The Middleby Corporation — Form 10-Q
Period clarification: The request identifies 2015 Q1, but this filing reports the quarter ended April 2, 2016, compared with the quarter ended April 4, 2015. The balance sheet compares April 2, 2016 with January 2, 2016.
Business context and reporting period
Middleby manufactures commercial foodservice, food processing and residential kitchen equipment. It reported results for the first quarter of fiscal 2016. Revenue growth chiefly reflects the 2015 acquisitions of Goldstein Eswood, Marsal, Induc, Thurne, AGA and Lynx.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $516.4 million | $406.6 million |
| Gross profit / margin | $196.8 million / 38.1% | $157.6 million / 38.8% |
| Operating income / margin | $86.4 million / 16.7% | $66.6 million / 16.4% |
| Net earnings | $54.5 million | $38.2 million |
| Diluted earnings per share | $0.96 | $0.67 |
| Operating cash flow | $14.5 million | $23.8 million |
Sales rose 27.0%; management attributed $106.6 million of the $109.8 million increase to acquisitions. Excluding acquisitions, sales increased 0.8%; organic sales growth excluding foreign-exchange effects was 2.3%. Gross margin fell 0.7 percentage points, while operating margin improved 0.3 points. Other income was $0.8 million versus other expense of $4.6 million, mainly reflecting foreign-exchange gains and losses. The effective tax rate was 33.4%, compared with 34.4%.
By segment, Commercial Foodservice sales were $279.0 million, up 6.4%; Food Processing sales were $78.6 million, up 12.6%; and Residential Kitchen sales were $158.7 million, up 112.7%. Excluding acquisitions, Residential Kitchen sales declined 19.7% (19.2% on a constant-currency basis), while its margin was pressured by lower-margin AGA and Lynx businesses.
Cash, debt and liquidity
Cash was $55.7 million, nearly unchanged from year-end. Total debt was $763.1 million, down from $766.1 million; the balance included $705.0 million drawn on a $1.0 billion revolving facility. Remaining revolver availability was $288.5 million after letters of credit. Current assets were $825.9 million and current liabilities $513.2 million. Operating cash flow decreased year over year, with working-capital changes reducing current-quarter operating cash flow by $68.9 million. Capital expenditures were $7.7 million. Management said available resources should fund foreseeable needs; the company reported compliance with debt covenants.
Management commentary, outlook and risks
- No specific consolidated revenue or earnings guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Residential Kitchen restructuring initiatives are expected to generate approximately $24.1 million of annual savings beginning in fiscal 2016. Cumulative restructuring costs were approximately $21.0 million; severance obligations were expected to be met by fiscal year-end 2016, while certain lease obligations extend through July 2020.
- Viking product recalls continued to affect Residential Kitchen organic sales. Management also cited foreign-exchange exposure, competition and pricing, raw-material availability, customer dependence, acquisition integration and goodwill impairment among risks.
- Operating cash flow was affected by higher receivables and inventory, lower accrued liabilities, a $14.4 million AGA pension funding payment, severance payments and annual customer rebates.
- Acquisition purchase-price allocations for Induc, AGA and Lynx remained provisional and could change. The company disclosed ordinary-course litigation and stated it did not expect pending matters to materially affect financial condition, results or cash flows.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q1 2016, not Q1 2015.
- Assess how much reported growth is acquisition-driven and monitor organic sales, especially Residential Kitchen.
- Track gross-margin performance and the integration and profitability of AGA and Lynx.
- Review cash conversion, working-capital needs, pension funding and the company’s debt and revolver capacity.
- Monitor recall-related effects, restructuring savings, provisional acquisition accounting and contingent earnout obligations.