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 six months endedJuly 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 Six Months Ended Jul 2, 2022 Jul 3, 2021 Jul 2, 2022 Jul 3, 2021 Sales Percent Sales Percent Sales Percent Sales Percent Business Segments: Commercial Foodservice$ 609,679 60.2 %$ 508,778 62.9 %$ 1,153,332 57.5 %$ 989,933 63.2 % Food Processing 123,913 12.2 130,008 16.1 243,856 12.1 242,502 15.5 Residential Kitchen 280,009 27.6 169,987 21.0 611,089 30.4 334,396 21.3 Total$ 1,013,601 100.0 %$ 808,773 100.0 %$ 2,008,277 100.0 %$ 1,566,831 100.0 % 29
--------------------------------------------------------------------------------
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 Six Months Ended Jul 2, 2022 Jul 3, 2021 Jul 2, 2022 Jul 3, 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 64.4 62.4 65.6 63.0 Gross profit 35.6 37.6 34.4 37.0 Selling, general and administrative expenses 18.7 20.5 19.7 20.5 Restructuring 0.4 0.1 0.3 0.1 Income from operations 16.5 17.0 14.4 16.4
Interest expense and deferred financing amortization, net
2.1 1.8 1.9 1.9
Net periodic pension benefit (other than service costs) (1.1)
(1.4) (1.1) (1.5) Other expense (income), net 0.6 (0.1) 0.5 (0.1) Earnings before income taxes 14.9 16.7 13.1 16.1 Provision for income taxes 3.8 1.7 3.2 2.7 Net earnings 11.1 % 15.0 % 9.9 % 13.4 % 30
--------------------------------------------------------------------------------
Three Months Ended
NET SALES . Net sales for the three months period endedJuly 2, 2022 increased by$204.8 million or 25.3% to$1,013.6 million as compared to$808.8 million in the three months period endedJuly 3, 2021 . Net sales increased by$117.0 million , or 14.5%, from the fiscal 2021 acquisitions ofNovy , Imperial, Newton CFV, Char-Griller, and Kamado Joe and Masterbuilt. Excluding acquisitions, net sales increased$87.8 million , or 10.9%, from the prior year period. The impact of foreign exchange rates on foreign sales translated intoU.S. Dollars for the three months period endedJuly 2, 2022 decreased net sales by approximately$19.9 million or 2.5%. Excluding the impact of foreign exchange and acquisitions, sales increased 13.3% for the three months period endedJuly 2, 2022 as compared to the prior year period, including a net sales increase of 17.7% at theCommercial Foodservice Equipment Group , a net sales decrease of 1.4% at theFood Processing Equipment Group and a net sales increase of 11.4% at theResidential Kitchen Equipment Group . •Net sales of theCommercial Foodservice Equipment Group increased by$100.9 million , or 19.8%, to$609.7 million in the three months period endedJuly 2, 2022 , as compared to$508.8 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$20.4 million during the three months period endedJuly 2, 2022 . Excluding the impact of acquisitions, net sales of theCommercial Foodservice Equipment Group increased$80.5 million , or 15.8%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales increased$90.2 million , or 17.7%, at theCommercial Foodservice Equipment Group . Domestically, the company realized a sales increase of$95.5 million , or 26.6%, to$454.5 million , as compared to$359.0 million in the prior year period. This includes an increase of$20.3 million from the recent acquisitions. Excluding the acquisitions, the net increase in domestic sales was$75.2 million , or 20.9%. The increase in domestic sales is related to higher shipments from realized benefits of investments to increase our production throughput. International sales increased$5.4 million , or 3.6%, to$155.2 million , as compared to$149.8 million in the prior year period. This includes a decrease of$9.7 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales increase in international sales was$15.0 million , or 10.0%. The increase in international sales is related to improvements in market conditions, primarily in the European and Latin American markets. •Net sales of theFood Processing Equipment Group decreased by$6.1 million , or 4.7%, to$123.9 million in the three months period endedJuly 2, 2022 , as compared to$130.0 million in the prior year period. Excluding the impact of foreign exchange, net sales decreased$1.8 million , or 1.4%, at theFood Processing Equipment Group . Domestically, the company realized a sales decrease of$7.6 million , or 8.0%, to$87.9 million , as compared to$95.5 million in the prior year period. The decrease in domestic sales is primarily driven by protein products. International sales increased$1.5 million , or 4.3%, to$36.0 million , as compared to$34.5 million in the prior year period. This includes a decrease of$4.3 million related to the unfavorable impact of exchange rates. Excluding foreign exchange, the net sales increase in international sales was$5.8 million , or 16.8%. The increase in international sales reflects growth primarily driven by protein products. •Net sales of theResidential Kitchen Equipment Group increased by$110.0 million , or 64.7%, to$280.0 million in the three months period endedJuly 2, 2022 , as compared to$170.0 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$96.6 million during the three months period endedJuly 2, 2022 . Excluding the impact of the acquisitions, net sales of theResidential Kitchen Equipment Group increased$13.4 million , or 7.9%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales increased$19.3 million , or 11.4% at theResidential Kitchen Equipment Group . Domestically, the company realized a sales increase of$76.4 million , or 67.4%, to$189.7 million , as compared to$113.3 million in the prior year period. This includes an increase of$57.1 million from the recent acquisitions. Excluding the acquisitions, the net increase in domestic sales was$19.3 million , or 17.0%. The increase in domestic sales reflects the strong demand for our premium appliance brands. International sales increased$33.6 million , or 59.3%, to$90.3 million , as compared to$56.7 million in the prior year period. This includes an increase of$39.5 million from the recent acquisitions and a decrease of$5.9 million related to the unfavorable impact of exchange rates. Excluding foreign exchange and the acquisitions, the international sales were flat from prior year. 31 -------------------------------------------------------------------------------- GROSS PROFIT. Gross profit increased to$360.7 million in the three months period endedJuly 2, 2022 , as compared to$303.7 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$8.0 million . The gross margin rate was 35.6% in the three months period endedJuly 2, 2022 , as compared to 37.6% in the prior year period. Gross profit margins have been negatively impacted by acquisitions along with rising costs of many raw materials and inputs, as well as higher labor rates and logistics costs. •Gross profit at theCommercial Foodservice Equipment Group increased by$33.5 million , or 17.4%, to$225.5 million in the three months period endedJuly 2, 2022 , as compared to$192.0 million in the prior year period. Gross profit from the acquisitions of Imperial and Newton CFV increased gross profit by$8.2 million . Excluding acquisitions, gross profit increased by$25.3 million related to higher sales volumes. The impact of foreign exchange rates decreased gross profit by approximately$3.8 million . The gross margin rate decreased to 37.0%, as compared to 37.7% in the prior year period. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 36.9%. •Gross profit at theFood Processing Equipment Group decreased by$5.4 million , or 11.4%, to$41.8 million in the three months period endedJuly 2, 2022 , as compared to$47.2 million in the prior year period. The impact of foreign exchange rates decreased gross profit by approximately$1.7 million . The gross profit margin rate decreased to 33.7%, as compared to 36.3% in the prior year period primarily related to lower sales volumes and product mix. The gross margin rate, excluding the impact of foreign exchange, was 33.9%. •Gross profit at theResidential Kitchen Equipment Group increased by$29.2 million , or 45.0%, to$94.1 million in the three months period endedJuly 2, 2022 , as compared to$64.9 million in the prior year period. Gross profit from the acquisitions ofNovy , Char-Griller, and Kamado Joe and Masterbuilt increased gross profit by$22.6 million . The impact of foreign exchange rates decreased gross profit by approximately$2.5 million . The gross margin rate decreased to 33.6%, as compared to 38.2%, which was negatively impacted by acquisitions. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 39.1%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses increased to$189.5 million in the three months period endedJuly 2, 2022 , as compared to$165.7 million in the three months period endedJuly 3, 2021 . As a percentage of net sales, selling, general, and administrative expenses were 18.7% in the three months period endedJuly 2, 2022 as compared to 20.5% in the three months period endedJuly 3, 2021 . Selling, general and administrative expenses reflect increased costs of$18.1 million associated with acquisitions, including$0.7 million of intangible amortization expense. Selling, general and administrative expenses increased from compensation, selling and commissions expenses, partially offset by lower professional fees. Foreign exchange rates had an favorable impact of$3.7 million . RESTRUCTURING EXPENSES. Restructuring expenses increased$3.0 million to$4.0 million for the three months period endedJuly 2, 2022 , as compared to$1.0 million for the three months period endedJuly 3, 2021 . Restructuring expenses in the three months period endedJuly 2, 2022 related primarily to non-cash restructuring valuation allowances on balances associated with activities inRussia . Restructuring expenses in the three months period endedJuly 3, 2021 related primarily to headcount reductions and facility consolidations within theCommercial Foodservice Equipment Group . NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were$20.8 million in the three months period endedJuly 2, 2022 , as compared to$14.2 million in the prior year period primarily reflecting higher borrowings levels on our current debt structure. Net periodic pension benefit (other than service costs) decreased$0.7 million to$10.8 million in the three months period endedJuly 2, 2022 , as compared to$11.5 million in the prior year period. Other expenses were$5.9 million in the three months period endedJuly 2, 2022 , as compared to other income of$0.5 million in the prior year period and consists mainly of foreign exchange gains and losses. INCOME TAXES. A tax provision of$38.0 million , at an effective rate of 25.1%, was recorded during the three months period endedJuly 2, 2022 , as compared to$13.9 million at an effective rate of 10.3%, in the prior year period. The effective tax rate for the three months period endedJuly 2, 2022 is higher than the comparable prior year rate primarily due to discrete tax benefits recorded in 2021 for a deferred tax benefit for the enactedUK tax rate change from 19% to 25% and tax benefits from amendedU.S. tax returns. When excluding the discrete tax adjustments, the 2021 rate was approximately 24.5%. 32 --------------------------------------------------------------------------------
Six Months Ended
NET SALES . Net sales for the six months period endedJuly 2, 2022 increased by$441.5 million , or 28.2%, to$2,008.3 million as compared to$1,566.8 million in the six months period endedJuly 3, 2021 . Net sales increased by$273.9 million , or 17.5%, from the fiscal 2021 acquisitions ofNovy , Imperial, Newton CFV, Char-Griller, and Kamado Joe and Masterbuilt. Excluding acquisitions, net sales increased$167.6 million , or 10.7%, from the prior year period. The impact of foreign exchange rates on foreign sales translated intoU.S. Dollars for the six months period endedJuly 2, 2022 decreased net sales by approximately$28.8 million , or 1.8%. Excluding the impact of foreign exchange and acquisitions, sales increased 12.5% for six months period endedJuly 2, 2022 as compared to the prior year period, including a net sales increase of 14.4% at theCommercial Foodservice Equipment Group , a net sales increase of 3.2% at theFood Processing Equipment Group and a net sales increase of 13.6% at theResidential Kitchen Equipment Group . •Net sales of theCommercial Foodservice Equipment Group increased by$163.4 million , or 16.5%, to$1,153.3 million in the six months period endedJuly 2, 2022 , as compared to$989.9 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$34.9 million during the six months period endedJuly 2, 2022 . Excluding the impact of acquisitions, net sales of theCommercial Foodservice Equipment Group increased$128.5 million , or 13.0%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales increased$143.0 million , or 14.4%, at theCommercial Foodservice Equipment Group . Domestically, the company realized a sales increase of$151.4 million , or 21.7%, to$849.3 million , as compared to$697.9 million in the prior year period. This includes an increase of$34.2 million from recent acquisitions. Excluding acquisitions, the net increase in domestic sales was$117.2 million , or 16.8%. The increase in domestic sales is related to improvements in market conditions and consumer demand. International sales increased$12.0 million , or 4.1%, to$304.0 million , as compared to$292.0 million in the prior year period. This includes an increase of$0.7 million from the recent acquisitions and a decrease of$14.5 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales increase in international sales was$25.8 million , or 8.8%. The increase in international revenues is related to improvements in market conditions, primarily in the European and Latin American markets. •Net sales of theFood Processing Equipment Group increased by$1.4 million , or 0.6%, to$243.9 million in the six months period endedJuly 2, 2022 , as compared to$242.5 million in the prior year period. Excluding the impact of foreign exchange, net sales increased$7.8 million , or 3.2%, at theFood Processing Equipment Group . Domestically, the company realized a sales increase of$7.6 million , or 4.3%, to$182.7 million , as compared to$175.1 million in the prior year period. The increase in domestic sales reflects growth primarily driven by protein products. International sales decreased$6.2 million , or 9.2%, to$61.2 million , as compared to$67.4 million in the prior year period. This includes a decrease of$6.4 million related to the unfavorable impact of exchange rates. Excluding foreign exchange, the international sales were flat from prior year. •Net sales of theResidential Kitchen Equipment Group increased by$276.7 million , or 82.7%, to$611.1 million in the six months period endedJuly 2, 2022 , as compared to$334.4 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$239.0 million during the six months period endedJuly 2, 2022 . Excluding the impact of acquisitions, net sales of theResidential Kitchen Equipment Group increased$37.7 million , or 11.3%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales increased$45.6 million , or 13.6%, at theResidential Kitchen Equipment Group . Domestically, the company realized a sales increase of$197.4 million , or 89.0%, to$419.3 million , as compared to$221.9 million in the prior year period. This includes an increase of$155.2 million from recent acquisitions. Excluding acquisitions, the net increase in domestic sales was$42.2 million , or 19.0%. The increase in domestic sales reflects the strong demand for our premium appliance brands. International sales increased$79.3 million , or 70.5%, to$191.8 million , as compared to$112.5 million in the prior year period. This includes an increase of$83.8 million from the recent acquisitions and a decrease of$7.9 million related to the unfavorable impact of exchange rates. Excluding foreign exchange and acquisitions, the net sales increase in international sales was$3.4 million , or 3.0%. 33 -------------------------------------------------------------------------------- GROSS PROFIT. Gross profit increased to$691.3 million in the six months period endedJuly 2, 2022 as compared to$579.6 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$11.3 million . The gross margin rate was 34.4% in the six months period endedJuly 2, 2022 as compared to 37.0% in the six months period endedJuly 3, 2021 . Gross profit margins have been negatively impacted by acquisitions, including$15.1 million of acquisition related inventory step-up charges, along with rising costs of many raw materials and inputs, as well as higher labor rates and logistics costs. •Gross profit at theCommercial Foodservice Equipment Group increased by$57.5 million , or 15.7%, to$424.7 million in the six months period endedJuly 2, 2022 , as compared to$367.2 million in the prior year period. Gross profit from the acquisitions of Imperial and Newton CFV increased gross profit by$13.2 million . Excluding acquisitions, gross profit increased by$44.3 million related to higher sales volumes. The impact of foreign exchange rates decreased gross profit by approximately$5.6 million . The gross margin rate decreased to 36.8%, as compared to 37.1% in the prior year period. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 36.8%. •Gross profit at theFood Processing Equipment Group decreased by$3.8 million , or 4.4%, to$82.5 million in the six months period endedJuly 2, 2022 , as compared to$86.3 million in the prior year period. The impact of foreign exchange rates decreased gross profit by approximately$2.4 million . The gross profit margin rate decreased to 33.8%, as compared to 35.6% in the prior year period primarily related to product mix. The gross margin rate, excluding the impact of foreign exchange, was 33.9%. •Gross profit at theResidential Kitchen Equipment Group increased by$59.5 million , or 47.4%, to$185.1 million in the six months period endedJuly 2, 2022 , as compared to$125.6 million in the prior year period. Gross profit from the acquisitions ofNovy , Char-Griller, and Kamado Joe and Masterbuilt increased gross profit by$43.5 million . The impact of foreign exchange rates decreased gross profit by approximately$3.3 million . The gross margin rate decreased to 30.3%, as compared to 37.6% in the prior year period. Gross profit margins have been negatively impacted by acquisitions, including$15.1 million of acquisition related inventory step-up charges. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 38.1%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses increased to$395.6 million in the six months period endedJuly 2, 2022 , as compared to$320.7 million in the six months period endedJuly 3, 2021 . As a percentage of net sales, selling, general, and administrative expenses were 19.7% in the six months period endedJuly 2, 2022 , as compared to 20.5% in the six months period endedJuly 3, 2021 . Selling, general and administrative expenses reflect increased costs of$54.2 million associated with acquisitions, including$18.4 million of intangible amortization expense. Selling, general and administrative expenses increased from compensation, selling and commissions expenses, partially offset by lower professional fees. Foreign exchange rates had an favorable impact of$5.3 million . RESTRUCTURING EXPENSES. Restructuring expenses increased$4.1 million to$5.9 million in the six months period endedJuly 2, 2022 from$1.8 million in the six months period endedJuly 3, 2021 . Restructuring expenses in the six months period endedJuly 2, 2022 related primarily to non-cash restructuring valuation allowances on balances associated with activities inRussia and headcount reductions and facility consolidations within theCommercial Foodservice Equipment Group andResidential Kitchen Equipment Group . Restructuring expenses in the six months period endedJuly 3, 2021 related primarily to headcount reductions and facility consolidations within theCommercial Foodservice Equipment Group . NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were$38.5 million in the six months period endedJuly 2, 2022 , as compared to$30.3 million in the prior year period, reflecting the increase in borrowing levels under our current credit facility. Net periodic pension benefit (other than service costs) decreased$0.6 million to$22.3 million in the six months period endedJuly 2, 2022 , as compared to$22.9 million in the prior year period. Other income was$9.9 million in the six months period endedJuly 2, 2022 , as compared to other income of$2.2 million in the prior year period and consists mainly of foreign exchange gains and losses. INCOME TAXES. A tax provision of$64.6 million , at an effective rate of 24.5%, was recorded during the six months period endedJuly 2, 2022 , as compared to$42.8 million at an effective rate of 16.9%, in the prior year period. The effective tax rate for the three months period endedJuly 2, 2022 is higher than the comparable prior year rate primarily due to discrete tax benefits recorded in 2021 for a deferred tax benefit for the enactedUK tax rate change from 19% to 25% and tax benefits from amendedU.S. tax returns. When excluding the discrete tax adjustments, the 2021 rate was approximately 24.5%. 34 --------------------------------------------------------------------------------
Financial Condition and Liquidity
During the six months endedJuly 2, 2022 , cash and cash equivalents decreased by$13.8 million to$166.6 million from$180.4 million atJanuary 1, 2022 . Total debt increased to$2.7 billion atJuly 2, 2022 from$2.4 billion atJanuary 1, 2022 .
OPERATING ACTIVITIES. Net cash provided by operating activities was
During the six months period endedJuly 2, 2022 , working capital changes meaningfully impacted operating cash flows. These included an increase in accounts receivable of$50.2 million due to increased sales from improved market conditions. Additionally, inventory increased$171.9 million due to the seasonality of acquired businesses, efforts to mitigate supply chain risks and the inflationary impacts on inventory.
INVESTING ACTIVITIES. During the six months ended
FINANCING ACTIVITIES. Net cash flows provided by financing activities were$17.7 million during the six months endedJuly 2, 2022 . The company's borrowing activities during the six months endedJuly 2, 2022 included$273.5 million of net proceeds under its Credit Facility. Additionally, the company repurchased$239.6 million of Middleby common shares during the six months endedJuly 2, 2022 . This was comprised of$15.6 million to repurchase 88,904 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$224.0 million used to repurchase 1,365,598 shares of its common stock under a repurchase program. AtJuly 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. 35
--------------------------------------------------------------------------------
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.
Cybersecurity Governance
The company dedicates significant resources in an effort to secure its confidential information as well as the data and any personal information the company receives and stores about its customers and employees. The company has systems in place designed to securely receive and store that information and to detect, contain, and respond to data security incidents. The company has a robust information security training and compliance program for all new and existing employees. Training is provided at least annually, with a formal communication cadence of additional components of training being provided throughout the year. The company has not experienced a material cybersecurity or information security breach in the last three years. Oversight responsibility for information security matters is shared by the Board (primarily through the Audit Committee) and senior management. The Audit Committee oversees the company's cybersecurity and information security program and receives periodic updates (more frequently than annually) from senior management on cybersecurity and information security matters. The company maintains a program, overseen by the company's Chief Financial Officer, that is designed to protect and preserve the confidentiality, integrity and continued availability of all information owned by or in the care of the company. The company has implemented a cyber incident response plan that provides controls and procedures for timely and accurate reporting of any material cybersecurity incident.
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"). 36 --------------------------------------------------------------------------------
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 Second
Variable Rate Quarter Debt 2023$ 49,076 2024 25,590 2025 24,022 2026 760,137 2027 and thereafter 1,837,564$ 2,696,389 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 ofJuly 2, 2022 , the fair value of these instruments was an asset of$35.1 million . The change in fair value of these swap agreements in the first six months of 2022 was a gain of$39.2 million , net of taxes. The potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted interest rates would not have a material impact on the company's financial position, results of operations and cash flows. 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$0.4 million at the end of the second 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. 37
--------------------------------------------------------------------------------
© Edgar Online, source