Middleby Corporation — Form 10-Q summary
Period clarification: The supplied filing is for the quarter ended September 29, 2018, not 2017 Q3 as indicated in the request metadata. Comparisons below are against the corresponding 2017 periods.
Business context and reporting period
Middleby designs and manufactures commercial foodservice, food processing, and residential kitchen equipment. This unaudited filing reports the third quarter and first nine months of fiscal 2018. The period reflects substantial acquisition activity, most notably the June 2018 acquisition of Taylor for approximately $1.0 billion.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Net sales | $713.3 million | $593.0 million | $1,966.3 million | $1,702.7 million |
| Gross profit / margin | $261.2 million / 36.6% | $228.5 million / 38.5% | $723.6 million / 36.8% | $672.6 million / 39.5% |
| Operating income / margin | $107.7 million / 15.1% | $109.4 million / 18.4% | $306.0 million / 15.6% | $315.7 million / 18.6% |
| Net earnings | $72.9 million | $74.7 million | $222.3 million | $222.9 million |
| Diluted EPS | $1.31 | $1.31 | $4.00 | $3.91 |
- Q3 sales rose 20.3%, but acquisitions contributed $118.0 million; excluding acquisitions, foreign exchange and the ASC 606 accounting impact, sales increased 0.8%. Nine-month sales increased 15.5%, while comparable sales excluding those factors declined 2.1%.
- Q3 gross margin fell 1.9 percentage points and operating margin fell 3.3 points year over year. Management attributed margin pressure in part to lower margins at acquired businesses; Food Processing also faced lower volumes and unfavorable product mix.
- Nine-month operating cash flow was $252.0 million, versus $204.9 million. Investing used $1.186 billion, including $1.1 billion for acquisitions; capital expenditures were $32.6 million. Financing provided $923.6 million, primarily reflecting higher credit-facility borrowings.
- Cash was $76.6 million at September 29, 2018, down from $89.7 million at year-end 2017. Total debt was $1.958 billion, up from $1.029 billion; net debt was approximately $1.882 billion. The company reported $0.5 billion of remaining credit-facility availability and compliance with all debt covenants.
- Current assets were $1.079 billion and current liabilities $574.2 million. Total assets were $4.579 billion, including $1.823 billion of goodwill and $1.275 billion of other intangibles.
- Nine-month interest expense and financing amortization increased to $38.4 million from $18.1 million. The effective tax rate was 24.7%, versus 30.8%, reflecting the lower federal tax rate partly offset by Tax Act impacts.
Material changes versus the prior comparable period
- Acquisition-driven growth materially expanded the Commercial Foodservice business; Taylor was included from June 22, 2018. Acquisition-related goodwill increased by $583.2 million during the first nine months.
- Commercial Foodservice Q3 sales rose 32.9%; Food Processing sales rose 1.6% as reported but fell 14.3% excluding acquisitions, foreign exchange, and ASC 606. Residential Kitchen sales rose 1.5%.
- For the first nine months, Food Processing sales declined 21.4% on the same adjusted basis, while Commercial Foodservice grew 2.5% and Residential Kitchen declined 1.3%.
- Higher debt to fund acquisitions drove increased interest expense. Q3 net earnings were lower despite higher sales; nine-month net earnings were broadly unchanged.
Outlook, management commentary, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said cash, operating cash generation, available credit and capital-market access should be sufficient for foreseeable operating, debt-service, capital-expenditure, acquisition and integration needs.
- Management cited timing and deferral of large orders as a source of quarterly volatility in Food Processing. It also reported slower UK conditions affecting AGA and Rangemaster, and slower markets and order timing in Australia and China.
- Q3 restructuring expense was $12.1 million, including $8.7 million related to exiting the non-core Grange business. The exit was expected to be largely completed in Q4 2018, with no significant additional charges expected. Management estimated annual savings of approximately $10 million from Commercial Foodservice initiatives and $4 million from Food Processing initiatives; prior Residential Kitchen initiatives were expected to generate approximately $20 million in annual savings.
- Purchase-price allocations for several 2018 acquisitions remained provisional. Taylor’s working-capital adjustment and asset valuations were still being finalized; Josper’s working-capital adjustment and earnout were also outstanding. The filing reports $3.5 million of acquisition-date contingent consideration for Josper.
- Middleby stated pending litigation was not expected to materially affect its financial condition, results or cash flows. Other disclosed risks include floating-rate debt, foreign exchange exposure, acquisition integration, competition, raw-material costs and potential goodwill or intangible-asset impairment.
- Goodwill and indefinite-lived intangibles are significant assets subject to impairment testing. The filing describes a prior $58.0 million Viking tradename impairment in 2017 and sensitivity to revenue, royalty-rate and discount-rate assumptions.
- On October 1, 2018, after quarter-end, Middleby acquired M-TEK for approximately $20 million; the business had annual revenue of approximately $10 million.
- The adoption of ASC 606 increased reported nine-month sales by $17.1 million and net earnings by $3.7 million versus the prior accounting presentation; it did not affect operating cash flow.
Most important facts for investors to verify
- Confirm the intended filing period: the supplied 10-Q is 2018 Q3, not 2017 Q3.
- Assess organic demand and order trends, particularly Food Processing, separately from acquisition contributions and ASC 606 effects.
- Track gross-margin recovery, acquired-business profitability, restructuring savings and integration costs.
- Monitor debt, interest costs, covenant headroom, credit availability and the company’s ability to reduce acquisition-related leverage.
- Review final purchase accounting, earnout obligations, and any impairment indicators for goodwill and intangible assets.
- Check subsequent filings for final 2018 tax accounting, Taylor and Josper purchase adjustments, and the impact of the M-TEK acquisition.