Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 28, 2019
or
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 1-9973
THE MIDDLEBY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
36-3352497
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)
1400 Toastmaster Drive,
Elgin,
Illinois
60120
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:
(847)
741-3300
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx No o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer, large accelerated filer, smaller reporting and emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock
MIDD
Nasdaq Global Market
As of November 4, 2019, there were 56,140,851 shares of the registrant's common stock outstanding.
Common stock, $0.01 par value; 63,080,940 and 62,592,707 shares issued in 2019 and 2018, respectively
145
145
Paid-in capital
382,526
377,419
Treasury stock, at cost; 6,940,089 and 6,889,241 shares in 2019 and 2018
(451,262
)
(445,118
)
Retained earnings
2,252,465
2,009,233
Accumulated other comprehensive loss
(327,843
)
(276,476
)
Total stockholders' equity
1,856,031
1,665,203
Total liabilities and stockholders' equity
$
4,928,528
$
4,549,781
See accompanying notes
1
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
Nine Months Ended
Sep 28, 2019
Sep 29, 2018
Sep 28, 2019
Sep 29, 2018
Net sales
$
724,014
$
713,331
$
2,171,820
$
1,966,259
Cost of sales
453,986
452,171
1,358,001
1,242,707
Gross profit
270,028
261,160
813,819
723,552
Selling, general and administrative expenses
144,460
141,372
445,000
399,328
Restructuring expenses
4,223
12,111
6,806
18,245
Income from operations
121,345
107,677
362,013
305,979
Interest expense and deferred financing amortization, net
20,846
19,143
63,334
38,370
Net periodic pension benefit (other than service costs)
(7,175
)
(9,225
)
(22,233
)
(28,046
)
Other expense (income), net
1,444
(260
)
(489
)
371
Earnings before income taxes
106,230
98,019
321,401
295,284
Provision for income taxes
24,210
25,114
78,158
72,971
Net earnings
$
82,020
$
72,905
$
243,243
$
222,313
Net earnings per share:
Basic
$
1.47
$
1.31
$
4.37
$
4.00
Diluted
$
1.47
$
1.31
$
4.37
$
4.00
Weighted average number of shares
Basic
55,663
55,577
55,641
55,575
Dilutive common stock equivalents1
—
—
—
—
Diluted
55,663
55,577
55,641
55,575
Comprehensive income
$
55,915
$
69,027
$
191,876
$
212,754
1There were no anti-dilutive equity awards excluded from common stock equivalents for any period presented.
See accompanying notes
2
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(amounts in thousands)
(Unaudited)
Common
Stock
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(loss)
Total
Stockholders'
Equity
Balance, June 29, 2019
$
145
$
380,603
$
(451,204
)
$
2,170,445
$
(301,738
)
$
1,798,251
Net earnings
—
—
—
82,020
—
82,020
Currency translation adjustments
—
—
—
—
(25,428
)
(25,428
)
Change in unrecognized pension benefit costs, net of tax of $1,026
—
—
—
—
4,975
4,975
Unrealized loss on interest rate swap, net of tax of $(1,867)
—
—
—
—
(5,652
)
(5,652
)
Stock compensation
—
1,923
—
—
—
1,923
Stock issuance
—
—
—
—
—
—
Purchase of treasury stock
—
—
(58
)
—
—
(58
)
Balance, September 28, 2019
$
145
$
382,526
$
(451,262
)
$
2,252,465
$
(327,843
)
$
1,856,031
Balance, December 29, 2018
$
145
$
377,419
$
(445,118
)
$
2,009,233
$
(276,476
)
$
1,665,203
Net earnings
—
—
—
243,243
—
243,243
Adoption of ASU 2017-12 (1)
—
—
—
(11
)
11
—
Currency translation adjustments
—
—
—
—
(27,190
)
(27,190
)
Change in unrecognized pension benefit costs, net of tax of $955
—
—
—
—
4,966
4,966
Unrealized loss on interest rate swap, net of tax of $(9,890)
—
—
—
—
(29,154
)
(29,154
)
Stock compensation
—
3,257
—
—
—
3,257
Stock issuance
—
1,850
—
—
—
1,850
Purchase of treasury stock
—
—
(6,144
)
—
—
(6,144
)
Balance, September 28, 2019
$
145
$
382,526
$
(451,262
)
$
2,252,465
$
(327,843
)
$
1,856,031
(1) As of December 30, 2018, the company adopted ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" using the modified retrospective method. The adoption of this guidance resulted in the recognition of less than $0.1 million as an adjustment to the opening balance of retained earnings.
See accompanying notes
3
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(amounts in thousands)
(Unaudited)
Common
Stock
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(loss)
Total
Stockholders'
Equity
Balance, June 30, 2018
$
145
$
376,740
$
(445,118
)
$
1,841,489
$
(272,100
)
$
1,501,156
Net earnings
—
—
—
72,905
—
72,905
Currency translation adjustments
—
—
—
—
(9,718
)
(9,718
)
Change in unrecognized pension benefit costs, net of tax of $322
—
—
—
—
1,674
1,674
Unrealized gain on interest rate swap, net of tax of $1,431
—
—
—
—
4,166
4,166
Stock compensation
—
3,450
—
—
—
3,450
Balance, September 29, 2018
$
145
$
380,190
$
(445,118
)
$
1,914,394
$
(275,978
)
$
1,573,633
Balance, December 30, 2017
$
145
$
374,922
$
(445,118
)
$
1,697,618
$
(266,419
)
$
1,361,148
Net earnings
—
—
—
222,313
—
222,313
Adoption of ASU 2018-02 (1)
—
—
—
(1,132
)
1,132
—
Adoption of ASU 2014-09 (2)
—
—
—
(4,405
)
—
(4,405
)
Currency translation adjustments
—
—
—
—
(29,879
)
(29,879
)
Change in unrecognized pension benefit costs, net of tax of $1,432
—
—
—
—
7,041
7,041
Unrealized gain on interest rate swap, net of tax of $4,172
—
—
—
—
12,147
12,147
Stock compensation
—
5,268
—
—
—
5,268
Balance, September 29, 2018
$
145
$
380,190
$
(445,118
)
$
1,914,394
$
(275,978
)
$
1,573,633
(1) As of December 31, 2017, the company adopted ASU No. 2018-02,Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The adoption of this guidance resulted in the reclassification of $1.1 million, including $1.6 million related to interest rate swap and $(0.5) million related to pensions, of stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings.
(2) As of December 31, 2017, the company adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606) using the modified retrospective method to contracts that were not completed as of December 30, 2017. The adoption of this guidance resulted in the recognition of $4.4 million as an adjustment to the opening balance of retained earnings.
See accompanying notes
4
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
Sep 28, 2019
Sep 29, 2018
Cash flows from operating activities--
Net earnings
$
243,243
$
222,313
Adjustments to reconcile net earnings to net cash provided by operating activities--
Depreciation and amortization
77,272
66,455
Operating lease asset amortization
17,246
—
Non-cash share-based compensation
3,257
5,268
Deferred income taxes
9,931
13,312
Impairment of property, plant and equipment
—
783
Non-cash restructuring
—
5,179
Changes in assets and liabilities, net of acquisitions
Accounts receivable, net
(1,116
)
(38,936
)
Inventories, net
(65,864
)
(25,604
)
Prepaid expenses and other assets
4,369
10,400
Accounts payable
(17,659
)
24,625
Accrued expenses and other liabilities
(40,935
)
(31,748
)
Net cash provided by operating activities
229,744
252,047
Cash flows from investing activities--
Additions to property, plant and equipment
(33,819
)
(32,552
)
Purchase of tradename
—
(5,399
)
Acquisitions, net of cash acquired
(238,974
)
(1,147,738
)
Net cash used in investing activities
(272,793
)
(1,185,689
)
Cash flows from financing activities--
Proceeds under Credit Facility
444,451
1,520,225
Repayments under Credit Facility
(375,188
)
(588,911
)
Net proceeds (repayments) under international credit facilities
319
(6,997
)
Net repayments under other debt arrangement
(175
)
(3
)
Payments of deferred purchase price
(1,648
)
(692
)
Repurchase of treasury stock
(6,144
)
—
Net cash provided by financing activities
61,615
923,622
Effect of exchange rates on cash and cash equivalents
(3,086
)
(3,046
)
Changes in cash and cash equivalents--
Net increase (decrease) in cash and cash equivalents
15,480
(13,066
)
Cash and cash equivalents at beginning of year
71,701
89,654
Cash and cash equivalents at end of period
$
87,181
$
76,588
See accompanying notes
5
THE MIDDLEBY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 2019
(Unaudited)
1)
Summary of Significant Accounting Policies
A)
Basis of Presentation
The condensed consolidated financial statements have been prepared by The Middleby Corporation (the "company" or “Middleby”), pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements are unaudited and certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information not misleading. These financial statements should be read in conjunction with the financial statements and related notes contained in the company's 2018 Form 10-K. The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2019.
In the opinion of management, the financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position of the company as of September 28, 2019 and December 29, 2018, the results of operations for the three and nine months endedSeptember 28, 2019 and September 29, 2018, cash flows for the nine months endedSeptember 28, 2019 and September 29, 2018 and statement of stockholders' equity for the three and nine months endedSeptember 28, 2019 and September 29, 2018.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long-lived and intangible assets, warranty reserves, insurance reserves, income tax reserves, non-cash share-based compensation and post-retirement obligations. Actual results could differ from the company's estimates.
B)
Non-Cash Share-Based Compensation
The company estimates the fair value of market-based stock awards and stock options at the time of grant and recognizes compensation cost over the vesting period of the awards and options. Non-cash share-based compensation expense was $2.0 million and $3.5 million for the three months period ended September 28, 2019 and September 29, 2018, respectively. Non-cash share-based compensation expense was $3.3 million and $5.3 million for the nine months period ended September 28, 2019 and September 29, 2018, respectively.
C)
Income Taxes
A tax provision of $78.2 million, at an effective rate of 24.3%, was recorded during the nine months period ended September 28, 2019, as compared to a $73.0 million tax provision at a 24.7% in the prior year period. The effective rates in 2019 and 2018 are higher than the federal tax rate of 21% primarily due to state taxes and foreign tax rate differentials.
D)
Fair Value Measures
Accounting Standards Codification ("ASC") 820 "Fair Value Measurements and Disclosures" defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into the following levels:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3 – Unobservable inputs based on our own assumptions.
6
The company’s financial assets and liabilities that are measured at fair value and are categorized using the fair value hierarchy are as follows (in thousands):
Fair Value
Level 1
Fair Value
Level 2
Fair Value
Level 3
Total
As of September 28, 2019
Financial Assets:
Interest rate swaps
$
—
$
1,384
$
—
$
1,384
Financial Liabilities:
Interest rate swaps
$
—
$
31,065
$
—
$
31,065
Contingent consideration
$
—
$
—
$
7,340
$
7,340
As of December 29, 2018
Financial Assets:
Interest rate swaps
$
—
$
13,487
$
—
$
13,487
Financial Liabilities:
Interest rate swaps
$
—
$
4,125
$
—
$
4,125
Contingent consideration
$
—
$
—
$
3,566
$
3,566
The contingent consideration as of September 28, 2019 relates to the earnout provision recorded in conjunction with the acquisitions of Josper S.A. ("Josper") and Ss Brewtech. The contingent consideration as of December 29, 2018 relates to the earnout provision recorded in conjunction with the acquisition of Josper.
The earnout provisions associated with these acquisitions are based upon performance measurements related to sales and earnings, as defined in the respective purchase agreement. On a quarterly basis, the company assesses the projected results for each acquired business in comparison to the earnout targets and adjusts the liability accordingly.
E) Consolidated Statements of Cash Flows
Cash paid for interest was $61.7 million and $35.9 million for the nine months endedSeptember 28, 2019 and September 29, 2018, respectively. Cash payments totaling $65.7 million and $61.3 million were made for income taxes for the nine months endedSeptember 28, 2019 and September 29, 2018, respectively.
7
2)
Acquisitions and Purchase Accounting
The company operates in a highly fragmented industry and has completed numerous acquisitions over the past several years as a component of its growth strategy. The company has acquired industry leading brands and technologies to position itself as a leader in the commercial foodservice equipment, food processing equipment and residential kitchen equipment industries.
The company has accounted for all business combinations using the acquisition method to record a new cost basis for the assets acquired and liabilities assumed. For the company's acquisitions, goodwill is calculated as the difference between the acquisition fair value of the consideration transferred and the fair value of the net assets acquired, and represents future economic benefits, including synergies, and assembled workforce, that are expected to be achieved as a result of the acquisition. The results of operations are reflected in the consolidated financial statements of the company from the dates of acquisition.
The following represents the company's more significant acquisitions in 2019 and 2018. The company also made smaller acquisitions not listed below which are individually and collectively immaterial.
Hinds-Bock
On February 16, 2018, the company completed its acquisition of all of the capital stock of Hinds-Bock Corporation ("Hinds-Bock"), a leading manufacturer of solutions for filling and depositing bakery and food product located in Bothell, Washington, for a purchase price of $25.4 million, net of cash acquired. During the third quarter of 2018, the company finalized the working capital provision provided by the purchase agreement resulting in a refund from the seller of $0.4 million.
The final allocation of consideration paid for the Hinds-Bock acquisition is summarized as follows (in thousands):
(as initially reported) February 16, 2018
Measurement Period Adjustments
(as adjusted) February 16, 2018
Cash
$
5
$
—
$
5
Current assets
5,301
(3
)
5,298
Property, plant and equipment
3,557
—
3,557
Goodwill
12,686
(1,166
)
11,520
Other intangibles
8,081
1,119
9,200
Long term deferred tax asset
—
115
115
Current liabilities
(3,800
)
(465
)
(4,265
)
Net assets acquired and liabilities assumed
$
25,830
$
(400
)
$
25,430
The goodwill and $4.9 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350 "Intangibles - Goodwill and Other". Other intangibles also include $3.7 million allocated to customer relationships and $0.6 million allocated to backlog, which are being amortized over periods of 6 years and 3 months, respectively. Goodwill and other intangibles of Hinds-Bock are allocated to the Food Processing Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
8
Ve.Ma.C
On April 3, 2018, the company completed its acquisition of all of the capital stock of Ve.Ma.C S.r.l. ("Ve.Ma.C"), a leading designer and manufacturer of handling, automation and robotics solutions for protein food processing lines located in Castelnuovo Rangone, Italy, for a purchase price of approximately $10.5 million, net of cash acquired. During the third quarter of 2018, the company finalized the working capital provision provided by the purchase agreement, resulting in no additional payment by either party.
The final allocation of consideration paid for the Ve.Ma.C acquisition is summarized as follows (in thousands):