Middleby Corporation — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2017; comparative periods ended October 1, 2016. The request metadata says 2016 Q3, but the supplied filing is for 2017 Q3.
Business context and financial performance
Middleby manufactures commercial foodservice, food-processing, and residential kitchen equipment. The filing is unaudited. Its interim results are not necessarily indicative of full-year results.
| Metric | Three months ended Sep. 30, 2017 | Three months ended Oct. 1, 2016 | Nine months ended Sep. 30, 2017 | Nine months ended Oct. 1, 2016 |
|---|---|---|---|---|
| Net sales | $593.0 million | $574.2 million | $1,702.7 million | $1,671.0 million |
| Gross profit / margin | $228.5 million / 38.5% | $231.7 million / 40.4% | $672.6 million / 39.5% | $662.0 million / 39.6% |
| Operating income / margin | $118.3 million / 19.9% | $121.4 million / 21.1% | $341.5 million / 20.1% | $319.7 million / 19.1% |
| Net earnings | $74.7 million | $75.9 million | $222.9 million | $203.3 million |
| Diluted EPS | $1.31 | $1.33 | $3.91 | $3.56 |
Cash flow, debt and liquidity
- Nine-month operating cash flow was $204.9 million, versus $175.1 million a year earlier. Investing used $187.6 million, including acquisitions and $42.4 million of capital expenditures. Operating cash flow less capital expenditures was approximately $162.5 million.
- Cash was $81.7 million at September 30, 2017, up from $68.5 million at year-end 2016. Total debt rose to $950.7 million from $732.1 million; net debt was approximately $869.0 million.
- The $2.5 billion revolving facility had $1.5 billion of remaining availability, after $9.5 million of letters of credit. The company reported compliance with its debt covenants and said available resources should fund operations, debt service, capital spending, acquisitions, product development and integration for the foreseeable future.
- Current assets were $901.5 million and current liabilities were $466.6 million. The balance sheet included $425.9 million of inventory and $325.1 million of accrued pension benefits.
Changes versus the prior comparable periods
- Third-quarter sales rose 3.3%, but management attributed $28.6 million of growth to acquisitions; excluding acquisitions, sales fell 1.7%. Nine-month sales rose 1.9%, while excluding acquisitions they declined 4.2%; foreign exchange reduced nine-month sales by approximately $21.9 million.
- Third-quarter net earnings decreased 1.6%, and gross margin fell 1.9 percentage points. Lower margins at recent acquisitions and weaker Residential Kitchen performance weighed on results. Nine-month earnings increased 9.7%, with operating margin improving to 20.1% from 19.1%.
- By segment, third-quarter sales increased 7.0% in Commercial Foodservice and 5.7% in Food Processing, but decreased 5.7% in Residential Kitchen. Excluding acquisitions and foreign exchange, the respective changes were +0.5%, -5.2%, and -6.0%. Nine-month Residential Kitchen sales declined 10.1%, reflecting AGA product rationalization, foreign exchange and continuing effects from the Viking product recall.
- Share repurchases used $225.0 million in the first nine months, including $200.4 million under the repurchase program. The company repurchased 1,680,395 program shares in Q3 at an average $119.23 per share.
Outlook, commentary, risks and unusual items
- Management did not provide specific revenue or earnings guidance. It estimated annual savings beginning in fiscal 2018 of approximately $10 million from Commercial Foodservice restructuring, $4 million from Food Processing initiatives, and $20 million from Residential Kitchen integration actions.
- 2017 acquisitions included Burford, CVP Systems, Sveba Dahlen and QualServ, for approximately $155 million of cash acquisition spending. Purchase-price allocations for these deals remained provisional. Middleby acquired Globe Food Equipment after quarter-end on October 17; Globe had approximately $50 million in annual revenue.
- Third-quarter restructuring expense was $4.2 million; nine-month expense was $17.4 million. Nine-month results also included a $12.0 million gain on sale of a plant. A $7.9 million excess share-based compensation tax benefit reduced nine-month tax expense; the nine-month effective tax rate was 30.8%, compared with 33.0%.
- Risks cited include acquisition integration and performance, competition and pricing, customer dependence, raw-material availability and cost, international and foreign-exchange exposure, product acceptance, and potential goodwill impairment. The company said pending litigation was not expected to materially affect its financial condition, results or cash flows. Tax audits and unrecognized tax benefits remain contingencies; approximately $1.9 million of remaining unrecognized benefits might be recognized within 12 months.
- The company hedged interest-rate exposure with $324 million of swaps; foreign-exchange forwards and options had a $4.1 million loss fair value at quarter-end. Management stated a hypothetical 10% adverse move in rates or foreign exchange would not materially affect results or financial position.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied filing is for Q3 2017, not Q3 2016.
- Assess underlying demand separately from acquisition-driven sales growth, especially in Commercial Foodservice and Food Processing.
- Track Residential Kitchen sales, margins, Viking recall effects and the delivery of expected restructuring savings.
- Review debt growth, acquisition funding, share repurchases, covenant headroom and sensitivity to floating interest rates.
- Monitor final purchase accounting and integration outcomes for 2017 acquisitions, as well as revenue-standard adoption planned for fiscal 2018.