Middleby Corporation — FY2019 Form 10-K
Period note: The filing is for the fiscal year ended December 28, 2019, not fiscal 2018. It also reports quarterly results, including the fourth quarter of 2019 and 2018.
Business context and reporting period
Middleby designs, manufactures, markets and services equipment through three segments: Commercial Foodservice, Food Processing and Residential Kitchen. Fiscal 2019 and 2018 each comprised 52 weeks. The company completed multiple acquisitions in 2019, including Cooking Solutions Group, Powerhouse Dynamics, Pacproinc, Brava and Synesso.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $2,959.4 million | $2,722.9 million |
| Gross profit / margin | $1,103.5 million / 37.3% | $1,004.1 million / 36.9% |
| Operating income / margin | $514.0 million / 17.4% | $446.0 million / 16.4% |
| Net earnings | $352.2 million | $317.2 million |
| Diluted EPS | $6.33 | $5.70 |
| Cash from operations | $377.4 million | $368.9 million |
| Capital expenditures | $46.6 million | $36.0 million |
| Total debt | $1,873.1 million | $1,892.1 million |
Net sales rose 8.7%; management attributed $278.9 million of growth to acquisitions. Excluding acquisitions and foreign exchange, sales increased 0.1%. Cash after capital expenditures was approximately $330.8 million. Year-end cash was $94.5 million, working capital was $616.1 million, and remaining borrowing availability under the then-current facility was $1.1 billion. The company reported compliance with its debt covenants.
Commercial Foodservice sales grew 14.7% to $1,984.3 million, largely through acquisitions; Food Processing sales increased 2.9% to $401.0 million, while Residential Kitchen sales declined 4.9% to $574.2 million. Excluding acquisitions and foreign exchange, Commercial Foodservice grew 1.6%; Food Processing declined 3.3%; Residential Kitchen declined 2.0%.
For Q4 2019, sales were $787.6 million versus $756.7 million in Q4 2018; net earnings were $109.0 million versus $94.8 million, and diluted EPS was $1.96 versus $1.70.
Material changes, outlook and risks
- FY2019 gross and operating margins improved year over year. Reported operating income included a $14.8 million litigation-settlement gain; restructuring expense was $10.5 million. Management also cited $10.0 million of transition costs related to the former Chairman and CEO.
- Interest expense increased to $82.6 million from $58.7 million, reflecting higher rates and acquisition-related borrowing. Goodwill was $1,849.7 million and other intangibles were $1,443.4 million; annual testing found no impairment in 2019. Pension obligations were underfunded by $289.1 million, up from $253.1 million.
- Management did not provide a quantified earnings or revenue forecast. It expected operating cash flows and lender borrowings to meet anticipated working-capital, capital-expenditure and debt-amortization needs for the foreseeable future. Commercial Foodservice restructuring actions were expected to generate $10–15 million in annual savings beginning in 2020.
- On January 31, 2020, Middleby entered a new five-year, $3.5 billion secured credit agreement, maturing January 31, 2025. Covenants include minimum interest coverage of 3.0x and a maximum leverage ratio of 4.0x, with specified acquisition-related flexibility.
- Key risks include substantial variable-rate debt, acquisition integration and execution, intense competition, foreign exchange and trade uncertainty, economic weakness affecting restaurant and residential demand, raw-material costs, and goodwill/intangible impairment. The filing specifically flagged the emerging coronavirus outbreak’s potential to disrupt facilities, suppliers, customers and travel; its effect was uncertain.
- Auditors issued unqualified opinions on the financial statements and internal controls. The control assessment excluded several recently acquired businesses, which represented 3.6% of revenue.
Investor facts to verify
- How much future growth and margin performance depends on acquisitions versus underlying organic demand, particularly in Food Processing and Residential Kitchen.
- Whether acquisition integration and the planned restructuring savings are realized, and whether acquired-business margins improve.
- Debt repayment capacity, sensitivity to interest rates, covenant headroom and the terms and availability under the amended credit agreement.
- Potential effects of coronavirus, trade and currency developments on operations and demand after year-end.
- Assumptions supporting goodwill and indefinite-lived intangible valuations, and developments in the $289.1 million pension underfunding.
- The sustainability of FY2019 earnings after excluding the $14.8 million settlement gain and considering higher interest and acquisition-related costs.