Middleby Corporation — FY2010 Form 10-K
Reporting period: The filing is for the fiscal year ended January 1, 2011 (52 weeks), not 2009 Q4. It includes quarterly results; fourth-quarter 2010 ended January 1, 2011. Amounts below are U.S. dollars.
Business context and performance
Middleby designs and manufactures commercial foodservice equipment and food-processing equipment through two segments. FY2010 sales benefited from improving market conditions, acquisitions, recovering customer capital spending, and international growth.
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Net sales | $719.1 million | $646.6 million | +11.3% |
| Gross profit / margin | $286.7 million / 39.9% | $250.6 million / 38.8% | Margin +1.1 percentage points |
| Operating income / margin | $122.8 million / 17.1% | $111.4 million / 17.2% | Income +10.2%; margin -0.1 point |
| Net earnings | $72.9 million | $61.2 million | +19.1% |
| Diluted EPS | $3.97 | $3.29 | +20.7% |
| Operating cash flow | $98.0 million | $100.8 million | Down $2.8 million |
The MD&A describes FY2010 gross margin as 40.0%, while the financial statements’ percentage table reports 39.9%; the difference appears to be rounding. Interest expense fell to $8.6 million from $11.6 million, principally due to lower borrowing costs. The effective tax rate was 36.2%, versus 38.7%.
Fourth-quarter 2010 sales were $207.2 million, gross profit $83.1 million, operating income $34.6 million, and net earnings $21.0 million; diluted EPS was $1.13. Fourth-quarter 2009 sales were $152.5 million and net earnings $17.9 million.
Segments and changes versus prior year
- Commercial Foodservice sales rose 5.3% to $611.6 million. Excluding acquisitions, sales increased 2.0%; excluding both acquisitions and a large prior-year chain rollout order, management reported growth of 8.5%.
- Food Processing sales rose 63.1% to $107.5 million, including $18.6 million from Cozzini; excluding that acquisition, sales increased 34.9% as deferred projects resumed and processors increased capital spending.
- Acquisition growth contributed $37.8 million, or 5.9 percentage points, to consolidated sales growth. FY2010 acquisitions included PerfectFry and Cozzini; Cozzini added food-processing products and brands.
- Gross margin improved with acquisition integration, plant-consolidation savings, higher volume, and prior cost reductions, partly offset by less favorable product mix. SG&A rose to $163.9 million from $139.2 million; incentive compensation, acquisition costs, commissions, marketing, and share-based compensation contributed. FY2010 included $1.7 million of plant-consolidation charges, compared with $5.1 million in FY2009.
Cash flow, debt, and liquidity
- Cash and equivalents were $7.7 million at year-end, versus $8.4 million. Working capital was $79.8 million, up from $70.7 million.
- Total debt declined to $214.0 million from $275.6 million. The company repaid $58.7 million net under its revolving facility and $2.4 million of foreign loans. Revolver availability was $277.0 million after letters of credit and foreign borrowings; the facility matures in December 2012.
- Investing cash use was $28.9 million, including $25.7 million for acquisitions and related payments; capital expenditures were $3.2 million. Financing cash use was $69.9 million, including debt repayments and $9.0 million for repurchases of 161,066 shares.
- Management said operating cash flow and available borrowing capacity should cover working capital, capital expenditures, and debt amortization for the foreseeable future. The company reported covenant compliance at year-end. Debt agreements restrict, among other things, dividends, additional debt, capital spending, and acquisitions.
Outlook, risks, and unusual items
- No numerical FY2011 revenue or earnings guidance is provided. Management cited improving markets and expected sufficient liquidity, but cautioned that backlog is not necessarily indicative of future business. Backlog was $63.5 million at year-end versus $51.7 million a year earlier; all was expected to ship in 2011.
- Principal risks include economic weakness and delayed customer equipment purchases, competition and pricing, steel and other input costs, customer concentration, acquisition integration, international and foreign-exchange exposure, product liability and warranty costs, and reliance on innovation and key personnel.
- Goodwill was $370.0 million, approximately 43% of total assets. No goodwill impairment was recorded; future impairment depends on estimates of cash flows and economic conditions.
- Recorded unrecognized tax benefits were $17.8 million, plus $2.1 million of accrued interest and $2.4 million of penalties. The IRS was examining FY2008; timing and final outcomes were not established in the filing.
- Defined-benefit obligations exceeded plan assets by $10.7 million. The company also had $7.2 million of deferred acquisition purchase-price payments and continuing lease commitments for exited facilities; estimated lease obligations do not reflect anticipated sublease income.
- Routine litigation was described as not expected to have a material adverse effect. The auditor reported fairly presented financial statements and effective internal control overall; controls at PerfectFry and Cozzini were excluded from management’s assessment during their first year of integration.
Important facts for investors to verify
- Confirm the intended period: this is FY2010, not a 2009 Q4 filing.
- Assess whether sales and profit growth reflect sustainable organic demand or acquisition contributions, and monitor integration results and margins.
- Review the 2012 revolving-credit maturity, covenant headroom, variable-rate exposure, and available liquidity.
- Track receivables and inventory growth, cash conversion, and the quality of reported operating cash flow.
- Evaluate goodwill impairment sensitivity, tax audit exposures, earnout obligations, and exited-facility lease costs.
- Check subsequent filings for updated guidance, acquisition payments, and changes in economic and customer demand conditions.