The Middleby Corporation — Form 10-Q Summary
Reporting period: The filing covers the quarter ended March 31, 2018, compared with the quarter ended April 1, 2017. This differs from the request metadata, which says 2017 Q1.
Financial results
| Metric | Q1 2018 | Comparable quarter | Change |
|---|---|---|---|
| Net sales | $584.8 million | $530.3 million | Up 10.3% |
| Gross profit / margin | $211.6 million / 36.2% | $209.5 million / 39.5% | Margin down 3.3 percentage points |
| Operating income / margin | $87.0 million / 14.9% | $92.7 million / 17.5% | Down 6.2% |
| Net earnings | $65.4 million | $70.7 million | Down 7.5% |
| Diluted earnings per share | $1.18 | $1.24 | Down 4.8% |
| Operating cash flow | $44.7 million | $46.9 million | Down $2.1 million |
Revenue growth was principally acquisition-driven: acquisitions added approximately $63.9 million, while sales excluding acquisitions declined 1.8%. Foreign exchange added about $14.8 million to sales, and adoption of ASC 606 added about $14.1 million. Excluding acquisitions, foreign exchange and ASC 606, sales declined 7.2%.
Gross margin compression reflected lower margins at recent Commercial Foodservice acquisitions, lower Food Processing volumes and unfavorable product mix, and Residential Kitchen distribution changes and related investments and incentives. SG&A was $122.9 million, or 21.0% of sales, versus $115.0 million, or 21.7%.
Segments and material changes
- Commercial Foodservice: Sales rose 15.3% to $359.9 million, largely from acquisitions. Excluding acquisitions and foreign exchange, sales declined 1.4%; segment operating income was $82.5 million versus $80.5 million.
- Food Processing: Sales rose 14.6% to $88.6 million, but excluding acquisitions, foreign exchange and ASC 606, sales fell 28.7%. Operating income declined to $10.7 million from $18.0 million, with weaker volumes and product mix.
- Residential Kitchen: Sales declined 3.2% to $136.3 million; excluding foreign exchange, they declined 8.4%. Operating income fell to $6.6 million from $10.6 million. The company cited softer UK conditions and changes to distribution of premium brands.
ASC 606 was adopted using the modified retrospective method. For Q1 2018, the company reported $14.1 million more sales and $2.7 million more net earnings than it would have reported without the new standard. Adoption reduced opening retained earnings by $4.4 million. The filing says adoption did not affect operating cash flow.
Cash, debt and liquidity
- Cash was $103.3 million at March 31, 2018, up from $89.7 million at year-end. Operating cash flow was $44.7 million; investing cash outflow was $51.5 million, including acquisitions, tradename purchase and capital spending; financing provided $18.4 million.
- Total debt was $1.049 billion, up from $1.029 billion at December 30, 2017. The company had $1.4 billion of remaining availability under its $2.5 billion revolving facility, after outstanding letters of credit.
- Credit Facility borrowings averaged 2.94% during the quarter. Interest-rate swaps covered $499.0 million of variable-rate debt notional. The company reported compliance with its debt covenants.
- Management said cash, operating cash generation, borrowing availability and capital-market access should be sufficient for foreseeable operating, debt-service, capital, acquisition and development needs.
Working-capital changes reduced operating cash flow by $43.4 million, primarily reflecting payments of prior-year rebates and incentive obligations, partly offset by lower prepaid taxes. Inventory increased $9.1 million.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management noted quarterly volatility in Food Processing from the timing and deferral of large orders.
- Management estimated approximately $10 million of annual savings from Commercial Foodservice restructuring and approximately $20 million from the principal 2017 AGA restructuring initiatives; savings were expected to continue into the first half of fiscal 2018.
- Acquisitions remain an important growth strategy. Hinds-Bock was acquired during the quarter for approximately $25.8 million. After quarter-end, Middleby acquired Ve.Ma.C, Firex and Josper for approximately $12.3 million, $64.6 million and $43.1 million, respectively.
- Risks highlighted include acquisition integration and performance, competition and pricing, key-customer dependence, international and foreign-exchange exposure, raw-material availability and cost, product acceptance, and possible goodwill impairment. Management said pending litigation was not expected to have a material financial effect.
- Tax estimates associated with the 2017 Tax Cuts and Jobs Act remained provisional and were to be finalized in 2018. The company also expected to recognize significant right-of-use assets and lease liabilities when it adopts the new lease standard.
Important facts for investors to verify
- Confirm the applicable reporting period: the supplied filing is Q1 2018, not Q1 2017.
- Separate underlying operating trends from acquisition, foreign-exchange and ASC 606 effects, particularly the Food Processing decline and margin contraction.
- Track acquisition-related borrowing, integration results, provisional purchase-price allocations and the subsequent acquisitions’ financing and performance.
- Monitor operating cash conversion, inventory and accrued-liability movements, covenant headroom, and final tax-accounting adjustments.