Middleby Corporation — Form 10-Q Summary
Period: Fiscal quarter and six months ended June 28, 2014; filed August 7, 2014. The request metadata says “2013 Q2,” but the filing itself reports 2014 Q2 results and compares them with 2013.
Business context and reporting period
Middleby manufactures commercial foodservice, food processing, and residential kitchen equipment. It reports three segments: Commercial Foodservice, Food Processing, and Residential Kitchen. Results include recent acquisitions, including Celfrost, Wunder-Bar, Market Forge, and PES; management also attributes growth to higher underlying sales and acquisition integration initiatives.
Financial performance
| Metric | Three months ended June 28, 2014 | Prior-year quarter | Six months ended June 28, 2014 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $424.8 million | $363.8 million | $797.3 million | $691.3 million |
| Gross profit | $166.2 million | $136.6 million | $309.2 million | $257.8 million |
| Gross margin | 39.1% | 37.5% | 38.8% | 37.3% |
| Operating income | $75.7 million | $60.3 million | $131.7 million | $102.5 million |
| Operating margin | 17.8% | 16.6% | 16.5% | 14.8% |
| Net earnings | $48.4 million | $37.2 million | $81.9 million | $63.1 million |
| Diluted EPS | $0.85 | $0.67 | $1.44 | $1.13 |
For the quarter, sales rose 16.8%; management said $21.1 million of the increase came from acquisitions and sales excluding acquisitions grew 11.0%. For the six-month period, sales rose 15.3%, with $39.9 million attributed to acquisitions and 9.6% growth excluding acquisitions. Management cited integration and cost-saving initiatives as contributors to improved consolidated gross margins.
- Quarterly segment sales: Commercial Foodservice $263.9 million, Food Processing $89.9 million, and Residential Kitchen $70.9 million. Excluding acquisitions, reported year-over-year growth was 10.2%, 6.2%, and 20.6%, respectively.
- Cash flow: Six-month operating cash flow was $61.7 million, versus $24.0 million a year earlier. Investing used $67.7 million, including $60.7 million for acquisitions and $7.0 million for property and equipment. Financing provided $1.8 million. Cash declined $4.6 million to $32.3 million.
- Liquidity and debt: Total debt was $592.7 million, compared with $571.6 million at year-end 2013; cash was $32.3 million. The $1.0 billion revolving facility had $583.0 million drawn, $10.5 million of letters of credit, and $406.5 million of remaining availability. Average senior debt interest rate was 1.64%; the facility matures in August 2017.
- Balance sheet: Total assets were $1.926 billion and stockholders’ equity was $911.0 million at June 28, 2014. Inventories were $260.0 million, up from $220.1 million at year-end.
Material changes versus the prior comparable period
- Quarterly and six-month sales and earnings increased, with growth from both acquisitions and existing businesses. International sales were $129.4 million for the quarter, versus $91.1 million; for six months they were $242.8 million, versus $176.5 million.
- Consolidated gross margin improved, though Commercial Foodservice segment gross margin declined year over year, reflecting sales mix and lower margins at acquired businesses.
- Six-month operating cash flow increased substantially from the prior year, while working capital absorbed cash: receivables increased $20.3 million, inventory $10.6 million, and accrued expenses and other liabilities decreased $26.7 million.
- Debt increased by $21.1 million from December 28, 2013. Six-month investing outflows were far below the prior-year period, which included the Viking acquisition.
Outlook, commentary, risks, contingencies, and unusual items
- No numerical revenue or earnings guidance is provided. Management said available cash, operating cash generation, lender availability, and capital-market access should be sufficient for operations, debt service, capital expenditures, acquisitions, product development, and integration for the foreseeable future.
- Management cited restaurant efficiency initiatives, improved market conditions, international expansion, and demand for more efficient food-processing equipment. It also noted acquisition integration benefits and continuing cost-reduction initiatives.
- Risks identified include quarterly earnings variability, customer concentration, international, foreign-exchange and political exposure, competition and pricing, raw-material availability and cost, product development and acceptance, and potential goodwill impairment.
- Six-month Viking integration and reorganization charges were $4.0 million; management expected the remaining obligations to be satisfied by fiscal year-end 2014. The second quarter also included $1.3 million of non-recurring Residential Kitchen reorganization charges.
- Accrued product recall costs rose to $13.0 million from $2.5 million at year-end; the filing does not clearly explain the cause or specific exposure. Warranty accruals increased to $25.6 million from $20.8 million.
- Acquisition-related deferred and contingent seller payments totaled $14.7 million. Contingent consideration fair value was $13.3 million. Purchase-price allocations for several recent acquisitions remained provisional.
- The company reported $12.7 million of unrecognized tax benefits at year-end 2013, plus accrued interest and penalties; it recorded $1.1 million of tax expense for current-year unrecognized tax benefits and said approximately $0.5 million may be recognized over the next 12 months.
- Management said pending litigation was not expected to materially affect financial condition, results, or cash flows. The company was in compliance with borrowing covenants. The credit agreement includes leverage and fixed-charge coverage requirements and customary default provisions.
- The board approved a three-for-one stock split, effective June 27, 2014; per-share amounts in the filing reflect the split. The company repurchased no shares under its public program during the quarter. Six-month treasury-stock purchases primarily reflected $44.3 million of shares surrendered by employees for withholding taxes on restricted-stock vesting.
- Management concluded disclosure controls were effective at period-end and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Reconcile reported growth with acquisition contributions and assess the sustainability of growth excluding acquisitions.
- Track margin trends by segment, especially Commercial Foodservice’s lower segment margin and the effect of acquired businesses, integration, and cost initiatives.
- Review cash conversion and working-capital movements, including receivables, inventory, and accrued liabilities.
- Monitor leverage, variable-rate exposure, revolver availability, covenant headroom, and the 2017 facility maturity.
- Seek clarification on the increase in the product recall accrual and any related claims, costs, or operational effects.
- Assess acquisition integration, provisional purchase accounting, seller earnouts, and whether reorganization costs recur.
- Review tax exposures and the potential resolution of unrecognized tax benefits.