Middleby Corporation — Form 10-K Summary
Period note: The filing covers the fiscal year ended January 2, 2021 (53 weeks), with fiscal 2019 as the prior comparable year. Although the request specifies 2019 Q4, this is not a 2019-year-end filing; fiscal 2020 fourth-quarter figures are included below where relevant. Unless noted, amounts are in U.S. dollars.
Business context and reporting period
Middleby designs, manufactures and sells equipment through three segments: Commercial Foodservice, Food Processing and Residential Kitchen. Its fiscal 2020 results reflect the COVID-19 pandemic and several acquisitions. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting, with certain recent acquisitions excluded from the control assessment.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $2,513.3 million | $2,959.4 million |
| Gross profit / margin | $882.0 million / 35.1% | $1,103.5 million / 37.3% |
| Operating income / margin | $324.4 million / 12.9% | $514.0 million / 17.4% |
| Net earnings | $207.3 million | $352.2 million |
| Diluted earnings per share | $3.76 | $6.33 |
| Operating cash flow | $524.8 million | $377.4 million |
| Cash and cash equivalents | $268.1 million | $94.5 million |
| Total debt, as reported | $1,729.6 million | $1,873.1 million |
| Working capital | $570.2 million | $616.1 million |
Net cash used in investing activities was $106.8 million, including approximately $79.0 million for acquisitions; capital expenditures were $34.8 million. Net cash used in financing activities was $252.5 million. The company reported $2.0 billion of remaining borrowing capacity under its credit facility, net of outstanding letters of credit, and compliance with its debt covenants at year-end.
Commercial Foodservice generated $1,510.3 million in sales, Food Processing $437.3 million, and Residential Kitchen $565.7 million. Segment operating income was $239.6 million, $78.0 million, and $67.0 million, respectively.
Material changes versus the prior comparable year
- Sales fell 15.1%; excluding acquisitions and foreign exchange, they declined 17.5%. Acquisitions contributed $72.3 million to reported sales growth, partially offsetting the underlying decline.
- Commercial Foodservice sales fell 23.9% as COVID-19 disrupted restaurant demand. Food Processing sales increased 9.1% (5.9% excluding acquisitions and foreign exchange), while Residential Kitchen sales declined 1.5% (2.9% excluding foreign exchange and the Brava acquisition).
- Gross margin contracted 2.2 percentage points, and operating margin fell 4.5 points. Management cited reduced sales volume, lower margins at recent acquisitions, and facility-consolidation effects.
- Operating cash flow increased despite lower earnings, with reduced working-capital requirements providing a significant benefit. Cash rose by $173.6 million during the year.
- Year-end order backlog rose in Commercial Foodservice to $238.2 million from $128.7 million and in Residential Kitchen to $153.3 million from $41.0 million; Food Processing backlog decreased to $131.2 million from $137.8 million. Backlog is not necessarily indicative of future sales.
Outlook, risks and unusual items
- Management provided no specific numerical revenue or earnings guidance. It said demand and production were anticipated to continue recovering, while emphasizing uncertainty from COVID-19. It believed cash, operating cash generation and credit availability were adequate for working-capital and cash needs and covenant compliance for at least the next 12 months.
- COVID-19 affected demand, supply chains, operations and collections; the commercial restaurant-related business was particularly affected. Management described gradual recovery in the second half of fiscal 2020.
- Fiscal 2020 included $15.3 million of impairment charges: $11.6 million for certain trade names and approximately $2.9 million for assets held for sale in a non-core Residential Kitchen business. A $14.7 million pension curtailment loss followed the decision to close the AGA Group pension scheme to future accruals. The company also recorded a $2.0 million gain on sale of a plant.
- The defined-benefit pension obligation was underfunded by $469.5 million at year-end, up from $289.1 million. Goodwill and indefinite-lived intangible assets were approximately 37% and 20% of total assets, respectively, creating potential exposure to future impairments.
- Debt includes $747.5 million principal of 1.00% convertible notes due 2025. Conversion or repurchase provisions could affect liquidity or dilute shareholders; the notes’ reported carrying value was lower because of an unamortized discount. Credit-facility covenants, floating-rate borrowings, interest-rate swaps, foreign exchange, acquisitions and integration are additional risks.
- Other disclosed risks include commodity and supply disruption, customer concentration, competition, cybersecurity, Brexit-related uncertainty, litigation and tax exposures. Management said routine litigation was not expected to materially affect results; no material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the post-year-end recovery in restaurant and international demand continued, and how much the high Commercial Foodservice backlog converted to sales.
- The sustainability of operating cash flow, particularly the contribution from working-capital movements, and the company’s ability to preserve margins as volumes recover.
- Debt maturities, covenant headroom, convertible-note settlement terms and dilution or cash requirements under potential conversion scenarios.
- Assumptions underlying goodwill and trade-name valuations, and whether weaker-than-forecast demand could trigger further impairment charges.
- Changes in the $469.5 million pension underfunding, future contribution requirements and sensitivity to discount rates and asset returns.
- Integration progress and returns from acquisitions, as well as the status and financial impact of the non-core business classified as held for sale.