Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Exhibits
EX-31.1
midd-ex311x201933019x10q.htm
EX-31.2
midd-ex312x201933019x10q.htm
EX-32.1
midd-ex321x201933019x10q.htm
EX-32.2
midd-ex322x201933019x10q.htm
Middleby Earnings 2019-03-30
MIDD 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 middleby10-qq12019.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 30, 2019
or
o
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.
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 and emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
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 o No x
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 May 3, 2019, there were 55,671,756 shares of the registrant's common stock outstanding.
Common stock, $0.01 par value; 62,597,716 and 62,592,707 shares issued in 2019 and 2018, respectively
145
145
Paid-in capital
378,488
377,419
Treasury stock, at cost; 6,933,618 and 6,889,241 shares in 2019 and 2018
(450,386
)
(445,118
)
Retained earnings
2,078,235
2,009,233
Accumulated other comprehensive loss
(280,423
)
(276,476
)
Total stockholders' equity
1,726,059
1,665,203
Total liabilities and stockholders' equity
$
4,688,117
$
4,549,781
See accompanying notes
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
Mar 30, 2019
Mar 31, 2018
Net sales
$
686,802
$
584,800
Cost of sales
429,490
373,167
Gross profit
257,312
211,633
Selling, general and administrative expenses
155,909
122,948
Restructuring expenses
342
1,693
Income from operations
101,061
86,992
Interest expense and deferred financing amortization, net
20,520
8,823
Net periodic pension benefit (other than service costs)
(7,761
)
(9,705
)
Other (income) expense, net
(1,413
)
1,173
Earnings before income taxes
89,715
86,701
Provision for income taxes
20,702
21,281
Net earnings
$
69,013
$
65,420
Net earnings per share:
Basic
$
1.24
$
1.18
Diluted
$
1.24
$
1.18
Weighted average number of shares
Basic
55,601
55,573
Dilutive common stock equivalents1
—
—
Diluted
55,601
55,573
Comprehensive income
$
65,066
$
84,903
1There were no anti-dilutive equity awards excluded from common stock equivalents for any period presented.
See accompanying notes
1
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, December 30, 2017
$
145
$
374,922
$
(445,118
)
$
1,697,618
$
(266,419
)
$
1,361,148
Net earnings
—
—
—
65,420
—
65,420
Adoption of ASU 2018-02 (1)
—
—
—
(1,132
)
1,132
—
Adoption of ASU 2014-09 (2)
—
—
—
(4,405
)
—
(4,405
)
Currency translation adjustments
—
—
—
—
21,802
21,802
Change in unrecognized pension benefit costs, net of tax of $(1,758)
—
—
—
—
(8,387
)
(8,387
)
Unrealized gain on interest rate swap, net of tax of $1,696
—
—
—
—
4,936
4,936
Stock compensation
—
145
—
—
—
145
Balance, March 31, 2018
$
145
$
375,067
$
(445,118
)
$
1,757,501
$
(246,936
)
$
1,440,659
Balance, December 29, 2018
$
145
$
377,419
$
(445,118
)
$
2,009,233
$
(276,476
)
$
1,665,203
Net earnings
—
—
—
69,013
—
69,013
Adoption of ASU 2017-12 (3)
—
—
—
(11
)
11
—
Currency translation adjustments
—
—
—
—
10,683
10,683
Change in unrecognized pension benefit costs, net of tax of $(1,383)
—
—
—
—
(5,263
)
(5,263
)
Unrealized gain on interest rate swap, net of tax of $(3,177)
—
—
—
—
(9,378
)
(9,378
)
Stock compensation
—
1,069
—
—
—
1,069
Purchase of treasury stock
—
—
(5,268
)
—
—
(5,268
)
Balance, March 30, 2019
$
145
$
378,488
$
(450,386
)
$
2,078,235
$
(280,423
)
$
1,726,059
(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.
(3) 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
2
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
Mar 30, 2019
Mar 31, 2018
Cash flows from operating activities--
Net earnings
$
69,013
$
65,420
Adjustments to reconcile net earnings to net cash provided by operating activities--
Depreciation and amortization
25,514
20,024
Non-cash share-based compensation
1,069
145
Deferred income taxes
984
2,568
Changes in assets and liabilities, net of acquisitions
Accounts receivable, net
11,743
1,041
Inventories, net
(54,532
)
(9,129
)
Prepaid expenses and other assets
7,036
19,326
Accounts payable
4,573
(3,404
)
Accrued expenses and other liabilities
(31,452
)
(51,243
)
Net cash provided by operating activities
33,948
44,748
Cash flows from investing activities--
Additions to property, plant and equipment
(8,095
)
(16,657
)
Purchase of tradename
—
(5,399
)
Acquisitions, net of cash acquired
(12,397
)
(29,459
)
Net cash used in investing activities
(20,492
)
(51,515
)
Cash flows from financing activities--
Proceeds under Credit Facility
103,957
234,344
Repayments under Credit Facility
(102,107
)
(215,862
)
Net repayments under international credit facilities
(72
)
(114
)
Net repayments under other debt arrangement
(175
)
(3
)
Payments of deferred purchase price
(446
)
—
Repurchase of treasury stock
(5,268
)
—
Net cash (used by) provided by financing activities
(4,111
)
18,365
Effect of exchange rates on cash and cash equivalents
164
2,038
Changes in cash and cash equivalents--
Net increase in cash and cash equivalents
9,509
13,636
Cash and cash equivalents at beginning of year
71,701
89,654
Cash and cash equivalents at end of period
$
81,210
$
103,290
See accompanying notes
3
THE MIDDLEBY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 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 March 30, 2019 and December 29, 2018, the results of operations for the three months ended March 30, 2019 and March 31, 2018, cash flows for the three months ended March 30, 2019 and March 31, 2018 and statement of stockholders' equity for the three months ended March 30, 2019 and March 31, 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 $1.1 million and $0.1 million for the three months period ended March 30, 2019 and March 31, 2018, respectively.
C)
Income Taxes
A tax provision of $20.7 million, at an effective rate of 23.1%, was recorded during the three months period ended March 30, 2019, as compared to a $21.3 million tax provision at a 24.5% in the prior year period. In comparison to the prior year the effective rate decreased primarily due to a refund of foreign taxes and enacted tax rate changes in several foreign jurisdictions. 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.
4
The company’s financial 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 March 30, 2019
Financial Assets:
Interest rate swaps
$
—
$
8,160
$
—
$
8,160
Financial Liabilities:
Interest rate swaps
$
—
$
11,353
$
—
$
11,353
Contingent consideration
$
—
$
—
$
3,585
$
3,585
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 March 30, 2019 and December 29, 2018 relates to the earnout provision recorded in conjunction with the acquisition of Josper S.A. ("Josper").
The earnout provisions associated with this acquisition is 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 $20.4 million and $7.2 million for the three months ended March 30, 2019 and March 31, 2018, respectively. Cash payments totaling $3.0 million and $5.7 million were made for income taxes for the three months ended March 30, 2019 and March 31, 2018, respectively.
5
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 to be 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.
6
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):
(as initially reported) April 3, 2018
Measurement Period Adjustments
(as adjusted) April 3, 2018
Cash
$
1,833
$
—
$
1,833
Current assets
10,722
—
10,722
Property, plant and equipment
389
—
389
Goodwill
7,278
(2,506
)
4,772
Other intangibles
2,584
3,776
6,360
Other assets
12
—
12
Current portion of long-term debt
(1,901
)
—
(1,901
)
Current liabilities
(8,076
)
(216
)
(8,292
)
Long term deferred tax liability
(340
)
(1,054
)
(1,394
)
Other non-current liabilities
(212
)
—
(212
)
Net assets acquired and liabilities assumed
$
12,289
$
—
$
12,289
The long term deferred tax liability amounted to $1.4 million. The net liability is comprised of $1.8 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets and $0.4 million of deferred tax asset related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $2.1 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $2.6 million allocated to customer relationships and $1.6 million allocated to backlog, which are to be amortized over periods of 6 years and up to 1 year, respectively. Goodwill and other intangibles of Ve.Ma.C are allocated to the Food Processing Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
7
Firex
On April 27, 2018, the company completed its acquisition of all of the capital stock of Firex S.r.l. ("Firex"), a leading manufacturer of steam cooking equipment for the commercial foodservice industry located in Sedico, Italy, for a purchase price of approximately $53.7 million, net of cash acquired. During the third quarter of 2018, the company finalized the working capital provision provided for by the purchase agreement resulting in a refund from the seller of $0.3 million.
The final allocation of consideration paid for the Firex acquisition is summarized as follows (in thousands):
(as initially reported) April 27, 2018
Measurement Period Adjustments
(as adjusted) April 27, 2018
Cash
$
10,652
$
(37
)
$
10,615
Current assets
7,656
39
7,695
Property, plant and equipment
2,447
—
2,447
Goodwill
36,706
(1,424
)
35,282
Other intangibles
19,806
2,294
22,100
Current portion of long-term debt
(1,210
)
—
(1,210
)
Current liabilities
(4,099
)
(471
)
(4,570
)
Long term deferred tax liability
(4,995
)
(652
)
(5,647
)
Long-term debt
(1,069
)
—
(1,069
)
Other non-current liabilities
(1,318
)
—
(1,318
)
Net assets acquired and liabilities assumed
$
64,576
$
(251
)
$
64,325
The long term deferred tax liability amounted to $5.6 million. The net liability is comprised of $6.1 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets and $0.5 million of deferred tax asset related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $10.2 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $11.3 million allocated to customer relationships and $0.6 million allocated to backlog, which are to be amortized over periods of 7 years and 3 months, respectively. Goodwill and other intangibles of Firex are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
8
Josper
On May 10, 2018, the company completed its acquisition of all of the issued share capital of Josper, a leading manufacturer of charcoal grill and oven cooking equipment for commercial foodservice and residential applications located in Pineda de Mar, Spain, for a purchase price of approximately $39.3 million, net of cash acquired. During the fourth quarter of 2018, the company finalized the working capital provision provided for by the purchase agreement resulting in a refund from the seller of $0.2 million.
The final allocation of consideration paid for the Josper acquisition is summarized as follows (in thousands):
(as initially reported) May 10, 2018
Measurement Period Adjustments
(as adjusted) May 10, 2018
Cash
$
3,308
$
—
$
3,308
Current assets
6,579
13
6,592
Property, plant and equipment
4,739
—
4,739
Goodwill
27,140
(3,345
)
23,795
Other intangibles
13,136
4,754
17,890
Other assets
2
—
2
Current portion of long-term debt
(217
)
—
(217
)
Current liabilities
(5,146
)
(89
)
(5,235
)
Long-term debt
(1,608
)
—
(1,608
)
Long term deferred tax liability
(2,934
)
(1,579
)
(4,513
)
Other non-current liabilities
(2,169
)
—
(2,169
)
Consideration paid at closing
$
42,830
$
(246
)
$
42,584
Contingent consideration
3,454
—
3,454
Net assets acquired and liabilities assumed
$
46,284
$
(246
)
$
46,038
The long term deferred tax liability amounted to $4.5 million. The net liability is comprised of $4.4 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets and $0.1 million of deferred tax liability related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $9.5 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $8.3 million allocated to customer relationships and $0.1 million allocated to backlog, which are to be amortized over periods of 7 years and 3 months, respectively. Goodwill and other intangibles of Josper are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
The Josper purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable in 2019, 2020 and 2021, if Josper exceeds certain earnings targets for the twelve months ended December 31, 2018, December 31, 2019 and December 31, 2020, respectively. The contractual obligation associated with this contingent earnout provision recognized on the acquisition date is $3.5 million.
9
Taylor
On June 22, 2018, the company completed its acquisition of all of the capital stock of the Taylor Company ("Taylor"), a world leader in beverage solutions, soft serve and ice cream dispensing equipment, frozen drink machines, and automated double-sided grills, located in Rockton, Illinois, for a purchase price of approximately $1.0 billion. During the fourth quarter of 2018, the company finalized the working capital provision provided for by the purchase agreement resulting in a refund from the seller of $11.5 million.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):
(as initially reported) June 22, 2018
Preliminary Measurement Period Adjustments
(as adjusted) June 22, 2018
Cash
$
2,551
$
64
$
2,615
Current assets
71,162
(1,359
)
69,803
Property, plant and equipment
21,187
9
21,196
Goodwill
491,339
(102,657
)
388,682
Other intangibles
484,210
99,500
583,710
Other assets
—
361
361
Long-term deferred tax asset
—
227
227
Current liabilities
(48,417
)
(3,106
)
(51,523
)
Other non-current liabilities
(8,161
)
(648
)
(8,809
)
Net assets acquired and liabilities assumed
$
1,013,871
$
(7,609
)
$
1,006,262
The goodwill and $290.0 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $270.0 million allocated to customer relationships, $15.0 million allocated to developed technology, and $1.7 million of existing developed oven technology and $7.0 million of backlogs, which are to be amortized over periods of 12.5 years, 7 years, 5 years and up to 3 years, respectively. Goodwill and other intangibles of Taylor are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. A significant portion of the assets are expected to be deductible for tax purposes.
The company estimated the fair value of the assets and liabilities of Taylor on a preliminary basis at the time of acquisition based on third-party appraisals used to assist in determining the fair market value for acquired tangible and intangible assets. Changes to these allocations will occur as additional information becomes available. The company is in the process of obtaining third-party valuations related to the fair value of tangible and intangible assets, in addition to determining and recording the tax effects of the transaction to include all assets/liabilities since those are recorded at fair value. Thus, the provisional measurements of fair value 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. Acquired goodwill represents the premium paid over the fair value of assets acquired and liabilities assumed.
10
M-TEK
On October 1, 2018, the company completed its acquisition of all of the capital stock of the M-TEK Corporation ("M-TEK"), a leading manufacturer of Modified Atmospheric Packaging (MAP) systems located in Elgin, Illinois, for a purchase price of approximately $20.0 million. During the first quarter of 2019, the company finalized the working capital provision provided by the purchase agreement resulting in no adjustment to the purchase price.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):
(as initially
reported)
October 1, 2018
Preliminary Measurement
Period
Adjustments
(as adjusted)
October 1, 2018
Current assets
$
2,745
$
—
$
2,745
Property, plant and equipment
2,497
—
2,497
Goodwill
11,610
—
11,610
Other intangibles
3,294
—
3,294
Current liabilities
(144
)
—
(144
)
Net assets acquired and liabilities assumed
$
20,002
$
—
$
20,002
The goodwill is subject to the non-amortization provisions of ASC 350. Other intangibles also include $2.7 million allocated to customer relationships, $0.3 million allocated to developed technology, and $0.3 million allocated to backlog, which are to be amortized over periods of 5 years, 5 years and 3 months, respectively. Goodwill and other intangibles of M-TEK are allocated to the Food Processing Equipment Group for segment reporting purposes. A significant portion of the assets are expected to be deductible for tax purposes.
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. Thus, the provisional measurements of fair value 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.
11
Crown
On December 3, 2018, the company completed its acquisition of all of the capital stock of the Crown Food Service Equipment, Ltd. ("Crown"), a leading design and manufacturer of steam cooking equipment for the commercial foodservice industry located in Toronto, Canada, for a purchase price of approximately $42.0 million, net of cash acquired. The purchase price is subject to adjustment based upon a working capital provision provided by the purchase agreement. The company expects to finalize this in the second quarter of 2019.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):
(as initially
reported)
December 3, 2018
Preliminary Measurement
Period
Adjustments
(as adjusted)
December 3, 2018
Cash
$
495
$
—
$
495
Current assets
5,045
—
5,045
Property, plant and equipment
8,710
3,658
12,368
Goodwill
31,226
(10,172
)
21,054
Other intangibles
—
10,564
10,564
Current liabilities
(2,340
)
(281
)
(2,621
)
Long-term deferred tax liability
(668
)
(3,769
)
(4,437
)
Net assets acquired and liabilities assumed
$
42,468
$
—
$
42,468
The long term deferred tax liability amounted to $4.4 million. The net deferred tax liability is comprised of $2.8 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets and $1.6 million of deferred tax liability related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $10.6 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Goodwill and other intangibles of Crown are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. This asset is not expected to be deductible for tax purposes.
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. Thus, the provisional measurements of fair value 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.
12
EVO
On December 31, 2018, the company completed its acquisition of all of the capital stock of EVO America, Inc. ("EVO"), a leading design and manufacturer of ventless cooking equipment for the commercial foodservice industry, located near Portland, Oregon, for a purchase price of approximately $12.4 million, net of cash acquired. The purchase price is subject to adjustment based upon a working capital provision provided by the purchase agreement. The company expects to finalize this in the second quarter of 2019.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):
(as initially
reported)
December 31, 2018
Cash
$
162
Current assets
1,490
Goodwill
6,896
Other intangibles
5,081
Current liabilities
(518
)
Long-term deferred tax liability
(540
)
Other non-current liabilities
(12
)
Net assets acquired and liabilities assumed
$
12,559
The long term deferred tax liability amounted to $0.5 million. The net deferred tax liability is comprised of $0.6 million of deferred tax liability related to the difference between the book and tax basis on identifiable tangible asset and liability accounts and $0.1 million of deferred tax asset related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $3.0 million of other intangibles associated with the trade name is subject to the non-amortization provisions of ASC 350. Other intangibles also include $1.9 million allocated to customer relationships and $0.2 million allocated to developed technology, which are to be amortized over periods of 10 years and 7 years, respectively. Goodwill and other intangibles of EVO are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
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. Thus, the provisional measurements of fair value 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.
13
Pro Forma Financial Information
In accordance with ASC 805 “Business Combinations”, the following unaudited pro forma results of operations for the three months ended March 30, 2019 and March 31, 2018, assumes the 2018 acquisitions of Hinds-Bock, Ve.Ma.C, Josper, Firex, Taylor, M-TEK and Crown and the 2019 acquisition of EVO were completed on December 31, 2017 (first day of fiscal year 2018). The following pro forma results include adjustments to reflect additional interest expense to fund the acquisitions, amortization of intangibles associated with the acquisitions, and the effects of adjustments made to the carrying value of certain assets (in thousands, except per share data):
Three Months Ended
March 30, 2019
March 31, 2018
Net sales
$
686,802
$
686,387
Net earnings
70,309
49,880
Net earnings per share:
Basic
$
1.26
$
0.90
Diluted
1.26
0.90
The historical consolidated financial information of the Company and the acquisitions have been adjusted in the pro forma information to give effect to pro forma 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.
14
4) Recently Issued Accounting Standards
Accounting Pronouncements - Recently Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments under this pronouncement change the way all leases with a duration of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or operating lease liability. The company adopted this guidance on December 30, 2018 using the modified retrospective method. The company has elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The adoption of this guidance increased total assets and liabilities due to the recognition of right-of-use assets and lease liabilities amounting to approximately $85.0 million. For additional information related to the impact of adopting this guidance, see Note 14 of the Condensed Consolidated Financial Statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". The amendments in ASU-12 provide new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (OCI) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. The adoption of this guidance did not have a material impact on the company's Condensed Consolidated Financial Statements. For additional information related to the impact of adopting this guidance, see Note 13 of the Condensed Consolidated Financial Statements.
In June 2018, the FASB issued ASU 2018-07, "Improvements to Nonemployee Share-Based Payment Accounting". The amendments in ASU-08 simplify several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The adoption of this guidance did not have an impact on the company's Condensed Consolidated Financial Statements.
In August of 2018, the SEC published Final Rule Release No. 33-10532, "Disclosure Update and Simplification." This guidance streamlines disclosure requirements by removing certain redundant topics and is effective for quarterly and annual reports submitted after November 5, 2018. The adoption of this guidance resulted in the presentation and expansion of the company's Condensed Consolidated Statements of Changes in Stockholders' Equity to display quarter-to-quarter details.
Accounting Pronouncements - To be adopted
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in ASU-04 simplify the subsequent measurement of goodwill, by removing the second step of the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This ASU is effective for annual reporting periods, and interim reporting periods, beginning after December 15, 2019. Early adoption is permitted for testing dates after January 1, 2017. The company is evaluating the application of this ASU on the company's annual impairment test. The company does not expect the adoption of this ASU to have a material impact on its Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement". The amendments in ASU-13 remove, modify and add various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2019 with early adoption permitted. The company does not expect the adoption of this ASU to have a material impact on its Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)". The amendments in ASU-14 remove, modify and add various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2020 with early adoption permitted. The amendments must be applied on a retrospective basis for all periods presented. The company is currently evaluating the impacts the adoption of this ASU will have on its Condensed Consolidated Financial Statements.
15
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)". The amendments in ASU-15 align the requirements for capitalizing implementation costs in a service contract hosting arrangement with those of developing or obtaining internal-use software. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2019 with early adoption permitted. The company does not expect the adoption of this ASU to have a material impact on its Condensed Consolidated Financial Statements.
In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments, which clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the lease standard. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2019 with early adoption permitted for those that have adopted ASU No. 2016-13. The company does not expect this ASU to have a material impact on its Condensed Consolidated Financial Statements.
5)
Revenue Recognition
Disaggregation of Revenue
We disaggregate our net sales by reportable operating segment and geographical location as we believe it best depicts how the nature, timing and uncertainty of our 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 our long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. The following table summarizes our net sales by reportable operating segment and geographical location (in thousands):
Commercial
Foodservice
Food Processing
Residential Kitchen
Total
Three Months Ended March 30, 2019
United States and Canada
$
300,275
$
57,589
$
83,358
$
441,222
Asia
48,293
8,682
1,398
58,373
Europe and Middle East
89,896
20,618
50,615
161,129
Latin America
19,067
5,585
1,426
26,078
Total
$
457,531
$
92,474
$
136,797
$
686,802
Three Months Ended March 31, 2018
United States and Canada
$
255,113
$
66,935
$
78,560
$
400,608
Asia
29,032
5,712
1,519
36,263
Europe and Middle East
66,611
8,732
55,055
130,398
Latin America
9,148
7,193
1,190
17,531
Total
$
359,904
$
88,572
$
136,324
$
584,800
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.
16
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):
Mar 30, 2019
Dec 29, 2018
Contract assets
$
17,484
$
14,048
Contract liabilities
$
58,475
$
57,913
Non-current contract liabilities
$
13,361
$
12,170
During the three months period ended March 30, 2019, the company reclassified $3.9 million to receivables, which was included in the contract asset balance at the beginning of the period. During the three months period ended March 30, 2019, the company recognized revenue of $46.9 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 $47.9 million during the three months period ended March 30, 2019. 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 three months period ended March 30, 2019.
6) Other Comprehensive Income
The company reports changes in equity during a period, except those resulting from investments by owners and distributions to owners, in accordance with ASC 220, "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
Total
Balance as of December 29, 2018
$
(112,771
)
$
(170,938
)
$
7,233
$
(276,476
)
Other comprehensive income before reclassification
10,683
(5,263
)
(10,133
)
(4,713
)
Amounts reclassified from accumulated other comprehensive income
—
—
766
766
Net current-period other comprehensive income
$
10,683
$
(5,263
)
$
(9,367
)
$
(3,947
)
Balance as of March 30, 2019
$
(102,088
)
$
(176,201
)
$
(2,134
)
$
(280,423
)
(1) As of March 30, 2019 pension and interest rate swap amounts are net of tax of $(38.1) million and $(0.6) million, respectively. During the three months ended March 30, 2019, the adjustments to pension benefit costs and unrealized gain/(loss) interest rate swap were net of tax of $(1.4) million and $(3.2) million, respectively.
Components of other comprehensive income were as follows (in thousands):
Three Months Ended
Mar 30, 2019
Mar 31, 2018
Net earnings
$
69,013
$
65,420
Currency translation adjustment
10,683
21,802
Pension liability adjustment, net of tax
(5,263
)
(8,874
)
Unrealized gain on interest rate swaps, net of tax
(9,367
)
6,555
Comprehensive income
$
65,066
$
84,903
17
7)
Inventories
Inventories are composed of material, labor and overhead and are stated at the lower of cost or market. 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 March 30, 2019 and December 29, 2018 are as follows (in thousands):
Mar 30, 2019
Dec 29, 2018
Raw materials and parts
$
269,346
$
245,976
Work-in-process
59,818
51,164
Finished goods
251,010
224,670
$
580,174
$
521,810
8)
Goodwill
Changes in the carrying amount of goodwill for the three months ended March 30, 2019 are as follows (in thousands):
Commercial
Foodservice
Food
Processing
Residential Kitchen
Total
Balance as of December 29, 2018
$
1,102,067
$
219,054
$
422,054
$
1,743,175
Goodwill acquired during the year
6,896
—
—
6,896
Measurement period adjustments to
goodwill acquired in prior year
(15,391
)
(2,722
)
—
(18,113
)
Exchange effect
253
(685
)
7,211
6,779
Balance as of March 30, 2019
$
1,093,825
$
215,647
$
429,265
$
1,738,737
9)
Intangibles
Intangible assets consist of the following (in thousands):
March 30, 2019
December 29, 2018
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
9.3
$
651,587
$
(237,090
)
9.5
$
644,145
$
(222,661
)
Backlog
2.3
28,096
(26,019
)
2.8
27,065
(24,755
)
Developed technology
5.8
39,115
(21,760
)
5.9
39,624
(20,998
)
$
718,798
$
(284,869
)
$
710,834
$
(268,414
)
Indefinite-lived assets:
Trademarks and tradenames
$
937,456
$
918,604
18
The aggregate intangible amortization expense was $16.1 million and $11.5 million for the first quarter periods ended March 30, 2019 and March 31, 2018, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands):
Twelve Month Period Ending in
Amortization Expense
2020
$
60,398
2021
58,675
2022
54,934
2023
50,227
2024
43,895
Thereafter
165,800
$
433,929
10) Accrued Expenses
Accrued expenses consist of the following (in thousands):
Mar 30, 2019
Dec 29, 2018
Accrued payroll and related expenses
$
74,440
$
74,952
Accrued warranty
61,621
59,451
Contract liabilities
58,475
57,913
Accrued customer rebates
24,750
45,740
Accrued short-term leases
20,884
—
Accrued product liability and workers compensation
16,164
16,284
Accrued professional fees
15,570
17,313
Accrued sales and other tax
13,632
19,452
Accrued agent commission
12,211
11,969
Other accrued expenses
65,882
64,372
$
363,629
$
367,446
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.
19
A rollforward of the warranty reserve is as follows (in thousands):
Three Months Ended
Mar 30, 2019
Balance as of December 29, 2018
$
59,451
Warranty reserve related to acquisitions
90
Warranty expense
17,442
Warranty claims
(15,362
)
Balance as of March 30, 2019
$
61,621
12)
Financing Arrangements
Mar 30, 2019
Dec 29, 2018
(in thousands)
Senior secured revolving credit line
$
1,888,264
$
1,887,764
Foreign loans
4,047
4,166
Other debt arrangement
—
175
Total debt
$
1,892,311
$
1,892,105
Less: Current maturities of long-term debt
3,017
3,207
Long-term debt
$
1,889,294
$
1,888,898
On July 28, 2016, the company entered into an amended and restated five-year $2.5 billion multi-currency senior secured revolving credit agreement (the "Credit Facility"). On December 18, 2018, the company entered into an amendment to the Credit Facility, increasing the revolving commitments under the Credit Facility by $500.0 million to a total of $3.0 billion. As of March 30, 2019, the company had $1.9 billion of borrowings outstanding under the Credit Facility, including $1.8 billion of borrowings in U.S. Dollars, and $69.3 million of borrowings denominated in Euro. The company also had $11.0 million in outstanding letters of credit as of March 30, 2019, which reduces the borrowing availability under the Credit Facility. Remaining borrowing availability under this facility was $1.1 billion at March 30, 2019.
At March 30, 2019, borrowings under the Credit Facility accrued interest at a rate of 1.625% above LIBOR per annum or 0.625% above the highest of the prime rate, the federal funds rate plus 0.50% and one month LIBOR plus 1.00%. The average interest rate per annum on the debt under the Credit Facility was equal to 4.11% at the end of the period. 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. This variable commitment fee was equal to 0.25% per annum as of March 30, 2019.
In addition, the company has other international credit facilities to fund working capital needs outside the United States and the United Kingdom. At March 30, 2019, these foreign credit facilities amounted to $4.0 million in U.S. Dollars with a weighted average per annum interest rate of approximately 5.86%.
The company’s debt is reflected on the balance sheet at cost. 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.
20
The company estimated the fair value of its loans by calculating the upfront cash payment a market participant would require to assume the company’s obligations. The upfront cash payment is the amount that a market participant would be able to lend to achieve sufficient cash inflows to cover the cash outflows under the company’s senior secured revolving credit facility assuming the facility was outstanding in its entirety until maturity. Since the company maintains its borrowings under a revolving credit facility and there is no predetermined borrowing or repayment schedule, for purposes of this calculation the company calculated the fair value of its obligations assuming the current amount of debt at the end of the period was outstanding until the maturity of the company’s Credit Facility in July 2021. Although borrowings could be materially greater or less than the current amount of borrowings outstanding at the end of the period, it is not practical to estimate the amounts that may be outstanding during future periods. The carrying value and estimated aggregate fair value, a level 2 measurement, based primarily on market prices, of debt is as follows (in thousands):
Mar 30, 2019
Dec 29, 2018
Carrying Value
Fair Value
Carrying Value
Fair Value
Total debt
$
1,892,311
$
1,892,311
$
1,892,105
$
1,892,105
The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At March 30, 2019, the company had outstanding floating-to-fixed interest rate swaps totaling $51.0 million notional amount carrying an average interest rate of 1.27% maturing in less than 12 months and $948.0 million notional amount carrying an average interest rate of 2.22% that mature in more than 12 months but less than 72 months.
The company believes that its current capital resources, including cash and cash equivalents, cash expected to be generated from operations, funds available from its current lenders and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and expenditures for the foreseeable future.
The terms of the Credit Facility limit the ability of the company and its subsidiaries to, with certain exceptions: incur indebtedness; grant liens; engage in certain mergers, consolidations, acquisitions and dispositions; make restricted payments; enter into certain transactions with affiliates; and requires, among other things, the company to satisfy certain financial covenants: (i) a minimum Interest Coverage Ratio (as defined in the Credit Facility) of 3.00 to 1.00 and (ii) a maximum Leverage Ratio of Funded Debt less Unrestricted Cash to Pro Forma EBIDTA (each as defined in the Credit Facility) of 3.50 to 1.00, which may be adjusted to 4.00 to 1.00 for a four consecutive fiscal quarter period in connection with certain qualified acquisitions, subject to the terms and conditions contained in the Credit Facility. The Credit Facility is secured by substantially all of the assets of Middleby Marshall, the company and the company's domestic subsidiaries and is unconditionally guaranteed by, subject to certain exceptions, the company and certain of the company's direct and indirect material foreign and domestic subsidiaries. The Credit Facility contains certain customary events of default, including, but not limited to, the failure to make required payments; bankruptcy and other insolvency events; the failure to perform certain covenants; the material breach of a representation or warranty; non-payment of certain other indebtedness; the entry of undischarged judgments against the company or any subsidiary for the payment of material uninsured amounts; the invalidity of the company guarantee or any subsidiary guaranty; and a change of control of the company. At March 30, 2019, the company was in compliance with all covenants pursuant to its borrowing agreements.
13)
Financial Instruments
ASC 815 “Derivatives and Hedging” requires an entity to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Derivatives that do not qualify as a hedge must be adjusted to fair value in earnings. If a derivative does qualify as a hedge under ASC 815, changes in the fair value will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments or recognized in other accumulated comprehensive income until the hedged item is recognized in earnings.
On December 30, 2018, the company adopted the new accounting standard ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" using the modified retrospective method. Prior to the adoption of ASU 2017-12, the ineffective portion of a hedge's change in fair value was recognized in earnings. Upon adoption of ASU 2017-12, the company no longer recognizes hedge ineffectiveness in our Condensed Consolidated Statements of Comprehensive Income, but instead recognizes the entire change in the fair value of the hedge contract in other accumulated comprehensive income.
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.
21
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 fair value of the forward and option contracts was a loss of $0.7 million at the end of the first quarter of 2019.
Interest Rate: The company has entered into interest rate swaps to fix the interest rate applicable to certain of its variable-rate debt. The agreements swap one-month LIBOR for fixed rates. The company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income. As of March 30, 2019, the fair value of these instruments was a liability of $3.2 million. The change in fair value of these swap agreements in the first three months of 2019 was a loss of $9.3 million, net of taxes.
The following table summarizes the company’s fair value of interest rate swaps (in thousands):
Condensed Consolidated
Balance Sheet Presentation
Mar 30, 2019
Dec 29, 2018
Fair value
Other assets
$
8,160
$
13,487
Fair value
Other non-current liabilities
$
11,353
$
4,125
The impact on earnings from interest rate swaps was as follows (in thousands):
Three Months Ended
Presentation of Gain/(loss)
Mar 30, 2019
Mar 31, 2018
Gain/(loss) recognized in accumulated other comprehensive income
Other comprehensive income
$
(11,789
)
$
6,620
Gain/(loss) reclassified from accumulated other comprehensive income (effective portion)
Interest expense
$
766
$
(12
)
Gain/(loss) recognized in income (ineffective portion)
Other expense
$
—
$
48
Interest rate swaps are subject to default risk to the extent the counterparties are unable to satisfy their settlement obligations under the interest rate swap agreements. The company reviews the credit profile of the financial institutions that are counterparties to such swap agreements and assesses their creditworthiness prior to entering into the interest rate swap agreements and throughout the term. The interest rate swap agreements typically contain provisions that allow the counterparty to require early settlement in the event that the company becomes insolvent or is unable to maintain compliance with its covenants under its existing debt agreements.
14)
Leases
Accounting Policy
On December 30, 2018, the company adopted the new accounting standard ASU No. 2016-02, "Leases" (ASC 842) using the modified retrospective method and elected to use the effective date as the date of initial application on transition. The company has elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs.
The adoption of ASC 842 represents a change in accounting principle that changes the way all leases with a duration of one year or more are treated. Under this guidance, lessees are required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or operating lease liability. The company determines if an arrangement is a lease at inception of a contract. Additionally, the guidance requires additional disclosure to enable users of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
22
The most material impact of the new standard is the recognition of new right-of-use (ROU) assets and lease liabilities on the Condensed Consolidated Balance Sheet for operating leases. Operating lease ROU assets are included in other assets and operating lease liabilities are included accrued expenses and other non-current liabilities. The lease liabilities are measured based upon the present value of minimum future payments and the ROU assets to be recognized will be equal to lease liabilities, adjusted for prepaid and accrued rent balances.
Leases
The company leases warehouse space, office facilities and equipment under operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The company's lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for these leases is recognized on a straight-line basis over the term of the lease. The company has operating lease costs of $7.5 million for the three months ended March 30, 2019, including short-term lease expense and variable lease costs, which were immaterial in the quarter.
Leases (in thousands)
March 30, 2019
Operating lease right-of-use assets
$
86,621
Operating Lease Liability:
Current
$
20,884
Non-Current
64,762
Total Liability
$
85,646
Total Lease Commitments (in thousands)
Operating Leases
Remainder of 2019
$
22,789
2020
18,617
2021
15,829
2022
11,465
2023
8,211
2024 and thereafter
16,820
Total future lease commitments
93,731
Less imputed interest
8,085
Total
$
85,646
Other Lease Information (in thousands, except lease term and discount rate)
Three Months Ended March 30, 2019
Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
The company operates in three reportable operating segments defined by management reporting structure and operating activities.
The Commercial Foodservice Equipment Group manufactures, sells, and distributes foodservice equipment for the restaurant and institutional kitchen industry. This business segment has manufacturing facilities in Arkansas, California, Illinois, Michigan, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Vermont, Washington, Australia, China, Denmark, Estonia, Italy, the Philippines, Poland, Sweden and the United Kingdom. Principal product lines of this group include conveyor ovens, combi-ovens, convection ovens, baking ovens, proofing ovens, deck ovens, speed cooking ovens, hydrovection ovens, ranges, fryers, rethermalizers, steam cooking equipment, food warming equipment, catering equipment, heated cabinets, charbroilers, ventless cooking systems, kitchen ventilation, induction cooking equipment, countertop cooking equipment, toasters, griddles, charcoal grills, professional mixers, stainless steel fabrication, custom millwork, professional refrigerators, blast chillers, coldrooms, ice machines, freezers, and soft serve ice cream, coffee, and beverage dispensing equipment. These products are sold and marketed under the brand names: Anets, Bear Varimixer, Beech, Blodgett, Blodgett Combi, Blodgett Range, Bloomfield, Britannia, CTX, Carter-Hoffmann, Celfrost, Concordia, CookTek, Crown, Desmon, Doyon, Eswood, EVO, Firex, Follett, Frifri, Giga, Globe, Goldstein, Holman, Houno, IMC, Induc, Jade, JoeTap, Josper, L2F, Lang, Lincat, MagiKitch’n, Market Forge, Marsal, Middleby Marshall, MPC, Nieco, Nu-Vu, PerfectFry, Pitco, QualServ, Southbend, Star, Sveba Dahlen, Taylor, Toastmaster, TurboChef, Wells and Wunder-Bar.
The Food Processing Equipment Group manufactures preparation, cooking, packaging food handling and food safety equipment for the food processing industry. This business segment has manufacturing operations in Georgia, Illinois, Iowa, North Carolina, Oklahoma, Texas, Virginia, Washington, Wisconsin, Denmark, France, Germany, India and the United Kingdom. Principal product lines of this group include batch ovens, baking ovens, proofing ovens, conveyor belt ovens, continuous processing ovens, frying systems and automated thermal processing systems, grinders, slicers, reduction and emulsion systems, mixers, blenders, battering equipment, breading equipment, seeding equipment, water cutting systems, food presses, food suspension equipment, filling and depositing solutions, forming equipment, automated loading and unloading systems, food safety, food handling, freezing, defrosting and packaging equipment. These products are sold and marketed under the brand names: Alkar, Armor Inox, Auto-Bake, Baker Thermal Solutions, Burford, Cozzini, CVP Systems, Danfotech, Drake, Emico, Glimek, Hinds-Bock, Maurer-Atmos, MP Equipment, M-TEK, RapidPak, Scanico, Spooner Vicars, Stewart Systems, Thurne and Ve.Ma.C.
The Residential Kitchen Equipment Group manufactures, sells and distributes kitchen equipment for the residential market. This business segment has manufacturing facilities in California, Michigan, Mississippi, Oregon, Wisconsin, France, Ireland, Romania and the United Kingdom. Principal product lines of this group are ranges, cookers, stoves, ovens, refrigerators, dishwashers, microwaves, cooktops, wine coolers, ice machines, ventilation equipment and outdoor equipment. These products are sold and marketed under the brand names: AGA, AGA Cookshop, Brigade, EVO, Fired Earth, Heartland, La Cornue, Leisure Sinks, Lynx, Marvel, Mercury, Rangemaster, Rayburn, Redfyre, Sedona, Stanley, TurboChef, U-Line and Viking.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief operating decision maker evaluates individual segment performance based on operating income.
Net Sales Summary
(dollars in thousands)
Three Months Ended
Mar 30, 2019
Mar 31, 2018
Sales
Percent
Sales
Percent
Business Segments:
Commercial Foodservice
$
457,531
66.6
%
$
359,904
61.5
%
Food Processing
92,474
13.5
88,572
15.2
Residential Kitchen
136,797
19.9
136,324
23.3
Total
$
686,802
100.0
%
$
584,800
100.0
%
24
The following table summarizes the results of operations for the company's business segments(1) (in thousands):
Commercial
Foodservice
Food Processing
Residential Kitchen
Corporate
and Other(2)
Total
Three Months Ended March 30, 2019
Net sales
$
457,531
$
92,474
$
136,797
$
—
$
686,802
Income (loss) from operations (3)
96,811
12,586
18,771
(27,107
)
101,061
Depreciation and amortization expense
16,180
3,524
5,359
451
25,514
Net capital expenditures
5,973
701
1,421
—
8,095
Total assets
$
2,970,850
$
530,440
$
1,156,191
$
30,636
$
4,688,117
Three Months Ended March 31, 2018
Net sales
$
359,904
$
88,572
$
136,324
$
—
$
584,800
Income (loss) from operations (3)
82,546
10,678
6,589
(12,821
)
86,992
Depreciation and amortization expense
8,000
4,047
7,509
468
20,024
Net capital expenditures
5,777
6,496
4,898
(514
)
16,657
Total assets
$
1,724,174
$
484,038
$
1,178,110
$
40,572
$
3,426,894
(1)Non-operating expenses are not allocated to the operating segments. Non-operating expenses consist of interest expense and deferred financing amortization, foreign exchange gains and losses and other income and expense items outside of income from operations.
(2)Includes corporate and other general company assets and operations.
(3)Restructuring expenses are allocated in operating income by segment. See note 17 for further details.
Geographic Information
Long-lived assets, not including goodwill and other intangibles (in thousands):
Mar 30, 2019
Mar 31, 2018
United States and Canada
$
265,512
$
239,179
Asia
15,089
13,294
Europe and Middle East
183,445
131,652
Latin America
2,804
1,705
Total international
$
201,338
$
146,651
$
466,850
$
385,830
16)
Employee Retirement Plans
(a)Pension Plans
U.S. Plans:
The company maintains a non-contributory defined benefit plan for its union employees at the Elgin, Illinois facility. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2002, and no further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 30, 2002 upon reaching retirement age.
The company maintains a non-contributory defined benefit plan for its employees at the Smithville, Tennessee facility, which was acquired as part of the Star acquisition. Benefits are determined based upon retirement age and years of service
25
with the company. This defined benefit plan was frozen on April 1, 2008, and no further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 1, 2008 upon reaching retirement age.
The company also maintains a retirement benefit agreement with its former Chairman ("Chairman Plan"). The retirement benefits are based upon a percentage of the former Chairman’s final base salary.
Non-U.S. Plans:
The company maintains a defined benefit plan for its employees at the Wrexham, the United Kingdom facility, which was acquired as part of the Lincat acquisition. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2010 prior to Middleby’s acquisition of the company. No further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 30, 2010 upon reaching retirement age.
The company maintains several pension plans related to AGA and its subsidiaries (collectively, the "AGA Group"), the most significant being the Aga Rangemaster Group Pension Scheme, which covers the majority of employees in the United Kingdom. Membership in the plan on a defined benefit basis of pension provision was closed to new entrants in 2001. The plan became open to new entrants on a defined contribution basis of pension provision in 2002, but was generally closed to new entrants on this basis during 2014.
The other, much smaller, defined benefit pension plans operating within the AGA Group cover employees in France, Ireland and the United Kingdom. All pension plan assets are held in separate trust funds although the net defined benefit pension obligations are included in the company's consolidated balance sheet.
The following table summarizes the company's net periodic pension benefit related to the AGA Group pension plans (in thousands):
Three Months Ended
March 30, 2019
March 31, 2018
Net Periodic Pension Benefit:
Service cost
$
626
$
977
Interest cost
8,432
8,278
Expected return on assets
(16,998
)
(19,278
)
Amortization of net (gain) loss
157
1,032
Amortization of prior service cost (credit)
648
—
Curtailment loss (gain)
—
287
Pension settlement gain
—
(24
)
$
(7,135
)
$
(8,728
)
The pension costs for all other plans of the company were not material during the period. The service cost component is recognized within Selling, general and administrative expenses and the non-operating components of pension benefit are included within Net periodic pension benefit (other than service cost) in the Condensed Consolidated Statements of Comprehensive Income.
(b)Defined Contribution Plans
The company maintains two separate defined contribution savings plans covering all employees in the United States. These two plans separately cover the union employees at the Elgin, Illinois facility and all other remaining union and non-union employees in the United States. The company also maintains defined contribution plans for its United Kingdom based employees.
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17)
Restructuring
Residential Kitchen Equipment Group:
Since the 2015 acquisition of the AGA Group, the company undertook various acquisition integration initiatives including organizational restructuring, headcount reductions and consolidation and disposition of certain facilities and business operations, including the impairment of equipment and facilities. Most recently during 2018, the company undertook additional restructuring efforts related to Grange, a non-core business within the AGA Group, and elected to cease its operations. This process was largely completed in the fourth quarter of 2018. Related to the AGA Group, the company recorded additional expense of $0.1 million in the three months ended March 30, 2019. These expenses are reflected in restructuring expenses in the Condensed Consolidated Statements of Comprehensive Income. The cumulative expenses incurred to date for these initiatives is approximately $55.8 million. The primary realization of the cost savings began in 2017 and 2018 related to compensation and facility costs of approximately $20.0 million annually. At March 30, 2019, the restructuring obligations accrued for these initiatives are immaterial and will be completed by the end of fiscal year 2019.
The restructuring expenses for the other segments of the company were not material during the period.
18)
Subsequent Event
On April 1, 2019, the company completed its acquisition from Standex International Corporation of its Cooking Solutions Group, which consists of the well-known brands APW Wyott, Bakers Pride, BKI and Ultrafryer located in primarily in Texas and South Carolina for a purchase price of approximately $105.0 million.
Additionally, on April 1, 2019, the company completed the acquisition of Powerhouse Dynamics, Inc., a leader in cloud-based Internet of Things solutions for the food service industry located near Boston, Massachusetts, for a purchase price of approximately $12.5 million.
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Informational Notes
This report contains forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The company cautions readers that these projections are based upon future results or events and are highly dependent upon a variety of important factors which could cause such results or events to differ materially from any forward-looking statements which may be deemed to have been made in this report, or which are otherwise made by or on behalf of the company. Such factors include, but are not limited to, volatility in earnings resulting from goodwill impairment losses which may occur irregularly and in varying amounts; variability in financing costs; quarterly variations in operating results; dependence on key customers; international exposure; foreign exchange and political risks affecting international sales; ability to protect trademarks, copyrights and other intellectual property; changing market conditions; the impact of competitive products and pricing; the timely development and market acceptance of the company’s products; the availability and cost of raw materials; and other risks detailed herein and from time-to-time in the company’s SEC filings, including the company’s 2018 Annual Report on Form 10-K.
Net Sales Summary
(dollars in thousands)
Three Months Ended
Mar 30, 2019
Mar 31, 2018
Sales
Percent
Sales
Percent
Business Segments:
Commercial Foodservice
$
457,531
66.6
%
$
359,904
61.5
%
Food Processing
92,474
13.5
88,572
15.2
Residential Kitchen
136,797
19.9
136,324
23.3
Total
$
686,802
100.0
%
$
584,800
100.0
%
Results of Operations
The following table sets forth certain consolidated statements of earnings items as a percentage of net sales for the periods: