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MIDD > SEC Filings for MIDD > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for MIDDLEBY CORP


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Informational Notes

This report contains forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The company cautions readers that these projections are based upon future results or events and are highly dependent upon a variety of important factors which could cause such results or events to differ materially from any forward-looking statements which may be deemed to have been made in this report, or which are otherwise made by or on behalf of the company. Such factors include, but are not limited to, volatility in earnings resulting from goodwill impairment losses which may occur irregularly and in varying amounts; variability in financing costs; quarterly variations in operating results; dependence on key customers; international exposure; foreign exchange and political risks affecting international sales; ability to protect trademarks, copyrights and other intellectual property; changing market conditions; the impact of competitive products and pricing; the timely development and market acceptance of the company's products; the availability and cost of raw materials; and other risks detailed herein and from time-to-time in the company's Securities and Exchange Commission ("SEC") filings, including the company's 2011 Annual Report on Form 10-K.

                               Net Sales Summary
                             (dollars in thousands)

                                     Three Months Ended                                 Nine Months Ended
                            Sep 29, 2012             Oct 1, 2011              Sep 29, 2012             Oct 1, 2011
                          Sales      Percent       Sales      Percent       Sales      Percent       Sales      Percent
Business Segments:
Commercial Foodservice $ 198,615       77.1     $ 189,133       86.5     $ 573,431       76.8     $ 521,137       85.1
Food Processing           59,084       22.9        29,587       13.5       173,131       23.2        91,010       14.9
Total                  $ 257,699      100.0 %   $ 218,720      100.0 %   $ 746,562      100.0 %     612,147      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              Nine Months Ended
                                     Sep 29, 2012     Oct 1, 2011    Sep 29, 2012    Oct 1, 2011
Net sales                                100.0 %         100.0 %         100.0 %        100.0 %
Cost of sales                             61.0              60.1          61.2             60.1
Gross profit                              39.0              39.9          38.8             39.9
Selling, general and administrative
expenses                                  20.6              22.9          21.5             22.9
Income from operations                    18.4              17.0          17.3             17.0
Net interest expense and deferred
financing amortization                     1.1               1.1           0.9              1.1
Other expense (income), net                1.1              (0.2 )         0.5              0.2
Earnings before income taxes              16.2              16.1          15.9             15.7
Provision for income taxes                 4.6               5.4           4.8              5.7
Net earnings                              11.6 %            10.7 %        11.1 %           10.0 %


Three Months Ended September 29, 2012 Compared to Three Months Ended October 1, 2011

NET SALES. Net sales for the third quarter of fiscal 2012 were $257.7 million as compared to $218.7 million in the third quarter of 2011. Of the $39.0 million increase in net sales, $17.6 million, or 8.0%, was attributable to acquisition growth, resulting from the fiscal 2011 acquisitions of Danfotech, Maurer, Auto-Bake, Drake and Armor Inox and the fiscal 2012 acquisitions of Baker and Stewart. Excluding acquisitions, net sales increased $21.4 million, or 9.8%, from the prior year, reflecting a net sales increase of 5.0% at the Commercial Foodservice Equipment Group and an increase of 40.2% at the Food Processing Equipment Group.
Net sales of the Commercial Foodservice Equipment Group increased by $9.5 million, or 5.0%, to $198.6 million in the third quarter of 2012 as compared to $189.1 million in the prior year quarter. International sales decreased $1.8 million, or 3.1%, to $55.5 million, as compared to $57.3 million in the prior year quarter. The decline in international sales reflects lower sales in Europe due to economic conditions, partially offset by increased sales in Asia and Latin America as the company continues to realize growth in emerging markets due to expansion of restaurant chains. Domestically, the company realized a sales increase of $11.3 million, or 8.6%, to $143.1 million, as compared to $131.8 million in the prior year quarter. This increase in domestic sales includes increased sales with major restaurant chains on new product initiatives and reflects improvements in general market conditions.

Net sales of the Food Processing Equipment Group increased by $29.5 million, or 99.7%, to $59.1 million in the third quarter of 2012 as compared to $29.6 million in the prior year quarter. Net sales resulting from the acquisitions of Maurer, Auto-Bake, Drake, Armor Inox, Baker and Stewart, which were acquired on July 22, 2011, August 1, 2011, December 2, 2011, December 21, 2011, March 14, 2012 and September 5, 2012, respectively, accounted for an increase of $17.6 million during the third quarter of 2012. Excluding the impact of these acquisitions, net sales of Food Processing Equipment increased by $11.9 million, or 40.2%, as compared to the prior year quarter. International sales increased by $13.7 million, or 119.1%, to $25.2 million, as compared to $11.5 million in the prior year quarter. This includes an increase of $10.8 million from the recent acquisitions. Domestically, the company realized a sales increase of $15.8 million, or 87.3%, to $33.9 million, as compared to $18.1 million in the prior year quarter. This includes an increase of $6.8 million from the recent acquisitions. The increase in sales, both international and domestic, reflects expansion of food processing operations to support growing global demand and initiatives to upgrade food processing operations to more efficient and cost effective equipment.

GROSS PROFIT. Gross profit increased to $100.4 million in the third quarter of 2012 from $87.3 million in the prior year period, reflecting the impact of higher sales volumes. The gross margin rate decreased from 39.9% in the third quarter of 2011 to 39.0% in the third quarter of 2012. The net decrease in the gross margin rate reflects the impact of lower margins at certain of the newly acquired companies and the effect of a higher sales mix of sales from the Food Processing Equipment Group at a lower gross margin rate.
Gross profit at the Commercial Foodservice Equipment Group increased by $2.1 million, or 2.7%, to $80.5 million in the third quarter of 2012 as compared to $78.4 million in the prior year quarter. The gross margin rate declined to 40.5% as compared to 41.5% in the prior year quarter.

Gross profit at the Food Processing Equipment Group increased by $10.6 million, or 109.3%, to $20.3 million in the third quarter of 2012 as compared to $9.7 million in prior year quarter. The gross margin rate increased to 34.3% as compared to 32.8% in the prior year quarter. Gross profit from the acquisitions of Maurer, Auto-Bake, Drake, Armor Inox, Baker and Stewart, accounted for approximately $5.4 million of the increase. Excluding the recent acquisition, the gross profit increased by approximately $5.2 million.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses increased from $50.1 million in the third quarter of 2011 to $53.0 million in the third quarter of 2012. As a percentage of net sales, operating expenses were 22.9% in the third quarter of 2011 as compared to 20.6% in the third quarter of 2012. Selling expenses increased from $24.6 million in the third quarter of 2011 to $26.0 million in the third quarter of 2012. Selling expenses reflect increased costs of $2.5 million associated with the Maurer, Auto-Bake, Drake, Armor Inox, Baker and Stewart acquisitions. The increase in selling expenses related to acquisitions is offset by decreases of $0.5 million due to sales incentive programs, $0.3 million in trade advertising and $0.3 million in convention and trade show costs. General and administrative expenses increased from $25.6 million in the third quarter of 2011 to $27.1 million in the third quarter of 2012. General and administrative expenses reflect $3.1 million of increased costs associated with the Maurer, Auto-Bake, Drake, Armor Inox, Baker and Stewart acquisitions including $1.4 million of non-cash intangible amortization expense. The increase in general and administrative expense related to acquisitions is offset by a net decrease of $1.9 million in non-cash share-based and incentive compensation.


NON-OPERATING EXPENSES. Interest and deferred financing amortization costs increased to $3.0 million in the third quarter of 2012 as compared to $2.3 million in the third quarter of 2011. Other expense was $2.8 million in the third quarter of 2012 as compared to $0.4 million of other income in the prior year third quarter and consists primarily of foreign exchange gains and losses. INCOME TAXES. A tax provision of $11.9 million, at an effective rate of 28.6%, was recorded during the third quarter 2012, as compared to an $11.8 million provision a 33.5% effective rate in the prior year quarter. In comparison to the prior year quarter, the tax provision reflects reduced state tax exposure related to prior year refunds, a lower effective rate on increased income in lower tax rate foreign jurisdictions and increased deductions related to U.S. manufacturing activities.

Nine Months Ended September 29, 2012 Compared to Nine Months Ended October 1, 2011

NET SALES. Net sales for the nine month period ended September 29, 2012 were $746.6 million as compared to $612.1 million in the nine month period ended October 1, 2011. Of the $134.5 million increase in net sales, $92.9 million, or 15.2%, was attributable to acquisition growth, resulting from the fiscal 2011 acquisitions of Beech, Lincat, Danfotech, Maurer, Auto-Bake, Drake and Armor Inox and the fiscal 2012 acquisitions of Baker and Stewart. Excluding acquisitions, net sales increased $41.6 million, or 6.8%, from the prior year, reflecting a net sales increase of 5.5% at the Commercial Foodservice Equipment Group and an increase of 14.2% at the Food Processing Equipment Group.
Net sales of the Commercial Foodservice Equipment Group increased by $52.3 million, or 10.0%, to $573.4 million in the nine month period ended September 29, 2012 as compared to $521.1 million in the prior period. Net sales resulting from the acquisitions of Beech and Lincat, which were acquired on April 12, 2011 and May 27, 2011, respectively, accounted for an increase of $23.7 million during the nine month period ended September 29, 2012. Excluding the impact of these acquisitions, net sales of Commercial Foodservice Equipment increased by $28.6 million, or 5.5%, as compared to the prior period. International sales increased $20.4 million, or 14.7%, to $158.8 million, as compared to $138.4 million in the prior period. This includes the increase of $23.7 million from the recent acquisitions, as these companies primarily have international sales. The increase in international sales reflects increased sales in Asia and Latin America as the company continues to realize growth in emerging markets due to expansion of restaurant chains, partially offset by lower sales in Europe due to economic conditions. Domestically, the company realized a sales increase of $31.9 million, or 8.3%, to $414.6 million, as compared to $382.7 million in the prior period. This increase in domestic sales includes increased sales with major restaurant chains on new product initiatives and reflects improvements in general market conditions.

Net sales of the Food Processing Equipment Group increased by $82.1 million, or 90.2%, to $173.1 million in the nine month period ended September 29, 2012 as compared to $91.0 million in the prior period. Net sales resulting from the acquisitions of Danfotech, Maurer, Auto-Bake, Drake, Armor Inox, Baker and Stewart, which were acquired on July 5, 2011, July 22, 2011, August 1, 2011, December 2, 2011, December 21, 2011, March 14, 2012 and September 5, 2012, respectively, accounted for an increase of $69.2 million during the nine month period ended September 29, 2012. Excluding the impact of these acquisitions, net sales of Food Processing Equipment increased by $12.9 million, or 14.2%, as compared to the prior period. International sales increased by $48.7 million, or 176.4%, to $76.3 million, as compared to $27.6 million in the prior period. This includes an increase of $38.8 million from the recent acquisitions. Domestically, the company realized a sales increase of $33.4 million, or 52.7%, to $96.8 million, as compared to $63.4 million in the prior year quarter. This includes an increase of $30.4 million from the recent acquisitions. The increase in sales, both international and domestic, reflects expansion of food processing operations to support growing global demand and initiatives to upgrade food processing operations to more efficient and cost effective equipment.


GROSS PROFIT. Gross profit increased to $289.7 million in the nine month period ended September 29, 2012 from $244.5 million in the prior year period, reflecting the impact of higher sales volumes. The gross margin rate decreased from 39.9% in the nine month period ended October 1, 2011 to 38.8% in the current year period. The net decrease in the gross margin rate reflects the impact of lower margins at certain of the newly acquired companies and the effect of a higher sales mix of sales from the Food Processing Equipment Group at a lower gross margin rate.
Gross profit at the Commercial Foodservice Equipment Group increased by $19.2 million, or 9.0%, to $232.6 million in the nine month period ended September 29, 2012 as compared to $213.4 million in the prior year period. The gross margin rate declined to 40.6% as compared to 41.0% in the prior year period. Gross profit from the acquisitions of Beech and Lincat, which were acquired during fiscal 2011, accounted for approximately $9.1 million of the increase in gross profit during the period. Excluding the recent acquisitions, the gross profit increased by approximately $10.1 million on higher sales volumes.

Gross profit at the Food Processing Equipment Group increased by $27.5 million, or 85.9%, to $59.5 million in the nine month period ended September 29, 2012 as compared to $32.0 million in prior year period. The gross margin rate declined to 34.4% as compared to 35.2% in the prior year period due to lower margins at recently acquired companies. Gross profit from the acquisitions of Danfotech, Maurer, Auto-Bake, Drake, Armor Inox, Baker and Stewart, accounted for approximately $22.3 million of the increase. Excluding the recent acquisitions, the gross profit increased by approximately $5.2 million on higher sales volumes.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses increased from $140.7 million in the nine month period ended October 1, 2011 to $160.3 million in the nine month period ended September 29, 2012. As a percentage of net sales, operating expenses were 22.9% in the nine month period ended October 1, 2011 as compared to 21.5% in the nine month period ended September 29, 2012. Selling expenses increased from $66.7 million in the nine month period ended October 1, 2011 to $79.4 million in the nine month period ended September 29, 2012. Selling expenses reflect increased costs of $11.6 million associated with the Beech, Lincat, Danfotech, Maurer, Auto-Bake, Drake, Armor Inox, Baker and Stewart acquisitions. Additionally, expenses increased $1.7 million related to higher commissions on higher sales volumes offset by a decrease of $0.7 million in convention and trade show costs. General and administrative expenses increased from $74.0 million in the nine month period ended October 1, 2011 to $80.9 million in the nine month period ended September 29, 2012. General and administrative expenses reflect $12.4 million of increased costs associated with the Beech, Lincat, Danfotech, Maurer, Auto-Bake, Drake, Armor Inox, Baker and Stewart acquisitions, including $5.3 million of non-cash intangible amortization expense. The increase in general and administrative costs related to acquisitions is offset by decreases of $2.7 million in non-cash share-based and incentive compensation, $0.6 million in professional fees, $1.6 million in professional services associated with acquisition related activities and $0.5 million in reduction to acquisition related future earnout payments.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were $7.0 million in the nine month period ended September 29, 2012 as compared to $6.5 million in the prior period. Other expense was $3.7 million in the nine month period ended September 29, 2012 as compared to $1.0 million in the prior year period and consists primarily of foreign exchange gains and losses. INCOME TAXES. A tax provision of $35.8 million, at an effective rate of 30.2%, was recorded during the nine month period ended September 29, 2012, as compared to a $35.4 million provision at a 36.7% effective rate in the prior year period. In comparison to the prior year period, the tax provision reflects favorable adjustments to tax reserves related to reduced state exposures, a lower effective rate on increased income in lower tax rate foreign jurisdictions and increased deductions related to U.S. manufacturing activities.


Financial Condition and Liquidity
During the nine months ended September 29, 2012, cash and cash equivalents decreased by $5.1 million to $35.1 million at September 29, 2012 from $40.2 million at December 31, 2011. Net borrowings decreased from $317.3 million at December 31, 2011 to $269.3 million at September 29, 2012.
OPERATING ACTIVITIES. Net cash provided by operating activities was $94.0 million for the nine months ended September 29, 2012 compared to $65.7 million for the nine months ended October 1, 2011 due primarily to increased earnings. During the nine months ended September 29, 2012, working capital levels changed due to increased working capital needs. These changes in working capital levels included a $14.3 million increase in inventory, due to several factors including increased order rates, increased inventory levels during build out periods in conjunction with plant consolidation efforts and higher levels of stock associated with foreign sourcing initiatives. Accounts receivable decreased $12.6 million due to lower receivable balances at the Food Processing Equipment Group resulting from the timing of projects which are often paid in advance. Changes in working capital levels also included an $9.2 million increase in prepaid expenses and other assets primarily related to deferred financing costs in conjunction with the new credit facility, an $8.2 million increase in accounts payable due to the timing of vendor payments and $16.7 million decrease in accrued expenses and other non-current liabilities primarily related to the timing of tax payments.
INVESTING ACTIVITIES. During the nine months ended September 29, 2012, net cash used in investing activities included $38.6 million related to the 2012 acquisitions of Baker and Stewart and prior year acquisitions of CookTek, Danfotech and Drake along with $6.0 million of additions and upgrades of production equipment and manufacturing facilities.
FINANCING ACTIVITIES. Net cash flows used in financing activities were $54.9 million during the nine months ended September 29, 2012. The company's borrowing activities included the repayment of $309.4 million under the company's previous credit facility which was repaid and replaced with its new amended facility, $264.5 million of net proceeds under its newly amended $1.0 billion revolving credit facility and $3.1 million of net repayments of foreign borrowings. The company used $16.0 million to repurchase 161,653 shares of its common stock that were surrendered to the company by employees in lieu of cash for payment for withholding taxes related to restricted stock vestings and stock option exercises that occurred during the nine months ended September 29, 2012. At September 29, 2012, the company was in compliance with all covenants pursuant to its borrowing agreements. The company believes that its current capital resources, including cash and cash equivalents, cash generated from operations, funds available from its revolving credit facility and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, acquisitions, product development and integration expenditures for the foreseeable future.


Recently Issued Accounting Standards
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This update provides clarification on existing fair value measurement requirements, amends existing guidance primarily related to fair value measurements for financial instruments, and requires enhanced disclosures on fair value measurements. The additional disclosures are specific to Level 3 fair value measurements, transfers between Level 1 and Level 2 of the fair value hierarchy, financial instruments not measured at fair value and use of an asset measured or disclosed at fair value differing from its highest and best use. The company adopted the provisions of ASU No. 2011-04 on January 1, 2012. There was no impact to the company's financial position, results of operations or cash flows. In June 2011 and December 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income" and ASU No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05", respectively. ASU No. 2011-05 eliminated the option to present the components of other comprehensive income in the statement of changes in stockholders' equity. Instead, entities have the option to present the components of net income, the components of other comprehensive income and total comprehensive income in a single continuous statement or in two separate but consecutive statements. The guidance does not change the items reported in other comprehensive income or when an item of other comprehensive income is reclassified to net income. The company adopted the provisions of ASU No. 2011-05 on January 1, 2012. As this guidance only revises the presentation of comprehensive income, there was no impact to the company's financial position, results of operations or cash flows. For interim reporting purposes, the company has elected to present comprehensive income in a single continuous statement now referred to as the Condensed Consolidated Statements of Comprehensive Income.
In September 2011, the FASB issued ASU No. 2011-08, "Intangibles - Goodwill and Other (Topic 350)." This ASU will allow an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The ASU also amends previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the ASU provides additional examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The company adopted the provisions of ASU 2011-08 on January 1, 2012. There was no impact to the company's financial position, results of operation or cash flows. The company will determine whether to apply the qualitative evaluation allowed under this ASU in connection with the company's annual goodwill impairment test.
On July 27, 2012, the FASB issued ASU 2012-02, "Intangibles - Goodwill and Other (Topic 350)". Similar to ASU 2011-08, this ASU amends the guidance in ASC 350-30. While ASU 2011-08 allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit, ASU-2012-02 allows an entity the option to make a qualitative evaluation to determine whether the existence of events and circumstances indicate that it is more likely than not the indefinite-lived intangible asset is impaired thus requiring the entity to perform quantitative impairment tests in accordance with ASC 350-30. The ASU also amends previous guidance by expanding upon the examples of events and circumstances that an entity should consider when making the qualitative evaluation. The company is currently evaluating its adoption approach to this guidance.
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 our consolidated financial statements. Revenue Recognition. At the Commercial Foodservice Group, the company recognizes revenue on the sale of its products when risk of loss has passed to the customer, which occurs at the time of shipment, and collectibility is reasonably assured. The sale prices of the products sold are fixed and determinable at the time of shipment. Sales are reported net of sales returns, sales incentives and cash discounts based on prior experience and other quantitative and qualitative factors. Such revenue was approximately 77% for the nine month period ended September 29, 2012.


At the Food Processing Equipment Group, the company enters into long-term sales contracts for certain products that are often significant relative to the business. Revenue under these long-term sales contracts is recognized using the percentage of completion method defined within ASC 605-35 "Construction-Type and Production-Type Contracts" due to the length of time to fully manufacture and assemble the equipment. The company measures revenue recognized based on the ratio of actual labor hours incurred in relation to the total estimated labor hours to be incurred related to the contract. Because estimated labor hours to complete a project are based upon forecasts using the best available information, the actual hours may differ from original estimates. The percentage . . .

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