Business context and reporting period
The supplied filing is Middleby Corporation’s unaudited Form 10-Q for the quarter ended September 26, 2020, not 2019 Q3 as stated in the request metadata. The prior-year comparable quarter ended September 28, 2019. Middleby reports Commercial Foodservice, Food Processing, and Residential Kitchen segments.
Financial performance
| Metric | Three months ended September 26, 2020 | Comparable 2019 period | Nine months ended September 26, 2020 | Comparable 2019 period |
|---|---|---|---|---|
| Net sales | $634.5 million | $724.0 million | $1,784.0 million | $2,171.8 million |
| Gross profit; margin | $222.7 million; 35.1% | $270.0 million; 37.3% | $626.1 million; 35.1% | $813.8 million; 37.5% |
| Operating income; margin | $86.7 million; 13.7% | $121.3 million; 16.7% | $231.2 million; 12.9% | $362.0 million; 16.7% |
| Net earnings; diluted EPS | $60.5 million; $1.10 | $82.0 million; $1.47 | $155.5 million; $2.82 | $243.2 million; $4.37 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $316.2 million | $229.7 million |
Quarterly sales fell 12.4% year over year; nine-month sales fell 17.9%. Excluding acquisitions and foreign exchange, sales declined 14.1% for the quarter and 20.5% for the nine months. Commercial Foodservice was the principal weakness: organic sales decreased 27.4% for the quarter and 29.2% for the nine months. Food Processing organic sales rose 22.4% and 8.7%, respectively; Residential Kitchen organic sales rose 11.4% in the quarter but declined 9.4% for the nine months.
Quarterly gross margin contracted 2.2 percentage points, and operating margin fell 3.0 points. Management attributed the gross-profit decline primarily to lower volumes associated with COVID-19 and, in some businesses, lower margins at recent acquisitions. Cost reductions lowered SG&A, but SG&A increased as a share of sales to 20.3% from 20.0% for the quarter and to 21.6% from 20.5% for the nine months. Restructuring expense was $7.3 million for the quarter and $10.3 million year to date.
Cash, debt and liquidity
At September 26, 2020, cash and equivalents were $220.3 million, compared with $94.5 million at December 28, 2019. Total debt was $1.832 billion, versus $1.873 billion; this included $747.5 million principal amount of 1.00% convertible senior notes due 2025, carried at $627.0 million after discount. The company reported $1.9 billion of remaining availability under its credit facility and compliance with its borrowing covenants. Management said cash, operating cash generation, and facility capacity were expected to support needs and covenant compliance for at least the next 12 months.
Nine-month operating cash flow was $316.2 million. Investing cash outflow was $53.5 million, including acquisitions and capital spending; financing cash outflow was $134.8 million, including debt repayments, $104.7 million for capped-call transactions, and $77.2 million of share repurchases. Cash increased by $125.8 million over the nine-month period. Current assets were $1.241 billion and current liabilities $597.0 million.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said demand and production levels were anticipated to recover, but emphasized that the timing and impact of COVID-19 remained uncertain.
- COVID-19 materially disrupted demand, particularly in Commercial Foodservice, and could continue to affect orders, collections, supply chains, production, costs, and operations. Management described cost controls, workforce and facility actions, working-capital initiatives, reduced capital spending, and new pandemic-related products.
- COVID-related Commercial Foodservice restructuring was expected to generate approximately $20 million in annual savings; related accrued obligations were $5.4 million and were expected to be substantially completed by year-end 2020.
- In August 2020, Middleby issued $747.5 million of 1.00% convertible notes due 2025 and purchased capped calls for $104.7 million. Conversion, if triggered, could require cash settlement or dilute shareholders; capped-call protection is subject to a cap and counterparty risk.
- Interest-rate swaps had a $57.8 million fair-value liability. The company identified LIBOR transition as a matter under evaluation. It reported no goodwill or indefinite-lived intangible impairment charges and no pending litigation expected to materially affect financial condition, results, or cash flows.
- The company reported suspending its share-repurchase program as part of pandemic liquidity measures, although it had repurchased $69.7 million under the program during the first nine months of 2020.
Important facts for investors to verify
- Confirm the intended filing period: the supplied document is for 2020 Q3, not 2019 Q3.
- Track the pace of recovery in Commercial Foodservice and whether reported improvement is organic or acquisition-driven.
- Assess whether margin pressure, restructuring costs, and cost savings develop as management described.
- Review debt, borrowing availability, covenant headroom, interest-rate exposure, and the terms and potential dilution or cash requirements of the convertible notes.
- Monitor COVID-19 impacts on demand, receivables, supply chains, and the company’s liquidity assumptions.