MIDDLEBY Corp 10-Q for FY2020 Q1
MIDDLEBY Corp (MIDD)
10-Q
2020-05-07
For: 2020-03-28
View Original
Added on
April 10, 2026
About this 10-Q
MIDDLEBY Corp filed this 10-Q on May 7, 2020, covering the quarter ended March 28, 2020 (FY2020 Q1).
Headline figures
Quarter ended March 28, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $677.46M
- down 1.4% from $686.8M a year earlier
- Net income
- $73.78M
- up 6.9% from net income of $69.01M a year earlier
- Diluted EPS
- $1.33
- up 7.3% from $1.24 a year earlier
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 March 28, 2020
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
Commission File No. 1-9973
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
(Address of principal executive offices) | (Zip Code) | ||
Registrant's telephone number, including area code: | ||
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.
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).
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.
☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | |
Smaller reporting company | Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
As of May 1, 2020, there were 55,580,048 shares of the registrant's common stock outstanding.
THE MIDDLEBY CORPORATION
QUARTER ENDED MARCH 28, 2020
INDEX
DESCRIPTION | PAGE | |
PART I. FINANCIAL INFORMATION | ||
Item 1. | ||
CONDENSED CONSOLIDATED BALANCE SHEETS as of MARCH 28, 2020 and DECEMBER 28, 2019 | ||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME for the three months ended MARCH 28, 2020 and MARCH 30, 2019 | ||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY for the three months ended MARCH 28, 2020 and MARCH 30, 2019 | ||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the three months ended MARCH 28, 2020 and MARCH 30, 2019 | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. OTHER INFORMATION | ||
Item 2. | ||
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 | Mar 28, 2020 | Dec 28, 2019 | |||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Accounts receivable, net of reserve for doubtful accounts of $16,350 and $14,886 | |||||||
Inventories, net | |||||||
Prepaid expenses and other | |||||||
Prepaid taxes | |||||||
Total current assets | |||||||
Property, plant and equipment, net of accumulated depreciation of $202,863 and $197,629 | |||||||
Goodwill | |||||||
Other intangibles, net of amortization of $350,795 and $333,507 | |||||||
Long-term deferred tax assets | |||||||
Other assets | |||||||
Total assets | $ | $ | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Current maturities of long-term debt | $ | $ | |||||
Accounts payable | |||||||
Accrued expenses | |||||||
Total current liabilities | |||||||
Long-term debt | |||||||
Long-term deferred tax liability | |||||||
Accrued pension benefits | |||||||
Other non-current liabilities | |||||||
Stockholders' equity: | |||||||
Preferred stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none issued | — | — | |||||
Common stock, $0.01 par value; 63,206,417 and 63,129,775 shares issued in 2020 and 2019, respectively | |||||||
Paid-in capital | |||||||
Treasury stock, at cost; 7,896,428 and 6,940,089 shares in 2020 and 2019 | ( | ) | ( | ) | |||
Retained earnings | |||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Total stockholders' equity | |||||||
Total liabilities and stockholders' equity | $ | $ | |||||
See accompanying notes
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THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended | |||||||
Mar 28, 2020 | Mar 30, 2019 | ||||||
Net sales | $ | $ | |||||
Cost of sales | |||||||
Gross profit | |||||||
Selling, general and administrative expenses | |||||||
Restructuring expenses | |||||||
Income from operations | |||||||
Interest expense and deferred financing amortization, net | |||||||
Net periodic pension benefit (other than service costs) | ( | ) | ( | ) | |||
Other expense (income), net | ( | ) | |||||
Earnings before income taxes | |||||||
Provision for income taxes | |||||||
Net earnings | $ | $ | |||||
Net earnings per share: | |||||||
Basic | $ | $ | |||||
Diluted | $ | $ | |||||
Weighted average number of shares | |||||||
Basic | |||||||
Dilutive common stock equivalents1 | |||||||
Diluted | |||||||
Comprehensive income | $ | $ | |||||
1There were no anti-dilutive equity awards excluded from common stock equivalents for any period presented.
See accompanying notes
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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 28, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Net earnings | |||||||||||||||||||||||
Currency translation adjustments | ( | ) | ( | ) | |||||||||||||||||||
Change in unrecognized pension benefit costs, net of tax of $3,123 | |||||||||||||||||||||||
Unrealized loss on interest rate swap, net of tax of $(9,299) | ( | ) | ( | ) | |||||||||||||||||||
Stock compensation | |||||||||||||||||||||||
Stock issuance | |||||||||||||||||||||||
Purchase of treasury stock | ( | ) | ( | ) | |||||||||||||||||||
Balance, March 28, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Common Stock | Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income/(loss) | Total Stockholders' Equity | ||||||||||||||||||
Balance, December 29, 2018 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Net earnings | |||||||||||||||||||||||
Adoption of ASU 2017-12 (1) | ( | ) | |||||||||||||||||||||
Currency translation adjustments | |||||||||||||||||||||||
Change in unrecognized pension benefit costs, net of tax of $(1,383) | ( | ) | ( | ) | |||||||||||||||||||
Unrealized loss on interest rate swap, net of tax of $(3,177) | ( | ) | ( | ) | |||||||||||||||||||
Stock compensation | |||||||||||||||||||||||
Purchase of treasury stock | ( | ) | ( | ) | |||||||||||||||||||
Balance, March 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
(1) As of December 30, 2018, the company adopted ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" using the modified retrospective method. The adoption of this guidance resulted in the recognition of less than $(0.1 ) million as an adjustment to the opening balance of retained earnings.
See accompanying notes
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THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended | |||||||
Mar 28, 2020 | Mar 30, 2019 | ||||||
Cash flows from operating activities-- | |||||||
Net earnings | $ | $ | |||||
Adjustments to reconcile net earnings to net cash provided by operating activities-- | |||||||
Depreciation and amortization | |||||||
Non-cash share-based compensation | |||||||
Deferred income taxes | |||||||
Net periodic pension benefit (other than service costs) | ( | ) | ( | ) | |||
Changes in assets and liabilities, net of acquisitions | |||||||
Accounts receivable, net | |||||||
Inventories, net | ( | ) | ( | ) | |||
Prepaid expenses and other assets | |||||||
Accounts payable | |||||||
Accrued expenses and other liabilities | ( | ) | ( | ) | |||
Net cash provided by operating activities | |||||||
Cash flows from investing activities-- | |||||||
Net additions to property, plant and equipment | ( | ) | ( | ) | |||
Acquisitions, net of cash acquired | ( | ) | ( | ) | |||
Net cash used in investing activities | ( | ) | ( | ) | |||
Cash flows from financing activities-- | |||||||
Proceeds under Credit Facility | |||||||
Repayments under Credit Facility | ( | ) | ( | ) | |||
Net proceeds (repayments) under international credit facilities | ( | ) | |||||
Net repayments under other debt arrangement | ( | ) | ( | ) | |||
Payments of deferred purchase price | ( | ) | |||||
Repurchase of treasury stock | ( | ) | ( | ) | |||
Debt issuance costs | ( | ) | |||||
Net cash provided by (used by) financing activities | ( | ) | |||||
Effect of exchange rates on cash and cash equivalents | ( | ) | |||||
Changes in cash and cash equivalents-- | |||||||
Net increase in cash and cash equivalents | |||||||
Cash and cash equivalents at beginning of year | |||||||
Cash and cash equivalents at end of period | $ | $ | |||||
See accompanying notes
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THE MIDDLEBY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2020
(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 2019 Form 10-K. The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2020.
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 28, 2020 and December 28, 2019, the results of operations for the three months ended March 28, 2020 and March 30, 2019, cash flows for the three months ended March 28, 2020 and March 30, 2019 and statement of stockholders' equity for the three months ended March 28, 2020 and March 30, 2019.
Certain prior year amounts have been reclassified to be consistent with current year presentation, including classifying the non-operating components of pension benefit as an individual adjustment within the operating activities on the Consolidated Statements of Cash Flows. Previously the amounts were reported as changes in accrued expenses and other liabilities.
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 |
C) | Income Taxes |
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. As of March 28, 2020, CARES did not have a material impact on the company's financial statements.
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:
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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 March 28, 2020 | |||||||||||||||
Financial Liabilities: | |||||||||||||||
Interest rate swaps | $ | $ | $ | $ | |||||||||||
Contingent consideration | $ | $ | $ | $ | |||||||||||
Foreign exchange derivative contracts | $ | ||||||||||||||
As of December 28, 2019 | |||||||||||||||
Financial Assets: | |||||||||||||||
Interest rate swaps | $ | $ | $ | $ | |||||||||||
Financial Liabilities: | |||||||||||||||
Interest rate swaps | $ | $ | $ | $ | |||||||||||
Contingent consideration | $ | $ | $ | $ | |||||||||||
Foreign exchange derivative contracts | $ | $ | $ | $ | |||||||||||
The contingent consideration as of March 28, 2020 and December 28, 2019, 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 acquired business in comparison to the earnout targets and adjusts the liability accordingly.
E) Consolidated Statements of Cash Flows
Cash paid for interest was $14.1 million and $20.4 million for the three months ended March 28, 2020 and March 30, 2019, respectively. Cash payments totaling $6.2 million and $3.0 million were made for income taxes for the three months ended March 28, 2020 and March 30, 2019, respectively.
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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. 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 also 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 following represents the company's significant acquisitions in 2020 and 2019 as well as summarized information on various acquisitions that were not individually material. The company also made smaller acquisitions not presented below which are individually and collectively immaterial.
Cooking Solutions Group
On April 1, 2019, the company completed its acquisition of all of the capital stock of Cooking Solutions Group, Inc. ("Cooking Solutions Group") from Standex International Corporation, which consists of the brands APW Wyott, Bakers Pride, BKI and Ultrafryer with locations in Texas, South Carolina and Mexico for a purchase price of approximately $106.1 million, net of cash acquired. During the third quarter of 2019, the company finalized the working capital provision provided for by the purchase agreement resulting in a payment due to the sellers of $0.1 million.
The final allocation of consideration paid for the Cooking Solutions Group acquisition is summarized as follows (in thousands):
(as initially reported) April 1, 2019 | Measurement Period Adjustments | (as adjusted) April 1, 2019 | |||||||||
Cash | $ | $ | $ | ||||||||
Current assets | ( | ) | |||||||||
Property, plant and equipment | ( | ) | |||||||||
Goodwill | |||||||||||
Other intangibles | ( | ) | |||||||||
Other assets | |||||||||||
Current liabilities | ( | ) | ( | ) | ( | ) | |||||
Long-term deferred tax liability | ( | ) | ( | ) | |||||||
Other non-current liabilities | ( | ) | ( | ) | |||||||
Net assets acquired and liabilities assumed | $ | $ | $ | ||||||||
The long-term deferred tax liability amounted to $10.5 million. The net deferred tax liability is comprised of $11.6 million of deferred tax liability related to the difference between the book and tax basis on identifiable intangible asset and liability accounts and $1.1 million of deferred tax asset related to the difference between the book and tax basis on identifiable tangible assets and liability accounts.
The goodwill and $24.7 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $22.5 million allocated to customer relationships and $0.4 million allocated to backlog, which are being amortized over periods of 9 years and 3 months, respectively. Goodwill and other intangibles of Cooking Solutions Group are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
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Other 2019 Acquisitions
During 2019, the company completed various other acquisitions that were not individually material. The 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 2019 acquisitions and are summarized as follows (in thousands):
Preliminary Opening Balance Sheet | Preliminary Measurement Period Adjustments | Adjusted Opening Balance Sheet | |||||||||
Cash | $ | $ | ( | ) | $ | ||||||
Current assets | |||||||||||
Property, plant and equipment | ( | ) | |||||||||
Goodwill | ( | ) | |||||||||
Other intangibles | |||||||||||
Long-term deferred tax asset | |||||||||||
Other assets | |||||||||||
Current liabilities | ( | ) | ( | ) | ( | ) | |||||
Other non-current liabilities | ( | ) | ( | ) | ( | ) | |||||
Consideration paid at closing | $ | $ | ( | ) | $ | ||||||
Deferred payments | |||||||||||
Contingent consideration | |||||||||||
Net assets acquired and liabilities assumed | $ | $ | ( | ) | $ | ||||||
The long-term deferred tax asset amounted to $2.7 million. The net deferred tax asset is comprised of $2.9 million of deferred tax asset related to tax loss carryforwards, $1.0 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets and $0.8 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 $29.6 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $22.3 million allocated to customer relationships, $11.1 million allocated to developed technology and $1.4 million allocated to backlog, which are being amortized over periods of 2 to 10 years, 5 to 7 years, and 3 months, respectively. Goodwill of $42.8 million and other intangibles of $35.5 million of the companies are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. Goodwill of $43.7 million and other intangibles of $21.3 million are allocated to the Food Processing Equipment Group for segment reporting purposes. Goodwill of $9.9 million and other intangibles of $7.6 million are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Of these assets, goodwill of $85.5 million and intangibles of $53.8 million are expected to be deductible for tax purposes.
One purchase agreement includes deferred payments and earnout provisions providing for contingent payments due to the sellers to the extent certain financial targets are exceeded. The deferred payments are payable between 2020 and 2022. The contractual obligation associated with the deferred payments on the acquisition date is $2.4 million. The earnout is payable in 2022, if the company exceeds certain sales and earnings targets. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $4.3 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 substantially all 2019 acquisitions. Thus, the provisional measurements of fair value set forth above are subject to change. The company expects to complete the purchase price allocations during 2020.
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2020 Acquisitions
As of March 28, 2020, the company has 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 acquisitions and are summarized as follows (in thousands):
Preliminary Opening Balance Sheet | |||
Cash | $ | ||
Current assets | |||
Property, plant and equipment | |||
Goodwill | |||
Other intangibles | |||
Other assets | |||
Current liabilities | ( | ) | |
Other non-current liabilities | ( | ) | |
Consideration paid at closing | $ | ||
Deferred payments | |||
Contingent consideration | |||
Net assets acquired and liabilities assumed | $ | ||
The goodwill and $9.0 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $6.5 million allocated to customer relationships, $0.2 million allocated to developed technology and $0.8 million allocated to backlog, which are being amortized over periods of 7 years, 7 years, and 6 months, respectively. Goodwill of $12.8 million and other intangibles of $16.5 million of the companies are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes and are expected to be deductible for tax purposes.
One purchase agreement includes a deferred payment and earnout provision providing for contingent payments due to the sellers to the extent certain financial targets are exceeded. The deferred payment is payable during 2020. The contractual obligation associated with the deferred payments on the acquisition date is $1.3 million. The earnout is payable in 2023, if the company exceeds certain sales and earnings targets. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $1.8 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 substantially all 2020 acquisitions to date. 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.
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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 28, 2020 and March 30, 2019, assumes the 2019 and 2020 acquisitions described above were completed on December 30, 2018 (first day of fiscal year 2019). 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 28, 2020 | March 30, 2019 | ||||||
Net sales | $ | $ | |||||
Net earnings | |||||||
Net earnings per share: | |||||||
Basic | $ | $ | |||||
Diluted | $ | $ | |||||
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.
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4) Recently Issued Accounting Standards
Accounting Pronouncements - Recently Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, and has since modified the standard with several ASUs (collectively, the “new credit loss standard”). The new credit loss standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The company adopted the new standard as of December 29, 2019 (first day of fiscal year 2020) using the modified retrospective approach. As a result of the company's assessment process on its receivables and contract assets portfolio, which is the only financial instrument in scope of this standard, the adoption of this guidance did not have a material impact on the company's Condensed Consolidated Financial Statements.
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. The company adopted this guidance on December 29, 2019 on a prospective basis. The adoption of this guidance did not have an impact on the company's 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 fair value measurement in order to clarify and improve the cost-benefit nature of disclosures. The company adopted this guidance on December 29, 2019 on a prospective basis. The adoption of this guidance did not have an impact on the company's Condensed Consolidated Financial Statements.
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. The company adopted this guidance on December 29, 2019 on a prospective basis. The adoption of this guidance did not have an impact on the company's Condensed Consolidated Financial Statements.
Accounting Pronouncements - To be adopted
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 guidance 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 guidance will have on its Condensed Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)", which removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This guidance is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2020 with early adoption permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings in the period of adoption. The company is currently evaluating the impacts the adoption of this guidance will have on its Condensed Consolidated Financial Statements.
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In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting". Subject to meeting certain criteria, ASU 2020-04 provides optional expedients and exceptions to applying contract modification accounting under existing generally accepted accounting principles, for contracts that are modified to address the expected phase out of the London Inter-bank Offered Rate (“LIBOR”) by the end of 2021. Some of the Company’s contracts with respect to its borrowings and interest rate swap contracts already contain comparable alternative reference rates that would automatically take effect upon the phasing out of LIBOR, while for others, the company anticipates negotiating comparable replacement rates with its counterparties. This guidance is effective for all entities from the beginning of an interim period that includes the issuance date of the ASU. An entity may elect to apply the amendments prospectively through December 31, 2022. The company is currently evaluating the impacts the adoption of this guidance will have on its Condensed Consolidated Financial Statements.
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 March 28, 2020 | |||||||||||||||
United States and Canada | $ | $ | $ | $ | |||||||||||
Asia | |||||||||||||||
Europe and Middle East | |||||||||||||||
Latin America | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Three Months Ended March 30, 2019 | |||||||||||||||
United States and Canada | $ | $ | $ | $ | |||||||||||
Asia | |||||||||||||||
Europe and Middle East | |||||||||||||||
Latin America | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
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.
12
The following table provides information about contract assets and contract liabilities from contracts with customers (in thousands):
Mar 28, 2020 | Dec 28, 2019 | ||||||
Contract assets | $ | $ | |||||
Contract liabilities | $ | $ | |||||
Non-current contract liabilities | $ | $ | |||||
During the three months period ended March 28, 2020, the company reclassified $5.1 million to receivables, which was included in the contract asset balance at the beginning of the period. During the three months period ended March 28, 2020, the company recognized revenue of $45.3 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 $63.2 million during the three months period ended March 28, 2020. The increase in contract liabilities primarily relates to companies acquired during the three months period ended March 28, 2020. 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 28, 2020.
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 28, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Other comprehensive income before reclassification | ( | ) | ( | ) | ( | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income | ( | ) | ( | ) | |||||||||||
Net current-period other comprehensive income | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||
Balance as of March 28, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Balance as of December 29, 2018 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||
Adoption of ASU 2017-12 (2) | |||||||||||||||
Other comprehensive income before reclassification | ( | ) | ( | ) | ( | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income | |||||||||||||||
Net current-period other comprehensive income | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Balance as of March 30, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
(1) As of March 28, 2020, pension and interest rate swap amounts are net of tax of $(45.5 ) million and $(15.3 ) million, respectively. During the three months ended March 28, 2020, the adjustments to pension benefit costs and unrealized gain/(loss) interest rate swap were net of tax of $3.1 million and $(9.3 ) million, respectively. 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.
(2) 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.
13
Three Months Ended | |||||||
Mar 28, 2020 | Mar 30, 2019 | ||||||
Net earnings | $ | $ | |||||
Currency translation adjustment | ( | ) | |||||
Pension liability adjustment, net of tax | ( | ) | |||||
Unrealized gain on interest rate swaps, net of tax | ( | ) | ( | ) | |||
Comprehensive income | $ | $ | |||||
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 28, 2020 and December 28, 2019 are as follows (in thousands):
Mar 28, 2020 | Dec 28, 2019 | ||||||
Raw materials and parts | $ | $ | |||||
Work-in-process | |||||||
Finished goods | |||||||
$ | $ | ||||||
8) | Goodwill |
Changes in the carrying amount of goodwill for the three months ended March 28, 2020 are as follows (in thousands):
Commercial Foodservice | Food Processing | Residential Kitchen | Total | ||||||||||||
Balance as of December 28, 2019 | $ | $ | $ | $ | |||||||||||
Goodwill acquired during the year | |||||||||||||||
Measurement period adjustments to goodwill acquired in prior year | |||||||||||||||
Exchange effect | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Balance as of March 28, 2020 | $ | $ | $ | $ | |||||||||||
The company continues to monitor the global outbreak of the COVID-19 pandemic to assess the outlook for demand of its products and the impact on its business and financial performance. The potential impact of the COVID-19 pandemic on demand, production levels, and its operating results in the short-term is uncertain, but the company remains committed to the strategic actions necessary to realize long-term revenue and cash flow growth rates. The potential negative demand effect on revenues is also uncertain given the volatile environment, but demand and production levels are anticipated to recover.
As a result of the company's analysis, and in consideration of the totality of events and circumstances, there were no triggering events requiring an interim goodwill impairment assessment identified during the first quarter of 2020.
Additionally, for the assessment of indefinite-life intangible assets other than goodwill, primarily trademarks and trade names, the company identified several trademarks and trade names with indicators of potential risk for impairment and performed quantitative assessments. The fair values of the trademarks tested exceeded their carrying values by more than 10%. As a result, no impairment charges for goodwill and indefinite-lived intangible assets were recorded during the first quarter of 2020.
14
9) | Intangibles |
Intangible assets consist of the following (in thousands):
March 28, 2020 | December 28, 2019 | ||||||||||||||||||
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 | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||
Backlog | ( | ) | ( | ) | |||||||||||||||
Developed technology | ( | ) | ( | ) | |||||||||||||||
$ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
Indefinite-lived assets: | |||||||||||||||||||
Trademarks and tradenames | $ | $ | |||||||||||||||||
The aggregate intangible amortization expense was $16.9 million and $16.1 million for the three months period ended March 28, 2020 and March 30, 2019, 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 First Quarter | Amortization Expense | |||
2021 | $ | |||
2022 | ||||
2023 | ||||
2024 | ||||
2025 | ||||
Thereafter | ||||
$ | ||||
15
10) Accrued Expenses
Accrued expenses consist of the following (in thousands):
Mar 28, 2020 | Dec 28, 2019 | ||||||
Contract liabilities | $ | $ | |||||
Accrued payroll and related expenses | |||||||
Accrued warranty | |||||||
Accrued customer rebates | |||||||
Accrued short-term leases | |||||||
Accrued product liability and workers compensation | |||||||
Accrued agent commission | |||||||
Accrued sales and other tax | |||||||
Accrued professional fees | |||||||
Other accrued expenses | |||||||
$ | $ | ||||||
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):
Three Months Ended | |||
Mar 28, 2020 | |||
Balance as of December 28, 2019 | $ | ||
Warranty reserve related to acquisitions | |||
Warranty expense | |||
Warranty claims | ( | ) | |
Balance as of March 28, 2020 | $ | ||
12) | Financing Arrangements |
Mar 28, 2020 | Dec 28, 2019 | ||||||
(in thousands) | |||||||
Senior secured revolving credit line | $ | $ | |||||
Term loan facility | |||||||
Foreign loans | |||||||
Other debt arrangement | |||||||
Total debt | |||||||
Less: Current maturities of long-term debt | |||||||
Long-term debt | |||||||
16
On January 31, 2020, the company entered into an amended and restated five-year, $3.5 billion multi-currency senior secured credit agreement (the "Credit Facility"). The Credit Facility amends the company's pre-existing $3.0 billion credit facility, which had an original maturity of July 2021. The Credit Facility consists of (i) a $750.0 million term loan facility and (ii) a $2.75 billion multi-currency revolving credit facility, with the potential under certain circumstances, to increase the amount of the credit facility to up to a total of $4.0 billion (plus additional amounts, subject to compliance with a senior secured net leverage ratio). The Credit Facility matures on January 31, 2025. The term loan facility will amortize in equal quarterly installments due on the last day of each fiscal quarter, commencing with the first full fiscal quarter after January 31, 2020, in an aggregate annual amount equal to 2.50 % of the original aggregate principal amount of the term loan facility, with the balance, plus any accrued interest, due and payable on January 31, 2025.
As of March 28, 2020, the company had $1.4 billion of borrowings outstanding under the revolving credit facility, including $1.4 billion of borrowings in U.S. Dollars and $47.1 million of borrowings denominated in Euro, and $750.0 million outstanding under the term loan. The company also had $13.2 million in outstanding letters of credit as of March 28, 2020, which reduces the borrowing availability under the Credit Facility. Remaining borrowing availability under this facility was $1.3 billion at March 28, 2020.
At March 28, 2020, 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 2.41 % 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 28, 2020.
The term loan facility had an average interest rate per annum of 3.19 % as of March 28, 2020.
In addition, the company has other international credit facilities to fund working capital needs outside the United States and the United Kingdom. At March 28, 2020, these foreign credit facilities amounted to $3.8 million in U.S. Dollars with a weighted average per annum interest rate of approximately 5.32 %.
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.
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 Credit Facility in January 2025. 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 28, 2020 | Dec 28, 2019 | ||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Total debt | $ | $ | $ | $ | |||||||||||
The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At March 28, 2020, 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 $1,062.0 million notional amount carrying an average interest rate of 2.02 % that mature in more than 12 months but less than 84 months.
17
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 EBITDA (each as defined in the Credit Facility) of 4.00 to 1.00 , which may be adjusted to 4.50 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 28, 2020, the company was in compliance with all covenants pursuant to its borrowing agreements.
The company was in compliance with all covenants pursuant to its borrowing agreements. The company has run various scenarios to estimate the impact of the COVID-19 pandemic and continues to believe that its future cash generated from operations, together with its capacity under its Credit Facility and its cash on hand, will provide adequate resources to meet its working capital needs and cash requirements for at least the next 12 months. The company expects to be in compliance with the financial covenants in its Credit Facility; however, given the uncertainty of conditions for the remainder of 2020, the company will aggressively monitor and assess whether compliance is at substantial risk and may warrant further actions with banking partners. The company believes any necessary actions would result in the ability to achieve subsequent compliance and avoidance of default under 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.
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 fair value of the forward and option contracts was a loss of $1.3 million at the end of the first quarter of 2020.
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 28, 2020, the fair value of these instruments was a liability of $57.8 million. The change in fair value of these swap agreements in the first three months of 2020 was a loss of $25.2 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 28, 2020 | Dec 28, 2019 | |||||||
Fair value | Other assets | $ | $ | ||||||
Fair value | Other non-current liabilities | $ | $ | ||||||
18
The impact on earnings from interest rate swaps was as follows (in thousands):
Three Months Ended | |||||||||
Presentation of Gain/(loss) | Mar 28, 2020 | Mar 30, 2019 | |||||||
Gain/(loss) recognized in accumulated other comprehensive income | Other comprehensive income | $ | ( | ) | $ | ( | ) | ||
Gain/(loss) reclassified from accumulated other comprehensive income (effective portion) | Interest expense | $ | ( | ) | $ | ||||
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) | Segment Information |
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, Massachusetts, Michigan, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Vermont, Washington, Australia, China, Denmark, Estonia, Italy, Mexico, 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, APW Wyott, Bakers Pride, Beech, BKI, Blodgett, Blodgett Combi, Blodgett Range, Bloomfield, Britannia, CTX, Carter-Hoffmann, Celfrost, Concordia, CookTek, Crown, Desmon, Deutsche, 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, RAM, SiteSage, Southbend, Star, Sveba Dahlen, Ss Brewtech, Synesso, Taylor, Toastmaster, TurboChef, Ultrafryer, Varimixer, 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, Pennsylvania, 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, Pacpro, 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, Brava, Brigade, EVO, Fired Earth, Heartland, La Cornue, Leisure Sinks, Lynx, Marvel, Mercury, Rangemaster, Rayburn, Redfyre, Sedona, Stanley, TurboChef, U-Line and Viking.
19
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 28, 2020 | Mar 30, 2019 | ||||||||||||
Sales | Percent | Sales | Percent | ||||||||||
Business Segments: | |||||||||||||
Commercial Foodservice | $ | % | $ | % | |||||||||
Food Processing | |||||||||||||
Residential Kitchen | |||||||||||||
Total | $ | % | $ | % | |||||||||
The following table summarizes the results of operations for the company's business segments (in thousands):
Commercial Foodservice | Food Processing | Residential Kitchen | Corporate and Other (1) | Total | |||||||||||||||
Three Months Ended March 28, 2020 | |||||||||||||||||||
Net sales | $ | $ | $ | $ | $ | ||||||||||||||
Income (loss) from operations (2)(3) | ( | ) | |||||||||||||||||
Depreciation expense | |||||||||||||||||||
Amortization expense (4) | |||||||||||||||||||
Net capital expenditures | |||||||||||||||||||
Total assets | $ | $ | $ | $ | $ | ||||||||||||||
Three Months Ended March 30, 2019 | |||||||||||||||||||
Net sales | $ | $ | $ | $ | $ | ||||||||||||||
Income (loss) from operations (2)(3) | ( | ) | |||||||||||||||||
Depreciation expense | |||||||||||||||||||
Amortization expense (4) | |||||||||||||||||||
Net capital expenditures | |||||||||||||||||||
Total assets | $ | $ | $ | $ | $ | ||||||||||||||
(1)Includes corporate and other general company assets and operations.
(2)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.
(3)Restructuring expenses are allocated in operating income by segment. See note 16 for further details.
(4)Includes amortization of deferred financing costs.
20
Geographic Information
Long-lived assets, not including goodwill and other intangibles (in thousands):
Mar 28, 2020 | Mar 30, 2019 | ||||||
United States and Canada | $ | $ | |||||
Asia | |||||||
Europe and Middle East | |||||||
Latin America | |||||||
Total international | $ | $ | |||||
$ | $ | ||||||
15) | 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. Benefits are determined based upon retirement age and years of service 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. 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 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 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.
21
The following table summarizes the company's net periodic pension benefit related to the AGA Group pension plans (in thousands):
Three Months Ended | |||||||
Mar 28, 2020 | Mar 30, 2019 | ||||||
Net Periodic Pension Benefit: | |||||||
Service cost | $ | $ | |||||
Interest cost | |||||||
Expected return on assets | ( | ) | ( | ) | |||
Amortization of net (gain) loss | |||||||
Amortization of prior service cost (credit) | |||||||
$ | ( | ) | $ | ( | ) | ||
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.
16) | Restructuring |
Commercial Foodservice Equipment Group:
During fiscal 2019, the company undertook cost reduction initiatives related to the Commercial Foodservice Equipment Group including headcount reductions and facility consolidations. These actions resulted in an additional charge of $0.5 million in the three months ended March 28, 2020. These expenses are reflected in restructuring expenses in the Condensed Consolidated Statements of Comprehensive Income. The company estimates that these restructuring initiatives, which began in 2019, will result in future cost savings of approximately $10.0 million to $15.0 million annually. At March 28, 2020, the restructuring obligations accrued for these initiatives are immaterial and are expected to be completed by second quarter of fiscal year 2020.
The restructuring expenses for the other segments of the company were not material during the period.
17) | Share Repurchases |
On November 7, 2017, the company's Board of Directors approved a stock repurchase program. This program authorizes the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock in open market purchase transactions. For the three months ended March 28, 2020, the company repurchased 896,965 shares of its common stock under the program for $69.7 million, including applicable commissions, which represented an average price of $77.70 . As of March 28, 2020, 1,023,165 shares had been purchased under the 2017 stock repurchase program.
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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, the impact of COVID-19 pandemic and the response of governments, businesses and other third parties; 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 2019 Annual Report on Form 10-K.
During the quarter, the company business began to experience significant disruptions with the expanding COVID-19 pandemic, initially in Asia and Europe. With the continued spread of the pandemic into other regions and the subsequent macroeconomic uncertainty, the disruption and impacts have expanded and may continue to do so throughout the year. The company has taken aggressive actions to address the health and safety of our employees, negative effect from demand disruptions and production impacts, including, but not limited to the following:
– | Employee Safety - Implemented companywide procedures including enhanced workplace sanitation, travel discontinuation, social distancing, staggered shifts and work-at-home protocols for most non-production employees. |
– | Customer Support - Ensured continued access to customer support, technical service and minimal interruption to the shipping of service parts and finished goods. Production continued to meet customer demand. |
– | Cost Initiatives - Initiated an aggressive reduction of all controllable and discretionary costs. This included the adjustment of global office and production workforces in response to near-term decreased demand levels and reduced cash compensation to executives. |
– | Supply Chain - Established a task force to identify and mitigate supply chain disruption risk and ensure continuity of business operations and customer support. |
– | Liquidity and Cash Flow - Reduced capital expenditures for the remainder of year, enhanced working capital reduction initiatives, deferred near-term acquisition and business development related investments, and discontinued the Middleby share repurchase program. |
– | COVID-19 Product Introductions - Developed and launched products addressing COVID-19 needs, including sterilization units for N95 masks, mobile and touchless handwashing stations, plexiglass safety shields for restaurants and retail locations, mobile foodservice stations, and hand and cleaning sanitizer produced at our most recent acquired company Deutche. |
The company believes that these aggressive cost reduction and liquidity preservation actions serve to position us appropriately and provide additional operating and financial flexibility to successfully navigate this uncertain environment.
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Net Sales Summary
(dollars in thousands)
Three Months Ended | |||||||||||||
Mar 28, 2020 | Mar 30, 2019 | ||||||||||||
Sales | Percent | Sales | Percent | ||||||||||
Business Segments: | |||||||||||||
Commercial Foodservice | $ | 443,124 | 65.4 | % | $ | 457,531 | 66.6 | % | |||||
Food Processing | 104,266 | 15.4 | 92,474 | 13.5 | |||||||||
Residential Kitchen | 130,069 | 19.2 | 136,797 | 19.9 | |||||||||
Total | $ | 677,459 | 100.0 | % | $ | 686,802 | 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:
Three Months Ended | |||||
Mar 28, 2020 | Mar 30, 2019 | ||||
Net sales | 100.0 | % | 100.0 | % | |
Cost of sales | 63.1 | 62.5 | |||
Gross profit | 36.9 | 37.5 | |||
Selling, general and administrative expenses | 21.2 | 22.7 | |||
Restructuring | 0.1 | — | |||
Income from operations | 15.6 | 14.8 | |||
Interest expense and deferred financing amortization, net | 2.4 | 3.0 | |||
Net periodic pension benefit (other than service costs) | (1.5 | ) | (1.1 | ) | |
Other expense (income), net | 0.5 | (0.2 | ) | ||
Earnings before income taxes | 14.2 | 13.1 | |||
Provision for income taxes | 3.3 | 3.0 | |||
Net earnings | 10.9 | % | 10.1 | % | |
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Three Months Ended March 28, 2020 as compared to Three Months Ended March 30, 2019
NET SALES. Net sales for the three months period ended March 28, 2020 decreased by $9.3 million or 1.4% to $677.5 million as compared to $686.8 million in the three months period ended March 30, 2019. Net sales increased by $36.0 million, or 5.2%, from the fiscal 2019 acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Pacproinc, Brava and Synesso and fiscal 2020 acquisitions of RAM and Deutsche. Excluding acquisitions, net sales decreased $45.3 million, or 6.6%, from the prior year period. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the three months period ended March 28, 2020 decreased net sales by approximately $4.4 million or 0.6%. Excluding the impact of foreign exchange and acquisitions, sales decreased 5.9%, including a net sales decrease of 8.7% at the Commercial Foodservice Equipment Group, a net sales increase of 6.1% at the Food Processing Equipment Group and a net sales decrease of 5.0% at the Residential Kitchen Equipment Group.
• | Net sales of the Commercial Foodservice Equipment Group decreased by $14.4 million, or 3.1%, to $443.1 million in the three months period ended March 28, 2020, as compared to $457.5 million in the prior year period. Net sales from the acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Synesso, RAM, and Deutsche, which were acquired on April 1, 2019, April 1, 2019, June 15, 2019, November 27, 2019, January 13, 2020, and March 2, 2020, respectively, accounted for an increase of $28.0 million during the three months period ended March 28, 2020. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group decreased $42.4 million, or 9.3%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales decreased $39.6 million or 8.7% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $6.2 million, or 2.1%, to $306.5 million, as compared to $300.3 million in the prior year period. The decline in domestic sales reflects the challenging market conditions and impacts of COVID-19 late in the quarter. This includes an increase of $24.8 million from recent acquisitions. Excluding the acquisitions, the net decrease in domestic sales was $18.6 million, or 6.2%. International sales decreased $20.6 million, or 13.1%, to $136.6 million, as compared to $157.2 million in the prior year period. This includes an increase of $3.2 million from the recent acquisitions and a decrease of $2.8 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales decrease in international sales was $21.0 million, or 13.4%. The decrease in international revenues reflects the continuation of challenging market conditions seen in 2019 and declines in sales in the Asian and European markets as a result of the outbreak of COVID-19. |
• | Net sales of the Food Processing Equipment Group increased by $11.8 million, or 12.8%, to $104.3 million in the three months period ended March 28, 2020, as compared to $92.5 million in the prior year period. Excluding the impact of foreign exchange and the acquisition of Pacproinc, acquired July 16, 2019, net sales increased $5.6 million, or 6.1% at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $15.3 million, or 26.6%, to $72.9 million, as compared to $57.6 million in the prior year period. The increase in domestic sales reflects growth in protein equipment sales. Excluding the acquisition, the net increase in domestic sales was $8.8 million, or 15.3%. International sales decreased $3.5 million, or 10.0%, to $31.4 million, as compared to $34.9 million in the prior year period. Excluding acquisitions and foreign exchange, the net sales decrease in international sales was $3.2 million, or 9.2%. |
• | Net sales of the Residential Kitchen Equipment Group decreased by $6.7 million, or 4.9%, to $130.1 million in the three months period ended March 28, 2020, as compared to $136.8 million in the prior year period. Excluding the impact of foreign exchange and the acquisition of Brava, acquired November 19, 2019, net sales decreased $6.9 million, or 5.0% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales increase of $1.7 million, or 2.0%, to $85.1 million, as compared to $83.4 million in the prior year period. Excluding the acquisition, the net increase in domestic sales was $0.7 million, or 0.8%. International sales decreased $8.4 million or 15.7% to $45.0 million, as compared to $53.4 million in the prior year period. This includes an unfavorable impact of exchange rates of $0.8 million. Excluding foreign exchange, the net sales decrease in international sales was $7.6 million, or 14.2%. The decrease in international revenues reflects decline of sales in the European market as a result of Brexit and the outbreak of COVID-19. |
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GROSS PROFIT. Gross profit decreased to $250.2 million in the three months period ended March 28, 2020 from $257.3 million in the prior year period, primarily reflecting lower sales volumes, lower margins at recent acquisitions and the unfavorable impact of foreign exchanges rates of $1.4 million. The gross margin rate was 37.5% in the three months period ended March 30, 2019 as compared to 36.9% in the current year period.
• | Gross profit at the Commercial Foodservice Equipment Group decreased by $7.4 million, or 4.3%, to $165.3 million in the three months period ended March 28, 2020, as compared to $172.7 million in the prior year period. Gross profit from the acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Synesso, RAM, and Deutsche increased gross profit by $7.4 million. Excluding acquisitions, gross profit decreased by $14.8 million primarily related to lower sales volumes. The impact of foreign exchange rates decreased gross profit by approximately $0.8 million. The gross margin rate decreased to 37.3%, as compared to 37.7% in the prior year period. The gross margin rate excluding acquisitions and the impact of foreign exchange was 38.0%. |
• | Gross profit at the Food Processing Equipment Group increased by $3.7 million, or 11.4%, to $36.1 million in the three months period ended March 28, 2020, as compared to $32.4 million in the prior year period. Excluding acquisitions, gross profit increased by $1.5 million. The impact of foreign exchange rates decreased gross profit by approximately $0.3 million. The gross profit margin rate decreased to 34.6%, as compared to 35.0% in the prior year period. The gross margin rate excluding acquisitions and the impact of foreign exchange was 34.9%. |
• | Gross profit at the Residential Kitchen Equipment Group decreased by $4.5 million, or 8.4%, to $48.8 million in the three months period ended March 28, 2020, as compared to $53.3 million in the prior year period. The impact of foreign exchange rates decreased gross profit by approximately $0.3 million. The gross margin rate decreased to 37.5%, as compared to 39.0% in the prior year period, primarily related to lower sales volumes and the impact of facility consolidations. |
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses decreased from $155.9 million in the three months period ended March 30, 2019 to $143.9 million in the three months period ended March 28, 2020. As a percentage of net sales, selling, general, and administrative expenses were 22.7% in the three months period ended March 30, 2019, as compared to 21.2% in the three months period ended March 28, 2020.
Selling, general and administrative expenses reflect increased costs of $10.7 million associated with acquisitions, including $2.1 million of intangible amortization expense. Selling, general and administrative expenses decreased $8.6 million related to compensation costs, $4.0 million related to professional fees, $2.2 million related to convention costs and $1.1 million related to favorable impact of foreign exchange rates. The prior year period expenses also included $10.1 million related to the transition costs with respect to the former Chairman and CEO upon his retirement in February 2019. The decreases were partially offset by a $3.1 million increase related to higher non-cash share-based compensation.
RESTRUCTURING EXPENSES. Restructuring expenses increased $0.5 million from $0.3 million in the three months period ended March 30, 2019 to $0.8 million in the three months period ended March 28, 2020. Restructuring expenses related primarily to headcount reductions and cost reduction initiatives related to facility consolidations at the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were $15.7 million in the three months period ended March 28, 2020, as compared to $20.5 million in the prior year period, reflecting a reduction in the average interest rates under the Credit Facility. Net periodic pension benefit (other than service costs) increased $2.3 million to $10.1 million in the three months period ended March 28, 2020 from $7.8 million in the prior year period, related to the decrease in discount rate used to calculate the interest cost and higher expected returns on assets driven by higher asset values at the end of fiscal 2019. Other expense was $3.3 million in the three months period ended March 28, 2020, as compared to other income of $1.4 million in the prior year period and consists mainly of foreign exchange gains and losses.
INCOME TAXES. A tax provision of $22.7 million, at an effective rate of 23.5%, was recorded during the three months period ended March 28, 2020, as compared to $20.7 million at an effective rate of 23.1%, in the prior year period. The lower rate in the current year is primarily due to lower non-deductible costs and lower U.S. taxes on foreign earnings. The effective rates in 2020 and 2019 are higher than the federal tax rate of 21% primarily due to state taxes.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. As of March 28, 2020, CARES did not have a material impact on the company's financial statements.
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Financial Condition and Liquidity
During the three months ended March 28, 2020, cash and cash equivalents increased by $286.5 million to $381.0 million at March 28, 2020 from $94.5 million at December 28, 2019. Borrowings increased from $1.9 billion to $2.2 billion at December 28, 2019 and March 28, 2020, respectively, since the company maintained higher cash balances as a result of the uncertainty due to the COVID-19 pandemic.
OPERATING ACTIVITIES. Net cash provided by operating activities was $87.1 million for the three months ended March 28, 2020, compared to $33.9 million for the three months ended March 30, 2019.
During three months ended March 28, 2020, net cash used to fund changes in assets and liabilities amounted to $16.0 million. This resulted from the timing of payments and collections largely attributable to reduction in sales volumes at the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group, as well as seasonal inventory increases. Changes also included a $45.9 million decrease in accrued expenses and other non-current liabilities including impacts from the timing of payments made for various customer programs and compensation programs.
INVESTING ACTIVITIES. During the three months ended March 28, 2020, net cash used for investing activities amounted to $39.2 million. This included $30.0 million for the 2020 acquisitions of RAM and Deutsche and $9.2 million primarily associated with additions and upgrades of production equipment, manufacturing facilities and residential and commercial showrooms, net proceeds from the sale of property.
FINANCING ACTIVITIES. Net cash flows provided by financing activities were $245.1 million during the three months ended March 28, 2020. On January 31, 2020, the company entered into an amended and restated five-year, $3.5 billion multi-currency senior secured credit agreement. The company’s borrowing activities during the quarter included $326.5 million of net proceeds under its credit agreement, as we maintained higher cash balances as a result of uncertainty due to the COVID-19 pandemic. The company also incurred $7.6 million of debt issuance costs to amend the credit agreement.
Additionally, the company repurchased $74.6 million of Middleby common shares during the three months ended March 28, 2020. This was comprised of $4.9 million to repurchase 59,374 shares of Middleby common stock that were surrendered to the company for withholding taxes related to restricted stock vestings during the quarter and $69.7 million used to repurchase 896,965 shares of its common stock under a repurchase program.
At March 28, 2020, the company was in compliance with all covenants pursuant to its borrowing agreements. The company has run various scenarios to estimate the impact of the COVID-19 pandemic and continues to believe that its future cash generated from operations, together with its capacity under its Credit Facility and its cash on hand, will provide adequate resources to meet its working capital needs and cash requirements for at least the next 12 months. The company expects to be in compliance with the financial covenants in its Credit Facility; however, given the uncertainty of conditions for the remainder of 2020, the company will aggressively monitor and assess whether compliance is at substantial risk and may warrant further actions with banking partners. The company believes any necessary actions would result in the ability to achieve subsequent compliance and avoidance of default under its borrowing agreements.
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Recently Issued Accounting Standards
See Part 1, Notes to Condensed Consolidated Financial Statements, Note 4 - Recent Issued Accounting Standards.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations are based upon the company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions and any such differences could be material to the company's consolidated financial statements. There have been no changes in the company's critical accounting policies, which include revenue recognition, inventories, goodwill and other intangibles, pensions benefits, and income taxes, as discussed in the company's Annual Report on Form 10-K for the year ended December 28, 2019 (the “2019 Annual Report on Form 10-K”) other than those described below.
During the three months period ended March 28, 2020, the company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)". The amendments simplify the subsequent measurement of goodwill, by removing the second step of the goodwill impairment test. The company's qualitative assessment of goodwill impairment remains consistent; however, in the case of an impairment, the company 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The company is exposed to market risk related to changes in interest rates. The following table summarizes the maturity of the company’s debt obligations:
Twelve Month Period coinciding with the end of the company's Fiscal First Quarter | Variable Rate Debt | |||
2021 | $ | 21,933 | ||
2022 | 19,134 | |||
2023 | 18,986 | |||
2024 | 18,842 | |||
2025 and thereafter | 2,120,192 | |||
$ | 2,199,087 | |||
On January 31, 2020, the company entered into an amended and restated five-year, $3.5 billion multi-currency senior secured credit agreement (the "Credit Facility"). The Credit Facility amends the company's pre-existing $3.0 billion credit facility, which had an original maturity of July 2021. The Credit Facility consists of (i) a $750.0 million term loan facility and (ii) a $2.75 billion multi-currency revolving credit facility, with the potential under certain circumstances, to increase the amount of the credit facility to up to a total of $4.0 billion (plus additional amounts, subject to compliance with a senior secured net leverage ratio). The Credit Facility matures on January 31, 2025. The term loan facility will amortize in equal quarterly installments due on the last day of each fiscal quarter, commencing with the first full fiscal quarter after January 31, 2020, in an aggregate annual amount equal to 2.50% of the original aggregate principal amount of the term loan facility, with the balance, plus any accrued interest, due and payable on January 31, 2025.
As of March 28, 2020, the company had $1.4 billion of borrowings outstanding under the revolving credit facility, including $1.4 billion of borrowings in U.S. Dollars and $47.1 million of borrowings denominated in Euro and $750.0 million outstanding under the term loan. The company also had $13.2 million in outstanding letters of credit as of March 28, 2020, which reduces the borrowing availability under the Credit Facility. Remaining borrowing availability under this facility was $1.3 billion at March 28, 2020.
At March 28, 2020, 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 2.41% 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 28, 2020.
The term loan facility had an average interest rate per annum of 3.19% as of March 28, 2020.
In addition, the company has other international credit facilities to fund working capital needs outside the United States and the United Kingdom. At March 28, 2020, these foreign credit facilities amounted to $3.8 million in U.S. Dollars with a weighted average per annum interest rate of approximately 5.32%.
The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the revolving credit line. At March 28, 2020, 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 $1,062.0 million notional amount carrying an average interest rate of 2.02% that mature in more than 12 months but less than 84 months.
The Credit Facility matures on January 31, 2025, and accordingly has been classified as a long-term liability with a portion of the term loan facility classified as a short-term liability on the condensed consolidated balance sheet.
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
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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 EBITDA (each as defined in the Credit Facility) of 4.00 to 1.00, which may be adjusted to 4.50 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 28, 2020, the company was in compliance with all covenants pursuant to its borrowing agreements.
The company was in compliance with all covenants pursuant to its borrowing agreements. The company has run various scenarios to estimate the impact of the COVID-19 pandemic and continues to believe that its future cash generated from operations, together with its capacity under its Credit Facility and its cash on hand, will provide adequate resources to meet its working capital needs and cash requirements for at least the next 12 months. The company expects to be in compliance with the financial covenants in its Credit Facility; however, given the uncertainty of conditions for the remainder of 2020, the company will aggressively monitor and assess whether compliance is at substantial risk and may warrant further actions with banking partners. The company believes any necessary actions would result in the ability to achieve subsequent compliance and avoidance of default under its borrowing agreements.
Financing Derivative Instruments
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 28, 2020, the fair value of these instruments was a liability of $57.8 million. The change in fair value of these swap agreements in the first three months of 2020 was a loss of $25.2 million, net of taxes. The potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted interest rates would not have a material impact on the company's financial position, results of operations and cash flows.
Foreign Exchange Derivative Financial Instruments
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 potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted foreign exchange rates would not have a material impact on the company's financial position, results of operations and cash flows. The fair value of the forward and option contracts was a loss of $1.3 million at the end of the first quarter of 2020.
The company accounts for its derivative financial instruments in accordance with ASC 815, "Derivatives and Hedging". In accordance with ASC 815, these instruments are recognized on the balance sheet as either an asset or a liability measured at fair value. Changes in the market value and the related foreign exchange gains and losses are recorded in the statement of earnings.
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Item 4. Controls and Procedures
The company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of March 28, 2020, the company carried out an evaluation, under the supervision and with the participation of the company's management, including the company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the company's disclosure controls and procedures. Based on the foregoing, the company's Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of this period.
During the quarter ended March 28, 2020, there has been no change in the company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
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PART II. OTHER INFORMATION
The company was not required to report the information pursuant to Items 1 through 6 of Part II of Form 10-Q for the three months ended March 28, 2020, except as follows:
Item 1A. Risk Factors
The risk factors disclosed in the 2019 Annual Report on Form 10-K should be considered together with information included in this Quarterly Report on Form 10-Q for the quarter ended March 28, 2020 and should not be limited to those referenced. The below information details changes that have occurred to the previously disclosed risk factors in the 2019 Annual Report on Form 10-K. Except for such additional information, the company believes there have been no material changes from the risk factors previously disclosed in the 2019 Annual Report on Form 10-K.
The COVID-19 pandemic has, and likely will continue to, adversely impact and pose risks to the company, the nature and extent of which are highly uncertain and unpredictable.
The company is monitoring the global outbreak of the COVID-19 pandemic and taking steps to mitigate the risks posed by its spread, including working with its customers, employees, suppliers and other stakeholders. The pandemic is adversely affecting, and is expected to continue to adversely affect, the company's financial results, condition and outlook. Certain elements of the company's business (including its supply chain, distribution systems, production levels and research and development activities) and operations have been negatively impacted due to significant portions of the company's workforce being unable to work effectively due to quarantines, government orders and guidance, facility closures, illness, travel restrictions, implementation of precautionary measures and other restrictions. The company also has experienced, and expects to continue to experience, unpredictable volatility in demand given disruptions in global health, economic and market conditions, consumer behavior and global restaurant operations. If the pandemic continues and conditions worsen, the company expects to experience additional adverse impacts on operational and commercial activities, costs, customer orders and purchases and collections of accounts receivable, which may be material, and the extent of these exposures remains uncertain even if conditions begin to improve. The pandemic has also increased the risk related to the company's ability to ensure business continuity during a potential disruption, including increased cybersecurity attacks related to the work-from-home environment. Furthermore, the pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates and interest rates, all of which could continue to negatively impact the company. Due to the speed with which the situation is developing, the global breadth of the pandemic's spread and the range of governmental and community reactions, there is uncertainty around the pandemic's duration, ultimate impact and the timing of recovery. Therefore, the pandemic could lead to an extended disruption of economic activity and the impact on the company's consolidated results of operations, financial position and cash flows could be material. In addition, the continuation or a resurgence of the pandemic could exacerbate the other risk factors identified in the "Risk Factors" section of the 2019 Annual Report on Form 10K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
c) Issuer Purchases of Equity Securities
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | Maximum Number of Shares that May Yet be Purchased Under the Plan or Program (1) | |||||||||
December 29 to January 25, 2020 | — | $ | — | — | 2,373,800 | |||||||
January 26 to February 22, 2020 | — | — | — | 2,373,800 | ||||||||
February 23 to March 28, 2020 | 896,965 | 77.70 | 896,965 | 1,476,835 | ||||||||
Quarter ended March 28, 2020 | 896,965 | $ | 77.70 | 896,965 | 1,476,835 | |||||||
(1) On November 7, 2017, the company's Board of Directors resolved to terminate the company's existing share repurchase program, effective as of such date, which was originally adopted in 1998, and approved a new stock repurchase program. This program authorizes the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock. As of March 28, 2020, the total number of shares authorized for repurchase under the program is 2,500,000. As of March 28, 2020, 1,023,165 shares had been purchased under the 2017 stock repurchase program.
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In the consolidated financial statements, the company also treats shares withheld for tax purposes on behalf of employees in connection with the vesting of restricted share grants as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. These withheld shares are not considered common stock repurchases under the authorized common stock repurchase plan and accordingly are not included in the common stock repurchase totals in the preceding table.
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Item 6. Exhibits
Exhibits – The following exhibits are filed herewith: | |
Exhibit 31.1 – | |
Exhibit 31.2 – | |
Exhibit 32.1 – | |
Exhibit 32.2 – | |
Exhibit 101 – | Financial statements on Form 10-Q for the quarter ended March 28, 2020, filed on May 7, 2020, formatted in Inline Extensive Business Reporting Language (iXBRL); (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of earnings, (iii) condensed statements of cash flows, (iv) notes to the condensed consolidated financial statements. |
Exhibit 104 – | Cover Page Interactive Data File (formatted as Inline Extensive Business Reporting Language (iXBRL) and contained in Exhibit 101). |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE MIDDLEBY CORPORATION | ||||
(Registrant) | ||||
Date: | May 7, 2020 | By: | /s/ Bryan E. Mittelman | |
Bryan E. Mittelman | ||||
Chief Financial Officer | ||||
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