Business context and reporting period
The Middleby Corporation designs and manufactures commercial foodservice, food processing and residential kitchen equipment. This Form 10-Q covers the quarter ended July 4, 2015, and the six months then ended, compared with periods ended June 28, 2014. Although the request metadata says “2014 Q2,” the filing itself reports second-quarter 2015 results and uses 2014 as the comparison period.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $436.3m | $424.8m | $842.9m | $797.3m |
| Gross profit / margin | $172.9m / 39.6% | $166.2m / 39.1% | $330.5m / 39.2% | $309.2m / 38.8% |
| Operating income / margin | $83.4m / 19.1% | $75.7m / 17.8% | $149.9m / 17.8% | $131.7m / 16.5% |
| Net earnings | $54.3m | $48.4m | $92.5m | $81.9m |
| Diluted EPS | $0.95 | $0.85 | $1.62 | $1.44 |
- Six-month operating cash flow was $108.8m, versus $61.7m a year earlier. Capital expenditures were $11.7m; operating cash flow less capital expenditures was approximately $97.1m.
- Cash was $38.6m at July 4, 2015, down from $43.9m at fiscal year-end. Total debt was $574.3m, down from $598.2m; cash less debt implies net debt of approximately $535.7m.
- The $1.0bn revolving credit facility had $427.1m of remaining availability after $9.9m of letters of credit. Average senior-debt interest rate was 2.02%; the facility matures in August 2017. The company reported compliance with debt covenants.
- Current assets were $653.6m and current liabilities $341.3m at July 4. Inventories rose to $291.9m from $255.8m at January 3.
Material changes versus comparable periods
- Q2 sales rose 2.7%, while six-month sales rose 5.7%. Acquisitions contributed $32.1m to Q2 and $61.2m to six-month sales; excluding acquisitions, sales fell 4.8% in Q2 and 2.0% for six months. Foreign exchange reduced sales by about $11.8m in Q2 and $23.2m for six months.
- Commercial Foodservice sales increased 9.4% in Q2 and 10.7% for six months. Food Processing sales decreased 20.0% and 14.4%, respectively. Residential Kitchen sales increased 6.5% and 12.2%, respectively, with acquisition contributions, particularly U-Line, materially affecting reported growth.
- Management attributed Food Processing weakness to timing of large orders and foreign-exchange-related price increases that delayed or deferred some international projects. Residential Kitchen results were affected by discontinuation of certain distributor products and limited availability during the launch of a new Viking refrigeration line.
- Gross margin improved in both reporting periods. Management cited acquisition integration initiatives; Q2 residential margin also benefited from product mix and lower warranty costs.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said existing cash, operating cash generation, borrowing availability and market access should fund operations, debt service, capital spending, acquisitions, product development and integration needs for the foreseeable future. Interim results are not necessarily indicative of full-year 2015 results.
- Six-month results included $6.1m of Viking-related integration and restructuring expense. MD&A also cites $7.9m of non-recurring charges associated with Residential Kitchen facility closures and warehouse consolidations; Q2 G&A included $1.5m of non-recurring Residential Kitchen charges and $1.2m of Celfrost earnout settlement costs.
- Six-month other expense was $4.2m, mainly foreign-exchange losses, compared with $1.1m in the prior-year period. Foreign-exchange exposure, variable-rate debt, international and political risks, raw-material costs, competition, customer concentration and product acceptance are among the risks identified by the company.
- On July 15, 2015, after quarter-end, Middleby announced a recommended cash offer for Aga Rangemaster at £1.85 per share, representing approximately £129.2m (about $200m) in equity value. The company expected completion in Q3 2015; this was a proposed transaction, not a completed quarter-end acquisition.
- The company said pending litigation was not expected to materially affect its financial condition, results or cash flows. It disclosed unrecognized tax benefits and related interest and penalties; approximately $0.6m of remaining unrecognized benefits could be recognized over the following 12 months.
Important facts for investors to verify
- Confirm the period: this filing is for Q2 2015, not Q2 2014.
- Assess whether organic demand and order trends improved, particularly in Food Processing and Residential Kitchen, and distinguish underlying performance from acquisition and currency effects.
- Review cash conversion and inventory growth, including the timing of large orders and new-product inventory investments.
- Monitor debt levels, revolving-facility maturity and availability, interest-rate exposure, and the funding and integration demands of acquisitions, including the proposed Aga transaction.
- Reconcile potentially inconsistent MD&A statements: the six-month Food Processing discussion reports a 20.7% organic sales decrease excluding acquisitions, but also says constant-currency organic sales increased 14.5%. The six-month Residential Kitchen discussion likewise reports an organic decline excluding acquisitions but later states constant-currency organic growth of 9.4%.