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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2023
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) |
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1400 Toastmaster Drive, | Elgin, | Illinois | 60120 |
(Address of principal executive offices) | (Zip Code) |
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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.
Yes x 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).
Yes x 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 company," and "emerging growth company” in Rule 12b-2 of the Exchange Act.
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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:
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Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock | MIDD | Nasdaq Global Select Market |
As of November 6, 2023, there were 53,603,195 shares of the registrant's common stock outstanding.
THE MIDDLEBY CORPORATION
QUARTER ENDED SEPTEMBER 30, 2023
INDEX
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DESCRIPTION | PAGE |
PART I. FINANCIAL INFORMATION | |
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Item 1. | | |
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| CONDENSED CONSOLIDATED BALANCE SHEETS as of SEPTEMBER 30, 2023 and DECEMBER 31, 2022 | |
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| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME for the three and nine months ended SEPTEMBER 30, 2023 and OCTOBER 1, 2022 | |
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| CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY for the three and nine months ended SEPTEMBER 30, 2023 and OCTOBER 1, 2022 | |
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| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the nine months ended SEPTEMBER 30, 2023 and OCTOBER 1, 2022 | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II. OTHER INFORMATION | |
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Item 2. | | |
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Item 6. | | |
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
| | | | | | | | | | | |
ASSETS | Sep 30, 2023 | | Dec 31, 2022 |
Current assets: | | | |
Cash and cash equivalents | $ | 167,189 | | | $ | 162,001 | |
Accounts receivable, net of reserve for doubtful accounts of $23,578 and $20,295 | 633,169 | | | 631,134 | |
Inventories, net | 1,015,047 | | | 1,077,729 | |
Prepaid expenses and other | 131,287 | | | 125,640 | |
Prepaid taxes | 14,165 | | | 9,492 | |
Total current assets | 1,960,857 | | | 2,005,996 | |
Property, plant and equipment, net of accumulated depreciation of $326,916 and $299,572 | 498,871 | | | 443,528 | |
Goodwill | 2,452,419 | | | 2,411,834 | |
Other intangibles, net of amortization of $559,186 and $503,034 | 1,775,546 | | | 1,794,232 | |
Long-term deferred tax assets | 8,877 | | | 6,738 | |
Other assets | 226,038 | | | 212,538 | |
Total assets | $ | 6,922,608 | | | $ | 6,874,866 | |
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Current maturities of long-term debt | $ | 44,330 | | | $ | 45,583 | |
Accounts payable | 224,375 | | | 271,374 | |
Accrued expenses | 595,542 | | | 671,327 | |
Total current liabilities | 864,247 | | | 988,284 | |
Long-term debt | 2,535,896 | | | 2,676,741 | |
Long-term deferred tax liability | 214,021 | | | 220,204 | |
Accrued pension benefits | 5,420 | | | 14,948 | |
Other non-current liabilities | 207,809 | | | 176,942 | |
Stockholders' equity: | | | |
Preferred stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none issued | — | | | — | |
Common stock, $0.01 par value; 63,941,790 and 63,508,855 shares issued in 2023 and 2022, respectively | 148 | | | 147 | |
Paid-in capital | 463,475 | | | 408,376 | |
Treasury stock, at cost; 10,338,764 and 9,814,480 shares in 2023 and 2022 | (906,011) | | | (831,176) | |
Retained earnings | 3,823,461 | | | 3,498,872 | |
Accumulated other comprehensive loss | (285,858) | | | (278,472) | |
Total stockholders' equity | 3,095,215 | | | 2,797,747 | |
Total liabilities and stockholders' equity | $ | 6,922,608 | | | $ | 6,874,866 | |
See accompanying notes
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Net sales | $ | 980,651 | | | $ | 992,871 | | | $ | 3,028,029 | | | $ | 3,001,148 | |
Cost of sales | 605,329 | | | 627,639 | | | 1,880,736 | | | 1,944,664 | |
Gross profit | 375,322 | | | 365,232 | | | 1,147,293 | | | 1,056,484 | |
Selling, general and administrative expenses | 196,433 | | | 201,200 | | | 615,361 | | | 596,757 | |
Restructuring expenses | 4,448 | | | 2,327 | | | 11,698 | | | 8,231 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Income from operations | 174,441 | | | 161,705 | | | 520,234 | | | 451,496 | |
Interest expense and deferred financing amortization, net | 31,080 | | | 24,067 | | | 92,071 | | | 62,563 | |
Net periodic pension benefit (other than service costs) | (2,103) | | | (9,944) | | | (6,929) | | | (32,244) | |
Other expense, net | 1,072 | | | 8,529 | | | 2,642 | | | 18,478 | |
Earnings before income taxes | 144,392 | | | 139,053 | | | 432,450 | | | 402,699 | |
Provision for income taxes | 35,742 | | | 34,684 | | | 107,861 | | | 99,327 | |
Net earnings | $ | 108,650 | | | $ | 104,369 | | | $ | 324,589 | | | $ | 303,372 | |
| | | | | | | |
Net earnings per share: | | | | | | | |
Basic | $ | 2.03 | | | $ | 1.94 | | | $ | 6.06 | | | $ | 5.60 | |
Diluted | $ | 2.01 | | | $ | 1.92 | | | $ | 5.99 | | | $ | 5.50 | |
Weighted average number of shares | | | | | | | |
Basic | 53,588 | | | 53,867 | | | 53,569 | | | 54,190 | |
Dilutive common stock equivalents | 569 | | | 517 | | | 623 | | | 944 | |
Diluted | 54,157 | | | 54,384 | | | 54,192 | | | 55,134 | |
Comprehensive income | $ | 76,504 | | | $ | 64,883 | | | $ | 317,203 | | | $ | 208,597 | |
See accompanying notes
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, July 1, 2023 | $ | 148 | | | $ | 444,290 | | | $ | (906,011) | | | $ | 3,714,811 | | | $ | (253,712) | | | $ | 2,999,526 | |
Net earnings | — | | | — | | | — | | | 108,650 | | | — | | | 108,650 | |
Currency translation adjustments | — | | | — | | | — | | | — | | | (36,602) | | | (36,602) | |
Change in unrecognized pension benefit costs, net of tax of $367 | — | | | — | | | — | | | — | | | 4,436 | | | 4,436 | |
Unrealized gain on interest rate swap, net of tax of $7 | — | | | — | | | — | | | — | | | 20 | | | 20 | |
| | | | | | | | | | | |
Stock compensation | — | | | 13,175 | | | — | | | — | | | — | | | 13,175 | |
Stock issuance | — | | | 6,010 | | | — | | | — | | | — | | | 6,010 | |
| | | | | | | | | | | |
Balance, September 30, 2023 | $ | 148 | | | $ | 463,475 | | | $ | (906,011) | | | $ | 3,823,461 | | | $ | (285,858) | | | $ | 3,095,215 | |
| | | | | | | | | | | |
Balance, December 31, 2022 | $ | 147 | | | $ | 408,376 | | | $ | (831,176) | | | $ | 3,498,872 | | | $ | (278,472) | | | $ | 2,797,747 | |
Net earnings | — | | | — | | | — | | | 324,589 | | | — | | | 324,589 | |
Currency translation adjustments | — | | | — | | | — | | | — | | | (4,751) | | | (4,751) | |
Change in unrecognized pension benefit costs, net of tax of $461 | — | | | — | | | — | | | — | | | (544) | | | (544) | |
Unrealized loss on interest rate swap, net of tax of $(731) | — | | | — | | | — | | | — | | | (2,091) | | | (2,091) | |
Stock compensation | — | | | 35,305 | | | — | | | — | | | — | | | 35,305 | |
Stock issuance | 1 | | | 19,794 | | | — | | | — | | | — | | | 19,795 | |
Purchase of treasury stock | — | | | — | | | (74,835) | | | — | | | — | | | (74,835) | |
Balance, September 30, 2023 | $ | 148 | | | $ | 463,475 | | | $ | (906,011) | | | $ | 3,823,461 | | | $ | (285,858) | | | $ | 3,095,215 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid-in Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income/(loss) | | Total Stockholders' Equity |
Balance, July 2, 2022 | $ | 147 | | | $ | 376,898 | | | $ | (806,008) | | | $ | 3,261,306 | | | $ | (414,373) | | | $ | 2,417,970 | |
Net earnings | — | | | — | | | — | | | 104,369 | | | — | | | 104,369 | |
Currency translation adjustments | — | | | — | | | — | | | — | | | (81,774) | | | (81,774) | |
Change in unrecognized pension benefit costs, net of tax of $2,775 | — | | | — | | | — | | | — | | | 17,928 | | | 17,928 | |
Unrealized gain on interest rate swap, net of tax of $8,574 | — | | | — | | | — | | | — | | | 24,360 | | | 24,360 | |
Stock compensation | — | | | 15,761 | | | — | | | — | | | — | | | 15,761 | |
| | | | | | | | | | | |
Purchase of treasury stock | — | | | — | | | (71) | | | — | | | — | | | (71) | |
| | | | | | | | | | | |
Balance, October 1, 2022 | $ | 147 | | | $ | 392,659 | | | $ | (806,079) | | | $ | 3,365,675 | | | $ | (453,859) | | | $ | 2,498,543 | |
| | | | | | | | | | | |
Balance, January 1, 2022 | $ | 147 | | | $ | 357,309 | | | $ | (566,399) | | | $ | 3,062,303 | | | $ | (359,084) | | | $ | 2,494,276 | |
Net earnings | — | | | — | | | — | | | 303,372 | | | — | | | 303,372 | |
Currency translation adjustments | — | | | — | | | — | | | — | | | (201,176) | | | (201,176) | |
Change in unrecognized pension benefit costs, net of tax of $6,850 | — | | | — | | | — | | | — | | | 44,127 | | | 44,127 | |
Unrealized gain on interest rate swap, net of tax of $22,389 | — | | | — | | | — | | | — | | | 63,604 | | | 63,604 | |
Unrealized loss on certain investments, net of tax of $(443) | — | | | — | | | — | | | — | | | (1,330) | | | (1,330) | |
Stock compensation | — | | | 42,641 | | | — | | | — | | | — | | | 42,641 | |
| | | | | | | | | | | |
Purchase of treasury stock | — | | | — | | | (239,680) | | | — | | | — | | | (239,680) | |
Purchase of capped calls, net of tax of $(2,364) | — | | | (7,291) | | | — | | | — | | | — | | | (7,291) | |
Balance, October 1, 2022 | $ | 147 | | | $ | 392,659 | | | $ | (806,079) | | | $ | 3,365,675 | | | $ | (453,859) | | | $ | 2,498,543 | |
See accompanying notes
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended |
| Sep 30, 2023 | | Oct 1, 2022 |
Cash flows from operating activities-- | | | |
Net earnings | $ | 324,589 | | | $ | 303,372 | |
Adjustments to reconcile net earnings to net cash provided by operating activities-- | | | |
Depreciation and amortization | 99,058 | | | 106,917 | |
Non-cash share-based compensation | 35,305 | | | 42,641 | |
Deferred income taxes | (6,553) | | | 17,657 | |
Net periodic pension benefit (other than service costs) | (6,929) | | | (32,244) | |
| | | |
| | | |
| | | |
Other non-cash items | (684) | | | (32,455) | |
Changes in assets and liabilities, net of acquisitions | | | |
Accounts receivable, net | (430) | | | (11,174) | |
Inventories, net | 66,973 | | | (214,017) | |
Prepaid expenses and other assets | (2,481) | | | (30,832) | |
Accounts payable | (49,188) | | | (47,262) | |
Accrued expenses and other liabilities | (86,557) | | | 70,846 | |
Net cash provided by operating activities | 373,103 | | | 173,449 | |
Cash flows from investing activities-- | | | |
Net additions to property, plant and equipment | (69,645) | | | (50,914) | |
| | | |
Purchase of intangible assets | (1,805) | | | (701) | |
Acquisitions, net of cash acquired | (67,774) | | | (206,253) | |
Net cash used in investing activities | (139,224) | | | (257,868) | |
Cash flows from financing activities-- | | | |
Proceeds under Credit Facility | 565,200 | | | 1,715,000 | |
Repayments under Credit Facility | (711,692) | | | (1,360,750) | |
| | | |
Premiums paid for capped call | — | | | (9,655) | |
Net repayments under international credit facilities | (495) | | | (24,156) | |
| | | |
Payments of deferred purchase price | (4,079) | | | (7,930) | |
Repurchase of treasury stock | (74,544) | | | (239,680) | |
| | | |
Other, net | (158) | | | (235) | |
| | | |
Net cash (used in) provided by financing activities | (225,768) | | | 72,594 | |
Effect of exchange rates on cash and cash equivalents | (2,923) | | | (23,619) | |
Changes in cash and cash equivalents-- | | | |
Net increase (decrease) in cash and cash equivalents | 5,188 | | | (35,444) | |
Cash and cash equivalents at beginning of year | 162,001 | | | 180,362 | |
Cash and cash equivalents at end of period | $ | 167,189 | | | $ | 144,918 | |
| | | |
Non-cash investing and financing activities: | | | |
Stock issuance related to acquisition and purchase of intangible assets | $ | 19,795 | | | $ | — | |
See accompanying notes
THE MIDDLEBY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(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 2022 Form 10-K. The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2023. Certain reclassifications of prior year data have been made to conform with current year reporting.
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 30, 2023 and December 31, 2022, the results of operations for the three and nine months ended September 30, 2023 and October 1, 2022, cash flows for the nine months ended September 30, 2023 and October 1, 2022 and statement of stockholders' equity for the three and nine months ended September 30, 2023 and October 1, 2022.
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 $13.2 million and $15.7 million for the three months period ended September 30, 2023 and October 1, 2022, respectively. Non-cash share-based compensation expense was $35.3 million and $42.6 million for the nine months period ended September 30, 2023 and October 1, 2022, respectively.
c)Income Taxes
A tax provision of $35.7 million, at an effective rate of 24.8%, was recorded during the three months period ended September 30, 2023, as compared to a $34.7 million tax provision at an effective rate of 24.9% in the prior year period. A tax provision of $107.9 million, at an effective rate of 24.9%, was recorded during the nine months period ended September 30, 2023, as compared to a $99.3 million tax provision at a 24.7% effective rate in the prior year period. The effective tax rate for the nine months period ended September 30, 2023 is higher than the comparable year rate primarily due to an increase in the UK statutory income tax rate from 19% in 2022 to a 23.5% blended rate in 2023.
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 the company's own assumptions.
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 30, 2023 | | | | | | | |
Financial Assets: | | | | | | | |
Interest rate swaps | $ | — | | | $ | 62,163 | | | $ | — | | | $ | 62,163 | |
| | | | | | | |
Financial Liabilities: | | | | | | | |
| | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 60,789 | | | $ | 60,789 | |
Foreign exchange derivative contracts | $ | — | | | $ | 558 | | | $ | — | | | $ | 558 | |
| | | | | | | |
As of December 31, 2022 | | | | | | | |
Financial Assets: | | | | | | | |
Interest rate swaps | $ | — | | | $ | 64,985 | | | $ | — | | | $ | 64,985 | |
| | | | | | | |
| | | | | | | |
Financial Liabilities: | | | | | | | |
| | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 47,242 | | | $ | 47,242 | |
Foreign exchange derivative contracts | $ | — | | | $ | 474 | | | $ | — | | | $ | 474 | |
The contingent consideration as of September 30, 2023 and December 31, 2022, relates to the earnout provisions recorded in conjunction with various purchase agreements.
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 of the acquisitions in comparison to the earnout targets and adjusts the liability accordingly. Discount rates for valuing contingent consideration are determined based on the company rates and specific acquisition risk considerations. Changes in fair value associated with the earnout provisions are recognized in Selling, general and administrative expenses within the Condensed Consolidated Statements of Comprehensive Income.
The following table represents changes in the fair value of the contingent consideration liabilities:
| | | | | |
| September 30, 2023 |
Beginning balance | $ | 47,242 | |
Payments of contingent consideration | (4,117) | |
New contingent consideration | 15,318 | |
Changes in fair value | 2,346 | |
Ending balance | $ | 60,789 | |
e) Consolidated Statements of Cash Flows
Cash paid for interest was $93.4 million and $57.0 million for the nine months ended September 30, 2023 and October 1, 2022, respectively. Cash payments totaling $119.4 million and $84.2 million were made for income taxes for the nine months ended September 30, 2023 and October 1, 2022, respectively.
Other non-cash items in the adjustments to reconcile net earnings to net cash provided by operating activities consists primarily of unrealized foreign exchange on non-functional currency third party debt.
f) Earnings Per Share
“Basic earnings per share” is calculated based upon the weighted average number of common shares actually outstanding, and “diluted earnings per share” is calculated based upon the weighted average number of common shares outstanding and other dilutive securities.
The company’s potentially dilutive securities consist of shares issuable on vesting of restricted stock grants computed using the treasury method and amounted to 19,000 and 23,000 for the three months ended September 30, 2023, and October 1, 2022, respectively. The company’s potentially dilutive securities consist of shares issuable on vesting of restricted stock grants computed using the treasury method and amounted to 9,000 and 12,000 for the nine months ended September 30, 2023 and October 1, 2022, respectively. For the nine months ended September 30, 2023 and October 1, 2022, the average market price of the company's common stock exceeded the exercise price of the Convertible Notes (as defined below) resulting in 614,000 and 932,000 diluted common stock equivalents to be included in the diluted net earnings per share, respectively. There have been no material conversions to date. See Note 12, Financing Arrangements for further details on the Convertible Notes. There were no anti-dilutive restricted stock grants excluded from common stock equivalents in any period presented.
2) Acquisitions and Purchase Accounting
The company accounts for all business combinations using the acquisition method to record a new cost basis for the assets acquired and liabilities assumed. The difference between the purchase price and the fair value of the assets acquired and liabilities assumed has been recorded as goodwill in the financial statements. The company recognizes identifiable intangible assets, primarily trade names and customer relationships, at their fair value using a discounted cash flow model. The significant assumptions used to estimate the value of the intangible assets include revenue growth rates, projected profit margins, discount rates, royalty rates, and customer attrition rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions. The results of operations are reflected in the consolidated financial statements of the company from the dates of acquisition.
The company completed no material acquisitions during the nine months ended September 30, 2023.
Other 2022 Acquisitions
During 2022, the company completed various acquisitions that were not individually material. The following estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition dates for the other 2022 acquisitions and are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Preliminary Opening Balance Sheet | | Preliminary Measurement Period Adjustments | | Adjusted Opening Balance Sheet |
Cash | $ | 25,860 | | | $ | 159 | | | $ | 26,019 | |
| | | | | |
Current assets | 115,264 | | | (8,653) | | | 106,611 | |
Property, plant and equipment | 44,598 | | | 615 | | | 45,213 | |
Goodwill | 139,633 | | | 8,945 | | | 148,578 | |
Other intangibles | 93,147 | | | 7,018 | | | 100,165 | |
Long-term deferred tax asset | 426 | | | 635 | | | 1,061 | |
Other assets | 1,420 | | | 3,209 | | | 4,629 | |
Current portion of long-term debt | (22,841) | | | 2,043 | | | (20,798) | |
Current liabilities | (57,158) | | | (2,611) | | | (59,769) | |
Long term debt | (5,646) | | | (3,995) | | | (9,641) | |
Long-term deferred tax liability | (23,137) | | | 1,994 | | | (21,143) | |
Other non-current liabilities | (19,061) | | | (7,022) | | | (26,083) | |
| | | | | |
Consideration paid at closing | $ | 292,505 | | | $ | 2,337 | | | $ | 294,842 | |
| | | | | |
| | | | | |
Contingent consideration | 19,105 | | | 3,969 | | | 23,074 | |
| | | | | |
Net assets acquired and liabilities assumed | $ | 311,610 | | | $ | 6,306 | | | $ | 317,916 | |
The net long-term deferred tax liability amounted to $20.1 million. The net deferred tax liability is comprised of $20.9 million related to the difference between the book and tax basis of identifiable intangible assets and $0.8 million net deferred tax asset related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $46.0 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $31.5 million allocated to customer relationships, $16.0 million allocated to developed technology, and $6.7 million allocated to backlog, which are being amortized over periods of 7 to 9 years, 5 to 11 years, and 3 to 12 months, respectively. Goodwill of $113.8 million and other intangibles of $63.8 million are allocated to the Food Processing Equipment Group for segment reporting purposes. Goodwill of $32.5 million and other intangibles of $35.6 million are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. Goodwill of $2.3 million and other intangibles of $0.8 million are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Of these assets, goodwill of $21.5 million and intangibles of $11.9 million are expected to be deductible for tax purposes.
Four purchase agreements include earnout provisions providing for a contingent payment due to the sellers for the achievement of certain targets. Three earnouts are payable to the extent certain EBITDA targets are met with measurement dates ending between 2022 and 2025. One of these three earnouts is also payable yearly through 2026 based on product sales. One earnout is payable yearly through 2027 based on product sales. The contractual obligation associated with the contingent earnout provisions recognized on the acquisition date amount to $23.1 million.
The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the company is waiting for additional information necessary to finalize those fair values for certain acquisitions completed during 2022. Certain intangible assets are preliminarily valued using historical information from the Commercial Foodservice Equipment Group, Food Processing Equipment Group and Residential Kitchen Equipment Group and qualitative assessments of the individual businesses at acquisition date. Specifically, the company estimated the fair values of the intangible assets based on the percentage of purchase price assigned to similar intangible assets in previous acquisitions. Thus, the provisional measurements of fair values set forth above are subject to change. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.
Other 2023 Acquisitions
During 2023, the company completed various acquisitions that were not individually material. The following estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition dates for the other 2023 acquisitions and are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Preliminary Opening Balance Sheet | | Preliminary Measurement Period Adjustments | | Adjusted Opening Balance Sheet |
Cash | $ | 3,102 | | | $ | — | | | $ | 3,102 | |
| | | | | |
Current assets | 9,964 | | | 542 | | | 10,506 | |
Property, plant and equipment | 21,954 | | | — | | | 21,954 | |
Goodwill | 38,422 | | | 1,089 | | | 39,511 | |
Other intangibles | 34,337 | | | (713) | | | 33,624 | |
| | | | | |
| | | | | |
| | | | | |
Current liabilities | (3,774) | | | (1,091) | | | (4,865) | |
| | | | | |
Long-term deferred tax liability | (958) | | | — | | | (958) | |
Other non-current liabilities | (12,099) | | | — | | | (12,099) | |
| | | | | |
Consideration paid at closing | $ | 90,948 | | | $ | (173) | | | $ | 90,775 | |
| | | | | |
| | | | | |
Contingent consideration | 14,743 | | | — | | | 14,743 | |
| | | | | |
Net assets acquired and liabilities assumed | $ | 105,691 | | | $ | (173) | | | $ | 105,518 | |
The net long-term deferred tax liability amounted to $1.0 million. The net deferred tax liability is comprised of $0.4 million related to the difference between the book and tax basis of identifiable intangible assets and $0.6 million related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $17.9 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $7.2 million allocated to customer relationships, and $7.9 million allocated to developed technology, and $0.6 million allocated to backlog, which are being amortized over periods of 7 years, 7 to 12 years, and 9 months, respectively. Goodwill of $17.9 million and other intangibles of $7.8 million are allocated to the Food Processing Equipment Group for segment reporting purposes. Goodwill of $8.3 million and other intangibles of $14.1 million are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. Goodwill of $13.3 million and other intangibles of $11.7 million are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Of these assets, goodwill of $37.9 million and intangibles of $32.2 million are expected to be deductible for tax purposes.
Four purchase agreements include earnout provisions providing for a contingent payment due to the sellers for the achievement of certain targets. Four earnouts are payable to the extent certain sales and EBITDA targets are met with measurement dates ending between 2024 and 2026. One earnout is payable upon the achievement of certain product rollout targets specific to the year of measurement. The contractual obligation associated with the contingent earnout provisions recognized on the acquisition date amount to $14.7 million.
The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the company is waiting for additional information necessary to finalize those fair values for all acquisitions completed during 2023. Certain intangible assets are preliminarily valued using historical information from the Commercial Foodservice Equipment Group and Food Processing Equipment Group and qualitative assessments of the individual businesses at acquisition date. Specifically, the company estimated the fair values of the intangible assets based on the percentage of purchase price assigned to similar intangible assets in previous acquisitions. Thus, the provisional measurements of fair values set forth above are subject to change. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.
Pro Forma Financial Information
In accordance with ASC 805 Business Combinations, the following unaudited pro forma results of operations for the nine months ended September 30, 2023 and October 1, 2022, assumes the 2022 and 2023 acquisitions described above were completed on January 2, 2022 (first day of fiscal year 2022). The following pro forma results include adjustments to reflect amortization of intangibles associated with the acquisition and the effects of adjustments made to the carrying value of certain assets (in thousands, except per share data):
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | October 1, 2022 |
Net sales | $ | 3,037,755 | | | $ | 3,115,311 | |
Net earnings | 327,032 | | | 294,878 | |
| | | |
Net earnings per share: | | | |
Basic | $ | 6.10 | | | $ | 5.44 | |
Diluted | $ | 6.03 | | | $ | 5.35 | |
The historical consolidated financial information of the company and the acquisitions have been adjusted in the pro forma information to give effect to events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. Pro forma data may not be indicative of the results that would have been obtained had these acquisitions occurred at the beginning of the periods presented, nor is it intended to be a projection of future results. Additionally, the pro forma financial information does not reflect the costs which the company has incurred or may incur to integrate the acquired businesses.
3) Litigation Matters
From time to time, the company is subject to proceedings, lawsuits and other claims related to products, suppliers, employees, customers and competitors. The company maintains insurance to partially cover product liability, workers compensation, property and casualty, and general liability matters. The company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after assessment of each matter and the related insurance coverage. The required accrual may change in the future due to new developments or changes in approach, such as a change in settlement strategy in dealing with these matters. The company does not believe that any pending litigation will have a material effect on its financial condition, results of operations or cash flows.
4) Recently Issued Accounting Standards
Accounting Pronouncements - Recently Adopted
In October 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The new accounting rules require entities to apply “Revenue from Contracts with Customers (Topic 606)” to recognize and measure contract assets and contract liabilities in a business combination. The new accounting rules were effective for the Company in the first quarter of 2023. The company adopted this standard in the first quarter of 2023 and it did not have a material impact on its Consolidated Financial Statements and disclosures.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The new standard is effective for the company as of January 1, 2023 and only impacts annual financial statement footnote disclosures. The company adopted this standard in the first quarter of 2023 and it did not have a material impact on its Consolidated Financial Statements and disclosures.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance for troubled debt restructurings by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current-period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The standard should be applied prospectively, and it allows for a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The company adopted this standard in the first quarter of 2023 and it did not have a material impact on its Consolidated Financial Statements and disclosures.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. The new standard expands and clarifies the use of the portfolio layer method for fair value hedges of interest rate risk. The new standard allows non-prepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The new guidance on hedging multiple layers in a closed portfolio should be applied prospectively and the guidance on the accounting for fair value basis adjustments should be applied on a modified retrospective basis. The company adopted this standard in the first quarter of 2023 and it did not have a material impact on its Consolidated Financial Statements and disclosures.
Accounting Pronouncements - To be adopted
In March 2023, the FASB issued Accounting Standards Update ASU 2023-01, “Leases (Topic 842): Common Control Arrangements.” This ASU clarified the accounting for leasehold improvements for leases under common control. The guidance is effective for the Company beginning on January 1, 2024. The company is currently evaluating the impacts the adoption of this guidance will have on its Consolidated Financial Statements and disclosures.
5) Revenue Recognition
Disaggregation of Revenue
The company disaggregates its net sales by reportable operating segment and geographical location as the company believes it best depicts how the nature, timing and uncertainty of its net sales and cash flows are affected by economic factors. In general, the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups recognize revenue at the point in time control transfers to their customers based on contractual shipping terms. Revenue from equipment sold under the company's long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. The following table summarizes the company's net sales by reportable operating segment and geographical location (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Foodservice | | Food Processing | | Residential Kitchen | | | | Total |
Three Months Ended September 30, 2023 | | | | | | | | | |
United States and Canada | $ | 458,529 | | | $ | 111,092 | | | $ | 116,522 | | | | | $ | 686,143 | |
Asia | 59,922 | | | 6,389 | | | 3,371 | | | | | 69,682 | |
Europe and Middle East | 91,112 | | | 34,250 | | | 57,474 | | | | | 182,836 | |
Latin America | 24,446 | | | 14,936 | | | 2,608 | | | | | 41,990 | |
Total | $ | 634,009 | | | $ | 166,667 | | | $ | 179,975 | | | | | $ | 980,651 | |
| | | | | | | | | |
Nine Months Ended September 30, 2023 | | | | | | | | | |
United States and Canada | $ | 1,385,929 | | | $ | 354,945 | | | $ | 395,236 | | | | | $ | 2,136,110 | |
Asia | 173,901 | | | 30,507 | | | 8,652 | | | | | 213,060 | |
Europe and Middle East | 272,252 | | | 101,808 | | | 194,631 | | | | | 568,691 | |
Latin America | 61,525 | | | 41,658 | | | 6,985 | | | | | 110,168 | |
Total | $ | 1,893,607 | | | $ | 528,918 | | | $ | 605,504 | | | | | $ | 3,028,029 | |
| | | | | | | | | |
Three Months Ended October 1, 2022 | | | | | | | | | |
United States and Canada | $ | 459,971 | | | $ | 108,449 | | | $ | 145,757 | | | | | $ | 714,177 | |
Asia | 55,243 | | | 7,805 | | | 11,647 | | | | | 74,695 | |
Europe and Middle East | 86,963 | | | 24,263 | | | 60,200 | | | | | 171,426 | |
Latin America | 17,380 | | | 11,832 | | | 3,361 | | | | | 32,573 | |
Total | $ | 619,557 | | | $ | 152,349 | | | $ | 220,965 | | | | | $ | 992,871 | |
| | | | | | | | | |
Nine Months Ended October 1, 2022 | | | | | | | | | |
United States and Canada | $ | 1,302,591 | | | $ | 297,778 | | | $ | 563,047 | | | | | $ | 2,163,416 | |
Asia | 148,419 | | | 15,673 | | | 27,724 | | | | | 191,816 | |
Europe and Middle East | 267,558 | | | 58,931 | | | 234,203 | | | | | 560,692 | |
Latin America | 47,281 | | | 30,863 | | | 7,080 | | | | | 85,224 | |
Total | $ | 1,765,849 | | | $ | 403,245 | | | $ | 832,054 | | | | | $ | 3,001,148 | |
Contract Balances
Contract assets primarily relate to the company's right to consideration for work completed but not billed at the reporting date and are recorded in prepaid expenses and other in the Condensed Consolidated Balance Sheet. Contract assets are transferred to receivables when the right to consideration becomes unconditional. Accounts receivable are not considered contract assets under the revenue standard as contract assets are conditioned upon the company's future satisfaction of a performance obligation. Accounts receivable, in contracts, are unconditional rights to consideration.
Contract liabilities relate to advance consideration received from customers for which revenue has not been recognized. Current contract liabilities are recorded in accrued expenses in the Condensed Consolidated Balance Sheet. Non-current contract liabilities are recorded in other non-current liabilities in the Condensed Consolidated Balance Sheet. Contract liabilities are reduced when the associated revenue from the contract is recognized.
The following table provides information about contract assets and contract liabilities from contracts with customers (in thousands):
| | | | | | | | | | | |
| Sep 30, 2023 | | Dec 31, 2022 |
Contract assets | $ | 59,129 | | | $ | 40,438 | |
Contract liabilities | $ | 141,388 | | | $ | 185,824 | |
Non-current contract liabilities | $ | 15,328 | | | $ | 12,495 | |
During the nine months period ended September 30, 2023, the company reclassified $32.2 million to receivables, which was included in the contract asset balance at the beginning of the period. During the nine months period ended September 30, 2023, the company recognized revenue of $99.4 million which was included in the contract liability balance at the beginning of the period. Additions to contract liabilities representing amounts billed to clients in excess of revenue recognized to date were $88.3 million during the nine months period ended September 30, 2023. In addition, contract liabilities increased due to the acquisitions during the nine months ended September 30, 2023. Substantially all of the company's outstanding performance obligations will be satisfied within 12 to 36 months. There were no contract asset impairments during the nine months period ended September 30, 2023.
6) Other Comprehensive Income
Changes in accumulated other comprehensive income(1) were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency Translation Adjustment | | Pension Benefit Costs | | Unrealized Gain/(Loss) Interest Rate Swap | | Unrealized Loss Certain Investments | | Total |
Balance as of December 31, 2022 | $ | (205,345) | | | $ | (121,701) | | | $ | 48,574 | | | $ | — | | | $ | (278,472) | |
Other comprehensive income before reclassification | (4,751) | | | (2,131) | | | 21,872 | | | — | | | 14,990 | |
Amounts reclassified from accumulated other comprehensive income | — | | | 1,587 | | | (23,963) | | | — | | | (22,376) | |
Net current-period other comprehensive income | $ | (4,751) | | | $ | (544) | | | $ | (2,091) | | | — | | | $ | (7,386) | |
Balance as of September 30, 2023 | $ | (210,096) | | | $ | (122,245) | | | $ | 46,483 | | | — | | | $ | (285,858) | |
| | | | | | | | | |
Balance as of January 1, 2022 | $ | (97,654) | | | $ | (249,696) | | | $ | (13,064) | | | $ | 1,330 | | | $ | (359,084) | |
Other comprehensive income before reclassification | (201,176) | | | 44,127 | | | 55,958 | | | (1,330) | | | (102,421) | |
Amounts reclassified from accumulated other comprehensive income | — | | | — | | | 7,646 | | | — | | | 7,646 | |
Net current-period other comprehensive income | $ | (201,176) | | | $ | 44,127 | | | $ | 63,604 | | | $ | (1,330) | | | $ | (94,775) | |
Balance as of October 1, 2022 | $ | (298,830) | | | $ | (205,569) | | | $ | 50,540 | | | $ | — | | | $ | (453,859) | |
| | | | | | | | | |
(1) As of September 30, 2023, pension and interest rate swap are net of tax of $(1.5) million and $16.1 million, respectively. During the nine months ended September 30, 2023, the adjustments to pension and interest rate swap were net of tax of $0.5 million and $(0.7) million, respectively. As of October 1, 2022, pension, interest rate swap, and gain on investment amounts are net of tax of $(32.6) million and $17.9 million, respectively. During the nine months ended October 1, 2022, the adjustments to pension, unrealized gain/(loss) interest rate swap, and loss on investments were net of tax of $6.9 million, $22.4 million, and $(0.4) million, respectively.
Components of other comprehensive income were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Net earnings | $ | 108,650 | | | $ | 104,369 | | | $ | 324,589 | | | $ | 303,372 | |
Currency translation adjustment | (36,602) | | | (81,774) | | | (4,751) | | | (201,176) | |
Pension liability adjustment, net of tax | 4,436 | | | 17,928 | | | (544) | | | 44,127 | |
Unrealized gain (loss) on interest rate swaps, net of tax | 20 | | | 24,360 | | | (2,091) | | | 63,604 | |
Unrealized loss on certain investments, net of tax | — | | | — | | | — | | | (1,330) | |
Comprehensive income | $ | 76,504 | | | $ | 64,883 | | | $ | 317,203 | | | $ | 208,597 | |
7) Inventories
Inventories are composed of material, labor and overhead and are stated at the lower of cost or net realizable value. Costs for inventory have been determined using the first-in, first-out ("FIFO") method. The company estimates reserves for inventory obsolescence and shrinkage based on its judgment of future realization. Inventories at September 30, 2023 and December 31, 2022 are as follows (in thousands):
| | | | | | | | | | | |
| Sep 30, 2023 | | Dec 31, 2022 |
Raw materials and parts | $ | 529,698 | | | $ | 595,325 | |
Work-in-process | 94,057 | | | 86,083 | |
Finished goods | 391,292 | | | 396,321 | |
| $ | 1,015,047 | | | $ | 1,077,729 | |
8) Goodwill
Changes in the carrying amount of goodwill for the nine months ended September 30, 2023 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Foodservice | | Food Processing | | Residential Kitchen | | Total |
Balance as of December 31, 2022 | $ | 1,309,776 | | | $ | 350,303 | | | $ | 751,755 | | | $ | 2,411,834 | |
Goodwill acquired during the year | 8,256 | | | 17,923 | | | 13,332 | | | 39,511 | |
Measurement period adjustments to goodwill acquired in prior year | 2,412 | | | 1,540 | | | — | | | 3,952 | |
Exchange effect | (4,573) | | | (1,591) | | | 3,286 | | | (2,878) | |
Balance as of September 30, 2023 | $ | 1,315,871 | | | $ | 368,175 | | | $ | 768,373 | | | $ | 2,452,419 | |
The annual impairment assessment for goodwill and indefinite-lived intangible assets is performed as of the first day of the fourth quarter and since that assessment, the company does not believe there are any indicators of impairment requiring subsequent analysis. This is supported by the review of order rates, backlog levels and financial performance across business segments.
9) Intangibles
Intangible assets consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Estimated Weighted Avg Remaining Life | | Gross Carrying Amount | | Accumulated Amortization | | Estimated Weighted Avg Remaining Life | | Gross Carrying Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | | | | | |
Customer lists | 7.2 | | $ | 839,507 | | | $ | (509,610) | | | 7.6 | | $ | 839,811 | | | $ | (460,885) | |
Backlog | 0.0 | | 7,496 | | | (7,286) | | | 0.1 | | 8,301 | | | (6,352) | |
Developed technology | 8.4 | | 97,886 | | | (42,290) | | | 8.3 | | 79,763 | | | (35,797) | |
| | | $ | 944,889 | | | $ | (559,186) | | | | | $ | 927,875 | | | $ | (503,034) | |
Indefinite-lived assets: | | | | | | | | | | | |
Trademarks and tradenames | | | $ | 1,389,843 | | | | | | | $ | 1,369,391 | | | |
The aggregate intangible amortization expense was $18.9 million and $19.8 million for the three months period ended September 30, 2023 and October 1, 2022, respectively. The aggregate intangible amortization expense was $56.6 million and $69.9 million for the nine months period ended September 30, 2023 and October 1, 2022, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands):
| | | | | | | | |
Twelve Month Period coinciding with the end of the company's Fiscal Third Quarter | | Amortization Expense |
| | |
2024 | | $ | 66,884 | |
2025 | | 57,668 | |
2026 | | 55,416 | |
2027 | | 47,063 | |
2028 | | 40,934 | |
Thereafter | | 117,738 | |
| | $ | 385,703 | |
10) Accrued Expenses
Accrued expenses consist of the following (in thousands):
| | | | | | | | | | | |
| Sep 30, 2023 | | Dec 31, 2022 |
Contract liabilities | $ | 141,388 | | | $ | 185,824 | |
Accrued payroll and related expenses | 115,363 | | | 122,861 | |
Accrued warranty | 87,327 | | | 82,096 | |
Accrued customer rebates | 56,357 | | | 70,706 | |
Accrued short-term leases | 26,634 | | | 25,250 | |
Accrued sales and other tax | 24,889 | | | 24,044 | |
Accrued contingent consideration | 19,720 | | | 20,529 | |
Accrued professional fees | 18,442 | | | 19,541 | |
Accrued agent commission | 16,788 | | | 17,381 | |
Accrued product liability and workers compensation | 11,150 | | | 11,326 | |
| | | |
Other accrued expenses | 77,484 | | | 91,769 | |
| | | |
| $ | 595,542 | | | $ | 671,327 | |
11) Warranty Costs
In the normal course of business, the company issues product warranties for specific product lines and provides for the estimated future warranty cost in the period in which the sale is recorded. The estimate of warranty cost is based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Because warranty estimates are forecasts that are based on the best available information, actual claims costs may differ from amounts provided. Adjustments to initial obligations for warranties are made as changes in the obligations become reasonably estimable.
A rollforward of the warranty reserve is as follows (in thousands):
| | | | | |
| Nine Months Ended |
| Sep 30, 2023 |
Balance as of December 31, 2022 | $ | 82,096 | |
Warranty reserve related to acquisitions | 290 | |
Warranty expense | 67,892 | |
Warranty claims | (62,951) | |
Balance as of September 30, 2023 | $ | 87,327 | |
12) Financing Arrangements
| | | | | | | | | | | |
| Sep 30, 2023 | | Dec 31, 2022 |
| (in thousands) |
Senior secured revolving credit line | $ | 148,645 | | | $ | 251,805 | |
Term loan facility | 951,819 | | | 975,785 | |
Delayed draw term loan facility | 731,250 | | | 750,000 | |
Convertible senior notes | 740,602 | | | 737,918 | |
Foreign loans | 7,169 | | | 5,917 | |
Other debt arrangement | 741 | | | 899 | |
Total debt | 2,580,226 | | | 2,722,324 | |
Less: Current maturities of long-term debt | 44,330 | | | 45,583 | |
Long-term debt | $ | 2,535,896 | | | $ | 2,676,741 | |
Credit Facility
As of September 30, 2023, the company had $1.8 billion of borrowings outstanding under its credit facility (the "Credit Facility"), including $956.3 million outstanding under the term loan ($951.8 million, net of unamortized issuance fees) and $731.3 million outstanding under the delayed draw term loan. The company also had $1.6 million in outstanding letters of credit as of September 30, 2023, which reduces the borrowing availability under the Credit Facility. Remaining borrowing capacity under this facility was $2.6 billion at September 30, 2023.
On August 11, 2022, the company borrowed $750.0 million against the delayed draw term facility as provided under the Credit Agreement. The funds were used to reduce outstanding borrowings under the revolver. The delayed draw term loan amortizes in quarterly installments due on the last day of each fiscal quarter, and commenced on December 31, 2022, in an amount equal to 0.625% of the principal drawn, with the balance, plus any accrued interest payable by October 21, 2026.
At September 30, 2023, borrowings under the Credit Facility accrued interest at a rate of 1.625% above the daily simple or term Secured Overnight Financing Rate (“SOFR”) per annum or 0.625% above the highest of the prime rate, the federal funds rate plus 0.50% and one month Term SOFR plus 1.00%. The interest rates on borrowings under the Credit Facility may be adjusted quarterly based on the company’s Funded Debt less Unrestricted Cash to Pro Forma EBITDA (the “Leverage Ratio”) on a rolling four-quarter basis. Additionally, a commitment fee based upon the Leverage Ratio is charged on the unused portion of the commitments under the Credit Facility. As of September 30, 2023, borrowings under the Credit Facility accrued interest at a minimum of 1.625% above SOFR and the variable unused commitment fee will be at a minimum of 0.25%. Borrowings under the Credit Facility accrue interest at a minimum of 1.625% above the daily simple SOFR or term SOFR for the applicable interest period (each of which includes a spread adjustment of 0.10%). The average interest rate per annum, inclusive of hedging instruments, on the debt under the Credit Facility was equal to 5.11% at the end of the period and the variable commitment fee was equal to 0.25% per annum as of September 30, 2023.
The term loan and delayed draw term loan facilities had an average interest rate per annum, inclusive of hedging instruments, of 4.94% as of September 30, 2023.
In addition, the company has international credit facilities to fund working capital needs outside the United States. At September 30, 2023, these foreign credit facilities amounted to $7.2 million in U.S. Dollars with a weighted average per annum interest rate of approximately 1.56%.
The company’s debt is reflected on the balance sheet at cost. The fair values of the Credit Facility, term debt and foreign and other debt is based on the amount of future cash flows associated with each instrument discounted using the company's incremental borrowing rate. The company believes its interest rate margins on its existing debt are consistent with current market conditions and therefore the carrying value of debt reflects the fair value. The interest rate margin is based on the company's Leverage Ratio. The carrying value and estimated aggregate fair value, a level 2 measurement, based primarily on market prices, of debt excluding the Convertible Notes is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Sep 30, 2023 | | Dec 31, 2022 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Total debt excluding convertible senior notes | $ | 1,839,624 | | | $ | 1,844,055 | | | $ | 1,984,406 | | | $ | 1,989,871 | |
The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At September 30, 2023, the company had outstanding floating-to-fixed interest rate swaps totaling $208.0 million notional amount carrying an average interest rate of 1.55% maturing in less than 12 months and $740.0 million notional amount carrying an average interest rate of 1.69% that mature in more than 12 months but less than 53 months.
At September 30, 2023, the company was in compliance with all covenants pursuant to its borrowing agreements.
Convertible Notes
The following table summarizes the outstanding principal amount and carrying value of the Convertible Notes:
| | | | | | | | | | | | | |
| Sep 30, 2023 | | Dec 31, 2022 | | |
| (in thousands) |
Principal amounts: | | | | | |
Principal | $ | 747,499 | | | $ | 747,499 | | | |
| | | | | |
Unamortized issuance costs | (6,897) | | | (9,581) | | | |
Net carrying amount | $ | 740,602 | | | $ | 737,918 | | | |
The following table summarizes total interest expense recognized related to the Convertible Notes:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Contractual interest expense | $ | 1,847 | | | $ | 1,848 | | | $ | 5,585 | | | $ | 5,606 | |
Interest cost related to amortization of issuance costs | 889 | | | 888 | | | 2,685 | | | 2,688 | |
Total interest expense | $ | 2,736 | | | $ | 2,736 | | | $ | 8,270 | | | $ | 8,294 | |
The estimated fair value of the Convertible Notes was $837.8 million as of September 30, 2023 and was determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 1(d), Fair Value Measurements, in these Notes to the Condensed Consolidated Financial Statement. The if-converted value of the Convertible Notes did not exceed their respective principal value as of September 30, 2023.
Capped Call Transactions
In connection with the pricing of the Convertible Notes, the company entered into privately negotiated Capped Call Transactions (the "2020 Capped Call Transactions") and the company used the net proceeds of the offering of the Convertible Notes to pay the aggregate amount of $104.7 million for them. The company entered into two tranches of privately negotiated Capped Call Transactions in December 2021 (the "2021 Capped Call Transactions") in the aggregate amount of $54.6 million. On March 15, 2022 , the company entered into an additional tranche of privately negotiated Capped Call Transactions (the "2022 Capped Call Transactions") in the amount of $9.7 million.
The 2020, 2021, and 2022 Capped Call Transactions (collectively, the "Capped Call Transactions") are expected generally to reduce the potential dilution and/or offset the cash payments the company is required to make in excess of the principal amount of the Convertible Notes upon conversion of the Convertible Notes in the event that the market price per share of the company's common stock is greater than the strike price of the Capped Call Transactions (which initially corresponds to the initial conversion price of the Convertible Notes and is subject to certain adjustments under the terms of the Capped Call Transactions), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Transactions. The 2020 Capped Call Transactions have an initial cap price of $207.93 per share of the company's common stock. The 2021 Capped Call Transactions have initial cap prices of $216.50 and $225.00 per share of the company's common stock. The 2022 Capped Call Transactions have an initial cap price of $229.00 per share. The Capped Call Transactions cover, initially, the number of shares of the company's common stock underlying the Convertible Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes.
The Capped Call Transactions are separate transactions entered into by the company with the capped call counterparties, and are not part of the terms of the Convertible Notes and will not affect any holder's right under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Capped Call Transactions. The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the company's stock. The premiums paid of the Capped Call Transactions have been included as a net reduction to additional paid-in capital with stockholders' equity.
13) Financial Instruments
Foreign Exchange: The company uses foreign currency forward, foreign exchange swaps and option purchase and sales contracts to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The notional amount of foreign currency contracts outstanding was $224.6 million and $562.5 million as of September 30, 2023