The Middleby Corporation — Form 10-Q Summary
Reporting period: The filing covers the quarter ended September 29, 2012, and the nine months ended September 29, 2012, compared with the corresponding 2011 periods. This differs from the request metadata’s “2011 Q3.” Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $257.7 million | $218.7 million | $746.6 million | $612.1 million |
| Gross profit / margin | $100.4 million / 39.0% | $87.3 million / 39.9% | $289.7 million / 38.8% | $244.5 million / 39.9% |
| Operating income / margin | $47.4 million / 18.4% | $37.2 million / 17.0% | $129.4 million / 17.3% | $103.8 million / 17.0% |
| Net earnings | $29.8 million | $23.5 million | $82.9 million | $60.9 million |
| Diluted EPS | $1.60 | $1.26 | $4.47 | $3.29 |
| Operating cash flow | Not presented separately | Not presented separately | $94.0 million | $65.7 million |
Q3 sales increased 17.8%; nine-month sales increased 22.0%. The nine-month effective tax rate was 30.2%, versus 36.7% a year earlier; Q3 rates were 28.6% and 33.5%, respectively. Lower tax exposure, income earned in lower-tax foreign jurisdictions, and U.S. manufacturing deductions benefited the current-period provision.
Business and material changes
- Middleby operates in Commercial Foodservice Equipment and Food Processing Equipment. Q3 sales were $198.6 million and $59.1 million, respectively; nine-month sales were $573.4 million and $173.1 million.
- Management attributed $17.6 million of Q3 sales growth and $92.9 million of nine-month growth to acquisitions. Excluding acquisitions, sales grew 9.8% in Q3 and 6.8% for nine months. Organic growth was strongest in Food Processing Equipment: 40.2% in Q3 and 14.2% for nine months.
- Gross margin declined year over year as acquired businesses had lower margins and Food Processing represented a larger share of sales. Operating margin improved, reflecting operating expenses declining as a percentage of revenue.
- Q3 Commercial Foodservice sales rose 5.0%, with domestic growth partly offset by weaker European sales. Food Processing sales rose 99.7%, including acquisition contributions and reported organic growth.
- Acquisitions included Baker and Stewart in 2012. Stewart was acquired in September for approximately $28 million at closing, with an additional $4 million contingent consideration recorded. The company completed its acquisition of Nieco, with approximately $20 million in annual revenue, on October 31, 2012, after quarter-end.
Cash, debt, and liquidity
- Cash was $35.1 million at September 29, 2012, down from $40.2 million at year-end 2011. Operating cash flow was $94.0 million; investing cash outflow was $44.6 million and financing cash outflow was $54.9 million for the nine-month period.
- Investing outflows included $38.6 million related to acquisitions and $6.0 million of property and equipment additions. Operating cash generation benefited from higher earnings; inventory increased $14.3 million and accrued expenses and other liabilities decreased $16.7 million.
- Total debt was $269.3 million, down from $317.3 million at December 31, 2011. The company entered a new $1.0 billion secured, multi-currency revolver in August; borrowings were $264.5 million, letters of credit were $6.6 million, and reported remaining availability was $728.9 million. Average senior-debt interest was 1.82%.
- Current assets were $384.6 million and current liabilities were $233.4 million. The company reported compliance with debt covenants and said available cash, operating cash flow, revolver capacity, and capital-market access should fund operations and obligations for the foreseeable future.
- The credit agreement includes a maximum debt-to-EBITDA ratio of 3.5 and minimum EBITDA-to-fixed-charges ratio of 1.25, restricts certain dividends, capital expenditures, and leases, and is secured by specified subsidiary shares and substantially all other company assets.
Outlook, risks, and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management cited demand from restaurant-chain initiatives, emerging markets, and food processors upgrading equipment, while noting economic weakness in Europe.
- Risks identified include quarterly operating variability, key-customer dependence, competition and pricing, product development and acceptance, raw-material availability and cost, international and foreign-exchange exposure, and potential goodwill impairment.
- Other expense was $2.8 million in Q3 versus $0.4 million of other income in the prior-year quarter; management said it consisted primarily of foreign-exchange gains and losses. Interest and financing amortization were $3.0 million in Q3 and $7.0 million for nine months.
- The company changed its annual goodwill and indefinite-lived-intangible impairment test date to the first day of the fourth quarter; it said the change had no financial-statement impact and did not avoid or delay an impairment charge. No impairment charge is reported here.
- Management stated pending litigation was not expected to materially affect financial condition, results, or cash flows. Warranty expense was $20.9 million for the nine months, and the warranty reserve was $16.6 million at quarter-end.
- Forward contracts and interest-rate swaps expose the company to foreign-exchange, interest-rate, and counterparty risks. Interest-rate swaps had a $3.3 million liability fair value; foreign-exchange forwards had a $0.2 million asset fair value.
Important facts for investors to verify
- Confirm the applicable reporting year: the filing itself is for Q3 2012, not Q3 2011.
- Assess how much of reported growth and earnings reflects acquisitions versus continuing organic performance, particularly in Food Processing.
- Monitor gross-margin pressure from acquired businesses and product mix, and whether operating-margin gains can be sustained.
- Review revolver usage, variable-rate exposure, covenant headroom, acquisition earnouts, and integration-related cash requirements.
- Track working-capital needs, especially inventory, and the provisional purchase-price allocations for recent acquisitions.
- Evaluate foreign-exchange effects, tax benefits and uncertain tax positions, and the eventual results of goodwill and intangible-asset impairment testing.