Middleby Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 29, 2019, compared with periods ended June 30, 2018. The request metadata says “2018 Q2,” but the supplied filing is for 2019 Q2.
Financial performance
- Second-quarter revenue: $761.0 million, up 13.9%. Net earnings were $92.2 million, up 9.8%; diluted EPS was $1.66 versus $1.51.
- First-half revenue: $1.448 billion, up 15.6%. Net earnings were $161.2 million, up 7.9%; diluted EPS was $2.90 versus $2.69.
- Margins: Second-quarter gross margin was 37.6% versus 37.5%; operating margin was 18.3% versus 16.6%; net margin was 12.1% versus 12.5%. First-half gross margin was 37.6% versus 36.9%, and operating margin was 16.6% versus 15.8%.
- Cash flow: First-half operating cash flow was $101.6 million, down from $146.6 million. Capital expenditures were $21.6 million, implying approximately $80.0 million of operating cash flow after capital expenditures, versus $122.4 million a year earlier. Inventory growth was a key cash-flow drag.
- Liquidity and debt: Cash was $81.7 million at June 29, 2019. Total debt was $2.0 billion, up from $1.9 billion at year-end 2018. The $3.0 billion revolving facility had about $1.0 billion of remaining availability. The company reported compliance with its debt covenants.
- Balance sheet: Current assets were $1.185 billion and current liabilities were $565.3 million. Inventory increased to $611.9 million from $521.8 million at year-end.
Material changes and business drivers
- Management attributed most reported revenue growth to acquisitions. Excluding acquisitions, foreign exchange and the closure of a non-core business, sales increased 1.3% in the quarter and 2.0% in the first half.
- Commercial Foodservice benefited from acquisitions and customer rollouts; comparable sales excluding acquisitions and foreign exchange increased 2.3% in the quarter and 2.8% in the first half. Food Processing comparable sales rose 3.4% in the quarter but 0.2% in the first half. Residential Kitchen comparable sales declined 2.6% in the quarter and rose 1.1% in the first half.
- First-half reported sales were reduced by approximately $23.0 million from unfavorable foreign exchange. Interest expense and financing amortization increased to $42.5 million from $19.2 million in the first half, reflecting higher debt balances and interest rates.
- First-half acquisitions included Cooking Solutions Group, Powerhouse Dynamics and Ss Brewtech; acquisition-related investing cash outflow was approximately $167.1 million. The company also completed the approximately $74 million Pacproinc acquisition on July 15, 2019, after quarter-end.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said available cash, operating cash generation, credit-facility availability and access to capital markets should fund operations, debt service, capital expenditures, acquisitions, product development and integration for the foreseeable future.
- Management cited inventory purchases ahead of potential tariff-related price increases, efforts to protect order fulfillment, and inventory accumulation amid lower-than-anticipated sales as reasons for increased inventory and weaker operating cash flow.
- Key disclosed risks include variable financing costs and interest rates, foreign-exchange and political exposure, raw-material availability and cost, customer concentration, competition, market conditions, and product development and acceptance. The company hedges some interest-rate and currency exposures.
- Restructuring expense was $2.6 million in the first half, primarily related to headcount reductions and AGA initiatives; remaining obligations were described as immaterial and expected to be completed by fiscal year-end. Management stated that pending litigation was not expected to materially affect financial condition, results or cash flows.
- Operating lease accounting adoption added approximately $85 million of right-of-use assets and lease liabilities. No material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much future growth and margin performance depends on acquisitions versus comparable underlying demand.
- Whether elevated inventory converts to sales and cash, particularly given tariff-related purchasing and lower-than-anticipated sales.
- Debt, interest expense, covenant headroom and the timing of the July 2021 revolving-credit-facility maturity.
- Integration, purchase-price allocation and earnout or deferred-payment exposure from recent acquisitions, including provisional values and working-capital adjustments.
- Performance in Residential Kitchen and Food Processing, and the effects of foreign exchange and interest-rate movements.