The Middleby Corporation — Form 10-Q Summary
Period clarification: The filing is for the quarter ended July 3, 2010, with comparative results for the quarter ended July 4, 2009. This conflicts with the request metadata identifying 2009 Q2.
Business context and reporting period
Middleby manufactures commercial foodservice and food processing equipment. It reports two segments: Commercial Foodservice Equipment and Food Processing Equipment. During Q2 2010, the company moved its International Distribution Division into Commercial Foodservice for current and prior periods.
Financial results
| Metric | Three months ended July 3, 2010 | Three months ended July 4, 2009 | Six months ended July 3, 2010 | Six months ended July 4, 2009 |
|---|---|---|---|---|
| Net sales | $173.4 million | $158.6 million | $334.1 million | $340.1 million |
| Gross profit / margin | $69.4 million / 40.0% | $61.3 million / 38.7% | $132.9 million / 39.8% | $130.1 million / 38.3% |
| Operating income / margin | $29.7 million / 17.1% | $26.9 million / 17.0% | $56.2 million / 16.8% | $55.0 million / 16.2% |
| Net earnings | $17.5 million | $13.7 million | $31.3 million | $27.8 million |
| Diluted earnings per share | $0.96 | $0.74 | $1.71 | $1.51 |
| Operating cash flow | Not provided separately for the quarter | $32.1 million | $47.2 million |
For the six months, cash used in investing was $5.0 million, including $2.4 million in capital expenditures and $2.6 million in acquisition-related deferred payments. Cash used in financing was $27.9 million, principally reflecting $25.2 million of debt repayments and $3.0 million of share repurchases. Cash declined $1.0 million to $7.4 million.
At July 3, 2010, total debt was $249.0 million, down from $275.6 million at January 2, 2010. The company reported $239.7 million of remaining revolving-credit availability, after letters of credit and foreign borrowings. Current assets were $233.4 million and current liabilities were $146.0 million. The company stated it was in compliance with debt covenants.
Material changes versus prior periods
- Q2 sales increased 9.3% year over year. Commercial Foodservice sales rose to $153.4 million, including $3.7 million from Doyon; excluding Doyon, sales increased $6.9 million. Food Processing sales rose to $20.0 million.
- Six-month sales declined 1.8%. Commercial Foodservice sales fell to $294.0 million; excluding acquisitions, they decreased $28.3 million, partly because a large customer order in the first half of 2009 did not recur. Food Processing sales increased to $40.1 million.
- Gross margin improved in both comparisons. Management cited cost-reduction initiatives, acquisition integration and plant-consolidation savings, and higher volume; Q2 benefit from volume was partly offset by unfavorable product mix.
- Operating expenses as a share of sales increased to 22.9% for Q2 and 23.0% for the six-month period. Incentive compensation, marketing, commissions, and acquisition costs contributed to expense growth.
- Six-month operating cash flow decreased by $15.1 million year over year, with a $17.6 million increase in accounts receivable and seasonal working-capital needs among the reported factors.
Outlook, risks, contingencies and unusual items
- Management said the 2010 economic outlook remained uncertain and that recovery timing and strength were unpredictable. It believed operating cash flow and available revolver capacity would fund foreseeable requirements.
- Management cited risks including global economic conditions, customer concentration, competition and pricing, raw-material availability and costs, foreign-exchange and political exposure, and product development and market acceptance.
- The Q2 effective tax rate was 36%, versus 42% a year earlier; the filing attributes the lower rate to a non-recurring tax-reserve benefit from closed audit periods. Completion of the IRS audit of the 2007 federal return produced a $1.3 million benefit.
- Unrecognized tax benefits were approximately $20.3 million at January 2, 2010, plus accrued interest and penalties; the filing reports no significant change by July 3, 2010. Management said any potential decrease over the next year was not expected to be material.
- CookTek contingent consideration was recorded at $3.7 million at July 3, 2010; the estimated probable payment range was $0–$10 million and the earnout has no contractual cap. The filing says pending litigation is not expected to have a material adverse effect.
- Debt is predominantly variable-rate; interest-rate swaps had a $2.8 million fair-value loss. The credit agreement includes leverage and fixed-charge covenants, restricts certain dividends, capital expenditures and leases, and contains a lender-defined material-adverse-change provision.
- After quarter-end, Middleby completed its acquisition of Perfect Fry on July 13, 2010 for approximately $4.9 million.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers Q2 2010, not Q2 2009.
- Assess whether improved margins and Q2 sales growth are sustainable given the six-month sales decline, product-mix pressure and higher operating expenses.
- Review the drivers of lower operating cash flow, particularly receivables and seasonal working capital, and the pace of debt reduction.
- Check revolver availability, variable-rate exposure, swap maturities and compliance with credit covenants.
- Monitor tax contingencies, CookTek earnout exposure, acquisition integration and the performance of Perfect Fry.