Middleby Corporation — Form 10-Q Summary
Reporting period: The filing covers the three months ended March 30, 2019, compared with the three months ended March 31, 2018. This differs from the request metadata, which labels the period “2018 Q1.”
Business context and results
Middleby manufactures commercial foodservice, food processing, and residential kitchen equipment. The quarter’s reported growth largely reflected acquisitions completed in 2018 and the acquisition of EVO at the end of 2018.
- Revenue: $686.8 million, up 17.4% from $584.8 million. Acquisitions contributed $100.4 million; excluding acquisitions and a business closure, sales rose 0.8%. Excluding foreign exchange as well, sales increased 2.9%.
- Segment revenue: Commercial Foodservice $457.5 million, up 27.1%; Food Processing $92.5 million, up 4.4%; Residential Kitchen $136.8 million, up 0.4%.
- Gross profit and margin: $257.3 million versus $211.6 million; gross margin improved to 37.5% from 36.2%.
- Operating income and margin: $101.1 million versus $87.0 million; operating margin was 14.8% versus 14.9%.
- Net earnings and EPS: Net earnings were $69.0 million, up 5.5% from $65.4 million. Diluted EPS was $1.24 versus $1.18.
- Cash flow: Operating cash flow was $33.9 million versus $44.7 million. Investing used $20.5 million, including $12.4 million for EVO and $8.1 million for capital expenditures. Cash increased $9.5 million to $81.2 million.
- Debt and liquidity: Total debt was $1.892 billion, essentially unchanged from year-end 2018. The $3.0 billion revolving facility had $1.1 billion of remaining availability, including the effect of outstanding letters of credit. The company reported compliance with debt covenants.
Material changes and management commentary
- Commercial Foodservice growth included $92.0 million from recent acquisitions; excluding acquisitions and foreign exchange, segment sales rose 3.4%. Food Processing sales declined 3.2% on that same basis; Residential Kitchen sales increased 5.5% excluding foreign exchange and the closure of a non-core business.
- SG&A rose to $155.9 million from $122.9 million, increasing to 22.7% of revenue from 21.0%. The filing attributes the increase to acquisitions (including $8.5 million of acquired-intangible amortization), $10.0 million of transition costs related to the former chairman and CEO’s retirement, and $3.5 million of conventions and trade shows.
- Interest expense and deferred financing amortization increased to $20.5 million from $8.8 million, reflecting higher rates and debt associated with acquisitions. The effective tax rate declined to 23.1% from 24.5%, primarily due to a foreign tax refund and enacted tax-rate changes in certain jurisdictions.
- Operating cash flow was lower year over year, with working-capital changes reducing cash flow by $62.7 million. Inventory increased $54.5 million, which management attributed to customer rollout timing and expected order fulfillment; accrued expenses and other liabilities decreased $31.5 million, primarily reflecting payments under annual rebate programs.
Outlook, risks, and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management said available cash, operating cash generation, credit-facility availability, and capital-market access should be sufficient for foreseeable operating, debt-service, capital-expenditure, acquisition, and integration needs.
- The company identified risks including financing-cost variability, customer concentration, international and foreign-exchange exposure, competition and pricing, raw-material availability and cost, and product-development and market-acceptance risks.
- Interest-rate swaps had $999 million of notional value; the filing reported a $3.2 million net swap liability and a $9.3 million after-tax fair-value loss in the quarter. Foreign-exchange forwards and options had a $0.7 million loss. The company does not use these derivatives for speculation.
- Adoption of lease accounting added approximately $85 million of right-of-use assets and lease liabilities. Operating lease cost was $7.5 million for the quarter.
- Acquisition purchase-price allocations for certain businesses, including Taylor, remained provisional. On April 1, 2019, after quarter-end, Middleby completed acquisitions of Standex’s Cooking Solutions Group for approximately $105 million and Powerhouse Dynamics for approximately $12.5 million.
- Management said pending litigation was not expected to materially affect financial condition, results, or cash flows. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much future growth and margin performance depends on acquisitions versus organic demand, particularly given weak underlying Food Processing sales.
- Whether inventory converts to sales and cash as planned, and whether working-capital pressures persist.
- Debt service, interest costs, covenant headroom, and the company’s ability to reduce leverage while funding acquisitions and integration.
- Integration results and final purchase accounting for recent acquisitions, including the subsequent April 2019 transactions.
- The effect of the former CEO transition costs and other acquisition-related or unusual expenses on ongoing profitability.