The Middleby Corporation — Form 10-Q Summary
Reporting-period note: The request identifies 2021 Q2, but the supplied filing is for the quarter ended July 2, 2022, with comparative figures for the quarter ended July 3, 2021. The filing was signed August 11, 2022. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context and reporting period
Middleby reports three operating segments: Commercial Foodservice Equipment, Food Processing Equipment, and Residential Kitchen Equipment. The filing covers the second quarter and first six months of fiscal 2022. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,013.6m | $808.8m | $2,008.3m | $1,566.8m |
| Gross profit | $360.7m | $303.7m | $691.3m | $579.6m |
| Gross margin | 35.6% | 37.6% | 34.4% | 37.0% |
| Operating income | $167.2m | $136.7m | $289.8m | $257.9m |
| Net earnings | $113.2m | $120.6m | $199.0m | $209.8m |
| Diluted EPS | $2.07 | $2.13 | $3.59 | $3.73 |
- Q2 sales rose 25.3%; six-month sales rose 28.2%. Excluding acquisitions and foreign exchange, sales increased 13.3% in Q2 and 12.5% for the six-month period.
- Operating income increased, but net earnings declined as margins contracted and tax and interest expenses rose. Q2 diluted EPS fell 2.8%; six-month diluted EPS fell 3.8%.
- Q2 gross margin declined 2.0 percentage points year over year; the six-month margin declined 2.6 points. Management attributed pressure to acquisitions, rising raw-material and input costs, labor and logistics costs, and, for the six-month period, $15.1m of acquisition-related inventory step-up charges.
- Q2 SG&A was $189.5m, or 18.7% of sales, versus $165.7m, or 20.5%, a year earlier. Six-month SG&A was $395.6m, or 19.7% of sales, versus $320.7m, or 20.5%.
Segments and material changes
- Commercial Foodservice: Q2 sales increased 19.8% to $609.7m; six-month sales rose 16.5% to $1,153.3m. Excluding acquisitions and currency effects, growth was 17.7% in Q2 and 14.4% for six months. Management cited improved demand and higher shipments supported by production-throughput investments.
- Food Processing: Q2 sales decreased 4.7% to $123.9m, including a 1.4% decline excluding currency effects. Six-month sales increased 0.6% to $243.9m, or 3.2% excluding currency effects. Q2 segment gross margin fell to 33.7% from 36.3%, reflecting lower volume and mix.
- Residential Kitchen: Q2 sales rose 64.7% to $280.0m and six-month sales rose 82.7% to $611.1m, substantially reflecting acquisitions. Excluding acquisitions and currency effects, sales increased 11.4% in Q2 and 13.6% for six months. Segment margins were pressured by acquisitions and inventory step-up charges.
Cash flow, debt and liquidity
- Six-month operating cash flow was $89.5m, down from $172.4m. Working capital absorbed cash, including a $171.9m increase in inventory and a $50.2m increase in receivables. Management cited acquired-business seasonality, supply-chain risk mitigation and inventory inflation as inventory factors.
- Investing activities used $107.3m, including $74.9m for acquisitions and $32.1m in capital expenditures. Financing activities provided $17.7m; the company repurchased $239.6m of shares and had $273.5m of net proceeds under its Credit Facility.
- Cash was $166.6m at July 2, 2022, versus $180.4m at January 1, 2022. Total debt was $2,696.4m, versus $2,414.3m; approximate net debt was $2,529.8m. The balance included $49.1m of current maturities.
- Remaining borrowing capacity under the Credit Facility was $2.5bn, and the company reported compliance with all debt covenants. Management said available resources and expected access to financing were sufficient for foreseeable operating and investment needs.
- After quarter-end, on August 11, the company drew $750m under a delayed-draw term facility and used the proceeds to reduce revolving borrowings. The loan begins quarterly amortization in October 2022 and is due by October 2026.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or margin guidance. Management’s liquidity statement is not a results forecast.
- Management cited inflation and availability of inputs, labor and logistics costs, supply-chain disruption, foreign-exchange and political risks, competition, customer concentration, COVID-19 effects, and variability in financing costs among relevant risks.
- Middleby suspended sales into and purchases from Russia following the Russia-Ukraine conflict. The company reported no material impact on results in the first half of 2022, but warned that broader economic and supply-chain effects could adversely affect future results. Q2 restructuring expense included non-cash valuation allowances related primarily to Russia activities.
- The effective tax rate was 25.1% in Q2 and 24.5% for six months, compared with 10.3% and 16.9% in the respective prior-year periods. The prior-year rates benefited from discrete tax items; excluding those items, the filing says the 2021 rates were approximately 24.5%.
- Acquisitions completed in 2022 were individually immaterial; related six-month cash outflow is included in acquisition spending. In July, the company announced two food-processing acquisitions for a combined approximately $140m.
- Management said pending litigation was not expected to have a material effect on financial condition, results or cash flows. Acquisition purchase-price allocations and earnout estimates remained subject to finalization.
Important facts for investors to verify
- Confirm the intended reporting year: the request says 2021 Q2, while the supplied 10-Q reports Q2 2022.
- Assess whether sales growth excluding acquisitions and currency can continue, particularly in Commercial Foodservice and Residential Kitchen.
- Monitor gross-margin recovery, including the effects of input inflation, labor and logistics costs, product mix, and acquisition-related charges.
- Track working-capital needs, especially inventory growth, operating cash conversion, and the effect of the post-quarter $750m term-loan draw on leverage and interest expense.
- Review future disclosures on Russia-related exposure, supply-chain disruption, acquisition valuations and contingent consideration.