Middleby Corporation — Form 10-K Summary
Period clarification: The supplied filing is for fiscal 2021, the 52 weeks ended January 1, 2022, filed March 2, 2022. It is not a 2020 Q4 filing; the figures below summarize the filing provided.
Business context
Middleby designs, manufactures, markets and services equipment through three segments: Commercial Foodservice, Food Processing and Residential Kitchen. Fiscal 2021 results reflect a recovery from pandemic-affected fiscal 2020, acquisitions, and a substantial increase in customer orders. The company also received a termination fee after its proposed Welbilt merger ended.
Financial performance and liquidity
- Revenue: $3.251 billion, up 29.3% from $2.513 billion. Excluding acquisitions, disposition and foreign exchange, sales increased 23.7%.
- Segment sales: Commercial Foodservice $2.033 billion, up 34.6%; Food Processing $480.7 million, up 9.9%; Residential Kitchen $737.3 million, up 30.3%.
- Profitability: Gross profit was $1.195 billion, with a 36.8% gross margin versus 35.1% in 2020. Operating income was $630.0 million, or 19.4% of sales, versus $324.4 million and 12.9%. Net earnings were $488.5 million versus $207.3 million; diluted EPS was $8.62 versus $3.76.
- Unusual item: Results included a $110 million Welbilt termination fee recorded as a reduction of expense. Management reported approximately $67.7 million received net of deal costs and taxes. The filing also reports $19.7 million of Welbilt-related deal costs in SG&A.
- Cash flow: Operating cash flow was $423.4 million, down from $524.8 million. Investing cash outflow was $1.009 billion, including $963.6 million for acquisitions and investments; capital expenditures were $46.6 million. Cash declined $87.7 million to $180.4 million.
- Working capital: Receivables rose $99.9 million and inventory rose $204.2 million, primarily reflecting increased sales and efforts to support demand amid supply-chain challenges. Current assets were $1.707 billion and current liabilities $914.9 million.
- Debt and liquidity: Total debt increased to $2.414 billion from $1.730 billion, principally to fund acquisitions. Net debt was approximately $2.234 billion. The amended $4.5 billion credit facility had $2.8 billion of remaining borrowing capacity; the company reported covenant compliance at year-end.
- Other measures: SG&A was $668.0 million, or 20.5% of sales, versus 21.2%. Effective tax rate was 21.1%, compared with 22.7%. The company paid no cash dividend.
Changes versus the prior comparable year
Fiscal 2020 was materially affected by COVID-19, including a 15.1% sales decline and lower operating and gross margins. Fiscal 2021’s strong year-over-year growth reflected improved market conditions and demand, as well as acquired businesses and favorable foreign exchange. The company reported broad-based organic sales growth across all three segments. The comparison also benefits from the $110 million Welbilt termination fee and from impairment charges recorded in 2020 but not 2021.
Middleby completed or added several businesses during 2021, including Novy, Imperial, Newton CFV, Char-Griller, and Kamado Joe and Masterbuilt. Cash used for acquisitions and investments was $963.6 million. The company’s backlog at January 1, 2022 was $881.9 million in Commercial Foodservice, $187.5 million in Food Processing, and $443.4 million in Residential Kitchen.
Outlook, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management said current capital resources, expected operating cash flow, lender availability and capital-market access should fund operations, debt service, capital expenditures and product development for the foreseeable future.
- Management cautioned that backlog growth reflects pandemic-related market conditions and supply-chain challenges and is not necessarily indicative of future business. Most Commercial Foodservice and all Residential Kitchen backlog was expected to be filled during 2022; Food Processing backlog was expected to be filled by the end of fiscal 2023.
- Risks include continuing COVID-19 disruption, supply shortages and delays, higher commodity and other costs, inflation, interest-rate and foreign-exchange exposure, competitive pressure, customer demand variability, and acquisition integration and execution.
- Debt-related risks include floating-rate exposure, restrictive credit covenants, and potential cash or share settlement of the 1.00% convertible notes due 2025. The company had $2.4 billion of borrowings and $2.7 million of letters of credit outstanding at year-end.
- Goodwill and indefinite-lived intangible assets represented approximately 35% and 21% of total assets, respectively. The company reported no 2021 impairment; its annual qualitative assessment concluded that impairment was not more likely than not.
- Routine litigation is disclosed; management did not believe pending matters would materially affect financial condition, results or cash flows. The auditor issued unqualified opinions on the financial statements and internal controls, but the control assessment excluded certain recently acquired businesses.
Investor verification priorities
- Reconcile the $110 million Welbilt termination fee with management’s approximately $67.7 million net-of-costs-and-taxes figure, and assess earnings excluding this one-time benefit.
- Check the cash-flow presentation: the cash-flow statement reports $502.8 million provided by financing activities, while the MD&A narrative describes $502.8 million as used. Verify the intended sign and presentation.
- Assess whether the unusually large backlog can be converted to revenue on schedule given supply constraints, and distinguish organic demand from acquired sales.
- Review post-acquisition performance, integration costs and final purchase-price allocations, which were provisional for several 2021 acquisitions.
- Monitor leverage, borrowing costs, covenant headroom, working-capital requirements and potential dilution or cash obligations from the convertible notes.