Middleby Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 28, 2013 (52 weeks), compared mainly with the fiscal year ended December 29, 2012. This filing is for FY2013, not FY2012 Q4. Amounts below are USD unless noted.
Business context
Middleby designs, manufactures, markets and services commercial foodservice equipment, food-processing equipment, and premium residential kitchen appliances. FY2013 included the first full-year reporting period for Viking, acquired December 31, 2012, as well as the 2013 acquisitions of Celfrost and Wunder-Bar and the acquisition of Viking distributors.
Financial performance and position
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Net sales | $1,428.7 million | $1,038.2 million | Up 37.6%; acquisitions added $282.5 million. Excluding acquisitions, sales rose 10.4%. |
| Gross profit / margin | $550.0 million / 38.5% | $403.0 million / 38.8% | Profit increased; margin edged down, principally reflecting lower Residential Kitchen margins. |
| Operating income / margin | $244.5 million / 17.1% | $188.1 million / 18.1% | Income rose; margin declined. FY2013 included $9.1 million of Viking integration costs. |
| Net earnings / diluted EPS | $153.9 million / $8.21 | $120.7 million / $6.49 | Net earnings up 27.5%; diluted EPS up 26.5%. |
| Operating cash flow | $146.2 million | $128.3 million | Higher by $17.8 million; working-capital investment was substantial. |
| Cash and cash equivalents | $36.9 million | $34.4 million | Up $2.5 million. |
| Total debt | $571.6 million | $260.1 million | Increased mainly to finance acquisitions. |
| Working capital | $234.3 million | $170.2 million | Improved; current assets were $545.7 million and current liabilities $311.4 million. |
Fourth-quarter FY2013 net sales were $377.4 million, operating income $74.5 million, net earnings $49.9 million and diluted EPS $2.62, compared with $291.6 million, $58.7 million, $37.8 million and $2.03, respectively, in Q4 FY2012.
Sales by segment were $895.5 million for Commercial Foodservice, $301.5 million for Food Processing and $231.7 million for Residential Kitchen. Commercial Foodservice and Food Processing organic sales increased 11.1% and 8.3%, respectively. The Residential Kitchen segment was established with the Viking acquisition.
Material changes and notable items
- Acquisitions drove much of the consolidated sales expansion. Viking generated FY2013 standalone sales of $233.1 million and operating income of $11.1 million, compared with an operating loss of $45.0 million in FY2012; the filing cautions that these standalone results are not directly equivalent to Middleby’s consolidated segment results.
- FY2013 interest expense rose to $15.9 million from $9.2 million, primarily due to acquisition-related borrowing. The effective tax rate increased to 31.8% from 30.8%.
- Viking integration and restructuring actions, substantially completed by year-end, included organizational changes, headcount reductions, facility and business-operation actions, and product discontinuations. Recorded costs were $9.1 million; $2.4 million remained accrued at year-end, with settlement expected by the end of Q2 2014.
- Goodwill was $688.0 million and other intangibles were $447.9 million at year-end. Goodwill was approximately 38% of total assets; no goodwill impairment was recorded.
- Acquisition spending was $461.9 million and capital expenditures were $14.6 million. The company reported $418.6 million of remaining availability on its $1.0 billion revolving facility after outstanding borrowings and letters of credit.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or sales guidance. Management stated that operating cash flows and borrowing availability were expected to provide sufficient resources for working capital, capital expenditures and debt amortization for the foreseeable future. Backlog at year-end was $51.0 million in Commercial Foodservice, $103.1 million in Food Processing and $11.0 million in Residential Kitchen; management expected it to be filled during 2014, while cautioning that backlog is not necessarily indicative of annual demand.
- Key risks include economic weakness affecting restaurant investment and premium appliance demand; intense competition; commodity-price and supply disruption exposure; foreign currency and international-market risks; and dependence on major customers.
- Debt rose materially. The credit facility includes restrictive covenants, a maximum indebtedness-to-EBITDA ratio of 3.5 and a minimum fixed-charge-coverage ratio of 1.25. Middleby reported compliance at year-end; covenant breaches could restrict borrowing or trigger default.
- Acquisition integration, execution and valuation risks are significant, alongside impairment exposure from the substantial goodwill and intangible balances.
- Other disclosed exposures include product liability and warranty claims, environmental and legal compliance, and tax examinations. Unrecognized tax benefits were $12.7 million, with approximately $2.0 million of accrued interest and $1.8 million of penalties.
- Routine litigation was not believed by management to have a material effect. Auditors issued unqualified opinions on the financial statements and internal controls; the internal-control assessment excluded specified 2013 acquisitions, representing 30.1% of assets and 16.4% of sales.
- Subsequent to year-end, Middleby acquired Market Forge for approximately $7.0 million and purchased assets of two additional Viking distributors for approximately $38.5 million.
Important facts for investors to verify
- How much future growth is organic versus acquisition-driven, and whether Viking integration produces the expected margin improvement.
- Debt reduction capacity, covenant headroom and sensitivity to variable interest rates after acquisition-related borrowing.
- Whether operating cash flow can sustain acquisition activity, capital needs and working-capital growth.
- Assumptions supporting goodwill and intangible-asset valuations, particularly for Viking and recent acquisitions.
- Progress on integration costs, unresolved acquisition purchase-price allocations, and the financial performance of acquired businesses.