Middleby Corporation — Form 10-K Summary
Period clarification: The filing is the annual report for the fiscal year ended December 29, 2018 (52 weeks), not a 2017 Q4 filing. It includes unaudited quarterly results for both 2018 and 2017.
Business context
Middleby designs, manufactures and services equipment in three segments: Commercial Foodservice, Food Processing, and Residential Kitchen. Fiscal 2018 growth was heavily acquisition-driven, including the approximately $1.0 billion acquisition of Taylor.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,722.9 million | $2,335.5 million |
| Gross profit / margin | $1,004.1 million / 36.9% | $912.7 million / 39.1% |
| Operating income / margin | $446.0 million / 16.4% | $378.6 million / 16.2% |
| Net earnings / diluted EPS | $317.2 million / $5.70 | $298.1 million / $5.26 |
| Cash from operations | $368.9 million | $304.5 million |
| Cash and working capital | $71.7 million / $502.6 million | $89.7 million / $458.2 million |
| Total debt | $1,892.1 million | $1,028.9 million |
FY2018 net sales rose 16.6%, but acquisitions contributed $375.2 million of the increase. Excluding acquisitions, foreign exchange and adoption of ASC 606, sales declined 0.8%. Interest expense rose to $58.7 million from $26.0 million, reflecting higher rates and acquisition-related borrowing. Fiscal 2018 investing cash outflow was $1,239.4 million, including $1,198.0 million for acquisitions; capital expenditures were $36.0 million.
Segment sales were Commercial Foodservice $1,729.8 million (+25.2%), Food Processing $389.6 million (+10.5%), and Residential Kitchen $603.5 million (+0.5%). Excluding acquisitions, ASC 606 and foreign exchange, segment sales changed +3.1%, -15.7% and -0.9%, respectively. Food Processing results were affected by delayed larger projects and lower sales volume.
In Q4 2018, sales were $756.7 million versus $632.9 million in Q4 2017; operating income was $140.0 million versus $62.9 million, and net earnings were $94.8 million versus $75.2 million.
Material changes, outlook and risks
- Gross margin fell 2.2 percentage points, mainly reflecting lower margins at recent Commercial Foodservice acquisitions, weaker Food Processing volume and mix, and Residential Kitchen distribution changes and Viking sales incentives. Reported operating margin increased slightly, but adjusted operating margin excluding restructuring and specified 2017 items declined to 17.1% from 19.0%, with acquisitions cited as a factor.
- Debt was principally under a $3.0 billion secured revolving facility, with $1.1 billion of availability at year-end and maturity on July 28, 2021. The company reported covenant compliance and expected operating cash flow and existing lenders to fund foreseeable needs. No formal earnings or revenue guidance is provided in the filing.
- Management cited growth opportunities from product innovation, automation, international markets and acquisitions. Backlog rose year over year in all three segments, but management cautioned that backlog is not necessarily indicative of future sales.
- Key risks include substantial leverage and variable interest rates; integration and execution risks from acquisitions; economic and residential-market weakness; competition; raw-material costs and supply disruptions; foreign exchange and Brexit uncertainty; goodwill and intangible impairment; and product liability, warranty and cybersecurity exposures.
- Goodwill was $1.743 billion, about 38% of total assets. Fiscal 2018 impairment testing found no impairment; the filing notes that tested trademarks had fair values less than 20% above carrying values. Fiscal 2017 included a $58.0 million Viking tradename impairment.
- The defined-benefit pension deficit was $253.1 million at year-end, down from $334.5 million. A U.K. court ruling increased the U.K. plans’ projected benefit obligation by $53.6 million, subject to possible adjustment. Routine litigation was not expected by management to have a material effect.
- Management and the auditor reported effective internal control over financial reporting, but controls at seven 2018 acquisitions were excluded from the assessment; those businesses represented 28.0% of total assets and 8.1% of revenue.
Important facts for investors to verify
- Separate organic growth and acquired revenue contributions, particularly in Commercial Foodservice, and whether Food Processing project timing reverses.
- Post-acquisition margins, integration costs and realization of restructuring savings against the increased interest burden and debt maturity profile.
- Current revolver availability, covenant headroom, interest-rate exposure and the effect of refinancing or higher rates.
- Final purchase-price allocations and performance of Taylor and other recent acquisitions; also note the subsequent December 31, 2018 acquisition of EVO for approximately $12.5 million.
- Assumptions underlying goodwill and trademark valuations, pension funding and the potential effects of Brexit, product claims and warranty costs.