Middleby Corporation — Form 10-Q Summary
Reporting period: Quarter ended March 29, 2014; comparisons are with the quarter ended March 30, 2013. The request metadata says “2013 Q1,” but the filing is for 2014 Q1.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $372.5 million | $327.5 million | +13.7% |
| Gross profit / margin | $143.0 million / 38.4% | $121.3 million / 37.0% | Margin +1.4 points |
| Operating income / margin | $55.9 million / 15.0% | $42.2 million / 12.9% | Margin +2.1 points |
| Net earnings | $33.4 million | $25.9 million | +29.1% |
| Diluted EPS | $1.78 | $1.39 | Increase |
| Operating cash flow | $(13.6) million | $13.5 million | Declined |
Revenue growth included $18.9 million from acquisitions; excluding acquisitions, sales rose 8.0%. Segment sales were $234.1 million in Commercial Foodservice (+18.6%), $75.6 million in Food Processing (+5.9%), and $62.8 million in Residential Kitchen (+7.0%).
Balance sheet and liquidity
- At March 29, 2014, cash was $39.1 million and total debt was $655.4 million, up from $571.6 million at year-end 2013. Net debt was approximately $616.4 million.
- Current assets were $629.3 million and current liabilities $300.8 million; reported figures imply a current ratio of approximately 2.1.
- The $1.0 billion revolving facility had $647.0 million drawn, $13.4 million in letters of credit, and $339.6 million of remaining availability. Average senior debt interest rate was 1.64%; the facility matures in August 2017.
- Management said resources were sufficient for foreseeable operating, debt service, capital expenditure, acquisition, product development, and integration needs. The company was in compliance with debt covenants.
Cash flow, changes, and management commentary
- Operating cash use reflected working-capital needs: receivables increased $15.8 million, prepaid assets and taxes $21.9 million, and accrued expenses and other liabilities decreased $26.5 million. Inventory increased $5.6 million.
- Investing cash use was $49.0 million, including $45.7 million for Market Forge and Viking distributor acquisitions; capital expenditures were $3.2 million.
- Financing provided $64.6 million, including $78.4 million of net revolving-credit borrowings. The company also reported $25.0 million of excess tax benefits related to share-based compensation and $44.3 million used to repurchase 155,211 shares surrendered by employees for withholding taxes.
- Management attributed improved consolidated gross margin to acquisition integration initiatives. Commercial Foodservice margin declined to 40.5% from 41.4%, reflecting sales mix and lower margins at newly acquired businesses; Food Processing and Residential Kitchen margins improved.
- Food Processing international sales grew strongly, while domestic sales fell 21.0%. Residential Kitchen sales were affected by distributor acquisitions and reorganization that disrupted sales during the quarter.
Acquisitions, outlook, and risks
- During the quarter, Middleby acquired Market Forge and two former Viking distributors for $45.7 million of cash consideration. The company completed its acquisition of food-processing equipment maker PES on March 31, after quarter-end; PES had approximately $15 million in annual revenue.
- Viking integration initiatives generated $2.6 million of expense in the quarter; management expected remaining obligations to be satisfied by the end of Q2 2014.
- The filing gives no quantified earnings or revenue guidance. Management cautioned that interim results may not indicate full-year results.
- Disclosed risks include market and competitive conditions, customer concentration, international and foreign-exchange exposure, raw-material availability and costs, product acceptance, financing costs, and potential goodwill impairment. Litigation was not expected by management to materially affect financial condition, results, or cash flows.
- Debt covenants include a maximum indebtedness-to-EBITDA ratio of 3.5 and minimum fixed-charge coverage ratio of 1.25. The credit agreement also includes a lender-defined material-adverse-effect default provision.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing covers Q1 2014, not Q1 2013.
- Track whether working-capital investment reverses and operating cash flow recovers after its negative Q1 result.
- Assess post-acquisition sales, margins, integration costs, and final purchase-price allocations, including PES’s impact in subsequent periods.
- Monitor debt growth, revolving-credit availability, variable interest-rate exposure, and covenant headroom.
- Review the effect of employee share withholding transactions and the reported $25.0 million excess tax benefit on financing cash flow.