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MIDD > SEC Filings for MIDD > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for MIDDLEBY CORP


7-Nov-2013

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 2012 Annual Report on Form 10-K.

                               Net Sales Summary
                             (dollars in thousands)

                                      Three Months Ended                                   Nine Months Ended
                            Sep 28, 2013              Sep 29, 2012               Sep 28, 2013              Sep 29, 2012
                          Sales      Percent       Sales        Percent        Sales       Percent       Sales      Percent
Business Segments:
Commercial Foodservice $ 230,807       64.1 %   $ 198,615         77.1 %   $   651,211       61.9 %   $ 573,431       76.8 %
Food Processing           71,209       19.8        59,084         22.9         224,583       21.4       173,131       23.2
Residential Kitchen       57,997       16.1             -   -        -         175,471       16.7             -          -
  Total                $ 360,013      100.0 %   $ 257,699        100.0 %   $ 1,051,265      100.0 %   $ 746,562      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 28, 2013     Sep 29, 2012    Sep 28, 2013     Sep 29, 2012
Net sales                                 100.0 %           100.0 %        100.0 %          100.0 %
Cost of sales                              60.7              61.0           62.0             61.2
Gross profit                               39.3              39.0           38.0             38.8
Selling, general and administrative
expenses                                   20.5              20.6           21.8             21.5
Income from operations                     18.8              18.4           16.2             17.3
Net interest expense and deferred
financing amortization                      1.2               1.1            1.1              0.9
Other expense (income), net                 0.4               1.1            0.2              0.5
Earnings before income taxes               17.2              16.2           14.9             15.9
Provision for income taxes                  5.8               4.6            5.0              4.8
Net earnings                               11.4 %            11.6 %          9.9 %           11.1 %


Three Months Ended September 28, 2013 Compared to Three Months Ended September 29, 2012

NET SALES. Net sales for the third quarter of fiscal 2013 were $360.0 million as compared to $257.7 million in the third quarter of 2012. Of the $102.3 million increase in net sales, $71.8 million, or 27.9%, was attributable to acquisition growth, resulting from the fiscal 2012 acquisitions of Stewart and Nieco and the fiscal 2013 acquisition of Viking. Excluding acquisitions, net sales increased $30.5 million, or 11.8%, from the prior year, reflecting a net sales increase of 11.7% at the Commercial Foodservice Equipment Group and an increase of 12.2% at the Food Processing Equipment Group.
Net sales of the Commercial Foodservice Equipment Group increased by $32.2 million, or 16.2%, to $230.8 million in the third quarter of 2013 as compared to $198.6 million in the prior year quarter. Net sales resulting from the acquisition of Nieco, which was acquired on October 31, 2012, accounted for an increase of $8.9 million during the third quarter of 2013. Excluding the impact of this acquisition, net sales of Commercial Foodservice Equipment increased $23.3 million, or 11.7% as compared to the prior year quarter. International sales increased $10.1 million, or 18.2%, to $65.6 million, as compared to $55.5 million in the prior year quarter. This includes the increase of $3.9 million from the recent acquisition. Excluding the acquisition, the net increase of $6.2 million in international sales reflects increased sales in Europe, Latin America and the Middle East as the company continues to realize strong growth in emerging markets due to expansion of restaurant chains. Domestically, the company realized a sales increase of $22.1 million, or 15.4%, to $165.2 million, as compared to $143.1 million in the prior year quarter. This includes an increase of $5.0 million from the recent acquisition. This increase in domestic sales includes increased sales with customer initiatives to improve efficiencies in restaurant operations by adopting new cooking and warming technologies and general improvements in market conditions.

Net sales of the Food Processing Equipment Group increased by $12.1 million, or 20.5%, to $71.2 million in the third quarter of 2013 as compared to $59.1 million in the prior year quarter. Net sales resulting from the acquisition of Stewart, which was acquired on September 5, 2012, accounted for an increase of $4.9 million during the third quarter of 2013. Excluding the impact of this acquisition, net sales of Food Processing Equipment increased by $7.2 million, or 12.2%, as compared to the prior year quarter. International sales increased by $1.4 million, or 5.6%, to $26.6 million, as compared to $25.2 million in the prior year quarter. This includes the increase of $1.2 million from the recent acquisition. Domestically, the company realized a sales increase of $10.7 million, or 31.6%, to $44.6 million, as compared to $33.9 million in the prior year quarter. This includes an increase of $3.7 million from the recent acquisition. The increase in domestic sales 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.

Net sales of the Residential Kitchen Equipment Group, which was established on December 31, 2012, were $58.0 million.

GROSS PROFIT. Gross profit increased to $141.4 million in the third quarter of 2013 from $100.4 million in the prior year period, reflecting the impact of higher sales volumes. The gross margin rate increased from 39.0% in the third quarter of 2012 to 39.3% in the third quarter of 2013. The net increase in the gross margin rate reflects the benefit of acquisition integration initiatives.
Gross profit at the Commercial Foodservice Equipment Group increased by $15.5 million, or 19.3%, to $96.0 million in the third quarter of 2013 as compared to $80.5 million in the prior year quarter. The gross margin rate increased to 41.6% as compared to 40.5% in the prior year quarter primarily due to a more favorable sales mix. Gross profit from the acquisition of Nieco accounted for approximately $4.0 million of the increase in gross profit. Excluding the recent acquisition, the gross profit increased by approximately $11.5 million on the higher sales volumes.

Gross profit at the Food Processing Equipment Group increased by $2.1 million, or 10.3%, to $22.4 million in the third quarter of 2013 as compared to $20.3 million in the prior year quarter. The gross margin rate declined to 31.5% as compared to 34.3% in the prior year quarter. Gross profit from the acquisition of Stewart, accounted for approximately $1.0 million of the increase. Excluding the recent acquisition, the gross profit increased by approximately $1.1 million on higher sales volumes and the gross margin rate increased to 32.3%.

Gross profit at the Residential Kitchen Equipment Group amounted to $22.1 million at a gross margin rate of 38.1%. The gross margin rate is expected to improve as the company realizes the benefit of ongoing integration initiatives.


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses increased from $53.0 million in the third quarter of 2012 to $74.0 million in the third quarter of 2013. As a percentage of net sales, operating expenses were 20.6% in the third quarter of 2012 as compared to 20.5% in the third quarter of 2013. Selling expenses increased from $26.0 million in the third quarter of 2012 to $41.8 million in the third quarter of 2013. Selling expenses reflect increased costs of $13.1 million associated with the Stewart, Nieco and Viking acquisitions. Additionally, expenses increased $1.8 million related to higher wages, commissions and bonuses on higher sales volumes and $0.6 million related to convention and trade show costs. General and administrative expenses increased from $27.1 million in the third quarter of 2012 to $32.2 million in the third quarter of 2013. General and administrative expenses reflect $3.5 million of increased costs associated with the Stewart, Nieco and Viking acquisitions, including $0.7 million of non-cash intangible amortization expense. Additionally, expenses increased $1.1 million in incentive compensation and $0.9 million in professional services associated with acquisition related activities. These increases were offset by a reduction of $0.4 million in non-cash intangible amortization expense.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs increased to $4.2 million in the third quarter of 2013 as compared to $3.0 million in the third quarter of 2012 due to increased borrowings to fund the Viking acquisition. Other expense was $1.4 million in the third quarter of 2013 as compared to $2.8 million in the prior year third quarter and consists primarily of foreign exchange gains and losses.
INCOME TAXES. A tax provision of $20.9 million, at an effective rate of 33.8%, was recorded during the third quarter 2013, as compared to an $11.9 million provision at a 28.6% effective rate in the prior year quarter. In comparison to the prior year quarter, the tax provision reflects a higher effective rate on increased income from its domestic jurisdiction as well as a decrease in favorable adjustments to tax reserves.

Nine Months Ended September 28, 2013 Compared to Nine Months Ended September 29, 2012

NET SALES. Net sales for the nine month period ended September 28, 2013 were $1,051.3 million as compared to $746.6 million in the nine month period ended September 29, 2012. Of the $304.7 million increase in net sales, $221.9 million, or 29.7%, was attributable to acquisition growth, resulting from the fiscal 2012 acquisitions of Baker, Stewart and Nieco and the fiscal 2013 acquisition of Viking. Excluding acquisitions, net sales increased $82.8 million, or 11.1%, from the prior year, reflecting a net sales increase of 10.5% at the Commercial Foodservice Equipment Group and an increase of 13.2% at the Food Processing Equipment Group.
Net sales of the Commercial Foodservice Equipment Group increased by $77.8 million, or 13.6%, to $651.2 million in the nine month period ended September 28, 2013 as compared to $573.4 million in the prior period. Net sales resulting from the acquisition of Nieco which was acquired on October 31, 2012, accounted for an increase of $17.7 million during the nine month period ended September 28, 2013. Excluding the impact of this acquisition, net sales of Commercial Foodservice Equipment increased by $60.1 million, or 10.5%, as compared to the prior period. International sales increased $25.6 million, or 16.1%, to $184.4 million, as compared to $158.8 million in the prior period. This includes the increase of $8.4 million from the recent acquisition. Excluding the acquisition, the net increase of $17.2 million in international sales reflects increased sales in Asia, Latin America and the Middle East as the company continues to realize strong growth in emerging markets due to expansion of restaurant chains, offset by lower sales in Europe due to economic conditions. Domestically, the company realized a sales increase of $52.2 million, or 12.6%, to $466.8 million, as compared to $414.6 million in the prior period. This includes an increase of $9.3 million from the recent acquisition. This increase in domestic sales includes increased sales with customer initiatives to improve efficiencies in restaurant operations by adopting new cooking and warming technologies and general improvements in market conditions.

Net sales of the Food Processing Equipment Group increased by $51.5 million, or 29.8%, to $224.6 million in the nine month period ended September 28, 2013 as compared to $173.1 million in the prior period. Net sales resulting from the acquisitions of Baker and Stewart, which were acquired March 14, 2012 and September 5, 2012, respectively, accounted for an increase of $28.7 million during the nine month period ended September 28, 2013. Excluding the impact of these acquisitions, net sales of Food Processing Equipment increased by $22.8 million, or 13.2%, as compared to the prior period. International sales increased by $6.6 million, or 8.7%, to $82.9 million, as compared to $76.3 million in the prior period. This includes an increase of $8.8 million from the recent acquisitions. Domestically, the company realized a sales increase of $44.9 million, or 46.4%, to $141.7 million, as compared to $96.8 million in the prior year quarter. This includes an increase of $19.9 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.


Net sales of the Residential Kitchen Equipment Group, which was established on December 31, 2012, were $175.5 million. Net sales included approximately $4.7 million related to non-core business activities which were discontinued in the previous quarter.

GROSS PROFIT. Gross profit increased to $399.3 million in the nine month period ended September 28, 2013 from $289.7 million in the prior year period, reflecting the impact of higher sales volumes. The gross margin rate decreased from 38.8% in the nine month period ended September 29, 2012 to 38.0% in the current year period. The net decrease in the gross margin rate reflects the impact of lower margins at Viking and other recent acquisitions.
Gross profit at the Commercial Foodservice Equipment Group increased by $38.8 million, or 16.7%, to $271.4 million in the nine month period ended September 28, 2013 as compared to $232.6 million in the prior year period. The gross margin rate increased to 41.7% as compared to 40.6% in the prior year period. Gross profit from the acquisition of Nieco accounted for approximately $8.0 million of the increase in gross profit during the period. Excluding the recent acquisition, gross profit increased by approximately $30.8 million on higher sales volumes.

Gross profit at the Food Processing Equipment Group increased by $14.2 million, or 23.9%, to $73.7 million in the nine month period ended September 28, 2013 as compared to $59.5 million in the prior year period. The gross margin rate declined to 32.8% as compared to 34.4% in the prior year period due to lower margins at recently acquired companies. Gross profit from the acquisitions of Baker and Stewart accounted for approximately $6.4 million of the increase. Excluding the recent acquisitions, gross profit increased by approximately $7.8 million on higher sales volumes and the gross margin rate remained consistent at 34.4%.

Gross profit at the Residential Kitchen Equipment Group amounted to $57.1 million at a gross margin rate of 32.5%. The gross margin rate is expected to improve as the company realizes the benefit of ongoing integration initiatives.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses increased from $160.3 million in the nine month period ended September 29, 2012 to $229.3 million in the nine month period ended September 28, 2013. As a percentage of net sales, operating expenses were 21.5% in the nine month period ended September 29, 2012 as compared to 21.8% in the nine month period ended September 28, 2013. Selling expenses increased from $79.4 million in the nine month period ended September 29, 2012 to $116.6 million in the nine month period ended September 28, 2013. Selling expenses reflect increased costs of $33.4 million associated with the Baker, Stewart, Nieco and Viking acquisitions. Additionally, expenses increased $3.8 million related to higher wages. commissions and bonuses on higher sales volumes. General and administrative expenses increased from $80.9 million in the nine month period ended September 29, 2012 to $112.7 million in the nine month period ended September 28, 2013. General and administrative expenses reflect $20.6 million of increased costs associated with the Baker, Stewart, Nieco and Viking acquisitions, including $9.8 million of non-cash intangible amortization expense. Additionally, expenses increased $2.3 million in incentive compensation and $1.5 million in professional services associated with acquisition related activities. The company also recorded $7.4 million of expenses associated with acquisition integration initiatives associated with Viking.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were $11.7 million in the nine month period ended September 28, 2013, as compared to $7.0 million in the prior period, due to increased borrowings to fund the Viking acquisition. Other expense was $2.0 million in the nine month period ended September 28, 2013, as compared to $3.7 million in the prior year period, and consists primarily of foreign exchange gains and losses.
INCOME TAXES. A tax provision of $52.3 million, at an effective rate of 33.5%, was recorded during the nine month period ended September 28, 2013, as compared to a $35.8 million provision at a 30.2% effective rate in the prior year period. In comparison to the prior year period, the tax provision reflects a higher effective rate on increased income from its domestic jurisdiction as well as a decrease in favorable adjustments to tax reserves. Financial Condition and Liquidity
During the nine months ended September 28, 2013, cash and cash equivalents decreased by $5.0 million to $29.4 million at September 28, 2013 from $34.4 million at December 29, 2012. Net borrowings increased from $260.1 million at December 29, 2012 to $537.4 million at September 28, 2013.
OPERATING ACTIVITIES. Net cash provided by operating activities was $83.6 million for the nine months ended September 28, 2013 compared to $94.0 million for the nine months ended September 29, 2012 due primarily to increased working capital needs offset by increased earnings and increased depreciation and amortization.


During the nine months ended September 28, 2013, working capital levels changed due to increased working capital needs. These changes in working capital levels included a $18.8 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 expanding foreign operations. Accounts receivable increased $13.3 million due to increased sales volume and higher receivable balances at the Food Processing Equipment Group resulting from the timing of projects. Changes in working capital levels also included a $13.8 million increase in prepaid tax expenses and other prepaid assets primarily related to the timing of orders at the Food Processing Equipment Group, a $5.4 million decrease in accounts payable due to the timing of vendor payments and a $15.6 million decrease in accrued expenses and other non-current liabilities primarily related to payment of 2012 annual rebate programs and incentive obligations. INVESTING ACTIVITIES. During the nine months ended September 28, 2013, net cash used in investing activities included $361.7 million related to the 2013 acquisition of Viking, $14.9 million related to the 2013 acquisition of Viking Distributors, $5.0 million related to the acquisition of intangible assets along with $11.1 million of additions and upgrades of production equipment and manufacturing facilities offset by $7.0 million of cash proceeds related to that sale of certain assets acquired in conjunction with the Viking acquisition. FINANCING ACTIVITIES. Net cash flows provided in financing activities were $296.5 million during the nine months ended September 28, 2013. The company's borrowing activities included the $278.5 million of net proceeds under its $1.0 billion revolving credit facility, primarily to fund the acquisition of Viking and other investing activities.
The company used $3.6 million to repurchase 22,726 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 28, 2013. At September 28, 2013, 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
On July 27, 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2012-02, "Intangibles - Goodwill and Other (Topic 350)". 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 adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In January 2013, the FASB issued ASU No. 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities". This update provides clarification on the disclosure requirements related to recognized derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and lending transactions. This update is effective for annual reporting periods and corresponding interim periods beginning on or after January 1, 2013, and retrospective application is required. The company is currently evaluating the impact of the adoption of ASU No. 2013-01 on its financial position, results of operations and cash flows.
In March 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". ASU No. 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. 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. 2013-02 on December 30, 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.


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 62% for the nine month period ended September 28, 2013.
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 of completion method of accounting for these contracts most accurately reflects the status of these uncompleted contracts in the company's financial statements and most accurately measures the matching of revenues with expenses. At the time a loss on a contract becomes known, the amount of the estimated loss is recognized in the consolidated financial statements. Revenue for sales of products and services not covered by long-term sales contracts are recognized 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. . . .

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