The Middleby Corporation — Form 10-Q Summary
Reporting period: Quarter ended April 4, 2015, compared with the three months ended March 29, 2014. Although the request metadata says 2014 Q1, the filing is for 2015 Q1.
Business context and results
Middleby manufactures commercial foodservice, food processing and residential kitchen equipment. Results include several recent acquisitions; the company reports three operating segments.
| Metric | Q1 2015 | Prior-year quarter |
|---|---|---|
| Net sales | $406.6 million | $372.5 million |
| Gross profit / margin | $157.6 million / 38.8% | $143.0 million / 38.4% |
| Operating income / margin | $66.6 million / 16.4% | $55.9 million / 15.0% |
| Net earnings | $38.2 million | $33.4 million |
| Diluted earnings per share | $0.67 | $0.59 |
| Operating cash flow | $23.8 million | $(13.6) million |
| Capital expenditures | $6.1 million | $3.2 million |
Sales increased 9.2%. Acquisitions contributed $29.1 million of the $34.1 million increase; sales excluding acquisitions rose 1.3%, or 4.4% on a constant-currency basis. The stronger U.S. dollar reduced sales by approximately $12.7 million. Gross margin improved, while the effective tax rate was 34.4% (34.5% prior year).
Segments and material changes
- Commercial Foodservice: Sales increased 12.0% to $262.2 million. Excluding acquisitions, sales grew 7.9%; constant-currency organic growth was 10.0%.
- Food Processing: Sales declined 7.7% to $69.8 million. Excluding PES, sales fell 13.2%; constant-currency organic sales declined 5.0%. Management cited foreign exchange and the timing of large orders.
- Residential Kitchen: Sales rose 18.8% to $74.6 million, primarily due to U-Line. Excluding acquisitions, sales declined $3.6 million amid discontinued products and production delays for Viking built-in refrigeration.
Other expense rose to $4.6 million from $0.9 million, mainly from foreign-exchange losses. The quarter included $4.6 million of Viking distribution integration and facility-consolidation charges, versus $2.6 million of prior-year reorganization charges. Comprehensive income was $22.1 million, affected by a $15.8 million currency-translation loss.
Cash, debt and liquidity
- Cash was $54.3 million at April 4, 2015, up from $43.9 million at year-end. Operating cash flow was $23.8 million; working capital included a $15.0 million inventory increase and a $21.0 million decrease in accrued expenses and other liabilities.
- Total debt was $639.0 million, up from $598.2 million at January 3; cash-adjusted debt was approximately $584.8 million. The revolving facility had $629.0 million drawn and $361.4 million of remaining availability, including the impact of letters of credit.
- Current assets were $662.0 million and current liabilities $333.7 million. The company was in compliance with debt covenants and stated that available resources should fund operations, debt service, capital spending, acquisitions and integration for the foreseeable future.
- Investing cash outflow was $52.6 million, including $46.8 million for Desmon, Goldstein Eswood and Marsal. Financing cash inflow was $39.5 million, primarily from revolving-credit borrowings.
Outlook, risks and contingencies
No specific numerical earnings or revenue guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results. It cited risks including foreign exchange and political exposure, competition and pricing, raw-material costs, customer concentration, product acceptance, quarterly variability and potential goodwill impairment.
Acquisitions and earnouts remain significant: contingent consideration was $9.3 million at quarter-end, with additional deferred and contingent acquisition payments included in contractual obligations. Purchase-price allocations for recent acquisitions were provisional. On April 7, 2015, Middleby acquired the Thurne high-speed slicing business, with approximately $15 million in annual revenue.
The company reported no material expected effect from pending litigation. Its senior credit agreement includes leverage and fixed-charge coverage tests, restrictions on certain transactions, and a default provision tied to a material adverse change. A $12.5 million balance of unrecognized tax benefits was reported at year-end; the filing says approximately $0.5 million may be recognized in the next twelve months.
Investor verification points
- Confirm the acquisition-related contribution to growth and the durability of organic performance, particularly Food Processing and Residential Kitchen.
- Track Viking production recovery, integration costs and whether the $4.6 million of restructuring charges recur.
- Assess foreign-exchange effects, including translation losses and the effect on reported sales and other expense.
- Monitor debt growth, revolving-facility availability, covenant headroom and refinancing of the facility maturing in August 2017.
- Review working-capital conversion, especially inventory growth and payments of rebates and incentive obligations.
- Check final purchase-price allocations, acquisition earnouts and the integration of Thurne.