foremost for end-consumers. Proper food handling, environmental sustainability and social responsibility, reduction of energy use as well as less waste from unused food and premature food spoilage have become more and more important. These issues are key drivers for the replacement and upgrade of existing equipment with our customers.

We believe that the size of the global foodservice equipment markets, including the hot side, cold side, beverage and aftermarket parts and services equates to approximately 1% of the foodservice market global revenue. The foodservice equipment market was valued at $27.7 billion in 2015 according to Future Market Insights. It is expected to expand at a CAGR of 5.1% from 2016-2024 and is expected to reach $42.9 billion by 2024. We believe the main growth will be in the hot side product categories of cooking and hold and serve with an expected CAGR for the 2016-2019 period of 4% to 5%, whereas the CAGR on the cold side and the aftermarket sales is expected to be around 3% to 4%.
The U.S. foodservice market accounted for approximately 20.6%, or $543.1 billion, of the global food service market in 2016 based on Euromonitor studies. The market size is influenced by disposable income, increased employment, investment in new establishments and the underlying trend for increased convenience. According to Technomic, the foodservice industry in the U.S. is expected to grow at a CAGR of approximately 2% during the 2017-2022 period with some foodservice industry sectors, such as senior living or fast casual dining growing at a CAGR of 4-6% during the same time period. Sales for the U.S. and Canadian foodservice equipment and supplies market in 2015 was $11.4 billion, an increase of 27.3% compared to 2011 market sales according to a 2016 study performed by the North American Association of Foodservice Equipment Manufacturers ("NAFEM").
The Latin American foodservice industry is expected to show 6% year over year growth from 2016-2020. This is mainly driven by the growth in the categories of cafes/bars and home delivery according to Euromonitor International. Last year, Chile, Argentina, Uruguay and Mexico demonstrated the highest productivity among all Latin American economies, which is based on gross domestic income per hour worked, while other countries like Brazil, Colombia or Venezuela have the potential for significant future development.
Industrialization is a huge factor for the growth of the middle class in Asia Pacific ("APAC"), with the consequence of more disposable income for consumption. Foodservice sales are projected to grow at a CAGR of approximately 7.3% or $407.5 billion during the 2016-2020 period based on Euromonitor data. Higher demand for new hotels and resorts and population growth in India and other Asian markets is expected to contribute to the overall market demand for new foodservice products.
The foodservice industry market in Europe, Middle East and Africa ("EMEA") in 2016 was approximately $578.8 billion and is expected to grow at a CAGR of 3.8% during the 2016-2020 period according to Euromonitor. Growth in the largest and established EMEA countries such as the United Kingdom, Germany and France will mainly be in replacement equipment and aftermarket parts. In Western Europe, consumers have become much more value-conscious, and increasingly look to modern chains and fine-dining concepts as the best way to spend their free time for food. On the other hand, emerging markets show a greater percentage of new equipment purchases in the Middle East (especially the Emirates), Eastern Europe and some African countries. Chain foodservice and QSR sales are up by 4% to 5% year over year in these emerging markets and are expected to grow at 5% in the coming years.

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Our History and Developments    
Our former parent, MTW, was founded in 1902 and began building commercial ice machines in 1966. MTW publicly listed on the NASDAQ stock exchange in 1971 and publicly listed on the NYSE in 1993. Through a focus on research and development, innovation and superior customer service, as well as strategic and transformational acquisitions, MFS over time became an industry-leading source for foodservice equipment. MFS publicly listed on the NYSE in March 2016. On February 6, 2017, we announced that we are rebranding the Company, our logo and brand identity to Welbilt, Inc. The new name and brand represent a long-standing commitment to put customers’ needs first. This change is part of our strategic repositioning after we spun off from MTW in March 2016.
Our key milestones include:
1995: Acquisition of Shannon Group solidified our strong position in food-cooling products and positioned MFS as a leading manufacturer of commercial ice-cube machines and walk-in refrigerators; opened an ice machine manufacturing facility in China.
1997: Acquisition of SerVend International, a manufacturer of ice/beverage dispensers; gave us a leading position in the convenience-store segment and in beverage-dispensing equipment.
1999: Acquisition of Kyees Aluminum Inc., a manufacturer of cooling components for suppliers of fountain soft drink dispensers; enabled us to build and distribute complete drink systems through the bottler channel.
2000: Acquisition of Multiplex Company provided us with an enhanced line of beverage dispensing equipment and services and accelerated our progress towards becoming a full-service provider of ice and beverage equipment.
2006: Acquisition of McCann’s Engineering & Manufacturing Co., a provider of beverage dispensing equipment primarily used in QSR's, stadiums, cafeterias and convenience stores.
2008: Acquisition of Enodis for $2.7 billion, a global leader in equipment manufacturing for the foodservice industry. The former Berisford changed its name to Enodis in 2000 and had previously acquired Convotherm in 1998 and Welbilt in 1995. Welbilt's leading brands Delfield®, Frymaster®, Merco®, Cleveland™, Garland® and Lincoln™ are still a backbone of MFS’ business today. With this acquisition, our capabilities expanded to span refrigeration, ice-making, cooking, food-prep, and beverage-dispensing technologies.
2009: Sale of Scotsman, Ice-O-Matic, Simag, Barline, and other ice machine and related businesses operated by subsidiaries of Enodis; MTW was required to divest Enodis Ice Group as a condition of the U.S. Department of Justice’s and the European Commission’s clearance of the Enodis acquisition.
2010: Acquisition of Appliance Scientific provided us with innovative accelerated cooking technologies and solidified our offerings for QSRs and convenience stores.
2011: Divestiture of Kysor/Warren and Kysor/Warren de Mexico to Lennox International.
2013: Divestiture of the Jackson warewashing business to Hoshizaki USA Holdings, Inc.
2013: Acquisition of Inducs provided us with an extensive line of advanced technology induction cooking products.
2015: On October 21, 2015, acquired the remaining 50% interest in Welbilt Manufacturing (Thailand) Ltd., a manufacturer of cold category foodservice equipment in Thailand and substantially all of the assets and operations comprising the manufacturing facility operated by Somerville (Siam) Ltd.
2015: On December 17, 2015, announced the completion of the sale of Kysor Panel Systems to D Cubed Group, LLC.
2016: On March 4, 2016, Manitowoc Foodservice publicly listed on the NYSE.
2017: On February 6, 2017, Manitowoc Foodservice announced its name change and rebranding to Welbilt, Inc.

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manitowochistorya01.jpg
Our global footprint positions us to capitalize on growth in both developed and emerging markets. Approximately one third of our sales are generated outside the U.S. and our full-line of hot and cold products and systems are sold in more than 100 countries globally, across three regional segments, the Americas (includes U.S., Canada and Latin America), EMEA (markets in Europe, including Russia and the Commonwealth of Independent States, Middle East and Africa) and APAC (principally comprised of markets in China, India, Singapore, Malaysia, Thailand, Philippines, Indonesia, Japan, South Korea, Australia and New Zealand).
Strategic Objectives
We have five clear strategic objectives:
Achieving profitable growth
Our right-sizing and simplification initiatives are a key basis to begin increasing profitability. In the short term, we intend to grow sales organically, however, we will selectively pursue strategic acquisitions and partnerships in the market mid-term. Our industry is fragmented and we believe there is significant opportunity for consolidation through acquisitions and partnerships to drive external growth.
Selected current initiatives supporting this strategic objective include:
80/20 portfolio rationalization: Focus the most resources and investments in developing the products that yield the greatest returns ("80% of the sales from 20% of the portfolio").
Acquisitions/partnership target prioritization process: Structured process in place to identify, analyze and assess potential targets for partnerships and acquisitions.


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Creating innovative products and solutions
To remain an industry leader and grow our reputation as an innovative company, we continuously create game-changing product and system solutions for the entire kitchen. We leverage our suppliers and customers to actively address product competitiveness and lifecycle extensions. We co-create innovation and refresh existing products with new, locally relevant and food-inspiring technologies, while simultaneously finding new ways to integrate those products to global platforms in a cost-effective manner and create cohesive kitchen systems for our customers.
Selected ongoing projects supporting this strategic objective include:
fitKitchenSM: "Food Inspiring Technology" as a whole new way of thinking about the kitchen. A holistic approach to kitchen solutions designed and developed for integrated kitchens that meet each customer’s individual equipment requirements and size constraints, covering our entire product portfolio and using our leading test kitchen facilities.
Digital strategy: Improvement of the connection between food, equipment and people in the kitchen.
New product initiative prioritization and discovery innovation process: Intense collaboration with customers and suppliers to identify innovations that will enhance our customers’ ability to compete in the marketplace; prioritize investments to deliver innovative products that simplify restaurant operations, improve food quality, improve speed and flexibility, reduce the overall energy use and life cycle operating cost thereby delivering for the customer the greatest potential to generate high returns on their investment.

Driving operational excellence
We aim to move assembly closer to end markets, localize products and use strategic sourcing to streamline our vendor base. We are committed to further improving our margins by driving lean manufacturing principles throughout the entire organization and by driving operational excellence in our manufacturing facilities.
Selected ongoing projects to drive increased margins include:
Facility rationalization: Reduce excess capacity in our network of global manufacturing facilities.
Global sourcing initiative: Ensure that suppliers are able to not only provide parts at competitive cost and lead times, but also help identify component-level innovations that will create differentiating advantages for MFS.

Guaranteeing customer satisfaction
We believe our broad product portfolio and leading brands position us to further grow the number of customers we serve and improve overall customer satisfaction as a trusted provider to the largest companies in the foodservice industry.
A selected ongoing project to support this strategic objective is:
KitchenCare® parts and service: Grow parts and service to a bigger proportion of the business.

Developing great people
We strive to make MFS the employer of choice in our industry and we believe we demonstrate a strong commitment to our people by providing an environment where employee input, efforts and achievements are recognized and valued.
Select ongoing projects supporting this strategic objective include:
Leadership: Driving the development of world-class leadership at all levels of our organization.
Talent and succession program: Focused development through tailored programs for our top talent with key succession planning identified through a robust talent assessment process.
Diversity and inclusion: Development of a diversity and inclusion strategy that recognizes and builds awareness for diversity, leading to a work environment in which all individuals are treated fairly and respectfully, have equal access to opportunities and resources and can contribute fully to our organization’s success.
Pay for performance: A rewards programs that recognizes outstanding employee achievements and measurable results in leadership, individual and organizational performance, innovation, and positive culture change that support the values and strategic goals of the business.


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Key Success Factors
We design, manufacture and provide parts and services for foodservice equipment and we have one of the industry’s broadest and integrated product portfolios. We have a long track record of innovation and our products as well as our aftermarket parts and service support are recognized by our customers and channel partners for their quality, reliability, and durability. Our products enable profitable growth for our end customers by improving their menus, enhancing their operations, and reducing their costs. MFS´ high quality products derive from combining deep industry expertise and understanding of our markets, our history of investment in research and development, our successful product innovation and our long-standing customer relationships. Our success is driven by:
Breadth and complementarity of industry leading brands: A complementary portfolio of hot and cold foodservice equipment products integrated under one operating company and supported by growing aftermarket parts and service support. Our capabilities span refrigeration, ice-making, cooking, holding, food-preparation, and beverage-dispensing technologies, which allow us to equip entire commercial kitchens and serve the world’s growing demand for food prepared away from home. Our aftermarket offering, KitchenCare®, provides support services to our entire product spectrum.

welbitbrands.jpg
Supported by KitchenCare®

Integration of food, equipment, digital technologies and people: With our research & development capabilities we combine our expertise in industrial engineering and culinary sciences to continuously optimize both the functionality and ease of operation of our foodservice equipment products. This leads to the creation of innovative kitchens with optimized work flow, energy and labor savings, and more comfortable work spaces, all of which result in higher customer satisfaction. Our foodservice equipment and design capabilities help customers differentiate their food and adapt to evolving and local tastes, different cooking styles, and aesthetic preferences, both regionally and globally.
Seamless customer experience: We are dedicated to putting the customer experience first. We offer a broad portfolio of products and growing parts and service support coupled with a unified customer service interface. Throughout the life cycle of each product, MFS provides customers with a consistent, seamless experience. We design custom kitchen environments based on the unique operational needs of each customer.

Global scale through our network: The scale and breadth of our worldwide network of over 3,000 dealers and distributors enables us to accompany our customers on their global journey, especially in fast-growing emerging markets. We have extensive manufacturing, sales, and customer service networks across all our regions. 26 locations in 11 countries provide us with the scale to serve the largest global customers and the local market expertise to leverage international growth. Our footprint enables us to build our products as close as possible to intended end markets, and apply our developed markets expertise in emerging markets.
Trusted innovation and service: We regularly partner with our customers to further develop the equipment, systems and technologies they use to serve their specific culinary needs, and enable their success by delivering tailored solutions. The MFS Education and Technology Centers ("ETCs") in New Port Richey, Florida, Hangzhou, China and Monterrey, Mexico contain computer-assisted design platforms, a model shop for on-site development of prototypes, a laboratory for product testing, and various display areas for new products. We also use the ETCs to provide training for our customers, marketing representatives, service providers, industry consultants, dealers and distributors.


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Our Product and Service Portfolio
Our suite of products is used by commercial and institutional foodservice operators including full-service restaurants, QSR chains, hotels, caterers, supermarkets, convenience stores, business and industry, hospitals, schools and other institutions.
We have a presence throughout the world’s most significant markets in the following product groups:
Storing. We design, manufacture and sell commercial upright and undercounter refrigerators and freezers, blast freezers, blast chillers and cook-chill systems under the Delfield® brand name. We manufacture modular and fully assembled walk-in refrigerators, coolers and freezers, and prefabricated cooler and freezer panels for use in the construction of refrigerated storage rooms and environmental systems under the Kolpak® brand name.
Cooking. We design, manufacture and sell a broad array of ranges, griddles, grills, combi ovens, convection ovens, conveyor ovens, induction cookers, broilers, tilt fry pans/kettles/skillets, braising pans, cheese melters/salamanders, cook stations, table top and countertop cooking/frying systems, fryers, steam jacketed kettles, and steamers. We sell traditional ovens, combi ovens, convection ovens, conveyor ovens, rapid-cooking ovens, range and grill products under the Convotherm®, Garland®, Lincoln™, Merrychef® and other brand names. Fryers and frying systems are marketed principally under the Frymaster® brand name, while steam equipment is manufactured and sold under the Cleveland™ brand.
Holding and Displaying. We design, manufacture and sell a range of cafeteria and buffet equipment stations, bins, boxes, warming cabinets, warmers, display and deli cases, and insulated and refrigerated salad and food bars. Our equipment stations, cases, food bars and food serving lines are marketed under the Delfield®, Frymaster®, Merco® and other brand names.
productcategoriesa02.jpg

Dispensing and Serving. We produce beverage dispensers, blended ice machines, ice/beverage dispensers, beer coolers, post-mix dispensing valves, backroom equipment and support system components and related equipment for use by QSR chains, convenience stores, bottling operations, movie theaters, and the soft-drink industry. Our ice machines make ice in cube, nugget and flake form. The ice-cube machines are available either as self-contained units, which make and store ice, or as modular units, which make ice, but do not store it. We design, manufacture and sell ice machines under the Manitowoc® and other brand names. Our beverage and related products are sold under the Multiplex®, Manitowoc® and other brand names.

In addition we provide comprehensive aftermarket parts and service solutions as well as a wide variety of solutions under the KitchenCare® brand name. Our service excels when it counts the most: Around the clock - around the world. Performance for a lifetime™.
The superior quality of our foodservice equipment has long been recognized by third-parties. As just one example of awards reflecting a history of innovation, MFS has won 31 Kitchen Innovation Awards since 2005 from the National Restaurant Association:

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awards.jpg
Product Innovation: Our Holistic Approach
We have a staff of in-house engineers and technicians on three continents, supplemented with external engineering resources, who collectively are responsible for improving existing products and developing new products. Our team of engineers focus on developing cost effective, innovative, high-performance, low-maintenance products that are intended to solve problems for our customers in differentiated ways and create brand loyalty among customers. They work closely with our culinary, manufacturing and marketing staff enabling us to identify changing end-user requirements, implement new technologies and effectively pursue product innovations.
MFS strives to deliver products and solutions that enable our customers to provide fresh, new food experiences to consumers outside the home globally. Consumer demands are constantly changing, and a more health-conscious public is looking for fresh, natural alternatives to traditional out-of-home eating options. They increasingly care about how food is sourced, handled and prepared. MFS is focused on providing our customers with the equipment they need to build on the opportunities from these dynamic changes in the foodservice market.
Through innovation, we strive to simplify and improve the speed and flexibility of restaurant operations, improve the quality of the food, improve health and sanitation, and reduce the overall energy consumption and life cycle operating costs of the equipment. We believe that these benefits can also be enhanced by mobile connectivity and monitoring:
Mobile Connectivity and Monitoring: Integration of mobile devices in kitchens is increasing rapidly, and will extend the user interface beyond the traditional boundaries of the equipment. The combination of wearables and beacons can provide notification of key tasks and equipment situations requiring immediate attention even if the foodservice preparation crew is not looking at the appliance. Bluetooth allows for secure information exchange using cellular or network mobile devices to collect information on the equipment, view training or maintenance instructions, and update menus and equipment software. RFID tracking of food and holding trays helps ensure the right food in the right quantities is available when needed. Our KitchenConnect™ enabled products also include a system for equipment monitoring which collects data to reduce downtime, optimize energy use, and improve service response time.


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Productivity, Speed and Flexibility: Kitchens that occupy less space, have higher output and are easier to operate are key to growth in the foodservice industry, particularly in urban locations. Greater speed and equipment flexibility also allow for higher productivity and a wider range of menu options. We are also expanding the use of impingement microwave ovens by adding steam and inverter control to the magnetron, which enables better control over moisture levels in the food and the microwave heating rate, and makes the oven much easier to clean with steam. Innovative control systems can improve information flow in the kitchen by letting operators know what and when to cook, and how to maintain and clean the equipment.
Energy Efficiency: We are focused on increasing the efficiency of individual components and reducing standby energy losses. An example of reducing standby energy loss is the use of induction heating for holding pans so that energy is only used when a thermal load is present. We are also leading in the area of high efficiency combustion systems with metal matrix burner technology. This technology reduces gas consumption and allows for variable firing rate. For cooling, natural refrigerants such as propane-based R-290 offer improved thermodynamic performance, and variable speed compressors and fans further increase overall cycle performance under partial load conditions.
Health and Sanitation: Manual sanitation of equipment in the restaurant has become a major challenge due to extended operating hours, the increasing pieces and complexity of equipment in kitchens, and competing demands from revenue producing tasks. For the cold product category, our HEPA filtration technology brings the cleanroom into the kitchen, controlling airborne contamination of ice machines. Electrically charged particles of water and UV light provide the basis for automated sterilization of food zones and contact surfaces in equipment. Compact steam generators are also being embedded in some of our equipment, providing a proven technology for cleaning cooking cavities in our ovens.

Our fitKitchenSM initiative strives to develop kitchen solutions that cover our entire product portfolio, including both existing products and the portfolio in the R&D stage. The primary objective of fitKitchenSM is to allow MFS to engage with current and potential customers in new, meaningful and more strategic ways. fitKitchenSM specializes in "right-sizing" operations, improving efficiencies and reducing a restaurant's equipment footprint.
Our fitKitchenSM employees have operational backgrounds that include experience at casual dining, family dining, QSR chains, and independent restaurants. We provide culinary support for customers in expanding their menus and integrating new technology into their operations, as well as engineering support for the development of solutions, prototypes and testing of new technologies. MFS has a strong track record of working with customers to develop equipment platforms from scratch, taking into account freshness, flavor and speed of service, as well as constraints of building infrastructure, kitchen ventilation and HVAC systems.
In 2016, we introduced 16 new products, 10 hot-side products and 6 cold-side and beverage products. In addition, we released 7 significant upgrades to our existing product platforms. Some of these new products include:
Hot-Side Products
Merrychef® e2s - Offering best-in-class: speed, heat up and cool down times, energy efficiency, noise level, cleanability and cavity-to-footprint ratio.
Garland® Xpress grill - Our next generation of clamshell grills with industry leading performance and reliability.
Merco® Merco Max - With forced air technology, touch screen timers and optional WiFi tray tracking feature, our new hot holding products improve food quality and simplify operator interactions.

Cold-Side and Beverage Products
Multiplex® Nitro N2 Fusion - Our award winning craft beverage system provides great quality Nitrogen infused cold-brewed coffee.
Delfield® CoolScapes refrigeration - Our latest developments in the most energy efficient, environmentally friendly refrigeration equipment on the market include our GreenGenius, R-290 propane-based refrigeration system.

In addition, MFS has had many other major new products and innovations over the past five years including:
Hot-Side Products
Convotherm®4 - Combi oven designed around our customers' needs, enabling them to achieve outstanding cooking and baking results, including an industry-leading flexible and safe cleaning system.
Merrychef® eikon - Recent additions to this series include the eikon e2 and eikon e4s, compact ovens with ventless technology allowing users to heat food to order at up to 10x and 15x, respectively faster than the speed of conventional ovens in a minimum of space.
Chick-fil-A Broiler - Our Garland® brand has leveraged its global leadership in clamshell technology to develop the first-ever clamshell broiler in partnership with the largest chicken chain in the U.S. 
Merco® IntelliHold Series - Specifically developed for commercial kitchens, this warmer provides a holding environment for food between the kitchen and the front-of-house with improved energy efficiency and increased storage capacity.

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Frymaster® FilterQuick - FilterQuick replaces the time-consuming manual filtration process with a simple push button automatic filtration process that allows the fryer to resume operation in less than four minutes.

Cold-Side and Beverage Products
Manitowoc® Indigo Ice Machine - An awarding-winning state-of-the-art modular cuber platform, offered in various sizes from 300 to 2,100 lbs./day sold under the Manitowoc brand. 
Koolaire® - A new brand of basic-feature ice machines complementing our premium Manitowoc® brand, offered in sizes ranging from 170 - 1,800 lbs./day.
Multiplex® Blend-In-Cup Smoothie Machine (with or without Integrated Ice Machine) - Plug and play fully integrated blended beverage station, blending beverages directly in the serving cups. With its automated portioning and dispense, it reduces waste and labor, and ensures the consistency of the final beverage.

Intellectual property, including certain patents, trademarks, copyrights, know-how, trade secrets and other proprietary rights, is important to our business. We hold numerous patents pertaining to our products, and have presently pending applications for additional patents in the U.S. and foreign countries. In addition, we have various registered and unregistered trademarks and licenses that are of material importance to our business and we believe our ownership of this intellectual property is adequately protected in customary fashions under applicable laws. Although certain proprietary intellectual property rights are important to our success, we do not believe we are materially dependent on any particular patent or license, or any particular group of patents or licensees.
Our worldwide intellectual property portfolio provides:
Global protection of our R&D and product development investments;
Recognizable competitive distinctions and proprietary advantages;
Brand support and enhancement; and
Leverage for value creation opportunities such as licenses.

We monitor other companies’ intellectual property to ensure our freedom-to-operate. Similarly, we study our competitors’ products to identify unauthorized use of our protected inventions, and follow-up to resolve through appropriate enforcement programs in case of any violations.
Engineering, Research and Development
We believe our extensive engineering, research and development capabilities are a key driver of our success. We engage in research and development activities at 15 locations in the Americas, EMEA and APAC. We have a staff of in-house engineers and technicians at these locations, supplemented with external engineering resources, who collectively are responsible for improving existing products and developing new products. We incurred total engineering costs of $48.2 million, $47.9 million and $52.6 million during the years ended December 31, 2016, 2015 and 2014, respectively, which included research and development costs of $35.2 million, $33.2 million, and $31.0 million during the years ended December 31, 2016, 2015 and 2014, respectively.
Key projects and initiatives for engineering and product development include the following:
Flexing engineering resources among the 15 research and development centers through engineering leadership for hot and cold category products and supplementing the internal resource pool with a strategic relationship with a major services provider based in India;
Regional technology centers that provide a continuous stream of application-focused new technologies and product concepts and fully leverage supplier and university relationships;
Internal capability for electronic controls development and applications working hand-in-hand with strategic suppliers, and ensuring continued industry leadership in this increasingly important product dimension; and
Technologies to lead the industry in the delivery of healthy food, equipment sanitation, energy efficiency, menu flexibility, and mobile devices and web connectivity.


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Our Customers

We sell our foodservice equipment primarily through a worldwide network of over 3,000 dealers and distributors in over 100 countries ("direct customers") who ultimately sell to end customers. Our end-customer base is comprised of a wide variety of foodservice providers, including large multinational and regional full-service restaurants as well as QSR chains, convenience stores and retail stores; chain and independent casual and family dining restaurants; independent restaurants and caterers; hotels, lodging, resort, leisure and convention facilities; healthcare facilities; schools and universities; large business and industrial customers; and many other foodservice outlets ("end customers"). Our network is differentiated from competitors through serving as a single source for a broad portfolio of leading brands and product categories. This allows us to provide one face to our customers for multiple brands with relevant culinary expertise and appropriate key account management for our larger global chain customers. We support our sales efforts with a variety of marketing efforts including trade-specific advertising, cooperative distributor merchandising, digital marketing, and marketing at a variety of industry trade shows.

We serve some of the largest and most widely recognized multinational and regional businesses in the foodservice and hospitality industries. None of our end customers represented 10% or more of MFS net sales for the years ended December 31, 2016 and 2015. McDonald's, one of our end customers, represented 10% or more of MFS net sales for the year ended December 31, 2014. The following table presents a representative selection of our customers:
Select MFS Global Foodservice End Customers
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Sales, Marketing and Distribution
In the Americas, MFS has a broad portfolio of channel partners, covering all major foodservice market segments, including QSR's, fast casual restaurants, education, health care, business and industry, as well as the convenience and retail space. Our direct sales team is supplemented by a network of industry-leading rep groups, providing national coverage. Direct sales team, sales reps and distributors jointly serve over 900 equipment dealers with our full portfolio of hot and cold product category brands. A dedicated strategic account team with culinary support is focused on the major U.S.-based restaurant chains, where we have significant global market share. Our teams work closely with our customers’ menu and equipment development teams to assure alignment with their strategic plans. We also have distribution hubs in Canada, Mexico and Latin America. Our KitchenCare® business provides a range of after-market parts and services that manages a comprehensive factory-authorized service network, assuring proper installation, preventative maintenance, spare parts supply and maximum customer uptime on all MFS appliances.
US Channel Partners typically referred to as "General Market"
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In EMEA, our distribution includes hubs in Herborn, Germany serving countries in central and eastern Europe, in Guildford, England serving countries in the United Kingdom and northern Europe, and in Barcelona, Spain serving countries in southern and western Europe. Each of these distribution centers operates a network of third party dealers chosen to satisfy the requirements of both chain customers and independent caterers in their respective territories. Outside these countries, MFS products and services are sold through non-exclusive third party distributors and service companies. In addition, our beverage customers receive specialist support from our beverage systems manufacturing facility in Halesowen, England.
In APAC, MFS has had a presence since the mid-1980s. As our chain customers expanded into the region, we first established distribution and service support, followed by building a sales force and our first manufacturing facility in China in 1992. Today, we operate four manufacturing facilities and five sales and service offices throughout the region. We access the market in APAC through our dedicated distribution and dealer channel partners, most of whom have been established in the market for decades and have been MFS partners for over 15 years. Our business in the region is expanding into a local customer base that is focused on western style menus and desires the appliances that will consistently deliver the quality expected from our top brands with the reliability and support for which we are known.
Competition
We sell all of our products in highly competitive markets and compete based on product design, quality, performance and aftermarket support services, as well as maintenance costs, energy and resource saving, other contributions to sustainability, and price. Our comprehensive offering of innovative and high-quality products and services provide competitive advantages that strengthen our regional market positioning and grow our global presence:
A complementary portfolio of industry-leading hot and cold category products, integrated under one company and supported by growing aftermarket parts, service and support;
The ability to integrate food, equipment, digital technologies and people seamlessly through collaborative innovation that enhances our customers’ ability to compete in the marketplace;
The scale and breadth of our dealer and distributor network to accompany our customers on their global journey, especially in fast-growing emerging markets;
Long-standing brands and innovative engineering that customers can trust for superior quality and reliability; and
Dedication to putting customer experience first.


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The following table sets forth our primary competitors in each of our product groups:
Product categories
 
Primary Competitors
 
 
 
Storing
 
Ali Group; American Panel; Arctic; Bally; Hoshizaki; ICS; ITW; Master-Bilt; Nor-Lake; Standex; Thermo-Kool; Traulsen; True Foodservice; TurboAir; Alto Shaam; Cambro; Duke; Hatco; ITW; Middleby; Standex; and Vollrath
 
 
 
Cooking
 
Ali Group; Alto Shaam; Dover Industries; Duke; Electrolux; Fujimak; Henny Penny; ITW; Middleby; Marmon; Rational; Standex, and Taylor
 
 
 
Holding & Displaying
 
Ali Group; Alto Shaam; Cambro; Dover Industries; Duke; Hatco; Henny Penny; Middleby; Marmon; Standex; and Vollrath
 
 
 
Dispensing & Serving
 
Ali Group; Automatic Bar Controls; Brema; Follett; Scotsman; Celli; Cornelius; Hoshizaki/Lancer Corporation; Ice-O-Matic; Marmon; Taylor; Vogt Beverage Air; and Vin Service
 
 
 
 
 
 

Regulatory Environment
In the Americas, EMEA and APAC, we actively work with standards organizations, industry associations, certification parties, and regulatory bodies to develop and promote effective and balanced standards, codes, and regulations that provide for the advancement of sustainable customer solutions with the highest possible levels of energy efficiency, sanitation, environmental standards, safety, and food quality.
For example, we are active members of the NAFEM, the Air-Conditioning, Heating and Refrigeration Institute, the UL task group, the NSF International Joint Committee, the American Society of Heating, Refrigerating and Air-Conditioning Engineers, various working groups responsible for European safety standards in Europe, the Industrial Association for House, Heating and Kitchen Technology, and other regional standards organizations. We fully engage with the Department of Energy on new energy standards, the U.S. Environmental Protection Agency on EnergySTAR programs and the Significant New Alternatives Policy program related to alternative refrigerant regulations, as well as the EU ECO directive consultant organizations.
Financial Information About Business Segments
Our products are sold in more than 100 countries. We report our operating results through three reportable segments: Americas, EMEA and APAC. All three reportable segments offer a broad range of hot and cold category foodservice products and solutions for customers in various end markets.
Our broad portfolio of foodservice equipment and services provides us with a balanced, diverse revenue base across geographies and foodservice product categories. Approximately 40-45% of our revenues are for cold category products, 35-40% are for hot category products and approximately 15-20% for aftermarket parts and services. Net sales by product class for the last three fiscal years is disclosed in Note 22, "Business Segments," to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
For the year ended December 31, 2016, MFS generated revenue of $1,456.6 million and earnings from operations of $199.2 million. Based on sales by destination in the fiscal year ended December 31, 2016, the majority of our revenue was derived from customers in the Americas at approximately 72%, with 17% from EMEA customers and 11% from APAC customers.
The following table presents the relative percentages of net sales attributable to each reportable segment for each of the last three fiscal years. The total measure of profit and loss for each of the last three fiscal years as well as the total assets as of December 31, 2016 and 2015 attributable to each reportable segment are included in Note 22, "Business Segments" to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
 
For the years ended December 31,
 
2016
 
2015
 
2014
Americas
81.5
 %
 
84.3
 %
 
82.3
 %
EMEA
19.7
 %
 
17.9
 %
 
19.9
 %
APAC
13.1
 %
 
12.2
 %
 
12.5
 %
Elimination of inter-segment sales
(14.3
)%
 
(14.4
)%
 
(14.7
)%
In the Americas, we provide foodservice equipment in over 30 countries and territories throughout North America, Canada and Latin America. Our Americas segment contributed net sales including intercompany sales of $1,186.6 million during the year ended December 31, 2016, representing 81.5% of total MFS revenue before eliminations.
In EMEA, we provide foodservice equipment in over 50 countries throughout Europe, the Middle East and Africa, including Russia and the Commonwealth of Independent States. Our EMEA segment contributed net sales including intercompany sales of $287.6 million during the year ended December 31, 2016, representing 19.7% of total MFS revenue before eliminations.

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In APAC, we provide foodservice equipment in over 20 countries throughout Asia, including China, India, Singapore, Malaysia, Thailand, Philippines, Indonesia, Japan, South Korea, Australia and New Zealand. Our APAC segment contributed net sales including intercompany sales of $190.9 million during the year ended December 31, 2016, representing 13.1% of total MFS revenue before eliminations.    
Seasonality
Typically, the first quarter of our fiscal year represents the least favorable period for our financial results. Our customers are primarily in the northern hemisphere, and the warmer summer weather generally leads to an increase in construction and remodeling within the foodservice industry, as well as in the use and replacement of ice machines.
Employees
As of December 31, 2016, we had approximately 5,500 employees across all of our locations. In North America, we have in place seven labor agreements with five employee unions. We have one trade union in Europe and one trade union in China.
Raw Materials
We support our region-of-use production strategy with corresponding region-of-use supplier partners. The primary raw materials that we use are structural and rolled steel, aluminum, and copper. We also purchase electrical equipment and other semi- and fully-processed materials. We maintain inventories of steel and other purchased material. We have been successful in our goal to maintain alternative sources of raw materials and supplies, and therefore are not dependent on a single source for any particular raw material or supply.
Available Information
We make available, free of charge at our website (http://www.manitowocfoodservice.com) our Registration Statement on Form 10, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statements and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). Our SEC reports can be accessed through the investor relations section of our website. Although some documents available on our website are filed with the SEC, the information generally found on our website is not part of this or any other report we file with or furnish to the SEC.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room located at 100 F Street NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of our reports on its website at www.sec.gov.

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ITEM 1A. RISK FACTORS
The following risk factors have been identified by management in that if any events contemplated by the following risks actually occur, then our business, financial condition, results of operations or cash flows could be materially adversely affected.
We have grouped our risks according to:
Risks Relating to Our Business
Risks Relating to the Spin-Off
Risks Relating to Our Common Stock and the Securities Markets

Risks Relating to Our Business
We have substantial indebtedness, and the degree to which we are leveraged may materially and adversely affect our business, financial condition, results of operations and cash flows.
Our ability to make payments on and to refinance our substantial indebtedness, including the debt incurred pursuant to the Spin-Off as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take disadvantageous actions, including reducing spending on marketing, advertising and new product innovation, reducing future financing for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in the foodservice industry could be impaired. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt.
In addition, our substantial leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our substantial leverage could also impede our ability to withstand downturns in our industry or the economy in general.
Our operational results are dependent on how well we can scale our manufacturing capacity and resources to the level of our customers’ demand.
Our products are sold in an industry that requires manufacturers to make highly efficient use of manufacturing capacity. Insufficient or excess capacity threatens our ability to generate competitive profit margins and may expose us to liabilities related to contract commitments. Adapting or modifying our capacity is difficult, as modifications take substantial time to execute and, in some cases, may require regulatory approval. Additionally, delivering product during process or facility modifications requires special coordination. The cost and resources required to adapt our capacity, such as through facility acquisitions, facility closings, or process moves between facilities, may negate any planned cost reductions or may result in costly delays, product quality issues or material shortages, all of which could adversely affect our operational results and our reputation with our customers.
If we are unable to successfully implement certain cost-reduction initiatives, we may not achieve our earnings targets.
We have developed initiatives to realize cost savings, for example, by reducing the complexity of our product offerings, including our "80/20" initiative that will focus the majority of our resources on our most important products and best customers. However, the success of this and other profit-enhancement and cost-reduction initiatives is not guaranteed, and we may not achieve the cost savings we expect. The 80/20 initiative in particular involves significant cultural shifts, both internally and for our customers, that may inhibit or impair its successful implementation. Additionally, if we devote a disproportionate amount of time, personnel and resources to initiatives that yield slower or less than anticipated results or that are ultimately unsuccessful, we may be distracted from other initiatives and priorities that might have yielded more rapid or better results, and our results of operations may suffer accordingly.
Price increases or our inability to execute successful procurement strategies for some materials and sources of supply, as well as disruptions of supplies of some materials, could affect our profitability.
We use large amounts of steel, stainless steel, aluminum, copper and electronic controls, among other items, in the manufacture of our products. Occasionally, market prices of some of our key raw materials increase significantly, which could adversely affect our margins. Furthermore, although we are implementing a strategic sourcing initiative, we may not be able to achieve the expected cost savings from that initiative. In addition, because we maintain limited raw material and component inventories, even brief unanticipated delays in delivery by suppliers - including those due to capacity constraints, labor disputes, impaired financial condition of suppliers, weather emergencies or other natural disasters - may impair our ability to satisfy our customers and could adversely affect our financial performance.
To better manage our exposures to certain commodity price fluctuations, we regularly hedge our commodity exposures through financial markets. Through this hedging program we fix the future price for a portion of these commodities used in the production of our products. To the extent that our hedging results in fixing commodity prices that are unfavorable in comparison to market prices at the time of purchase, we would experience a negative impact on our profit margins compared to the margins we would have realized if these price commitments were not in place, which may adversely affect our financial condition, results of operations and cash flows.

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Because we participate in an industry that is highly competitive, our net sales and profits could decline as we respond to competition.
We sell our products in a highly competitive industry. We compete based on product design, quality of products, quality and responsiveness of product support services, product performance and reliability, maintenance costs and price. Some of our competitors may have greater financial, marketing, manufacturing and distribution resources than we do. Competition could cause our sales to decrease or cause us to cut prices or incur additional costs to remain competitive, any of which could adversely affect our financial condition, results of operations and cash flows.
Additionally, a substantial portion of our dealer revenue comes from a small number of buying groups, which gives those buying groups a large degree of leverage and purchasing power with us and other suppliers. In recent years those buying groups have used their leverage to extract larger rebates, discounts and other price reductions. We must continually balance the added revenue from providing reduced prices to those buying groups against the reduced margins generated by them, which could adversely affect our results of operations.
If we do not develop new and innovative products or if customers in our markets do not accept them, our results would be negatively affected.
Our products must be kept current to meet our customers’ needs, overcome competitive products and meet evolving regulatory requirements. To remain competitive, we therefore must develop new and innovative products on an on-going basis, and we invest significantly in the research and development of new products. If we do not successfully develop innovative products, it may be difficult to differentiate our products from our competitors' products and satisfy regulatory requirements, and our sales and results would suffer.
If we do not meet customers’ product quality and reliability standards/expectations, we may experience increased or unexpected product warranty claims and other adverse consequences to our business.
Product quality and reliability are significant factors influencing customers’ decisions to purchase our products. Inability to maintain the high quality of our products relative to the perceived or actual quality of similar products offered by competitors could result in the loss of market share, loss of revenue, reduced profitability, an increase in warranty costs, and/or damage to our reputation. Similarly, if we fail to provide the same level of quality through our KitchenCare® aftermarket parts and service as we provide in original equipment manufacturing, it could likewise negatively affect our revenue and our reputation with our customers.
Product quality and reliability are determined in part by factors that are not entirely within our control. We depend on our suppliers for parts and components that meet our standards. If our suppliers fail to meet those standards, we may not be able to deliver the quality products that our customers expect, which may impair revenue and our reputation and lead to higher warranty costs.
We provide our customers a warranty covering workmanship, and in some cases materials, on products we manufacture. Our 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 the warranty, we may be obligated, at our expense, to correct any defect by repairing or replacing the defective product. Although we maintain warranty reserves in an amount based primarily on the number of units shipped and on historical and anticipated warranty claims, there can be no assurance that future warranty claims will follow historical patterns or that we can accurately anticipate the level of future warranty claims. An increase in the rate of warranty claims or the occurrence of unexpected warranty claims could adversely affect our financial condition, results of operations and cash flows.
Changing consumer tastes and government regulations affecting the quick-service restaurant ("QSR") industry could affect sales to our largest customers.
A number of our largest customers operate in the QSR industry. The QSR industry is frequently affected by changes in consumer tastes and eating habits, often as a result of new information or attitudes regarding diet and health or as a result of government regulations requiring QSRs to disclose the nutritional content of their food. If consumers’ eating habits change significantly, our customers may choose or be required to modify their menu offerings. Such modifications, or the failure to make the modifications to the extent consumers desire, could have an adverse effect on our customers’ business, financial conditions, results of operations or cash flows, which in turn could adversely affect the customers' demand for our products.
We have significant manufacturing and sales of our products outside of the United States, which may present additional risks to our business.
For the years ended December 31, 2016, 2015 and 2014, approximately 35.1%, 32.1% and 37.1%, respectively, of our net sales were attributable to products sold outside of the United States. Expanding our international sales is part of our growth strategy. International operations generally are subject to various risks, including political, military, religious and economic instability, local labor market conditions, the imposition of U.S. tariffs on goods entering or re-entering the U.S. from our foreign operations in Mexico and elsewhere, the imposition of foreign tariffs, the impact of foreign government regulations, the effects of income and withholding tax, governmental expropriation, and differences in business practices. We may incur increased costs and experience delays or disruptions in product deliveries and payments in connection with our international sales, manufacturing and the integration of new facilities that could cause loss of revenue or increased cost. Unfavorable changes in the political, regulatory and business climate and devaluations of various foreign currencies could adversely affect our financial condition, results of operations and cash flows.

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Our results of operations may be negatively impacted by product liability lawsuits.
Our business exposes us to potential product liability risks that are inherent in the design, manufacture, sale and use of our products. To date, we have not incurred material costs related to these product liability claims. We vigorously defend ourselves against current claims and intend to do so against future claims. However, a substantial increase in the number of claims that are made against us or the amounts of any judgments or settlements could adversely affect our reputation and our financial condition, results of operations and cash flows.
If we fail to protect our intellectual property rights or maintain our rights to use licensed intellectual property, our business could be adversely affected.
Our patents, trademarks and licenses are important in the operation of our businesses. Although we protect our intellectual property rights vigorously, we cannot be certain that we will be successful in doing so. Third parties may assert or prosecute infringement or validity claims against us in connection with the services and products that we offer, and we may or may not be able to successfully defend these claims. Litigation, either to enforce our intellectual property rights or to defend against claimed infringement of the rights of others, could result in substantial costs and diversion of our resources. In addition, if a third party would prevail in an infringement claim against us, then we would likely need to obtain a license from the third party on commercial terms, which would likely increase our costs. Our failure to maintain or obtain necessary licenses or an adverse outcome in any litigation relating to patent infringement or other intellectual property matters could have a material adverse effect on our financial condition, results of operations and cash flows.
Sales of our products are sensitive to volatile or variable factors. A downturn or weakness in overall economic activity or fluctuations in weather or other factors could adversely affect us.
Historically, sales of products that we manufacture and sell have been subject to variations caused by changes in general economic conditions and other factors. In particular, the strength of the economy generally may affect the rates of expansion, consolidation, renovation and equipment replacement within the restaurant, lodging, convenience store and healthcare industries, which may affect our sales. Furthermore, any future economic recession may impact leveraged companies like us more than competing companies with less leverage and may adversely affect our financial condition, results of operations and cash flows.
Weather conditions can substantially affect our business, as relatively cool summer weather and cooler-than-normal weather in hot climates tend to decrease sales of ice and beverage dispensers. Our sales depend in part upon our customers’ replacement or repair cycles. Adverse economic conditions may cause customers to forego or postpone new purchases in favor of repairing existing machinery.
If we are unable to sufficiently adjust to market conditions, among other potential adverse effects on our financial condition, results of operations and cash flows, we could fail to deliver on planned results, fall short of analyst and investor expectations, incur higher fixed costs, and/or fail to benefit from higher than expected customer demand resulting in loss of market share.
Our operations and profitability could suffer if we experience labor relations problems.
As of December 31, 2016, we employed approximately 5,500 people and had seven labor agreements with five employee unions in North America. We have one trade union in Europe, and a large majority of our European employees belong to that trade union or European work councils. We have two labor agreements with one trade union in China. In 2017, we have four union contracts that will expire. Any significant labor relations issues could adversely affect our operations, reputation, financial condition, results of operations and cash flows.
We are exposed to the risk of changes in interest rates or foreign currency fluctuations.
We have indebtedness that accrues interest at a variable rate. Increases in interest rates will reduce our operating cash flows and could hinder our ability to fund our operations, capital expenditures, acquisitions or dividends. In such cases we may seek to reduce our exposure to fluctuations in interest rates, but hedging our exposure carries the risk that we may forego the benefits we would otherwise experience if interest rates were to change in our favor. Developing an effective strategy for dealing with movements in interest rates is complex, and no strategy is guaranteed to completely insulate us from the risks associated with such fluctuations.
Additionally, some of our operations are or may be conducted by subsidiaries in foreign countries. The results of operations and the financial position of these subsidiaries will be reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, which are stated in U.S. dollars. The exchange rates between many of these currencies and the U.S. dollar have fluctuated significantly in recent years and may continue to fluctuate significantly in the future. Such fluctuations may have a material effect on our results of operations and financial position and may significantly affect the comparability of our results between financial periods. In particular, the weakening of the British pound following the United Kingdom’s vote to exit the European Union had a negative foreign currency translation impact on our Statements of Operations for the fiscal year 2016, and similar negative impacts could continue in the future.
We also incur currency transaction risk whenever one of our operating subsidiaries enters into a transaction using a different currency than its functional currency. We attempt to reduce currency transaction risk whenever one of our operating subsidiaries enters into a material transaction using a different currency than its functional currency by:
matching cash flows and payments in the same currency;
direct foreign currency borrowing; and

-23-


entering into foreign exchange contracts for hedging purposes.
However, we may not be able to hedge such a risk completely or at an acceptable cost, which may adversely affect our financial condition, results of operations and cash flows in future periods.
Changes to tax laws or exposure to additional tax liabilities may have a negative impact on our operating results.
Tax policy reform continues to be a topic of discussion in the U.S. A significant change to the tax system in the U.S., including changes to the taxation of international income and related tariffs/border adjustability taxes, could have a material effect upon our results of operations. We regularly undergo tax audits in various jurisdictions in which our products are sold. Although we believe that our tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could materially affect our 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.
Our business and/or reputation could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.
Certain of our stockholders may in the future publicly or privately express views with respect to the operation of our business, our business strategy, corporate governance considerations or other matters that may not be fully aligned with our own. Responding to actions by activist shareholders can be costly and time-consuming, disrupt our operations and divert the attention of management and our employees. Perceived uncertainties as to our future direction may result in the loss of potential business opportunities, damage to our reputation, and may make it more difficult to attract and retain qualified directors, personnel and business partners. These actions could also cause our stock price to experience periods of volatility.
Activist shareholders may in the future make strategic proposals, suggestions, or requests for changes concerning the operation of our business, our business strategy, corporate governance considerations, or other matters. We cannot predict, and no assurances can be given, as to the outcome or timing of any consequences arising from these actions, and any such consequences may impact the value of our securities.
Environmental liabilities that may arise in the future could be material to us.
Our operations, facilities and properties are subject to extensive and evolving laws and regulations pertaining to air emissions, wastewater discharges, the handling and disposal of solid and hazardous materials and wastes, the remediation of contamination, and otherwise relating to health, safety and the protection of the environment. As a result, we are involved from time to time in administrative or legal proceedings relating to environmental and health and safety matters, and we have in the past and will continue to incur capital and other expenditures relating to such matters. We also cannot be certain that identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory authorities, or other unanticipated events will not arise in the future and give rise to additional environmental liabilities, compliance costs and/or penalties that could be material. Further, environmental laws and regulations are constantly evolving and it is impossible to predict accurately the effect any changes may have upon our financial condition, results of operations or cash flows.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners, as well as personally identifiable information of our customers and employees, in our internal and external data centers, cloud services, and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure, and that of our partners, may be vulnerable to malicious attacks or breaches due to employee error, malfeasance or other disruptions, including as a result of roll-outs of new systems. Any such breach or operational failure could compromise our networks and/or that of our partners and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings and/or regulatory penalties, disrupt our operations, damage our reputation, and/or cause a loss of confidence in our products and services, which could adversely affect our business.
Our inability to recover from natural or man-made disasters could adversely affect our business.
Our business and financial results may be affected by certain events that we cannot anticipate or that are beyond our control, such as natural or man-made disasters, national emergencies, significant labor strikes, work stoppages, political unrest, war or terrorist activities that could curtail production at our facilities and cause delayed deliveries and canceled orders. In addition, we purchase components and raw materials and information technology and other services from numerous suppliers, and, even if our facilities were not directly affected by such events, we could be affected by interruptions at such suppliers. Such suppliers may be less likely than our own facilities to be able to quickly recover from such events and may be subject to additional risks such as financial problems that limit their ability to conduct their operations. We cannot assure you that we will have insurance to adequately compensate us for any of these events.

-24-


Our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations.
We must comply with all applicable international trade, customs, export controls and economic sanctions laws and regulations of the U.S. and other countries. We are also subject to the Foreign Corrupt Practices Act and other anti-bribery laws that generally bar bribes or unreasonable gifts to foreign governments or officials. Changes in trade sanctions laws may restrict our business practices, including cessation of business activities in sanctioned countries or with sanctioned entities, and may result in modifications to compliance programs. Violation of these laws or regulations could result in sanctions or fines and could have a material adverse effect on our financial condition, results of operations and cash flows.
Compliance with regulations related to conflict minerals may force us to incur additional expenses and affect the manufacturing and sale of our products.
In recent years, governments in both the U.S. and Europe have implemented or proposed regulations governing the use of certain minerals, including tin, tantalum, tungsten and gold ("conflict minerals"). In the U.S., SEC rules require disclosures related to conflict minerals that are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by an SEC-reporting company, that are sourced from the Democratic Republic of Congo and other countries in central Africa. In the European Union, proposed regulations would require similar disclosures, and may encompass other geographic regions outside of central Africa.
These disclosure requirements could affect the sourcing and availability of some of the minerals used in the manufacture of our products. Our supply chain is complex, and if we are not able to conclusively verify the origins for all conflict minerals used in our products or that our products are "conflict free," we may face reputational challenges with our customers or investors. Furthermore, we may also encounter challenges to satisfy customers who require that our products be certified as "conflict free," which could place us at a competitive disadvantage if we are unable to do so. Additionally, as there may be only a limited number of suppliers offering "conflict free" metals, we cannot be sure that we will be able to obtain necessary metals from such suppliers in sufficient quantities or at competitive prices. Finally, because European regulations have not yet been finalized, it is difficult for us to determine whether and how we will establish a compliance program. For all of these reasons, we could incur significant costs related to the conflict minerals compliance process, and face equally significant costs in satisfying the disclosure requirements.
We may increase our debt or raise additional capital in the future, including to fund acquisitions, or for general corporate purposes, which could affect our financial health and decrease our profitability.
We may increase our debt or raise additional capital in the future, subject to restrictions in our debt agreements. In addition, our Board of Directors ("Board") may issue shares of preferred stock without further action by holders of our common stock. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more financing. However, debt or equity financing may not be available to us on terms we find acceptable, if at all. If we incur additional debt or raise equity through the issuance of our preferred stock, the terms of the debt or our preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. Also, regardless of the terms of our debt or equity financing, our agreements and obligations under a tax matters agreement dated as of March 4, 2016, between MTW and MFS (the "Tax Matters Agreement"), may limit our ability to issue stock. For a more detailed discussion, see "—Risks Relating to the Spin-Off." We may not be able to engage in certain transactions now that we have completed the Spin-Off. If we are unable to raise additional capital when needed, our financial condition, and thus your investment in us, could be materially and adversely affected.
Our debt instruments have restrictive covenants that could limit our financial flexibility.
The terms of the credit agreement that governs our senior secured credit facilities, the agreements that govern the securitization facility and the indenture governing the high yield notes contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our ability to borrow under our senior secured credit facilities and to securitize accounts receivable under the securitization facility is subject to compliance with a maximum consolidated total leverage ratio covenant and a minimum consolidated interest coverage ratio covenant. Our senior secured credit facilities include other restrictions that, among other things, limit our ability to incur indebtedness; grant liens; engage in mergers, consolidations and liquidations; make asset dispositions, restricted payments and investments; enter into transactions with affiliates; and amend, modify or prepay certain indebtedness. The indenture governing the high yield notes contains limitations on our ability to effect mergers and change of control events as well as other limitations, including limitations on:
the declaration and payment of dividends or other restricted payments;
incurring additional indebtedness or issuing preferred stock;
the creation or existence of certain liens;
incurring restrictions on the ability of certain of our subsidiaries to pay dividends or other payments;
transactions with affiliates; and
sale of assets.
We report the status of our compliance with these covenants quarterly. Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of substantially all of our funded debt. We do not have sufficient working capital to satisfy our debt obligations in the event of an acceleration of all or a significant portion of our outstanding indebtedness.

-25-


Risks Relating to the Spin-Off
There could be significant liability if the Spin-Off is determined to be a taxable transaction as a result of the Company's breach of related covenants and agreements with MTW, and we could have an indemnification obligation to MTW if the transactions we undertook in the Spin-Off do not qualify for non-recognition treatment as a result of actions by the Company, which could materially adversely affect our financial condition.
In connection with the Spin-Off, MTW received an opinion from its legal counsel, substantially to the effect that the Spin-Off and certain related transactions will qualify as tax-free to MTW and its shareholders under Sections 355, 368 and related provisions of the Internal Revenue Code of 1986, as amended (the "Code"), except to the extent of any cash received in lieu of fractional shares of MFS’ common stock. Any such opinion is not binding on the U.S. Internal Revenue Service (the "IRS"). Accordingly, the IRS may reach conclusions with respect to the Spin-Off that are different from the conclusions reached in the opinion. The opinion relied on certain facts, assumptions, representations and undertakings from MTW and us regarding the past and future conduct of the companies’ respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter the conclusions of the party giving such opinion.
If the Spin-Off ultimately is determined to be a taxable event, the Spin-Off could be treated as a taxable dividend to MTW’s shareholders at the time of the Spin-Off for U.S. federal income tax purposes, and MTW’s shareholders could incur significant federal income tax liabilities. In addition, MTW would recognize a taxable gain to the extent that the fair market value of MFS’ common stock exceeds MTW’s tax basis in such stock on the date of the Spin-Off.
Generally, taxes resulting from the failure of the Spin-Off to qualify for non-recognition treatment for U.S. federal income tax purposes would be imposed on MTW or MTW’s shareholders and, under the Tax Matters Agreement, MTW is generally obligated to indemnify us against such taxes. However, under the Tax Matters Agreement, we could be required, under certain circumstances, to indemnify MTW and its affiliates against all tax-related liabilities caused by those failures, to the extent those liabilities result from an action we or our affiliates take or from any breach of our or our affiliates’ representations, covenants or obligations under the Tax Matters Agreement or any other agreement we entered into in connection with the Spin-Off. Events triggering an indemnification obligation under the agreement include events occurring after the Distribution that cause MTW to recognize a gain under Section 355(e) of the Code.
We may not be able to engage in certain transactions now that the Spin-Off is complete.
To preserve the tax-free treatment of the Spin-Off, we entered into a Tax Matters Agreement with MTW that restricts us from taking any action that prevents the Distribution and related transactions from being tax-free for U.S. federal income tax purposes. Under the Tax Matters Agreement, for an agreed upon period following the Distribution, we are prohibited, except in certain circumstances, from:
entering into any transaction resulting in the acquisition of above a certain percentage of our stock or substantially all of our assets, whether by merger or otherwise;
merging, consolidating or liquidating;
issuing equity securities beyond certain thresholds;
repurchasing our capital stock; and
ceasing to actively conduct our business.
These restrictions may limit our ability to pursue certain strategic transactions or other transactions that we may believe to be in the best interests of our stockholders or that might increase the value of our business.
We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.
We believe that, as an independent, publicly traded company, we are able, among other factors, to better focus our financial and operational resources on our specific business, growth profile and strategic priorities, design and implement corporate strategies and policies targeted to our operational focus and strategic priorities, streamline our processes and infrastructure to focus on our core strengths, implement and maintain a capital structure designed to meet our specific needs and more effectively respond to industry dynamics. However, we may be unable to achieve some or all of these benefits. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
We have a limited operating history as an independent, publicly traded company, and our historical financial information is not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.
We derived the historical financial information included in this Annual Report on Form 10-K for periods prior to the Spin-Off from MTW’s consolidated financial statements, and this information does not necessarily reflect the results of operations, financial position and cash flows we would have achieved as an independent, publicly traded company during those periods presented, or those that we will achieve in the future. This is primarily because of the following factors:

-26-


Prior to the Spin-Off, we operated as part of MTW’s broader corporate organization, rather than as an independent company. MTW performed part or all of various corporate functions for us, including information technology, finance, legal, insurance, compliance and human resources activities. Our historical financial information reflects allocations of corporate expenses from MTW for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent company.
In connection with the Spin-Off, we have entered into agreements and transactions with MTW that did not exist prior to the Spin-Off.
Our historical financial information for periods prior to the Spin-Off does not reflect changes that we have experienced and we expect to experience in the future as a result of the Spin-Off, including changes in our cost structure, personnel needs, tax structure, financing and business operations. As part of MTW, we enjoyed certain benefits from MTW’s operating diversity, size, purchasing power and available capital for investments, and we lost these benefits after the Spin-Off. After the Spin-Off, as an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses, on terms as favorable to us as those we obtained as part of MTW prior to the Spin-Off.
Following the Spin-Off, we are also now responsible for the additional costs associated with being an independent, publicly traded company, including costs related to corporate governance, investor and public relations and public reporting. Therefore, our financial statements may not be indicative of our future performance as an independent company. While we have been profitable as part of MTW, we cannot assure you that our profits will continue at a similar level when we are a stand-alone company. For additional information about our past financial performance and the basis of presentation of our financial statements, see "Selected Financial Data," "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K.
Risks Relating to Our Common Stock and the Securities Markets
There is not a long history of trading in our common stock, and our stock price may fluctuate significantly.
We cannot predict the prices at which our common stock may trade. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including the factors listed in the following:
our quarterly or annual earnings, or those of other companies in our industry;
announcements by us or our competitors of significant new business awards;
announcements of significant acquisitions, divestitures, strategic alliances, joint ventures or dispositions by us or our competitors;
the failure of securities analysts to cover our common stock;
changes in earnings estimates by securities analysts;
the operating and stock price performance of other comparable companies;
investor perception of our company and the foodservice industry;
overall market fluctuations;
changes in capital gains taxes and taxes on dividends affecting stockholders; and
general economic conditions and other external factors.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could also adversely affect the trading price of our common stock.
We cannot assure you that we will be able to pay dividends in the future on our common stock based on our indebtedness or any other limiting factors.
The timing, declaration, amount and payment of any future dividends to stockholders will fall within the discretion of our Board and will depend on many factors, including our financial condition, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our existing debt or debt that we may incur in the future may limit or prohibit the payment of dividends. For more information, see "Dividend Policy" as part of "Item 5.—Market of Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
The following table outlines the principal facilities the Company owns or leases as of December 31, 2016.
Facility Location
 
Type of Facility
 
Approximate
Square Footage
 
Owned/Leased
Americas
 
 
 
 
 
 
New Port Richey, Florida (2)
 
Corporate Headquarters
 
42,000
 
Owned
Manitowoc, Wisconsin (2)
 
Manufacturing/Office
 
376,000
 
Owned
Parsons, Tennessee (1)
 
Manufacturing
 
120,000
 
Owned
Sellersburg, Indiana (2)
 
Manufacturing/Office
 
146,000
 
Owned
Tijuana, Mexico (1)
 
Manufacturing
 
111,000
 
Leased
Shreveport, Louisiana (1), (2)
 
Manufacturing/Office
 
539,000
 
Owned
Mt. Pleasant, Michigan (2)
 
Manufacturing/Office
 
345,000
 
Owned
Baltimore, Maryland
 
Manufacturing/Office
 
16,000
 
Leased
Cleveland, Ohio (1), (2), (3)
 
Office/Warehouse
 
391,000
 
Owned/Leased
Covington, Tennessee (1)
 
Manufacturing/Office/Warehouse
 
386,000
 
Owned/Leased
Concord, Ontario, Canada
 
Manufacturing/Office
 
116,000
 
Leased
Mississauga, Ontario, Canada (1), (2)
 
Manufacturing/Office/Warehouse
 
186,000
 
Leased
Monterrey, Mexico
 
Manufacturing/Office
 
303,750
 
Leased
EMEA
 
 
 
 
 
 
Guildford, United Kingdom (2)
 
Office
 
35,000
 
Leased
Eglfing, Germany (2)
 
Manufacturing/Office/Warehouse
 
130,000
 
Leased
Herisau, Switzerland (2)
 
Manufacturing/Office
 
26,974
 
Leased
Halesowen, United Kingdom (2)
 
Manufacturing/Office
 
86,000
 
Leased
Sheffield, United Kingdom
 
Manufacturing/Office
 
100,000
 
Leased
APAC
 
 
 
 
 
 
Foshan, China (2)
 
Manufacturing/Office/Warehouse
 
125,000
 
Leased
Shanghai, China (2)
 
Office/Warehouse
 
29,000
 
Leased
Prachinburi, Thailand (2)
 
Manufacturing/Office/Warehouse
 
438,608
 
Owned
Singapore
 
Office
 
93,300
 
Leased
Hangzhou, China (2)
 
Manufacturing/Office
 
260,000
 
Owned/Leased
Bang Na, Thailand
 
Office
 
5,112
 
Leased
(1) There are multiple separate facilities within these locations.
(2) Serves also as a research and development center.
(3) Vacant as of December 31, 2016. See Note 19, "Restructuring," to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.
In addition, we lease sales office and/or warehouse space in Manitowoc, Wisconsin; Odessa and Tampa, Florida; Fort Wayne and Jeffersonville, Indiana; Herborn, Germany; Kuala Lumpur, Malaysia; Barcelona, Spain; Mexico City and Naucalpan de Juarez, Mexico; Gurgaon, and Mumbai, India; and Dubai UAE.
See Note 21, "Leases," to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding leases.

-28-


ITEM 3. LEGAL PROCEEDINGS
Our global operations are governed by laws addressing the protection of the environment and employee safety and health.  Under various circumstances, these laws impose civil and criminal penalties and fines, as well as injunctive and remedial relief, for noncompliance.  They also may require remediation at sites where Company related substances have been released into the environment.
We have expended substantial resources globally, both financial and managerial, to comply with the applicable laws and regulations, and to protect the environment and our workers.  We believe we are in substantial compliance with such laws and regulations and we maintain procedures designed to foster and ensure compliance.  However, we have been and may in the future be subject to formal or informal enforcement actions or proceedings regarding noncompliance with such laws or regulations, whether or not determined to be ultimately responsible in the normal course of business.  Historically, these actions have been resolved in various ways with the regulatory authorities without material commitments or penalties to the Company.
For information concerning other contingencies and uncertainties, see Note 17, "Contingencies and Significant Estimates," to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURE
None.


-29-


PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Shares of our common stock began trading on the New York Stock Exchange ("NYSE") under the ticker symbol MFS on March 4, 2016. Prior to that date, there was no public trading market for shares of our common stock. As of February 17, 2017, we had 1,800 stockholders of record of our common stock. We anticipate that our common stock will begin trading under our new name, Welbilt, Inc., and ticker symbol, WBT, on March 6, 2017.
The following table shows the highest and lowest prices paid per share for our common stock during the calendar quarter indicated below since the Spin-Off on March 4, 2016.
 
Common Stock Market Price
 
Highest
 
Lowest
2016
 
 
 
First Quarter (from March 4, 2016)
$
15.12

 
$
13.98

Second Quarter
17.62

 
14.07

Third Quarter
18.71

 
15.57

Fourth Quarter
19.33

 
15.01

Dividend Policy
The amount and timing of dividends, if any, will be determined by our Board at its regular meetings each year. Our Board did not authorize or pay a dividend in 2016 and does not currently plan on paying a dividend in 2017 as our focus continues to be the reduction of outstanding debt. The timing, declaration, amount of, and payment of any future dividends is within the discretion of our Board and will depend upon many factors, including our financial condition, earnings, corporate strategy, capital requirements of its operating subsidiaries, covenants associated with certain debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets and other factors deemed relevant by our Board.
Issuer Purchases of Equity Securities
There were no unregistered offerings nor any repurchases of our common stock by us or an "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the year ended December 31, 2016.
Performance Graph
The following graph and table depict the total return to stockholders from March 4, 2016 (the date our common stock began trading on the NYSE) through December 31, 2016, relative to the performance of the S&P 500 Index and the S&P 400 Midcap Index. The graph and table assume $100 invested at the closing price of $13.80 on March 4, 2016 and that all dividends were reinvested.
The performance graph and table are not intended to be indicative of future performance. The performance graph and table shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act.

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performancegrapha01.jpg
 
March 4, 2016
 
December 31, 2016
 MFS
$
100.00

 
$
140.07

 S&P 500
100.00

 
111.94

 S&P 400 Midcap
100.00

 
118.68


ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected financial data for each of the periods indicated. We derived the selected consolidated financial data for each of the fiscal years ended December 31, 2016, 2015 and 2014 and as of December 31, 2016 and 2015, from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We derived the selected combined financial data for the fiscal years ended December 31, 2013 and 2012 from our audited and unaudited combined financial statements that are not included in this Annual Report on Form 10-K.
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. 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 for the period from January 1, 2016 up to the Spin-Off on March 4, 2016 and for the entirety of the prior periods presented. These allocated costs were primarily related to: 1) corporate officers, 2) employee benefits and compensation, 3) share-based compensation, and 4) certain administrative functions, which were 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 MFS believes the assumptions underlying 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 financial statements may not be indicative of MFS’ future performance, and do not necessarily include all of the actual expenses that would have been incurred by MFS and may not reflect the financial position, results of operations and cash flows had MFS been a standalone company during the entirety of the periods presented. No cash dividends were declared during the periods presented.

-31-


You should read the selected historical consolidated financial data presented below in conjunction with our audited consolidated financial statements and accompanying notes, and "Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report Form 10-K.
 
 
As of and for the year ended December 31,
(in millions)
 
2016
 
2015
 
2014
 
2013
 
2012
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,456.6

 
$
1,570.1

 
$
1,581.3

 
$
1,541.8

 
$
1,486.2

Depreciation and amortization
 
48.5

 
51.0

 
53.0

 
51.4

 
53.6

Earnings before income taxes
 
104.8

 
196.4

 
185.7

 
204.6

 
179.5

Net earnings
 
79.5

 
157.1

 
159.8

 
146.1

 
132.6

Earnings per common share — Basic (1)
 
0.58

 
1.15

 
1.17

 
1.07

 
0.97

Earnings per common share — Diluted (1)
 
0.57

 
1.15

 
1.17

 
1.07

 
0.97

 
 
 
 
 
 
 
 
 
 
 
Balance Sheets Data:
 
 
 
 
 
 
 
 
 
 
Working capital (2)
 
$
118.9

 
$
88.0

 
$
72.7

 
$
74.0

 
$
75.6

Total assets
 
1,769.1

 
1,754.0

 
1,898.3

 
1,918.2

 
1,969.0

Long-term obligations (3)
 
1,278.7

 
2.3

 
3.6

 
1.7

 
1.8

Capital expenditures
 
16.0

 
13.2

 
25.3

 
33.6

 
17.5

 
 
 
 
 
 
 
 
 
 
 
(1) On March 4, 2016, MTW distributed 137.0 million shares of MFS common stock to MTW shareholders, thereby completing the Spin-Off. Basic and diluted earnings per common share and the average number of common shares outstanding were retrospectively restated for the number of MFS shares outstanding immediately following this transaction. The same number of shares was used to calculate basic and diluted earnings per share, for the prior periods presented, since no equity awards were outstanding prior to the Spin-Off.
(2) Working capital is defined as net receivables and inventory less third-party accounts payable.
(3) Long-term obligations includes long-term capital lease obligations.

-32-


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes of Manitowoc Foodservice, Inc. and its consolidated subsidiaries included in Part II, Item 8 of this Annual Report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements as described in "Cautionary Statements about Forward-Looking Information." See "Item 1A.Risk Factors" for a discussion of uncertainties, risks and assumptions associated with these statements. Actual results may differ from those contained in any forward-looking statements.
Introduction
Management’s discussion and analysis of financial condition and results of operations accompanies our consolidated financial statements included elsewhere in this Annual Report on Form 10-K and provides additional information about our business, financial condition, liquidity and capital resources, cash flows and results of operations. We have organized the information as follows:
Overview. This section provides a brief description of the Spin-Off, our business, reportable segments, accounting basis of presentation and a brief summary of our results of operations.
Results of operations. This section highlights items affecting the comparability of our financial results and provides an analysis of our consolidated and segment results of operations for each of the years ended December 31, 2016, 2015 and 2014.
Market outlook. This section provides a brief overview of the global foodservice market and foodservice equipment industry.
Liquidity and capital resources. This section provides an overview of our cash and financing activities. We also review our historical sources and uses of cash in our operating, investing and financing activities. We summarize our debt and other long-term financial commitments.
Quantitative and qualitative disclosures about market risk. This section discusses how we monitor and manage market risk related to changing commodity prices, currency and interest rates. We also provide an analysis of how adverse changes in market conditions could impact our results based on certain assumptions we have provided. We discuss how we hedge certain of these risks to mitigate unplanned or adverse impacts to our operating results and financial condition.
Non-GAAP financial measures. This section discusses certain operational performance measures we use internally to evaluate our operating results and to make important decisions about our business. We also provide a reconciliation of these measures to the financial measures we have reported in our consolidated financial statements so you understand the adjustments we make to further evaluate our underlying operating performance.
Critical accounting policies and estimates. This section summarizes the accounting policies that we consider important to our financial condition and results of operations and that require significant judgment or estimates to be made in their application. We also discuss commodity cost trends impacting our historical results and that we expect will continue through the remainder of the year.
Overview
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 the MFS common stock to MTW's shareholders on a pro rata basis, and MFS became an independent publicly traded company (the "Distribution"). In this Annual Report on Form 10-K, "Spin-Off" refers to both the above described internal reorganization and the Distribution, collectively. The financial condition and results of operations discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are those of Manitowoc Foodservice, Inc. and its consolidated subsidiaries, collectively, the "Company," "MFS," "we," "our" or "us."

Business
We are one of the world’s leading commercial foodservice equipment companies. We design and manufacture a complementary portfolio of hot and cold foodservice equipment products integrated under one operating company and supported by a growing aftermarket parts and repair service business. Our capabilities span refrigeration, ice-making, cooking, holding, food-preparation and beverage-dispensing technologies, which allow us to equip entire commercial kitchens and serve the world’s growing demand for food prepared away from home. Our suite of products is used by commercial and institutional foodservice operators including full-service restaurants, quick-service restaurant ("QSR") chains, hotels, caterers, supermarkets, convenience stores, business and industry, hospitals, schools and other institutions. Our products and aftermarket parts and service support are recognized by our customers and channel partners for their quality, reliability and durability that enable our end customers profitable growth by improving their menus, enhancing operations and reducing costs.


-33-


Our products are sold in over 100 countries globally, across the Americas, EMEA and APAC. Our products, services and solutions are marketed through a worldwide network of over 3,000 dealers and distributors under industry-leading brands, including Cleveland™, Convotherm®, Delfield®, fitKitchenSM, Frymaster®, Garland®, Kolpak®, Lincoln™, Manitowoc® Ice, Merco®, Merrychef® and Multiplex®. All of our products are supported by KitchenCare®, our aftermarket parts and repair service business. Our scale and expertise enable us to serve a global customer base across the world in continually evolving foodservice markets. For the years ended December 31, 2016, 2015 and 2014, we generated revenue of $1,456.6 million, $1,570.1 million and $1,581.3 million, respectively.
On February 6, 2017, we announced that we are rebranding the Company, our logo and our brand identity to Welbilt, Inc. effective March 6, 2017. The new name and brand represent a long-standing commitment to put customers’ needs first. This change is part of our strategic repositioning after we spun off from MTW on March 4, 2016.
Our five current strategic objectives are the following:
Achieving profitable growth;
Creating innovative products and solutions;
Driving operational excellence;
Guaranteeing customer satisfaction; and
Developing great people.

Reportable Segments
We manage our business in three geographic reportable segments: Americas, EMEA and APAC. These segments represent the level at which we review our financial performance and make operating decisions. Segment Operating EBITA, or earnings before interest, taxes, other (income) expense and amortization expense is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial performance of our business and is the basis for resource allocation and performance reviews. For these reasons, we believe that segment Operating EBITA represents the most relevant measure of segment profit and loss. A reconciliation of segment Operating EBITA to earnings before income taxes is presented in "—Results of Operations."
In contrast to many other companies in the fragmented foodservice equipment industry, we have the scale and experience to follow our customers globally, operating in the Americas, EMEA and APAC regions. The Americas is by far the Company’s largest geographic segment in terms of sales, followed by EMEA. While we plan to continue growing in all regions, the Company recognizes that the majority of long-term growth in the foodservice industry is expected to occur in markets other than the U.S., Canada and Western Europe.
Americas
The Americas segment, including the U.S., Canada and Latin America, had net sales and segment Operating EBITA of approximately $1,186.6 million and $219.1 million, respectively, for the year ended December 31, 2016. Sales generated by our U.S. operations represent the majority of sales in the Americas segment.
EMEA
The EMEA segment is made up of markets in Europe, Middle East and Africa, including Russia and the Commonwealth of Independent States. The EMEA segment had net sales and segment Operating EBITA of approximately $287.6 million and $41.3 million, respectively, for the year ended December 31, 2016.
APAC
The APAC segment is comprised principally of markets in China, India, Singapore, Malaysia, Thailand, Philippines, Indonesia, Japan, South Korea, Australia and New Zealand. The APAC segment had net sales and segment Operating EBITA of approximately $190.9 million and $21.8 million, respectively, for the year ended December 31, 2016.
Accounting Basis of Presentation
During the periods presented prior to the Spin-Off on March 4, 2016, our consolidated 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 and certain costs related to the Company have been allocated from MTW for the period of January 1, 2016 up to the Spin-Off on March 4, 2016 and for the entirety of the years ended December 31, 2015 and 2014.
The financial information included herein may not necessarily reflect our financial condition, results of operations and cash flows in the future or what our financial condition, results of operation and cash flows would have been had MFS been an independent, publicly-traded company prior to the Spin-Off.

All dollar amounts are in millions of dollars throughout the tables included in this Management’s Discussion and Analysis of Financial Conditions and Results of Operations unless otherwise indicated.

-34-


Results of Operations
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
Our consolidated results comprised the following for the years ended December 31, 2016 and 2015:
Millions of dollars, except per share data
 
2016
 
2015
 
$ Change
 
% Change
Net sales
 
$
1,456.6

 
$
1,570.1

 
$
(113.5
)
 
(7.2
)%
Cost of sales
 
923.8

 
1,068.4

 
(144.6
)
 
(13.5
)%
Gross profit
 
532.8

 
501.7

 
31.1

 
6.2
 %
Gross profit margin
 
36.6
%
 
32.0
%
 
 
 
 
Selling, general and administrative expenses
 
290.1

 
291.6

 
(1.5
)
 
(0.5
)%
Amortization expense
 
31.2

 
31.4

 
(0.2
)
 
(0.6
)%
Separation expense
 
6.5

 
5.2

 
1.3

 
25.0
 %
Restructuring expense
 
2.5

 
4.6

 
(2.1
)
 
(45.7
)%
Asset impairment expense
 
3.3

 
9.0

 
(5.7
)
 
(63.3
)%
Earnings from operations
 
199.2

 
159.9

 
39.3

 
24.6
 %
Interest expense
 
85.2

 
1.4

 
83.8

 
5,985.7
 %
Interest expense (income) on notes with MTW — net
 
0.1

 
(15.8
)
 
15.9

 
(100.6
)%
Other expense (income) — net
 
9.1

 
(22.1
)
 
31.2

 
(141.2
)%
Earnings before income taxes
 
104.8

 
196.4

 
(91.6
)
 
(46.6
)%
Income taxes
 
25.3

 
39.3

 
(14.0
)
 
(35.6
)%
Net earnings
 
$
79.5

 
$
157.1

 
$
(77.6
)
 
(49.4
)%
Analysis of Net Sales
Net sales for our reportable segments comprised the following for the years ended December 31, 2016 and 2015:
(in millions)
 
2016
 
2015
 
$ Change
 
% Change
Net sales:
 
 

 
 

 
 
 
 
Americas
 
$
1,186.6

 
$
1,323.7

 
$
(137.1
)
 
(10.4
)%
EMEA
 
287.6

 
281.6

 
6.0

 
2.1
 %
APAC
 
190.9

 
191.1

 
(0.2
)
 
(0.1
)%
Elimination of intersegment sales
 
(208.5
)
 
(226.3
)
 
17.8

 
(7.9
)%
Total net sales
 
$
1,456.6

 
$
1,570.1

 
$
(113.5
)
 
(7.2
)%
Consolidated net sales totaled $1,456.6 million for the year ended December 31, 2016, representing a $113.5 million, or 7.2%, decrease compared to the prior year, which was primarily driven by a 10.4% decrease in the Americas segment. Prior year net sales included $122.1 million from Kysor Panel Systems ("KPS"), which was sold in December 2015. In addition, foreign currency translation negatively impacted net sales for the year ended December 31, 2016 by $26.4 million, or 1.8%.
Net sales in the Americas segment for the year ended December 31, 2016 decreased $137.1 million, or 10.4%, primarily due to the divestiture of KPS in December 2015, which caused a decrease of approximately $122.1 million. Adjusted for the divestiture of KPS, net sales decreased $15.0 million from the prior year, which is a non-GAAP measure that consisted of a decrease in third party net sales of $12.0 million and lower intersegment net sales of $3.0 million. The $12.0 million third party net sales decrease year over year was due to softness in sales of hot-side products and a reduction in KitchenCare® sales of $2.4 million, partially offset by an increase of $28.7 million in pricing realization from our Simplification and Right-Sizing Initiatives. As well as pricing from 80/20, these initiatives include product and customer rationalization, product cost take out, lean implementation, strategic sourcing, manufacturing capacity reduction and reduction in workforce. Foreign currency translation had an $8.1 million negative impact on third party net sales for the year ended December 31, 2016.

Net sales in the EMEA segment for the year ended December 31, 2016 increased $6.0 million, or 2.1%, primarily driven by an increase in third party net sales of $16.1 million, partially offset by lower intersegment net sales of $10.1 million. Third party net sales increased due to stronger sales of hot-side products, including Merrychef® high-speed ovens, stronger sales of beverage products, an increase of $6.8 million in pricing realization from the Simplification and Right-Sizing Initiatives and an increase of $1.0 million from improvement in KitchenCare® sales in the region. Foreign currency translation had a $14.6 million negative impact on third party net sales for the year ended December 31, 2016.


-35-


Net sales in the APAC segment for the year ended December 31, 2016 decreased $0.2 million, or 0.1%. Current year net sales included $11.2 million from the Welbilt Thailand acquisition in October 2015. Adjusted for the acquisition of Welbilt Thailand, which is a non-GAAP measure, net sales decreased $7.1 million and consisted of a decrease in third party net sales of $2.4 million and lower intersegment sales of $4.7 million. Foreign currency translation had a $3.7 million negative impact on third party net sales for the year ended December 31, 2016.

Analysis of Earnings from Operations

Earnings from operations for our reportable segments comprised the following for the years ended December 31, 2016 and 2015:
(in millions)
 
2016
 
2015
 
$ Change
 
% Change
Earnings from operations:
 
 

 
 

 
 
 
 
Americas
 
$
190.6

 
$
161.0

 
$
29.6

 
18.4
 %
EMEA
 
38.7

 
20.8

 
17.9

 
86.1
 %
APAC
 
21.7

 
22.3

 
(0.6
)
 
(2.7
)%
Elimination of intersegment sales
 
(51.8
)
 
(44.2
)
 
(7.6
)
 
17.2
 %
Total earnings from operations
 
$
199.2

 
$
159.9

 
$
39.3

 
24.6
 %

Consolidated earnings from operations for the year ended December 31, 2016 totaled $199.2 million, an increase of $39.3 million, or 24.6%, compared to the prior year, which was principally driven by savings from the Simplification and Right-Sizing Initiatives of approximately $56.8 million, partially offset by higher incentive compensation and the sale of KPS in December 2015.

Earnings from operations in the Americas segment for the year ended December 31, 2016 increased by $29.6 million, or 18.4%, despite the decrease in net sales. Adjusted for the impact of the divestiture of KPS of $12.8 million, earnings from operations increased from the prior year by $42.4 million. The increase in earnings from operations was primarily driven by $42.6 million of savings from the Simplification and Right-Sizing Initiatives, a $15.9 million improvement in KitchenCare® operations and operating efficiency improvements. These increases were partially offset by the negative impact from lower sales volume, higher incentive compensation and lower fixed cost absorption.

Earnings from operations in the EMEA segment for the year ended December 31, 2016 increased by $17.9 million, or 86.1%, which was primarily driven by cost savings of approximately $10.8 million from the Simplification and Right-Sizing Initiatives, a $4.0 million improvement in KitchenCare® operations in the region and better product mix from new product introductions. These increases were partially offset by the negative impact from foreign currency translation, higher incentive compensation and lower fixed cost absorption.

Earnings from operations in the APAC segment for the year ended December 31, 2016 decreased by $0.6 million, or 2.7%. The decrease was primarily driven by the negative impact of lower sales volume and fixed cost absorption, partially offset by savings from the Simplification and Right-Sizing Initiatives of $3.4 million and a $1.9 million improvement in KitchenCare® operations in the region.

Total selling, general and administrative expenses amounted to $290.1 million for the year ended December 31, 2016, a decrease of $1.5 million, or 0.5%, compared to the prior year. The decrease was principally driven by the impact from the divestiture of KPS of approximately $9.7 million, cost containment savings of $7.8 million and savings from the Simplification and Right-Sizing Initiatives of approximately $6.9 million. These decreases were partially offset by a $9.4 million increase in incentive compensation expense, a $5.8 million increase from the impact of foreign currency translation, $6.4 million of costs allocated to MFS in connection with the Spin-Off and the impact from the acquisition of Welbilt Thailand of $1.3 million.

Analysis of Non-Operating Income Statement Items
For the year ended December 31, 2016, interest expense was $85.2 million, an $83.8 million increase from the prior year, which was due to the issuance of $1,400.0 million of long-term debt as a result of the Spin-Off in the first quarter of 2016. See "—Liquidity and Capital Resources" for further discussion on our long-term debt and related future interest obligations. "Interest expense (income) on notes with MTW—net" reflects net interest income on funding provided by MFS to MTW via intercompany debt settled immediately prior to the Spin-Off as disclosed in Note 24, "Net Parent Company Investment and Related Party Transactions," to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The remaining "Other expense (income)—net" reflects primarily amortization of deferred financing fees on the aforementioned long-term debt, gains and losses on the disposal of businesses and foreign currency gains and losses. The decrease in other income, net of $31.2 million was due primarily to a $9.9 million gain on the sale of KPS in December 2015, the $5.4 million gain on sale of a certain investment property in 2015, a $4.9 million gain on the acquisition of Welbilt Thailand in October 2015 and $4.8 million of deferred financing costs recognized during the year ended December 31, 2016 in connection with the aforementioned debt issuance.


-36-


Analysis of Income Taxes
Income taxes for the year ended December 31, 2016 was $25.3 million, a decrease of $14.0 million, or 35.6%, from the prior year, which was primarily due to a decrease in earnings before income taxes of $91.6 million. The effective income tax rate was 24.1% and 20.0% for the years ended December 31, 2016 and 2015, respectively. The change was due to nonrecurring 2015 items and a change in the mix of earnings in jurisdictions without a valuation allowance. Included in the 2016 tax provision is a $2.9 million benefit for out-of-period balance sheet adjustments related to the Spin-Off. The Company does not believe these adjustments are material to our consolidated financial statements for 2016 or its comparative annual or quarterly financial statements.
Domestic earnings before income taxes in 2016 represent 29.1% of total earnings and a favorable 8.1% effective tax rate impact for lower tax rates in foreign jurisdictions, whereas 2015 domestic earnings represent 61.8% of total earnings and a 3.9% effective tax rate benefit for lower foreign tax rates. The 2016 and 2015 effective tax rates were favorably impacted by income earned in jurisdictions, primarily in Canada and China, where the statutory rates are approximately 25%.
The 2015 tax provision benefited by $17.8 million related to the divestiture of KPS 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 recorded in purchase accounting and use of a capital loss carryforward.
Earnings associated with the investments in the Company’s foreign subsidiaries are considered to be indefinitely reinvested outside of the U.S. Therefore, a U.S. provision for income taxes on those earnings or translation adjustments has not been recorded, as permitted by criterion outlined in ASC 740 “Income Taxes.” Determination of any unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries that are essentially permanent in duration is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates. As of December 31, 2016, approximately $57.5 million of the $60.2 million of cash and cash equivalents, including restricted cash, on the consolidated balance sheet was held by foreign entities.

Year Ended December 31, 2015 vs. Year Ended December 31, 2014
Our consolidated results comprised the following for the years ended December 31, 2015 and 2014:
Millions of dollars, except per share data
 
2015
 
2014
 
$ Change
 
% Change
Net sales
 
$
1,570.1

 
$
1,581.3

 
$
(11.2
)
 
(0.7
)%
Cost of sales
 
1,068.4

 
1,073.3

 
(4.9
)
 
(0.5
)%
Gross profit
 
501.7

 
508.0

 
(6.3
)
 
(1.2
)%
Gross profit margin
 
32.0
%
 
32.1
%
 
 
 
 
Selling, general and administrative expenses
 
291.6

 
299.6

 
(8.0
)
 
(2.7
)%
Amortization expense
 
31.4

 
31.8

 
(0.4
)
 
(1.3
)%
Separation expense
 
5.2

 
0.4

 
4.8

 
1,200.0
 %
Restructuring expense
 
4.6

 
2.6

 
2.0

 
76.9
 %
Asset impairment expense
 
9.0

 
1.1

 
7.9

 
718.2
 %
Earnings from operations
 
159.9

 
172.5

 
(12.6
)
 
(7.3
)%
Interest expense
 
1.4

 
1.3

 
0.1

 
7.7
 %
Interest expense (income) on notes with MTW — net
 
(15.8
)
 
(16.6
)
 
0.8

 
(4.8
)%
Other expense (income) — net
 
(22.1
)
 
2.1

 
(24.2
)
 
(1,152.4
)%
Earnings before income taxes
 
196.4

 
185.7

 
10.7

 
5.8
 %
Income taxes
 
39.3

 
25.9

 
13.4

 
51.7
 %
Net earnings
 
$
157.1

 
$
159.8

 
$
(2.7
)
 
(1.7
)%
Analysis of Net sales
Net sales for our reportable segments comprised the following for the years ended December 31, 2015 and 2014:
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
Net sales:
 
 

 
 

 
 
 
 
Americas
 
$
1,323.7

 
$
1,301.9

 
$
21.8

 
1.7
 %
EMEA
 
281.6

 
315.1

 
(33.5
)
 
(10.6
)%
APAC
 
191.1

 
198.2

 
(7.1
)
 
(3.6
)%
Elimination of intersegment sales
 
(226.3
)
 
(233.9
)
 
7.6

 
(3.2
)%
Total net sales
 
$
1,570.1

 
$
1,581.3

 
$
(11.2
)
 
(0.7
)%

-37-


Consolidated net sales totaled $1,570.1 million for the year ended December 31, 2015, representing a $11.2 million, or 0.7%, decrease compared to the prior year. The decrease in total net sales included an unfavorable foreign exchange impact of approximately $49.5 million due to the relative strength of the U.S. Dollar to foreign currencies, and product roll-outs in the first half of 2014, which generated sales of approximately $35.2 million, that did not recur in the first half of 2015. Favorable volume, product and price mix impact of $73.5 million partially offset the negative impacts of foreign exchange and product roll-outs over the prior year period. Sales in the Americas totaled $1,323.7 million, an increase of 1.7% over the prior year, on favorable sales volumes across both hot and cold brands. Sales in EMEA and APAC were down 10.6% and 3.6%, respectively, compared to the prior year period, due to unfavorable foreign exchange only partially offset by strength in particular markets and product types. Further analysis of the changes in sales by reportable segments is shown below.

In 2015, net sales in the Americas segment increased by $21.8 million, or 1.7%, to $1,323.7 million, compared to $1,301.9 million in 2014. This increase was principally driven by higher sales across both hot and cold brands, with new product roll-outs to chain customers for our Delfield® and Ovens products, and continued strength in our ice business related to our Koolaire ice machines.

Net sales in the EMEA region for 2015 decreased by $33.5 million, or 10.6%, to $281.6 million compared to $315.1 million in the prior year. This decrease was primarily driven by unfavorable foreign currency impact and a benefit to 2014 sales from a new product roll-out to a major customer in the EMEA region, which more than offset increases from roll-out of the Convotherm® 4 oven and higher general market sales.

Net sales in the APAC region decreased by $7.1 million in 2015 from $198.2 million in the prior year. This decrease was primarily driven by lower sales to large QSR chain customers.

Analysis of Earnings from Operations

Earnings from operations for our reportable segments comprised the following for the years ended December 31, 2015 and 2014:
(in millions)
 
2015
 
2014
 
$ Change
 
% Change
Earnings from operations:
 
 

 
 

 
 
 
 
Americas
 
$
161.0

 
$
168.3

 
$
(7.3
)
 
(4.3
)%
EMEA
 
20.8

 
18.1

 
2.7

 
14.9
 %
APAC
 
22.3

 
21.5

 
0.8

 
3.7
 %
Elimination of intersegment sales
 
(44.2
)
 
(35.4
)
 
(8.8
)
 
24.9
 %
Total earnings from operations
 
$
159.9

 
$
172.5

 
$
(12.6
)
 
(7.3
)%

For the year ended December 31, 2015, earnings from operations for the Americas region decreased $7.3 million, or 4.3%, compared to the prior year. The change was a result of a decline of approximately $13.0 million due to specific product roll-outs in the first half of 2014 that did not recur in the first half of 2015, as well as approximately $14.0 million of incremental costs associated with the consolidation and transition of our KitchenCare® business to third-party warehouse management during the first three quarters of the year. These costs were almost entirely offset by savings from headcount reductions and product and manufacturing cost reduction initiatives.

For the year ended December 31, 2015, compared to the prior year, earnings from operations for the EMEA region increased by $2.7 million to $20.8 million. Earnings for the segment increased despite the decrease in sales due to favorable pricing on new product roll-outs and cost containment across the region from headcount reductions and product and manufacturing cost reduction initiatives.

For the year ended December 31, 2015, earnings from operations for the APAC segment remained fairly consistent with the prior year, with an increase of approximately $0.8 million to $22.3 million. The decline in sales was offset by cost containment from headcount reductions and product and manufacturing cost reduction initiatives.

Total selling, general and administrative expenses amounted to $291.6 million in 2015, a decrease of 2.7% or $8.0 million compared to the prior year. The year-over-year decrease was attributable primarily to headcount reductions implemented during the year, as well as cost containment across the business.

Analysis of Non-Operating Income Statement Items

Interest expense for the years ended December 31, 2015 and 2014 primarily related to the financing costs on capital lease arrangements. Net interest income reflects the historical net interest income recognized by MFS from notes with MTW, which were settled on March 3, 2016. Other income - net for the year ended December 31, 2015 included a $9.9 million gain on sale of KPS, a $5.4 million gain on sale of a certain investment property and a $4.9 million gain on the acquisition of a Thailand joint venture. The remainder of costs in 2015 related primarily to foreign exchange gains. Other (expense) income - net for the year ended December 31, 2014 primarily related to foreign exchange gains or losses.


-38-


Analysis of Income Taxes

MFS’ effective tax rate for the years ended 2015 and 2014 was 20.0% and 13.9%, respectively. The 2015 tax provision was reduced by $17.8 million related to the divestiture of the KPS business resulting in a favorable impact to the effective tax rate. This benefit was primarily due to the write-off of $13.8 million of an unamortized deferred tax liability recorded in purchase accounting and use of a capital loss carryforward. The 2014 effective tax rate was reduced by a $25.6 million tax benefit related to a capital loss realization from an election with the IRS to treat a Foodservice entity as a partnership for U.S. federal income tax purposes.

Market Conditions and Outlook
We are a leading participant in the global foodservice equipment industry. Our customers include many of the fastest-growing and most-innovative foodservice companies in the world. We serve customers around the globe and we will continue to expand and support our customers wherever they grow. Our integrated manufacturing operations, service sites and sales offices work together to assist customers worldwide, whether these customers are local businesses or global companies.
The U.S. foodservice market accounted for approximately 20.6%, or $543.1 billion, of the global food service market in 2016 based on Euromonitor studies. According to Technomic, the foodservice industry in the U.S. is expected to grow at a compound annual growth rate ("CAGR") of approximately 2% during the 2017-2022 period with some foodservice industry sectors, such as senior living or fast casual dining growing at a CAGR of 4-6% during the same time period. Among other factors, the market growth will be driven by disposable income, increased employment, investment in new establishments and the underlying trend for increased convenience.
On a global scale, the demand for affordable dining is expected to continue. The size of the global foodservice equipment markets we serve, including the hot side, cold side, beverage and aftermarket parts and services equates to approximately 1% of the foodservice market global revenue. The foodservice equipment market was valued at $27.7 billion in 2015 according to Future Market Insights and is expected to expand at a CAGR of 5.1% from 2016-2024 and reach $42.9 billion by 2024. We believe the main growth will be in the hot side product categories of cooking and hold and serve with an expected CAGR for the 2016-2019 period of 4% to 5%, whereas the CAGR on the cold side and the aftermarket sales is expected to be around 3% to 4%.
Consumers in most markets are expected to gravitate towards more informal options, which is a trend seen among both high income consumers looking to save during a slow economic recovery, and lower income consumers looking for accessible entry points for "on the go" food consumption. For foodservice equipment operators in emerging markets, this offers enormous opportunity for innovation, particularly in terms of format, as new restaurant consumers look to experiment with a variety of brands and experiences. QSR chains, in particular, have proved successful at innovation in these markets. Global expansion and long-term focus on new emerging markets with new equipment will be driven by chain restaurants in countries such as India, China, parts of the Middle East and South-East Asia in general.
Within the restaurant industry, growing trends towards enhancing food safety and waste reduction are expected to drive demand for foodservice equipment. According to the World Health Organization, as populations worldwide become increasingly urbanized and globalized, people are more often eating outside of the home and the global food chain is becoming increasingly complex. Food providers have an ever greater responsibility to ensure food safety for consumers. High quality foodservice equipment can help these providers meet this challenge. Additionally, restaurants are striving to reduce waste and promote sustainability. According to the Food and Agriculture Organization of the United Nations, approximately one third of all food produced globally gets either lost or wasted each year. Modern and efficient foodservice equipment can promote energy efficiency in the kitchen, prevent premature spoilage, and reduce waste.

Overall, we believe that continued growth in demand for foodservice equipment will result from the development of new restaurant concepts in the U.S., the expansion of U.S. and foreign chains into international markets, the replacement and upgrade of existing equipment, and new equipment requirements resulting from menu changes as well as waste reduction. We expect to benefit from these trends, and grow market penetration alongside our customers as they expand into new service categories and geographies. We believe we are well-positioned to take advantage of worldwide growth opportunities with global and regional new product introductions, improvement in operational performance and other strategic initiatives.

We believe our strong position gives us significant opportunities to grow along with our customers. Not only do we aim to be their supplier of choice, but also their innovator of choice. Our customers are constantly looking for ways to innovate their menus, and we are at the forefront of that innovation. MFS was again honored in 2016 by the National Restaurant Association ("NRA") as one of the restaurant industry's leading companies focused on innovation by understanding and meeting the operator's needs. The superior quality of our foodservice equipment has long been recognized by third-parties. As just one example of awards reflecting a history of innovation, MFS has won 31 Kitchen Innovation Awards from the NRA since 2005.

Our brands are well-positioned leaders that span most major commercial foodservice equipment categories. Our team is passionate about the opportunities that our market position and global capabilities provide us. For 2017, our priorities are to continue to grow our customer base, deepen customer penetration, and drive international expansion to continue to achieve profitable growth, and to drive margin expansion through right-sizing our operations and business simplification.


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Liquidity and Capital Resources
Overview of Factors Affecting our Liquidity
Prior to the Spin-off, MTW provided capital, cash management and other treasury services to MFS. As part of these services, certain cash balances were swept to MTW on a daily basis and were held in a centralized account. In turn, MTW transferred cash to MFS in order for MFS to meet its cash needs. As a result, the cash balances presented in the consolidated financial statements prior to the Spin-Off consist primarily of cash held at certain MFS entities used to satisfy their own cash needs. Following the Spin-Off, MFS’ capital structure and sources of liquidity have changed significantly from its historical capital structure and sources. MFS no longer participates in capital management with MTW, and MFS’ ability to fund its cash needs now depends on its ongoing ability to generate and raise cash.
On March 3, 2016, in connection with the completion of the Spin-Off, we incurred a total of approximately $1,400.0 million of aggregate debt, which consists of a $975.0 million senior secured term loan B facility, which bears interest at a floating rate and will mature in 2023, and $425.0 million of senior notes due 2024, which bear interest at 9.5% per annum. Additionally, we have a senior secured revolving credit facility that permits borrowings of up to $225.0 million, which bears interest at a floating rate and will mature in 2021. See "—Description of Material Indebtedness" for more information regarding this new debt.

In connection with the Spin-Off, we distributed $1,362.0 million of cash to MTW, including net proceeds from debt that we incurred.

Our primary cash needs are centered on operating activities, working capital and capital investments. Although we believe that our cash from operations, together with our access to capital markets, will provide adequate resources to fund our operating and financing needs, our access to, and the availability of financing on acceptable terms in the future will be affected by many factors including: (i) our credit rating, (ii) the liquidity of the overall capital markets and (iii) the then-current state of the economy. There can be no assurances that we will have future access to the capital markets on acceptable terms.

Sources and Uses of Cash
The table below shows a summary of cash flows for the years ended December 31, 2016, 2015 and 2014:
 
 
Years Ended December 31,
(in millions)
 
2016
 
2015
 
2014
Net cash provided by (used for):
 
 
 
 
 
 
Operating activities
 
$
122.0

 
$
143.0

 
$
200.2

Investing activities
 
(20.4
)
 
59.1

 
(25.3
)
Financing activities
 
(78.9
)
 
(183.1
)
 
(167.0
)
Effect of exchange rate changes on cash
 
(0.9
)
 
(3.5
)
 
(1.0
)
Net change in cash and cash equivalents
 
$
21.8

 
$
15.5

 
$
6.9

Operating Activities
Cash and cash equivalents on-hand at December 31, 2016 amounted to $53.8 million, compared to $32.0 million at December 31, 2015.
Cash flows from operating activities for the year ended December 31, 2016 was $122.0 million, a decrease of $21.0 million compared to the prior year. The decrease in cash flow from operating activities was primarily due to cash paid for interest of $69.6 million during the year ended December 31, 2016 on $1,400.0 million of long-term debt issued as a result of the Spin-Off in the first quarter of 2016. This was partially offset by the timing of cash payments on trade accounts payable of $14.5 million.

Cash flows from operating activities during 2015 was $143.0 million, a decrease of $57.2 million compared to the prior year. The decrease in cash flow from operating activities for the year ended December 31, 2015, compared to 2014 was primarily due to the timing of cash payments on trade accounts payable of $46.8 million and lower cash from earnings of $25.1 million, partially offset by a decrease in inventory of $28.5 million on better working capital management and non-recurring inventory build-up at year-end 2014 due to the consolidation and transition of our KitchenCare® business in that period.
Investing Activities
Cash flows used for investing activities of $20.4 million in 2016 consisted primarily of capital expenditures of $16.0 million, with the majority of capital expenditures related to fixed asset equipment purchases.
Cash flows provided by investing activities of $59.1 million in 2015 related mainly to $78.2 million of proceeds from a sale of KPS partially offset by capital expenditures of $13.2 million on fixed asset equipment purchases.
Cash flows used for investing activities of $25.3 million in 2014 related mainly to capital expenditures on fixed asset equipment purchases.

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Financing Activities
Cash flows used for financing activities for the year ended December 31, 2016 was $78.9 million, primarily due to the dividend payment of $1,362.0 million to MTW, the repayment of long term debt of $186.8 million and cash paid of $41.3 million for costs incurred in connection with the issuance of debt, partially offset by debt issuance proceeds of $1,501.1 million.
Cash flows used for financing activities for the years ended December 31, 2015 and 2014 were $183.1 million and $167.0 million, respectively, primarily related to financing transactions with MTW during these periods.
Description of Material Indebtedness
On March 3, 2016, in connection with the completion of the Spin-Off, we incurred a total of $1,400.0 million in new indebtedness, and had an additional $225.0 million available under a senior secured revolving credit facility, limited by the amount of letters of credit outstanding at any given point of time.
The outstanding indebtedness at the completion of the Spin-Off consisted of:
$975.0 million senior secured term loan B facility;
$425.0 million aggregate principal amount of 9.5% senior notes due 2024; and
no outstanding balance under the senior secured revolving credit facility.
The following summarizes the principal terms of the senior secured term loan facility and senior secured revolving credit facility and the terms of our senior notes.
Senior Secured Credit Facilities
On March 3, 2016, the Company entered into a credit agreement (the "2016 Credit Agreement") for a new senior secured revolving credit facility in an aggregate principal amount of $225.0 million (the "Revolving Facility") and a senior secured Term Loan B facility in an aggregate principal amount of $975.0 million (the "Term Loan B Facility" and, together with the Revolving Facility, the "Senior Secured Credit Facilities") with JPMorgan Chase Bank, N.A, as administrative agent and collateral agent, J.P. Morgan Securities LLC, Goldman Sachs Bank USA, HSBC Securities (USA) Inc., and Citigroup Global Markets Inc., on behalf of certain of its affiliates, as joint lead arrangers and joint bookrunners, and certain lenders, as lenders. The Revolving Facility includes (i) a $20.0 million sublimit for the issuance of letters of credit on customary terms, and (ii) a $40.0 million sublimit for swingline loans on customary terms. The Company entered into security and other agreements relating to the 2016 Credit Agreement.
Interest Rate
Borrowings under the Senior Secured Credit Facilities bear interest at a rate per annum equal to, at the option of MFS, (i) LIBOR plus the applicable margin of 4.75% for term loans subject to a 1.00% LIBOR floor and 1.50% - 2.75% for revolving loans, based on consolidated total leverage, or (ii) an alternate base rate plus the applicable margin, which is 1.00% lower than for LIBOR loans.
Maturity and Amortization
The loans and commitments under the Revolving Facility mature or terminate on March 3, 2021. The loans and commitments under the Term Loan B Facility will mature or terminate on March 3, 2023 and require quarterly principal payments at a rate of 0.25% of the original principal balance, which began with the fiscal quarter ending September 30, 2016.
Mandatory Prepayments
Mandatory prepayments on the Term Loan B Facility are required, subject to customary exceptions, (i) from the receipt of net cash proceeds by the Company or any of its restricted subsidiaries from certain asset dispositions and casualty events, in each case, to the extent such proceeds are not reinvested or committed to be reinvested in assets useful in the business of the Company or any of its subsidiaries within twelve months of the date of such disposition or casualty event, (ii) following the receipt of net cash proceeds from the issuance or incurrence of additional debt of the Company or any of its subsidiaries and (iii) in an amount equal to 50% of excess cash flow of the Company and its subsidiaries with step-downs to 25% if the senior secured leverage ratio is less than or equal to 4.50 to 1 but greater than 4.00 to 1, and to 0% if the senior secured leverage ratio is less than or equal to 4.00 to 1.
Guarantees and Security
The Company's obligations under the Senior Secured Credit Facilities are jointly and severally guaranteed by certain of its existing and future direct and indirectly wholly-owned U.S. subsidiaries (but excluding (i) unrestricted subsidiaries, (ii) immaterial subsidiaries and (iii) special purpose securitization vehicles).
There is a first priority perfected lien on substantially all of the assets and property of the Company and guarantors and proceeds therefrom excluding certain excluded assets. The liens securing the obligations of the Company under the Senior Secured Credit Facilities will be pari passu.

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Certain Covenants and Events of Default
The 2016 Credit Agreement contains customary financial covenants including (a) a maximum consolidated total leverage ratio of 6.25 to 1, with step-downs of 0.25 each fiscal quarter beginning with the fiscal quarter ending September 30, 2016 until the ratio reaches 4.00 to 1 in the fiscal quarter ending September 30, 2018 , and (b) a minimum consolidated interest coverage ratio of 2.00 to 1, with increases of 0.25 every other fiscal quarter beginning with the fiscal quarter ending September 30, 2016 until the ratio reaches 3.00 to 1 in the fiscal quarter ending December 30, 2017. Only lenders holding at least a majority of the Senior Secured Credit Facilities have the ability to amend the financial covenants, waive a breach of the financial covenants or accelerate the Senior Secured Credit Facilities upon a breach of the financial covenants, and a breach of the financial covenants will not constitute an event of default with respect to the Senior Secured Credit Facilities or trigger a cross-default under the Senior Secured Credit Facilities until the date on which the Senior Secured Credit Facilities has been accelerated and terminated.
The current levels of the financial ratio covenants under the Senior Secured Credit Facilities and our actual ratios for each quarter ended during 2016 are set forth below:
Fiscal Quarter Ending
 
Consolidated Total Leverage Ratio Level (less than)
 
Actual Consolidated Total Leverage Ratio
 
Consolidated Interest Coverage Ratio Level (greater than)
 
Actual Consolidated Interest Coverage Ratio
March 31, 2016
 
6.25:1.00
 
5.49:1.00
 
2.00:1.00
 
5.91:1.00
June 30, 2016
 
6.25:1.00
 
5.52:1.00
 
2.00:1.00
 
3.25:1.00
September 30, 2016
 
6.00:1.00
 
5.29:1.00
 
2.25:1.00
 
3.17:1.00
December 31, 2016
 
5.75:1.00
 
5.18:1.00
 
2.25:1.00
 
3.13:1.00
In addition, the 2016 Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability and the ability of our other restricted subsidiaries to:
incur additional indebtedness;
pay dividends and other distributions;
make investments, loans and advances;
engage in transactions with our affiliates;
sell assets or otherwise dispose of property or assets;
alter the business we conduct;
merge and engage in other fundamental changes; and
incur liens.
The 2016 Credit Agreement also contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default.
Senior Notes
On February 18, 2016, the Company issued 9.50% Senior Notes due 2024 in an aggregate principal amount of $425.0 million (the "Senior Notes") under an indenture with Wells Fargo Bank, National Association, as trustee (the "Trustee"). The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of the Company's domestic restricted subsidiaries that is a borrower or guarantor under the Senior Secured Credit Facilities. The Senior Notes and the subsidiary guarantees are unsecured, senior obligations.
The Senior Notes were initially sold to qualified institutional buyers pursuant to Rule 144A (and outside the United States in reliance on Regulation S) under the Securities Act. In September 2016, the Company completed an exchange offer pursuant to which all of the initial Senior Notes were exchanged for new Senior Notes, the issuance of which was registered under the Securities Act.
The Senior Notes are redeemable, at the Company's option, in whole or in part from time to time, at any time prior to February 15, 2019, at a price equal to 100% of the principal amount thereof plus a "make-whole" premium and accrued but unpaid interest to the date of redemption. In addition, the Company may redeem the Senior Notes at its option, in whole or in part, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the 12-month period commencing on February 15 of the years set forth below:

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Year
Percentage
2019
107.1
%
2020
104.8
%
2021
102.4
%
2022 and thereafter
100.0
%
The Company must generally offer to repurchase all of the outstanding Senior Notes upon the occurrence of certain specific change of control events at a purchase price equal to 101% of the principal amount of Senior Notes purchased plus accrued and unpaid interest to the date of purchase. The indenture provides for customary events of default. Generally, if an event of default occurs (subject to certain exceptions), the Trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding Senior Notes may declare all the Senior Notes to be due and payable immediately.
Off-Balance Sheet Arrangements
The Company's disclosures concerning transactions, arrangements and other relationships with uncombined entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources are as follows:
The Company disclosed its accounts receivable securitization arrangement in Note 11, "Accounts Receivable Securitization," to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
The Company leases various assets under operating leases. The future estimated payments under these arrangements are disclosed in Note 21, "Leases," to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
On March 3, 2016, the Company entered into a new $110.0 million accounts receivable securitization program (the "2016 Securitization Facility") with Wells Fargo Bank, National Association, as purchaser and agent, whereby the Company 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 to the Purchaser. The Purchaser will receive ownership of the pools 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.

Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2016:
(in millions)
 
Total
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
Long-term debt
 
$
1,313.5

 
$

 
$

 
$

 
$

 
$
63.5

 
$
1,250.0

Interest obligations
 
600.2

 
88.6

 
88.5

 
88.5

 
88.6

 
88.5

 
157.5

Capital leases
 
3.3

 
1.6

 
0.5

 
0.4

 
0.4

 
0.2

 
0.2

Operating leases
 
37.4

 
11.2

 
9.2

 
7.6

 
5.6

 
3.6

 
0.2

Purchase orders
 
76.5

 
76.4

 
0.1

 

 

 

 

Total contractual obligations
 
$
2,030.9

 
$
177.8

 
$
98.3

 
$
96.5

 
$
94.6

 
$
155.8

 
$
1,407.9

Unrecognized tax benefits totaling $12.5 million as of December 31, 2016, excluding related interests and penalties, are not included in the table because the timing of their resolution cannot be estimated. See Note 13, "Income Taxes," to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for disclosures surrounding uncertain income tax positions under Accounting Standards Codification Topic 740.
We maintain defined benefit pension plans for some of our operations in the United States, Europe and Asia. Additionally, certain of our employees participated in a pension plan sponsored by MTW, which is accounted for as a multiemployer plan. As of March 4, 2016, we held our own Defined Benefit Plan and no longer participated in the MTW Defined Benefit Plan. We have established a Retirement Plan Committee to manage the operations and administration of all benefit plans and related trusts. The composition of the MFS plan is substantially the same as the former MTW plan.
In 2016, cash contributions by us to all pension plans, including the multiemployer plan, were $6.1 million, and we estimate that our pension plan contributions will be approximately $10.0 million in 2017.
Please refer to Note 17, "Contingencies and Significant Estimates," to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, where we have disclosed our environmental, health, safety, contingencies and other matters.

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Non-GAAP Financial Measures
The Securities and Exchange Commission ("SEC") has adopted rules to regulate the use in filings with the SEC and in public disclosures of financial measures that are not in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), and the ratios related thereto. These measures are derived on the basis of methodologies other than in accordance with U.S. GAAP. Generally, a non-GAAP financial measure is a numerical measure of financial performance that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with U.S. GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with U.S. GAAP. The Company's non-GAAP measures may not be comparable to similarly titled measures used by other companies.

Our non-GAAP measures include Free Cash Flow, Adjusted Operating EBITA, Adjusted Net Earnings, Adjusted Net Earnings Per Share, Organic Net Sales and Organic Net Sales and the related ratios. Free Cash Flow represents operating cash flows less property, plant and equipment additions. We define Adjusted Operating EBITA as Operating EBITA (net earnings before interest, income taxes, other expense (income) — net and amortization), adjusted for the impact of certain items that we do not consider representative of our ongoing operating performance, including asset impairment, restructuring and separation charges. We define Adjusted Net Earnings as net earnings before the impact of certain items including asset impairment, restructuring and separation charges, net of taxes. The tax effect of these adjustments is determined using the effective tax rates for the countries comprising such adjustments, which is primarily the U.S. Adjusted Net Earnings Per Share represents Adjusted Net Earnings while giving effect to all potentially dilutive common shares that were outstanding during the respective period. For the years ended December 31, 2015 and 2014, Adjusted Net Earnings Per Share was retrospectively restated for the number of MFS shares outstanding immediately following the Spin-Off. Organic Net Sales and Organic Net Sales in Constant Currency reflect net sales before the impact of acquisitions and divestitures and before the impact of acquisitions, divestitures and foreign currency translation, respectively.

The Company believes that these measures are helpful to investors in evaluating the ongoing performance and liquidity of our operating businesses, the and provides greater transparency into our results of operations. In addition, these non-GAAP measures provide a comparison to commonly used financial metrics within the professional investing community which do not include special items.

Non-GAAP measures have limitations as an analytical tool, and you should not consider these non-GAAP measures either in isolation or as a substitute for analyzing our results as reported under U.S. GAAP.


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A reconciliation of GAAP financial measures to non-GAAP financial measures for the years ended December 31, 2016, 2015 and 2014 is as follows:
(in millions)
 
2016
 
2015
 
2014
Free Cash Flow:
 
 
 
 
 
 
Net cash provided by operating activities
 
$
122.0

 
$
143.0

 
$
200.2

Net capital expenditures
 
(16.0
)
 
(13.2
)
 
(25.3
)
Free cash flow
 
$
106.0

 
$
129.8

 
$
174.9

 
 
 
 
 
 
 
Adjusted Operating EBITA:
 
 
 
 
 
 
Net earnings
 
$
79.5

 
$
157.1

 
$
159.8

Income taxes
 
25.3

 
39.3

 
25.9

Other expense (income) — net
 
9.1

 
(22.1
)
 
2.1

Interest expense (income) on notes with MTW — net
 
0.1

 
(15.8
)
 
(16.6
)
Interest expense
 
85.2

 
1.4

 
1.3

Earnings from operations
 
199.2

 
159.9

 
172.5

Asset impairment expense
 
3.3

 
9.0

 
1.1

Restructuring expense
 
2.5

 
4.6

 
2.6

Separation expense
 
6.5

 
5.2

 
0.4

Amortization expense
 
31.2

 
31.4

 
31.8

Total Adjusted Operating EBITA
 
$
242.7

 
$
210.1

 
$
208.4

 
 
 
 
 
 
 
Adjusted Operating EBITA Margin (1):
 
16.7
%
 
13.4
%
 
13.2
%
(1) Adjusted Operating EBITA margin in the section above is calculated by dividing the dollar amount of Adjusted Operating EBITA by net sales.

 
 
 
 
 
 
 
Adjusted Net Earnings:
 
 
 
 
 
 
Net earnings
 
$
79.5

 
$
157.1

 
$
159.8

Asset impairment expense
 
3.3

 
9.0

 
1.1

Restructuring expense
 
2.5

 
4.6

 
2.6

Separation expense
 
6.5

 
5.2

 
0.4

Tax effect of adjustments
 
(4.7
)
 
(7.0
)
 
(1.5
)
Total Adjusted Net Earnings
 
$
87.1

 
$
168.9

 
$
162.4

 
 

 

 

Adjusted Diluted Net Earnings Per Share:
 
 
 
 
 
 
Diluted net earnings per share
 
$
0.57

 
$
1.15

 
$
1.17

Asset impairment expense per share
 
0.02

 
0.07

 
0.01

Restructuring expense per share
 
0.02

 
0.03

 
0.02

Separation expense per share
 
0.05

 
0.04

 

Tax effect of adjustments per share
 
(0.04
)
 
(0.06
)
 
(0.01
)
Total Adjusted Diluted Net Earnings Per Share
 
$
0.62

 
$
1.23

 
$
1.19

 
 

 

 

Organic Net Sales:
 

 

 

Net sales
 
$
1,456.6

 
$
1,570.1

 
$
1,581.3

Less: Kysor Panel Systems sales
 

 
(122.1
)
 

Plus: Welbilt Thailand sales
 

 
6.9

 

Organic Net Sales
 
1,456.6

 
1,454.9

 
1,581.3


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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Although we have listed a number of accounting policies below which we believe to be most critical, we also believe that all of our accounting policies are important to the reader. Therefore, please refer also to the notes to the audited consolidated financial statements for more detailed description of these and other accounting policies of MFS.
Basis of Presentation - The consolidated financial statements for all periods prior to the Spin-Off include the accounts of MFS and its subsidiaries as well as entities which were not subsidiaries prior to the Spin-Off but are now part of MFS. The initial accounts of MFS were based on the segmental accounts of the Foodservice segment within MTW’s consolidated accounts. The consolidated accounts also include the costs associated with shared functions, primarily corporate functions such as tax, treasury, internal audit, corporate accounting, reporting and controls, information technology, investor relations, human resources and legal. MTW historically only allocated a portion of the costs associated with these shared functions to the segments, but not on a fully allocated basis. See "Corporate Expense Allocations" for details of the allocations.
Prior to the Spin-off, the consolidated financial statements were prepared on a standalone basis and reflect the historical results of operations, financial position and cash flows of MFS in accordance with U.S. GAAP. The consolidated financial statements are presented as if MFS had been carved out of MTW for all periods presented. All significant transactions within MFS have been eliminated.
Corporate Expense Allocations - The consolidated financial statements for the periods prior to the Spin-Off include expense allocations for (1) corporate support functions that were provided on a centralized basis at MTW enterprise level including, but not limited to, finance, audit, legal, information technology, human resources, tax, treasury, investor relations, and external reporting; (2) share-based compensation; (3) employee compensation, pension and benefit costs; and (4) securitization financing costs. These expenses were allocated to MFS based on direct usage or direct identification where applicable, and where not applicable, such costs were allocated primarily based on net sales, headcount or based on existing allocation methods, specifically for those costs which have been previously partially allocated to MFS. Debt obligations of MTW, specifically those that relate to the enterprise senior notes, term loans and revolving credit facilities, have not been allocated to MFS as it was not an obligor nor a party to the obligations between MTW and the debt holders. Corresponding financing costs related to these debt obligations likewise were not allocated to MFS as it did not participate in these enterprise financing activities. See Note 24, "Net Parent Company Investment and Related Party Transactions," of the audited consolidated financial statements for additional discussions on expense allocations.
Management believes that the assumptions underlying the consolidated financial statements, including the assumptions regarding allocated expenses reasonably reflect the use of services provided to or the benefit received by MFS during the periods presented. Nevertheless, the consolidated financial statements may not include all of the actual expenses that would have been incurred by MFS and may not reflect our results of operations, financial position and cash flows had we been a standalone Company during the periods presented. Actual expenses that would have been incurred if MFS had been a standalone Company would depend on several factors, including but not limited to the standalone organizational structure and certain operational and strategic decisions in various areas like corporate infrastructure.
Revenue Recognition - Revenue is generally recognized and earned when all the following criteria are satisfied with regard to a specific transaction: persuasive evidence of an arrangement exists, the price is fixed and determinable, collectability of cash is reasonably assured, and delivery has occurred or services have been rendered.
Allowance for Doubtful Accounts - Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Our estimate for the allowance for doubtful accounts related to trade receivables includes evaluation of specific accounts where we have information that the customer may have an inability to meet its financial obligations together with a general provision for unknown but existing doubtful accounts based on historical experience, which are subject to change if experience improves or deteriorates.
Inventories and Related Reserve for Obsolete and Excess Inventory - Inventories are valued at the lower of cost or market using both the first-in, first-out (FIFO) method and the last-in, first-out (LIFO) method and are reduced by a reserve for excess and obsolete inventories. The estimated reserve is based upon specific identification of excess or obsolete inventories based on historical usage, estimated future usage, sales requiring the inventory, and on historical write-off experience and are subject to change if experience improves or deteriorates.
Goodwill, Other Intangible Assets and Other Long-Lived Assets - We account for goodwill and other intangible assets under the guidance of Accounting Standards Codification ("ASC") Subtopic 350-10, "Intangibles - Goodwill and Other." Under ASC Subtopic 350-10, goodwill is not amortized; however, we perform an annual impairment review at June 30 of every year or more frequently if events or changes in circumstances indicate that the asset might be impaired. We perform impairment reviews for our reporting units, which we have determined to be: Americas, EMEA, and APAC. To perform our impairment review, we use a fair-value method, primarily the income approach, 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. Goodwill and other intangible assets are then subject to risk of write-down to the extent that the carrying amount exceeds the estimated fair value.

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We will continue to monitor market conditions and determine if any additional interim reviews of goodwill, other intangibles or long-lived assets are warranted. Deterioration in the market or actual results as compared with our projections may ultimately result in a future impairment. In the event we determine that assets are impaired in the future, we would need to recognize a non-cash impairment charge, which could have a material adverse effect on our consolidated balance sheet and results of operations.
We also review long-lived assets for impairment whenever events or changes in circumstances indicate that the assets carrying amount may not be recoverable. We conduct our long-lived asset impairment analyses in accordance with ASC Subtopic 360-10-5, "Property, Plant, and Equipment." ASC Subtopic 360-10-5 requires us 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.
Other intangible assets with definite lives continue to be amortized over their estimated useful lives. Indefinite and definite lived intangible assets are also subject to impairment testing. Indefinite lived assets are tested annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired. Definite lived intangible assets are tested whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. A considerable amount of management judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of the assets. While we believe our judgments and assumptions were reasonable, different assumptions could change the estimated fair values and, therefore, impairment charges could be required.
Employee Benefit Plans - We provide a range of benefits to our employees and retired employees, including pensions and postretirement health care coverage. Plan assets and obligations are recorded annually based on the Company’s measurement date utilizing various actuarial assumptions such as discount rates, expected return on plan assets, compensation increases, retirement and mortality rates, and health care cost trend rates as of that date. The approach we use to determine the annual assumptions are as follows:
Discount Rate - Our discount rate assumptions are based on the interest rate of noncallable high-quality corporate bonds, with appropriate consideration of our pension plans’ participants’ demographics and benefit payment terms.
Expected Return on Plan Assets - Our expected return on plan assets assumptions are based on our expectation of the long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds.
Compensation increase - Our compensation increase assumptions reflect our long-term actual experience, the near-term outlook and assumed inflation
Retirement and Mortality Rates - Our retirement and mortality rate assumptions are based primarily on actual plan experience and mortality tables.
Health Care Cost Trend Rates - Our health care cost trend rate assumptions are developed based on historical cost data, near-term outlook and an assessment of likely long-term trends.
Measurements of net periodic benefit cost are based on the assumptions used for the previous year-end measurements of assets and obligations. We review our actuarial assumptions on an annual basis and make modifications to the assumptions when appropriate. As required by U.S. GAAP, the effects of the modifications are recorded currently or amortized over future periods. We have developed the assumptions with the assistance of our independent actuaries and other relevant sources, and we believe that the assumptions used are reasonable; however, changes in these assumptions could impact our financial position, results of operations or cash flows. Refer to Note 20, "Employee Benefit Plans," to the audited consolidated financial statements for a summary of the impact of a 0.5% change in the discount rate and rate of return on plan assets and a 1% change on health care trend rates would have on our financial statements.
Product Liability - We are subject in the normal course of business to product liability lawsuits. To the extent permitted under applicable laws, our exposure to losses from these lawsuits is mitigated by insurance with self-insurance retention limits. We record product liability reserves for our self-insured portion of any pending or threatened product liability actions. Our reserve is based upon two estimates. First, we track the population of all outstanding pending and threatened product liability cases to determine an appropriate case reserve for each based upon our best judgment and the advice of legal counsel. These estimates are continually evaluated and adjusted based upon changes to the facts and circumstances surrounding the case. Second, we determine the amount of additional reserve required to cover incurred but not reported product liability issues and to account for possible adverse development of the established case reserves (collectively referred to as "IBNR"). This analysis is performed twice annually. We have established a position within the actuarially determined range, which we believe is the best estimate of the IBNR liability.
Income Taxes - We account for income taxes under the guidance of ASC Subtopic 740-10, "Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We record a valuation allowance that represents a reserve on deferred tax assets for which utilization is not more likely than not. Management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against our net deferred tax assets. We do not currently provide for additional U.S. and foreign income taxes which would become payable upon repatriation of undistributed earnings of foreign subsidiaries.

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We measure and record income tax contingency accruals under the guidance of ASC Subtopic 740-10. We recognize liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the tax accrual.
Stock-Based Compensation - The computation of the expense associated with stock-based compensation requires the use of certain valuation models and based on projected achievement of underlying performance criteria for performance shares. We currently use a Black-Scholes option pricing model to calculate the fair value of our stock options and Monte Carlo analysis to calculate the total stockholder return portion of performance shares that were granted in 2014. The Black-Scholes and Monte Carlo models require assumptions regarding the volatility of the Company’s stock, the expected life of the stock award and the Company’s dividend ratio. We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility, future dividend payments and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards.
Warranties - In the normal course of business, we provide our customers warranties covering workmanship, and in some cases materials, on products manufactured by us. Such 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 our warranty, we may be obligated, at our expense, to correct any defect by repairing or replacing such defective product. We provide for an estimate of costs that may be incurred under our warranty at the time product revenue is recognized based on historical warranty experience for the related product or estimates of projected losses due to specific warranty issues on new products. 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 shipped units and historical and anticipated rates or 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.
Restructuring Charges - Restructuring charges for exit and disposal activities are recognized when the liability is incurred. The Company accounts for restructuring charges under the guidance of ASC Subtopic 420-10, "Exit or Disposal Cost Obligations." The liability for the restructuring charge associated with an exit or disposal activity is measured initially at its fair value.
Recent Accounting Changes and Pronouncements
See Note 2, "Summary of Significant Accounting Policies," to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently issued accounting pronouncements applicable to us and the impact of those standards on our consolidated financial statements and related disclosures.


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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations in the U.S. and globally and are exposed to market risks in the ordinary course of our business. These risks include, but are not limited to, changes in interest rates, commodities and foreign currency exchange rates. To reduce these risks, we selectively use derivative financial instruments and other proactive management techniques. We have policies and procedures that place financial instruments under the direction of corporate finance and restrict all derivative transactions to those intended for hedging purposes only. The use of financial instruments for trading purposes or speculation is strictly prohibited.
Interest Rate Risk
We are exposed to interest rate risk on borrowings under the Senior Secured Credit Facilities which bear interest at variable rates. As of December 31, 2016, we had $888.5 million of debt outstanding under the Senior Secured Credit Facilities. As of December 31, 2016, the undrawn borrowing availability under the Revolving Facility was $158.2 million, excluding $3.3 million of standby letters of credit. Borrowings under the Senior Secured Credit Facilities will bear interest at a rate per annum equal to, at the option of MFS, (i) LIBOR plus the applicable margin of 4.75% for term loans subject to a 1.00% LIBOR floor and 1.50% - 2.75% for revolving loans, based on consolidated total leverage, or (ii) an alternate base rate plus the applicable margin, which will be 1.00% lower than for LIBOR loans. Using the debt balances as of December 31, 2016, if LIBOR rates were to rise above the floor, then each hypothetical 0.25% increase in LIBOR would result in additional annual interest expense of $2.3 million. While we currently do not engage in interest rate hedging activity, we monitor interest rates and if appropriate, may engage in hedging activity in the future.
Commodity Price Risk
We are exposed to fluctuating market prices for commodities, including steel, nickel, copper, aluminum, and natural gas. We have established programs to manage the negotiations of commodity prices.  In addition to the regular negotiations of material prices with certain vendors, our customer contracts generally provide that we may recover increases in the cost of our commodity inputs by increasing our prices with at least 60-days advance notice. We also routinely enter into certain commodity hedges that fix the price of certain of our key commodities utilized in the production of our product offerings. Commodities that are hedged include copper, aluminum, certain steel inputs and natural gas.  As of December 31, 2016, $0.5 million of unrealized gains, net of tax, due to commodity hedging positions will be reclassified from other comprehensive income (loss) into earnings over the next 12 months. As of December 31, 2016, we had open commodity derivatives that qualify for hedge accounting with aggregate notional values of 1,663 metric tons of aluminum, 746 metric tons of copper, 56,416 million BTU of natural gas, and 8,663 short tons of steel, and no open commodity derivatives that did not qualify for hedge accounting.
Historically, we have not experienced material reductions in our margins as a result of increases in commodity prices. However, to the extent that our hedging is not successful in fixing commodity prices that are favorable in comparison to market prices at the time of purchase and we cannot or do not pass along increased commodity prices to our customers, we would experience a negative impact on our profit margins.
Currency Price Risk
We have manufacturing, sales and distribution facilities around the world and thus make investments and enter into transactions denominated in various foreign currencies.  Non-U.S. sales were approximately 35.1% of our total sales for 2016, with the largest percentage 14% being sales into various European countries.
Regarding transactional foreign exchange risk, we enter into limited forward exchange contracts to 1) reduce the impact of changes in foreign currency rates between a budgeted rate and the rate realized at the time we recognize a particular purchase or sale transaction and 2) reduce the earnings and cash flow impact on nonfunctional currency denominated receivables and payables.  Gains and losses resulting from hedging instruments either impact our consolidated statements of operations in the period of the underlying purchase or sale transaction, or offset the foreign exchange gains and losses on the underlying receivables and payables being hedged.  The maturities of these forward exchange contracts coincide with either the underlying transaction date or the settlement date of the related cash inflow or outflow.  The hedges of anticipated transactions are designated as cash flow hedges under the guidance of Accounting Standards Codification ("ASC") Subtopic 815-10, "Derivatives and Hedging."  As of December 31, 2016, we had outstanding forward exchange contracts hedging anticipated transactions and future settlements of outstanding accounts receivable and accounts payable with a market value of a $0.2 million of unrealized losses.  A 10% appreciation or depreciation of the underlying functional currency at December 31, 2016 for non-designated hedges of foreign exchange contracts would not have a significant impact on our consolidated statements of operations as any gains or losses under the foreign exchange contracts hedging accounts receivable or payable balances would be offset by equal gains or losses on the underlying receivables or payables.  A 10% appreciation of the underlying functional currency at December 31, 2016 for foreign exchange contracts designated as cash flow hedges could have an impact of approximately $2.9 million on the date of settlement. A 10% depreciation of the underlying functional currency at December 31, 2016 for foreign exchange contracts designated as cash flow hedges could have an impact of approximately $3.5 million on the date of settlement.
Amounts invested in non-U.S. based subsidiaries are translated into U.S. dollars at the exchange rate in effect at year-end.  Results of operations are translated into U.S. dollars at an average exchange rate for the period.  The resulting translation adjustments are recorded in stockholders’ equity as cumulative translation adjustments.  The translation adjustment recorded in accumulated other comprehensive loss at December 31, 2016 was a loss of $9.8 million.



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedule:

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.



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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
of Manitowoc Foodservice, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, equity, and cash flows present fairly, in all material respects, the financial position of Manitowoc Foodservice, Inc. and its subsidiaries at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our audits (which was an integrated audit in 2016). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
 
Milwaukee, Wisconsin

 
February 24, 2017
 


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MANITOWOC FOODSERVICE, INC.
Consolidated Statements of Operations
For the years ended December 31, 2016, 2015 and 2014

Millions of dollars, except per share data
 
2016
 
2015
 
2014
Net sales
 
$
1,456.6

 
$
1,570.1

 
$
1,581.3

Cost of sales
 
923.8

 
1,068.4

 
1,073.3

Gross profit
 
532.8

 
501.7

 
508.0

Selling, general and administrative expenses
 
290.1

 
291.6

 
299.6

Amortization expense
 
31.2

 
31.4

 
31.8

Separation expense
 
6.5

 
5.2

 
0.4

Restructuring expense
 
2.5

 
4.6

 
2.6

Asset impairment expense
 
3.3

 
9.0

 
1.1

Earnings from operations
 
199.2

 
159.9

 
172.5

Interest expense
 
85.2

 
1.4

 
1.3

Interest expense (income) on notes with MTW — net
 
0.1

 
(15.8
)
 
(16.6
)
Other expense (income) — net
 
9.1

 
(22.1
)
 
2.1

Earnings before income taxes
 
104.8

 
196.4

 
185.7

Income taxes
 
25.3

 
39.3

 
25.9

Net earnings
 
$
79.5

 
$
157.1

 
$