The Middleby Corporation — Form 10-Q Summary
Period clarification: The request identifies 2009 Q3, but the supplied filing is for the quarter and nine months ended October 2, 2010, compared with October 3, 2009. The filing was signed November 12, 2010. Financial amounts below are in U.S. dollars; millions unless noted.
Business context and reporting period
Middleby manufactures commercial foodservice and food-processing equipment. It reports two operating groups: Commercial Foodservice Equipment and Food Processing Equipment. The International Distribution Division was incorporated into Commercial Foodservice for current and prior periods after management determined it no longer qualified as a separate reportable segment.
Financial performance
- Third quarter: Sales were $177.8 million, up 15.5% from $154.0 million. Gross profit was $70.7 million; operating income $32.0 million; net earnings $20.6 million; diluted EPS $1.13.
- Nine months: Sales were $511.9 million, up 3.6%. Gross profit was $203.6 million; operating income $88.2 million; net earnings $51.9 million; diluted EPS $2.84.
- Margins: Gross margin was 39.8% in Q3 versus 40.3% a year earlier, and 39.8% for nine months versus 38.9%. Operating margin was 18.0% in Q3 versus 18.2%, and 17.2% for nine months versus 16.8%. Net margin was 11.6% in Q3 versus 10.1%, and 10.1% for nine months versus 8.8%.
- Cash flow: Nine-month operating cash flow was $66.2 million, down from $77.2 million. Investing used $28.8 million, including acquisition spending; financing used $39.8 million. Cash declined $2.4 million to $6.0 million.
- Liquidity and debt: Current assets were $253.3 million and current liabilities $170.2 million, a current ratio of approximately 1.49. Total debt fell to $243.6 million from $275.6 million at January 2, 2010. The company reported $247.2 million of remaining revolving-credit availability, including the effect of letters of credit and foreign borrowings. It was in covenant compliance.
- Segments: Q3 Commercial Foodservice sales were $156.1 million, up from $136.6 million; Food Processing sales were $21.7 million, up from $17.3 million. Nine-month Food Processing sales rose to $61.9 million from $45.9 million, while Commercial Foodservice was approximately flat at $450.0 million.
Changes versus comparable periods
- Q3 sales growth reflected improved replacement-equipment spending, product introductions, sales activity with major restaurant chains and emerging markets, and $4.8 million from Doyon and PerfectFry acquisitions. Food Processing also benefited from improved market and customer capital-spending conditions.
- Nine-month Commercial Foodservice sales excluding acquisitions declined $13.7 million, partly because a large major-chain order in the first half of 2009 did not recur. Food Processing improved amid stronger demand and acquisitions.
- Q3 gross margin slipped amid higher steel costs, lower acquired-company margins and less favorable mix; cost savings and volume provided offsets. Nine-month gross margin improved through cost reductions and integration savings, partly offset by steel inflation.
- Interest and financing-amortization expense declined to $2.2 million for Q3 and $6.9 million for nine months, reflecting lower average debt and rates. Effective tax rates also fell: 31% for Q3 versus 39%, and 36% for nine months versus 41%, due to tax benefits and reserve adjustments, some described as non-recurring.
Outlook, risks and unusual items
- Management said the 2010 economic outlook remained uncertain, with operating results exposed to conditions in North America, Europe, Asia and Latin America. It did not provide numeric revenue or earnings guidance in the supplied text.
- Management expected operating cash flow and revolving-credit availability to fund working capital, capital expenditures, debt amortization, product development and integration for the foreseeable future.
- Risks identified include economic and market volatility, customer concentration, competition and pricing, raw-material availability and cost, foreign-exchange and political risks, product acceptance, intellectual-property protection, and possible goodwill impairment.
- Acquisitions included PerfectFry in July and Cozzini in September 2010. Purchase-price allocations were provisional; Cozzini included $2.0 million of contingent consideration, and acquired businesses added goodwill and intangibles. The filing also reports deferred acquisition payments and ongoing earnout exposure.
- Unrecognized tax benefits were approximately $20.3 million at January 2, 2010, plus accrued interest and penalties; no significant change was reported by October 2. The IRS audit of the 2007 federal return produced a $1.3 million tax benefit in Q2.
- Interest-rate swaps had a fair-value loss of $2.9 million. Litigation was not expected by management to have a material adverse effect. The credit facility is secured by substantial company assets and includes leverage and fixed-charge covenants.
- The filing reports $8.8 million spent repurchasing 161,066 shares over nine months; its quarterly issuer-purchase table separately lists 104,668 shares purchased in August. The filing text does not clearly reconcile these figures.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2010, not Q3 2009.
- Assess how much of sales and earnings growth came from acquired businesses versus organic demand, especially given the recent Cozzini and PerfectFry acquisitions.
- Track working-capital use and operating cash conversion: operating cash flow fell year over year while receivables and inventory increased.
- Review debt availability, floating-rate exposure, covenant headroom and the approaching maturities of interest-rate swaps and revolving credit.
- Check final acquisition valuations, contingent payments, tax exposures and the reconciliation of share-repurchase disclosures.