Special Notes Regarding Forward-Looking Statements
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'sSEC filings, including the company's 2021 Annual Report on Form 10-K. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this report are made only as of the date hereof and, except as required by federal securities laws and rules and regulations of theSEC , the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The ongoing conflict betweenRussia andUkraine has resulted in significant economic disruption globally and may adversely affect our business and results of operations. In response to theRussia -Ukraine conflict, governments have imposed sanctions and other restrictive actions againstRussia and accordingly, the company has suspended all sales into and purchases fromRussia . TheRussia -Ukraine conflict has resulted in increased transportation costs and supply chain challenges, and further escalation of such conflict may result in additional supply chain disruptions, among other things, which may adversely affect our business and results of operations. As the Company does not have material operations inUkraine orRussia , the impact of this conflict did not have a material impact on our results of operations during the three months endedApril 2, 2022 . However, the extent of the adverse impacts of the ongoing conflict on the broader global economy cannot be predicted and could negatively impact our business and results of operations in the future. Net Sales Summary (dollars in thousands) Three Months Ended Apr 2, 2022 Apr 3, 2021 Sales Percent Sales Percent Business Segments: Commercial Foodservice$ 543,653 54.7 %$ 481,155 63.5 % Food Processing 119,943 12.0 112,494 14.8 Residential Kitchen 331,080 33.3 164,409 21.7 Total$ 994,676 100.0 %$ 758,058 100.0 % 25
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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 EndedApr 2, 2022 Apr 3, 2021
Net sales 100.0 % 100.0 % Cost of sales 66.8 63.6 Gross profit 33.2 36.4 Selling, general and administrative expenses 20.7 20.4 Restructuring 0.2 0.1 Income from operations 12.3 16.0 Interest expense and deferred financing amortization, net 1.8 2.1 Net periodic pension benefit (other than service costs) (1.2) (1.5) Other expense (income), net 0.4 (0.2) Earnings before income taxes 11.3 15.6 Provision for income taxes 2.7 3.8 Net earnings 8.6 % 11.8 % 26
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Three Months Ended
NET SALES . Net sales for the three months period endedApril 2, 2022 increased by$236.6 million or 31.2% to$994.7 million as compared to$758.1 million in the three months period endedApril 3, 2021 . Net sales increased by$157.0 million , or 20.7%, from the fiscal 2021 acquisitions ofNovy , Imperial, Newton CFV, Char-Griller, and Kamado Joe and Masterbuilt. Excluding acquisitions, net sales increased$79.6 million , or 10.5%, from the prior year period. The impact of foreign exchange rates on foreign sales translated intoU.S. Dollars for the three months period endedApril 2, 2022 decreased net sales by approximately$8.8 million or 1.2%. Excluding the impact of foreign exchange and acquisitions sales increased 11.7% for the three months period endedApril 2, 2022 as compared to the prior year period, including a net sales increase of 10.9% at theCommercial Foodservice Equipment Group , a net sales increase of 8.4% at theFood Processing Equipment Group and a net sales increase of 16.1% at theResidential Kitchen Equipment Group . •Net sales of theCommercial Foodservice Equipment Group increased by$62.5 million , or 13.0%, to$543.7 million in the three months period endedApril 2, 2022 , as compared to$481.2 million in the prior year period. Net sales from the acquisitions of Imperial and Newton CFV, which were acquired onSeptember 24, 2021 andNovember 16, 2021 , respectively, accounted for an increase of$14.6 million during the three months period endedApril 2, 2022 . Excluding the impact of acquisitions, net sales of theCommercial Foodservice Equipment Group increased$47.9 million , or 10.0%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales increased$52.6 million , or 10.9%, at theCommercial Foodservice Equipment Group . Domestically, the company realized a sales increase of$36.0 million , or 10.6%, to$374.9 million , as compared to$338.9 million in the prior year period. This includes an increase of$13.4 million from the recent acquisitions. Excluding the acquisitions, the net increase in domestic sales was$22.6 million , or 6.7%. The increase in domestic sales is related to improvements in market conditions and consumer demand. International sales increased$26.5 million , or 18.6%, to$168.8 million , as compared to$142.3 million in the prior year period. This includes an increase of$1.2 million from the recent acquisitions and a decrease of$4.7 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales increase in international sales was$30.0 million , or 21.1%. The increase in international sales is related to improvements in market conditions, primarily in the European markets. •Net sales of theFood Processing Equipment Group increased by$7.4 million , or 6.6%, to$119.9 million in the three months period endedApril 2, 2022 , as compared to$112.5 million in the prior year period. Excluding the impact of foreign exchange, net sales increased$9.4 million , or 8.4%, at theFood Processing Equipment Group . Domestically, the company realized a sales increase of$15.1 million , or 18.9%, to$94.8 million , as compared to$79.7 million in the prior year period. The increase in domestic sales reflects growth primarily driven by protein products. International sales decreased$7.7 million , or 23.5%, to$25.1 million , as compared to$32.8 million in the prior year period. This includes a decrease of$2.0 million related to the unfavorable impact of exchange rates. Excluding foreign exchange, the net sales decrease in international sales was$5.7 million , or 17.4%. The decrease in international sales is impacted by the timing of certain larger projects in the European markets. •Net sales of theResidential Kitchen Equipment Group increased by$166.7 million , or 101.4%, to$331.1 million in the three months period endedApril 2, 2022 , as compared to$164.4 million in the prior year period. Net sales from the acquisitions ofNovy , Char-Griller, and Kamado Joe and Masterbuilt, which were acquired onJuly 12, 2021 ,December 27, 2021 andDecember 27, 2021 , respectively, accounted for an increase of$142.4 million during the three months period endedApril 2, 2022 . Excluding the impact of the acquisitions, net sales of theResidential Kitchen Equipment Group increased$24.3 million , or 14.8%, as compared to the prior year period. Excluding the impact of foreign exchange and the acquisitions, net sales increased$26.4 million , or 16.1% at theResidential Kitchen Equipment Group . Domestically, the company realized a sales increase of$121.0 million , or 111.4%, to$229.6 million , as compared to$108.6 million in the prior year period. International sales increased$45.7 million , or 81.9%, to$101.5 million , as compared to$55.8 million in the prior year period. This includes an decrease of$2.1 million related to the unfavorable impact of exchange rates. Excluding foreign exchange and the acquisitions, the net sales increase in international sales was$3.6 million , or 6.5%. The increase in domestic and international sales reflects the strong demand for our premium appliance brands and strength in the European market. 27 -------------------------------------------------------------------------------- GROSS PROFIT. Gross profit increased to$330.5 million in the three months period endedApril 2, 2022 from$275.9 million in the prior year period, primarily reflecting higher sales volumes related to improvements in market conditions and consumer demand. The impact of foreign exchange rates decreased gross profit by approximately$3.3 million . The gross margin rate was 36.4% in the three months period endedApril 3, 2021 as compared to 33.2% in the current year period. Gross profit margins have been negatively impacted by acquisitions, including$14.3 million of acquisition related inventory step-up charges, along with rising costs of many raw materials and inputs, labor rates and logistics costs. •Gross profit at theCommercial Foodservice Equipment Group increased by$24.0 million , or 13.7%, to$199.2 million in the three months period endedApril 2, 2022 , as compared to$175.2 million in the prior year period. Gross profit from the acquisitions of Imperial and Newton CFV increased gross profit by$5.0 million . Excluding acquisitions, gross profit increased by$19.0 million related to higher sales volumes. The impact of foreign exchange rates decreased gross profit by approximately$1.7 million . The gross margin rate increased to 36.6%, as compared to 36.4% in the prior year period. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 36.7%. •Gross profit at theFood Processing Equipment Group increased by$1.5 million , or 3.8%, to$40.7 million in the three months period endedApril 2, 2022 , as compared to$39.2 million in the prior year period. The impact of foreign exchange rates decreased gross profit by approximately$0.7 million . The gross profit margin rate decreased to 33.9%, as compared to 34.8% in the prior year period primarily related to higher sales volumes and product mix. The gross margin rate, excluding the impact of foreign exchange, was 34.0%. •Gross profit at theResidential Kitchen Equipment Group increased by$30.2 million , or 49.7%, to$91.0 million in the three months period endedApril 2, 2022 , as compared to$60.8 million in the prior year period. Gross profit from the acquisitions ofNovy , Char-Griller, and Kamado Joe and Masterbuilt increased gross profit by$20.9 million . The impact of foreign exchange rates decreased gross profit by approximately$0.9 million . The gross margin rate decreased to 27.5%, as compared to 37.0% in the prior year period related to higher sales volumes. Gross profit margins have been negatively impacted by acquisitions, including$14.3 million of acquisition related inventory step-up charges. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 37.2%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses increased from$155.0 million in the three months period endedApril 3, 2021 to$206.1 million in the three months period endedApril 2, 2022 . As a percentage of net sales, selling, general, and administrative expenses were 20.4% in the three months period endedApril 3, 2021 , as compared to 20.7% in the three months period endedApril 2, 2022 . Selling, general and administrative expenses reflect increased costs of$36.1 million associated with acquisitions, including$17.7 million of intangible amortization expense. Selling, general and administrative expenses increased$6.1 million related to compensation costs. Higher sales volumes also resulted in increased commission expense. Foreign exchange rates had an favorable impact of$1.7 million . RESTRUCTURING EXPENSES. Restructuring expenses were$0.8 million for the three months period endedApril 3, 2021 and$1.9 million for the three months period endedApril 2, 2022 . Restructuring expenses in both periods related primarily to headcount reductions and facility consolidations within theCommercial Foodservice Equipment Group . NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were$17.7 million in the three months period endedApril 2, 2022 , as compared to$16.1 million in the prior year period. Net periodic pension benefit (other than service costs) increased$0.1 million to$11.5 million in the three months period endedApril 2, 2022 from$11.4 million in the prior year period. Other expense was$4.1 million in the three months period endedApril 2, 2022 , as compared to other income of$1.7 million in the prior year period and consists mainly of foreign exchange gains and losses. INCOME TAXES. A tax provision of$26.6 million , at an effective rate of 23.7%, was recorded during the three months period endedApril 2, 2022 , as compared to$28.9 million at an effective rate of 24.5%, in the prior year period. The effective tax rate for the three months period endedApril 2, 2022 is lower than the comparable year rate primarily due to excess tax benefits from share-based compensation award vesting. 28
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Financial Condition and Liquidity
During the three months endedApril 2, 2022 , cash and cash equivalents decreased by$33.7 million to$146.7 million from$180.4 million atJanuary 1, 2022 . Total debt increased to$2.6 billion atApril 2, 2022 from$2.4 billion atJanuary 1, 2022 .
OPERATING ACTIVITIES. Net cash used for operating activities was
During the three months period endedApril 2, 2022 , working capital changes meaningfully impacted operating cash flows. These included an increase in accounts receivable of$55.3 million due to increased sales from improved market conditions. Additionally, inventory increased$88.5 million due to the seasonality of acquired businesses, efforts to mitigate supply chain risks and the inflationary impacts on inventory.
INVESTING ACTIVITIES. During the three months ended
FINANCING ACTIVITIES. Net cash flows provided by financing activities were$8.7 million during the three months endedApril 2, 2022 . The company's borrowing activities during the three months endedApril 2, 2022 included$187.8 million of net proceeds under its Credit Facility. Additionally, the company repurchased$170.0 million of Middleby common shares during the three months endedApril 2, 2022 . This was comprised of$14.8 million to repurchase 84,086 shares of Middleby common stock that were surrendered to the company by employees in lieu of cash payment for withholding taxes related to restricted stock vesting and$155.2 million used to repurchase 862,912 shares of its common stock under a repurchase program. AtApril 2, 2022 , the company believes that its current capital resources, including cash and cash equivalents, cash expected to be generated from operations, funds available from its current lenders and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and expenditures for the foreseeable future. 29
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Recently Issued Accounting Standards
See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 4 - Recent Issued Accounting Standards, of this Quarterly Report on Form 10-Q.
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 indefinite-life intangibles, convertible debt, pensions benefits, and income taxes, as discussed in the company's Annual Report on Form 10-K for the year endedJanuary 1, 2022 (the "2021 Annual Report on Form 10-K"). 30 --------------------------------------------------------------------------------
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
Variable Rate Quarter Debt 2023$ 27,693 2024 23,644 2025 23,639 2026 758,789 2027 and thereafter 1,764,060$ 2,597,825 The company is exposed to interest rate risk on its floating-rate debt. 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 ofApril 2, 2022 , the fair value of these instruments was an asset of$24.0 million . The change in fair value of these swap agreements in the first three months of 2022 was a gain of$31.1 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. InAugust 2020 , the company issued$747.5 million aggregate principal amount of Convertible Notes in a private offering pursuant to the Indenture. The company does not have economic interest rate exposure as the Convertible Notes have a fixed annual rate of 1.00%. The fair value of the Convertible Notes is subject to interest rate risk, market risk and other factors due to its conversion feature. The fair value of the Convertible Notes is also affected by the price and volatility of the company's common stock and will generally increase or decrease as the market price of our common stock changes. The interest and market value changes affect the fair value of the Convertible Notes but do not impact the company's financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, the company carries the Convertible Notes at face value, less any unamortized discount on the balance sheet and presents the fair value for disclosure purposes only.
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$3.0 million at the end of the first quarter of 2022. 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. 31
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