MIDD

Business Context and Reporting Period

Company: The Middleby Corporation (Middleby)

Reporting Period: Fiscal year ended December 29, 2001

Business Overview: Middleby is a leading manufacturer of commercial cooking and warming equipment for foodservice operations, including quick-service and full-service restaurants, hotels, and institutions. The company operates through two primary segments: the Cooking Systems Group (manufacturing) and the International Distribution Division (Middleby Worldwide).

Key Event: On December 21, 2001, Middleby acquired Blodgett Holdings, Inc. from Maytag Corporation for approximately $95.1 million, becoming the largest supplier of commercial cooking and warming equipment. This acquisition significantly altered the company's balance sheet and debt profile.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 20.0% to $101.6 million. The Cooking Systems Group sales fell 17.4% due to slowed store openings by major pizza chains and general economic slowdown. The International Distribution Division sales dropped 38.0% due to weaker foreign currencies and reduced global demand.
• Margin Compression: Gross profit margin declined from 35.6% to 31.0%. This was driven by lower production volumes, reduced efficiencies, and an $868,000 inventory write-down related to discontinued Blodgett product lines.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased 29.1% to $23.6 million. This reduction was achieved through headcount reductions, office closures, and lower incentive compensation, partially offsetting the revenue decline.
• Debt Surge: Total debt increased from $8.5 million to $97.0 million, primarily to finance the Blodgett acquisition. Financing included a $68.0 million senior credit facility, $25.0 million in subordinated notes, and $20.0 million in seller notes.
• Effective Tax Rate: The effective tax rate rose to 74.4% in 2001 (from 58.7% in 2000) due to foreign losses with no recorded tax benefit and state tax assessments.

Guidance, Outlook, and Risks

Management Commentary: Management expects to record integration-related expenses in 2002 as it consolidates Blodgett manufacturing facilities and eliminates redundant positions. The company anticipates that international sales will continue to represent a significant portion of consolidated net sales.

Risks and Contingencies:

• Integration Risk: Failure to successfully integrate Blodgett operations could materially adversely impact financial results.
• Financing Exposure: The company carries significant debt with restrictive covenants (minimum equity, debt ratios). A material adverse change in operations could trigger a default. Interest rates on a portion of the debt are variable, exposing the company to rate fluctuations (though a $20 million swap was entered into in January 2002).
• Customer Dependence: Growth is heavily influenced by the expansion plans of major restaurant chains. A slowdown in new store openings or economic downturns could materially affect results.
• International Exposure: Operations in Asia, Europe, and Latin America are subject to economic downturns, political instability, and foreign currency fluctuations.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the new senior bank agreement and subordinated note covenants, specifically regarding minimum stockholders' equity and fixed charge coverage ratios.
• Blodgett Integration: Monitor the execution of cost-reduction initiatives and facility closures planned for 2002 to ensure projected synergies are realized.
• Customer Concentration: Assess the impact of major pizza chain store opening rates on future revenue, given the historical dependence on these customers.
• Interest Rate Sensitivity: Review the impact of the interest rate swap agreement and the remaining variable-rate debt on future interest expenses.
• Inventory Valuation: Confirm the status of inventory write-downs and obsolescence reserves, particularly for legacy Blodgett products.