Middleby Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended October 2, 2021, not 2020 Q3 as specified in the request. Comparative results are for the quarter ended September 26, 2020. Financial amounts below are in U.S. dollars; “$ million” is used for readability.
Business context and reporting period
Middleby reports three operating groups: Commercial Foodservice Equipment, Food Processing Equipment, and Residential Kitchen Equipment. The filing covers the three- and nine-month periods ended October 2, 2021. Results include Novy, acquired in July, and Imperial, acquired in September; the company also completed other acquisitions during the comparison periods.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $817.5 million | $634.5 million | $2,384.4 million | $1,784.0 million |
| Gross profit / margin | $299.6 million / 36.6% | $222.7 million / 35.1% | $879.2 million / 36.9% | $626.1 million / 35.1% |
| Operating income / margin | $233.5 million / 28.6% | $86.7 million / 13.7% | $491.4 million / 20.6% | $231.2 million / 12.9% |
| Net earnings | $176.0 million | $60.5 million | $385.8 million | $155.5 million |
| Diluted EPS | $3.09 | $1.10 | $6.83 | $2.82 |
| Operating cash flow | Not separately reported | Not separately reported | $346.0 million | $316.2 million |
Q3 sales increased 28.8%; nine-month sales increased 33.7%. Management attributed growth primarily to stronger demand and market conditions, with acquisitions and currency translation also contributing. Excluding acquisitions, dispositions, and foreign exchange, sales rose 22.4% in Q3 and 28.3% for nine months, according to the filing.
For Q3, segment sales were $511.5 million in Commercial Foodservice, $112.7 million in Food Processing, and $193.4 million in Residential Kitchen. Nine-month segment sales were $1,501.4 million, $355.2 million, and $527.8 million, respectively.
- Cash and liquidity: Cash was $251.5 million at October 2, versus $268.1 million at January 2, 2021. Current assets were $1,507.7 million and current liabilities $822.8 million.
- Debt: Total debt was $1,887.6 million, compared with $1,729.6 million at year-end. Debt less cash was approximately $1,636.1 million. The company reported compliance with borrowing covenants.
- Cash flows: Nine-month investing cash outflow was $412.7 million, including $389.0 million for acquisitions; financing provided $54.4 million. Capital expenditures were $29.7 million.
- Other balance-sheet items: Inventories rose to $686.0 million from $540.2 million at year-end; accounts receivable rose to $466.5 million from $363.4 million.
Material changes versus the prior comparable period
- Reported operating income and earnings include a $110.0 million Welbilt merger termination fee received in July 2021. Middleby also recorded $19.7 million of related deal costs in SG&A. The fee materially boosts reported operating results and is not recurring operating revenue.
- Q3 gross margin improved to 36.6% from 35.1%; nine-month gross margin improved to 36.9% from 35.1%. The company nevertheless said rising raw-material, labor, and logistics costs weighed on margins.
- SG&A increased to $175.4 million from $128.8 million in Q3, while falling as a share of nine-month sales to 20.8% from 21.6%. Management cited acquisition costs, compensation, professional and deal fees, and higher commissions.
- Operating cash flow increased year over year, but growth in receivables and inventory absorbed cash: nine-month cash-flow changes included a $97.4 million receivables use and a $134.5 million inventory use.
- Debt increased in part because adoption of ASU 2020-06 raised the reported carrying amount of convertible notes. Novy and Imperial acquisitions increased goodwill and intangible assets.
Outlook, management commentary, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management said existing cash, expected operating cash generation, lender funding, and capital-market access should be sufficient for foreseeable operating, debt-service, capital-expenditure, and product-development needs.
- Management cited improved market conditions and demand, including strength in premium residential appliances and European markets. It also warned that raw-material, labor, and logistics inflation is pressuring gross margins.
- The Welbilt merger was terminated after Middleby allowed the match period to expire; Middleby received the $110.0 million termination fee. The filing states approximately $67.7 million was received net of deal costs and taxes.
- On October 21, 2021, after quarter-end, Middleby entered a new five-year $4.5 billion secured credit agreement, replacing its prior $3.1 billion facility. The new agreement includes a $1.0 billion term loan, a $750 million delayed-draw term loan, and a $2.75 billion revolving facility.
- Disclosed risks include COVID-19 impacts, supply and input costs, competition and pricing, customer dependence, foreign exchange and political risks, financing costs, and potential goodwill impairment. The company said pending litigation was not expected to materially affect its financial condition, results, or cash flows.
- Management stated that restructuring actions were expected to generate approximately $20 million in annual savings; remaining obligations were immaterial and actions were expected to be substantially complete by fiscal year-end 2021.
Important facts for investors to verify
- Confirm the intended reporting year: this filing is Q3 2021, not Q3 2020.
- Assess earnings excluding the one-time Welbilt termination fee and related deal costs; reported margins and EPS are affected by this item.
- Track whether sales growth and improved gross margins persist as raw-material, labor, and logistics costs evolve.
- Monitor working-capital needs, particularly inventory and receivables, alongside operating cash conversion.
- Review debt, covenant headroom, and the terms and use of the October 2021 credit agreement.
- Evaluate acquisition integration and the provisional purchase-price allocations, goodwill, and intangible-asset balances.