Middleby Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended June 30, 2018 (and six months ended June 30, 2018), not 2017 Q2 as indicated in the request metadata. Comparisons below are with the corresponding 2017 periods.
Business context and reporting period
Middleby manufactures commercial foodservice, food processing, and residential kitchen equipment. The filing is unaudited. Its 2018 results reflect multiple acquisitions, most notably Taylor, acquired June 22 for approximately $1.0 billion.
Key financial results
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Net sales | $668.1 million; up 15.3% | $1,252.9 million; up 12.9% |
| Gross profit / margin | $250.8 million / 37.5% (40.5% prior year) | $462.4 million / 36.9% (40.0% prior year) |
| Operating income | $111.3 million; down from $113.5 million | $198.3 million; down from $206.3 million |
| Net earnings | $84.0 million; up from $77.6 million | $149.4 million; up from $148.3 million |
| Diluted EPS | $1.51; versus $1.35 | $2.69; versus $2.59 |
| Operating cash flow | Not separately reported in the supplied statements | $146.6 million; versus $86.0 million |
For the six months, acquisitions contributed $148.1 million of reported sales growth; foreign exchange added about $21.0 million and adoption of ASC 606 added about $14.6 million. Excluding acquisitions, foreign exchange, and ASC 606, sales declined 3.6%. The lower effective tax rate helped net earnings: 24.3% for the six-month period versus 29.2% a year earlier.
Liquidity, debt, and cash flow
- Cash was $92.3 million at June 30, 2018, versus $89.7 million at year-end 2017. Current assets were $1.08 billion and current liabilities $556.1 million.
- Total debt rose to $2.07 billion from $1.03 billion at year-end, primarily to fund acquisitions. Credit-facility availability was approximately $0.4 billion, net of outstanding letters of credit.
- Six-month operating cash flow was $146.6 million. Investing used $1.17 billion, including acquisition spending; financing provided $1.03 billion, mainly from net credit-facility borrowings.
- Capital expenditures were $24.2 million for the six months. The company reported compliance with debt covenants and stated that available resources should fund operations and obligations for the foreseeable future.
Material changes, outlook, and risks
- Acquisitions and leverage: Taylor and other acquisitions substantially increased assets, goodwill, intangibles, and debt. Purchase-price allocations for several 2018 acquisitions remained provisional; working-capital adjustments and earnouts could affect amounts paid.
- Margin pressure: Consolidated gross margin fell 3.0 percentage points in Q2 and 3.1 points for the six months. Management cited lower margins at acquired commercial foodservice businesses, weak food-processing volumes and product mix, and residential distribution changes and Viking sales incentives.
- Segment trends: Organic commercial foodservice sales increased, but international sales were weaker in some markets. Food processing sales excluding acquisitions and accounting effects fell sharply; management cited timing and deferral of large orders. Residential performance was affected by slower UK conditions and changes to distribution.
- Restructuring: Six-month restructuring expense was $6.1 million. Management estimated annual savings of about $10 million in Commercial Foodservice and $4 million in Food Processing; AGA-related initiatives had previously been estimated to yield about $20 million annually. Savings are estimates, not guaranteed results.
- Accounting and unusual items: ASC 606 adoption increased six-month sales by about $14.6 million and net earnings by about $3.1 million versus results without the new standard. Prior-year operating results included a $12.0 million plant-sale gain. Taylor transaction expenses included approximately $3.0 million.
- Other exposures: The filing cites acquisition integration, variable-rate debt, foreign exchange, market and competitive conditions, raw-material availability, and potential goodwill or intangible impairment as risks. It says pending litigation is not expected to materially affect the company. No specific full-year revenue or earnings guidance is provided.
Important facts for investors to verify
- Confirm the filing period: this is a Q2 2018 filing, despite the 2017 Q2 request metadata.
- Review organic sales and margin trends by segment, particularly Food Processing and Residential Kitchen, apart from acquisitions and ASC 606 effects.
- Assess debt repayment capacity, covenant headroom, interest-rate exposure, and the effect of additional acquisition or earnout payments.
- Track integration results and final purchase-price allocations for Taylor and other recently acquired businesses, including goodwill and intangible valuations.
- Evaluate whether restructuring savings materialize and whether the company’s stated liquidity remains adequate as acquisition-related obligations and operating needs evolve.