THE MIDDLEBY CORPORATION 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
During the quarter, the company business began to experience significant
disruptions with the expanding COVID-19 pandemic, initially in
- 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
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
• Net sales of theCommercial Foodservice Equipment Group decreased by$14.4 million , or 3.1%, to$443.1 million in the three months period endedMarch 28, 2020 , as compared to$457.5 million in the prior year period. Net sales from the acquisitions ofCooking Solutions Group , Powerhouse, Ss Brewtech, Synesso, RAM, and Deutsche, which were acquired onApril 1, 2019 ,April 1, 2019 ,June 15, 2019 ,November 27, 2019 ,January 13, 2020 , andMarch 2, 2020 , respectively, accounted for an increase of$28.0 million during the three months period endedMarch 28, 2020 . Excluding the impact of acquisitions, net sales of theCommercial 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 theCommercial 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 theFood Processing Equipment Group increased by$11.8 million , or 12.8%, to$104.3 million in the three months period endedMarch 28, 2020 , as compared to$92.5 million in the prior year period. Excluding the impact of foreign exchange and the acquisition of Pacproinc, acquiredJuly 16, 2019 , net sales increased$5.6 million , or 6.1% at theFood 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 theResidential Kitchen Equipment Group decreased by$6.7 million , or 4.9%, to$130.1 million in the three months period endedMarch 28, 2020 , as compared to$136.8 million in the prior year period. Excluding the impact of foreign exchange and the acquisition of Brava, acquiredNovember 19, 2019 , net sales decreased$6.9 million , or 5.0% at theResidential 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. 25
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GROSS PROFIT. Gross profit decreased to
• Gross profit at theCommercial Foodservice Equipment Group decreased by$7.4 million , or 4.3%, to$165.3 million in the three months period endedMarch 28, 2020 , as compared to$172.7 million in the prior year period. Gross profit from the acquisitions ofCooking 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 theFood Processing Equipment Group increased by$3.7 million , or 11.4%, to$36.1 million in the three months period endedMarch 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 theResidential Kitchen Equipment Group decreased by$4.5 million , or 8.4%, to$48.8 million in the three months period endedMarch 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
Selling, general and administrative expenses reflect increased costs of
RESTRUCTURING EXPENSES. Restructuring expenses increased
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were
INCOME TAXES. A tax provision of
On
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Financial Condition and Liquidity During the three months endedMarch 28, 2020 , cash and cash equivalents increased by$286.5 million to$381.0 million atMarch 28, 2020 from$94.5 million atDecember 28, 2019 . Borrowings increased from$1.9 billion to$2.2 billion atDecember 28, 2019 andMarch 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 endedMarch 28, 2020 , compared to$33.9 million for the three months endedMarch 30, 2019 . During three months endedMarch 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 theCommercial Foodservice Equipment Group andResidential 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 endedMarch 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 endedMarch 28, 2020 . OnJanuary 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 endedMarch 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. AtMarch 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. 27
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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 inthe 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 endedDecember 28, 2019 (the "2019 Annual Report on Form 10-K") other than those described below.
During the three months period ended
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