Middleby Corporation — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended September 28, 2013. The request metadata says “2012 Q3,” but that does not match the filing period; comparisons below are against the comparable 2012 periods.
Business context and results
Middleby makes commercial foodservice, food processing and residential kitchen equipment. The residential segment reflects the December 2012 acquisition of Viking Range. Results are unaudited, and management cautions that interim results are not necessarily indicative of full-year results.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $360.0m | $257.7m | $1,051.3m | $746.6m |
| Gross profit / margin | $141.4m / 39.3% | $100.4m / 39.0% | $399.3m / 38.0% | $289.7m / 38.8% |
| Operating income / margin | $67.5m / 18.8% | $47.4m / 18.4% | $170.0m / 16.2% | $129.4m / 17.3% |
| Net earnings | $40.9m | $29.8m | $104.0m | $82.9m |
| Diluted earnings per share | $2.18 | $1.60 | $5.58 | $4.47 |
| Operating cash flow | Not separately presented for the quarter | $83.6m | $94.0m |
Material changes and financial position
- Quarterly sales increased 39.7%; management attributed $71.8m, or 27.9 percentage points, of the increase to acquisitions. Excluding acquisitions, sales rose 11.8%. Nine-month sales rose 40.8%, including $221.9m of acquisition growth; excluding acquisitions, they increased 11.1%.
- Q3 gross margin improved to 39.3%, while nine-month margin declined to 38.0%. Management attributed the nine-month decrease mainly to lower margins at Viking and other recent acquisitions. Q3 operating margin also improved, but the nine-month operating margin fell.
- Cash was $29.4m at September 28, down from $34.4m at December 29, 2012. Net cash from operations was $83.6m, below $94.0m a year earlier, with working-capital needs cited as a factor. Investing used $385.2m, primarily for Viking and distributor acquisitions; financing provided $296.5m, principally from revolver borrowings.
- Total debt was $537.4m, up from $260.1m at year-end 2012, primarily reflecting funding for Viking. The $1.0bn revolving facility had $535.0m drawn, $13.0m of letters of credit and $452.0m of remaining availability. Average senior-debt interest rate was 1.95%; the facility matures in August 2017. The company reported compliance with debt covenants.
- Total assets were $1.700bn and stockholders’ equity was $781.5m. Current assets were $514.1m and current liabilities $282.5m. Inventory increased to $209.8m from $153.5m at year-end.
- Q3 sales by segment were Commercial Foodservice $230.8m, Food Processing $71.2m and Residential Kitchen $58.0m. Nine-month segment operating income was $169.1m, $34.0m and $5.2m, respectively; corporate and other costs were $38.3m.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said Viking’s gross margin is expected to improve as integration initiatives take effect and expected those initiatives to be substantially complete by fiscal year-end 2013. Management believed available cash, operating cash flow, credit availability and capital-market access would fund operations, debt service, investment and integration needs for the foreseeable future.
- Middleby recorded $7.4m of Viking-related integration costs during the first nine months, primarily severance and benefits, product discontinuance, office consolidation and contract terminations. Acquisition-related intangible amortization and higher expenses also affected results.
- Q3 effective tax rate was 33.8%, versus 28.6%; the nine-month rate was 33.5%, versus 30.2%. Management cited more income from domestic jurisdictions and fewer favorable tax-reserve adjustments. The filing reported $12.1m of unrecognized tax benefits at year-end 2012, plus accrued interest and penalties, and a $1.5m tax expense for current-year uncertain tax positions.
- Risks highlighted include acquisition integration and purchase-accounting estimates, goodwill and intangible impairment, variable interest rates, foreign exchange and political exposure, raw-material availability and cost, competition, customer dependence, and market conditions. The credit agreement includes leverage and fixed-charge coverage covenants and a lender-defined material-adverse-effect default provision. Management did not believe pending litigation would materially affect financial condition, results or cash flows.
- After quarter-end, Middleby completed its acquisition of Celfrost Innovations in India on October 15, 2013; the filing cites approximately $20m in annual revenue.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q3 2013, not Q3 2012.
- Assess how much growth and earnings improvement is organic versus acquired, and whether Viking integration can deliver the expected margin improvement.
- Review working-capital conversion, particularly inventory growth, and the sustainability of operating cash flow.
- Monitor leverage, variable-rate exposure, covenant headroom and the company’s ability to service or refinance debt as the revolver approaches maturity.
- Evaluate provisional acquisition valuations, goodwill and intangible balances, integration costs, and uncertain tax positions.