MIDDLEBY Corp - Quarter Report: 2005 April (Form 10-Q)
FORM
10-Q
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the quarterly period ended April 2, 2005
or
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission
File No. 1-9973
|
THE
MIDDLEBY CORPORATION | |
|
(Exact
Name of Registrant as Specified in its
Charter) |
|
Delaware |
36-3352497 | |
|
(State
or Other Jurisdiction of |
(I.R.S.
Employer Identification No.) | |
|
Incorporation
or Organization) |
|
1400
Toastmaster Drive, Elgin, Illinois |
60120 | |
|
(Address
of Principal Executive Offices) |
(Zip
Code) | |
|
Registrant's
Telephone No., including Area Code |
(847)
741-3300 | |
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve (12) months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x
NO o
Indicate
by check mark whether the registrant is an accelerated filer (as defined by Rule
12b-2 of the Exchange Act).
Yes x No o
As of May
6, 2005, there were 7,758,450 shares of the registrant's common stock
outstanding.
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
QUARTER
ENDED APRIL 2, 2005
INDEX
|
DESCRIPTION |
PAGE |
|
PART
I. FINANCIAL INFORMATION |
|
|
Item
1. Condensed Consolidated Financial Statements (unaudited) |
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS April 2, 2005 and January 1,
2005 |
1 |
|
CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS April 2, 2005 and April 3,
2004 |
2 |
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS April 2, 2005 and April 3,
2004 |
3 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
4 |
|
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations |
14 |
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk |
21 |
|
Item
4. Controls and Procedures |
23 |
|
PART
II. OTHER INFORMATION |
|
|
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds |
24 |
|
Item
6. Exhibits |
24 |
PART
I. FINANCIAL INFORMATION
Item
1. Condensed Consolidated Financial Statements
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
Thousands, Except Share Amounts)
(Unaudited)
|
ASSETS |
Apr.
2, 2005 |
Jan.
1, 2005 |
|||||
|
Current
assets: |
|||||||
|
Cash
and cash equivalents |
$ |
2,639 |
$ |
3,803 |
|||
|
Accounts
receivable, net of reserve for doubtful
accounts of $3,748 and $3,382 |
32,022 |
26,612 |
|||||
|
Inventories,
net |
37,186 |
32,772 |
|||||
|
Prepaid
expenses and other |
2,587 |
2,008 |
|||||
|
Prepaid
taxes |
6,198 |
9,952 |
|||||
|
Current
deferred taxes |
8,831 |
8,865 |
|||||
|
Total
current assets |
89,463 |
84,012 |
|||||
|
Property,
plant and equipment, net of accumulated
depreciation of $31,815 and $31,191 |
23,608 |
22,980 |
|||||
|
Goodwill |
81,515 |
74,761 |
|||||
|
Other
intangibles |
26,300 |
26,300 |
|||||
|
Other
assets |
2,469 |
1,622 |
|||||
|
Total
assets |
$ |
223,355 |
$ |
209,675 |
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|||||||
|
Current
liabilities: |
|||||||
|
Current
maturities of long-term debt |
$ |
11,105 |
$ |
10,480 |
|||
|
Accounts
payable |
16,543 |
11,298 |
|||||
|
Accrued
expenses |
40,507 |
51,311 |
|||||
|
Total
current liabilities |
68,155 |
73,089 |
|||||
|
Long-term
debt |
127,357 |
113,243 |
|||||
|
Long-term
deferred tax liability |
8,149 |
11,434 |
|||||
|
Other
non-current liabilities |
4,892 |
4,694 |
|||||
|
Stockholders'
equity: |
|||||||
|
Preferred
stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none
issued |
-- |
-- |
|||||
|
Common
stock, $0.01 par value; 20,000,000 shares authorized; 11,587,544 and
11,402,044 shares issued in 2005 and 2004, respectively |
116 |
114 |
|||||
|
Restricted
stock |
(11,388 |
) |
(4,700 |
) | |||
|
Paid-in
capital |
68,224
|
60,446 |
|||||
|
Treasury
stock at cost; 3,856,344 shares
in 2005 and 2004, respectively |
(89,650 |
) |
(89,650 |
) | |||
|
Retained
earnings |
47,710 |
41,362 |
|||||
|
Accumulated other comprehensive loss |
(210 |
) |
(357 |
) | |||
|
Total
stockholders' equity |
14,802 |
7,215 |
|||||
|
Total
liabilities and stockholders' equity |
$ |
223,355 |
$ |
209,675 |
|||
See
accompanying notes
-1-
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
(In
Thousands, Except Per Share Amounts)
(Unaudited)
|
Three
Months Ended |
|||||||
|
Apr.
2, 2005 |
Apr.
3, 2004 |
||||||
|
Net
sales |
$ |
74,889 |
$ |
62,463 |
|||
|
Cost
of sales |
47,817 |
39,287 |
|||||
|
Gross profit |
27,072 |
23,176 |
|||||
|
Selling
expenses |
8,184 |
7,376 |
|||||
|
General
and administrative expenses |
6,885 |
5,696 |
|||||
|
Income
from operations |
12,003 |
10,104 |
|||||
|
Interest
expense and deferred financing amortization, net |
1,786 |
897 |
|||||
|
Gain
on acquisition financing derivatives |
-- |
(2 |
) | ||||
|
Other
expense (income), net |
(203 |
) |
194 |
||||
|
Earnings
before income taxes |
10,420 |
9,015 |
|||||
|
Provision
for income taxes |
4,072 |
3,424 |
|||||
|
Net
earnings |
$ |
6,348 |
$ |
5,591 |
|||
|
Net
earnings per share: |
|
||||||
|
Basic |
$ |
0.85 |
$ |
0.61 |
|||
|
Diluted |
$ |
0.79 |
$ |
0.56 |
|||
|
Weighted
average number of shares |
|||||||
|
Basic |
7,473 |
9,219 |
|||||
|
Dilutive stock options1 |
547 |
749 |
|||||
|
Diluted |
8,020 |
9,968 |
|||||
| 1 | There were no anti-dilutive stock options excluded from common stock equivalents for any period presented |
See
accompanying notes
-2-
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
Thousands)
(Unaudited)
|
Three
Months Ended |
|||||||
|
Apr.
2, 2005 |
Apr.
3, 2004 |
||||||
|
Cash
flows from operating activities- |
|||||||
|
Net
earnings |
$ |
6,348 |
$ |
5,591 |
|||
|
Adjustments
to reconcile net earnings to cash provided
by operating activities: |
|||||||
|
Depreciation
and amortization |
929 |
966 |
|||||
|
Deferred
taxes |
386 |
(68 |
) | ||||
|
Unrealized
gain on derivative financial instruments |
-- |
(2 |
) | ||||
|
Equity
compensation |
827 |
-- |
|||||
|
Cash
effects of changes in- |
|||||||
|
Accounts receivable, net |
(4,442 |
) |
(2,128 |
) | |||
|
Inventories,
net |
(3,212 |
) |
(3,522 |
) | |||
|
Prepaid
expenses and other assets |
2,251 |
691 |
|||||
|
Accounts
payable |
3,590 |
3,554 |
|||||
|
Accrued
expenses and other liabilities |
(10,550 |
) |
(2,826 |
) | |||
|
Net
cash (used in) provided by operating activities |
(3,873 |
) |
2,256 |
||||
|
Cash
flows from investing activities- |
|||||||
|
Net
additions to property and equipment |
(321 |
) |
(71 |
) | |||
|
Acquisition
of Blodgett |
-- |
(1,000 |
) | ||||
|
Acquisition
of Nu-Vu |
(12,000 |
) |
-- |
||||
|
Net
cash (used in) investing activities |
(12,321 |
) |
(1,071 |
) | |||
|
Cash
flows from financing activities- |
|||||||
|
Net
proceeds
under revolving credit facilities |
17,280 |
1,400 |
|||||
|
Repayments
under senior secured bank notes |
(2,500 |
) |
(3,250 |
) | |||
|
Net
proceeds from stock issuances |
265
|
86 |
|||||
|
Net
cash provided by (used in) financing activities |
15,045 |
(1,764 |
) | ||||
|
Effect
of exchange rates on cash and cash
equivalents |
(15 |
) |
-- |
||||
|
Changes
in cash and cash equivalents- |
|||||||
|
Net
(decrease) in cash and cash equivalents |
(1,164 |
) |
(579 |
) | |||
|
Cash
and cash equivalents at beginning of year |
3,803 |
3,652 |
|||||
|
Cash
and cash equivalents at end of quarter |
$ |
2,639 |
$ |
3,073 |
|||
|
Supplemental
disclosure of cash flow information: |
|||||||
|
Interest
paid |
$ |
1,362 |
$ |
885 |
|||
|
Income
tax (refunds) payments |
$ |
(36 |
) |
$ |
649 |
||
See
accompanying notes
-3-
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April
2, 2005
(Unaudited)
|
1) |
Summary
of Significant Accounting Policies |
| A) | Basis of Presentation |
The
condensed consolidated financial statements have been prepared by The Middleby
Corporation (the "company"), pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements are unaudited and
certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, although the company believes that the disclosures are
adequate to make the information not misleading. These financial statements
should be read in conjunction with the financial statements and related notes
contained in the company's 2004 Form 10-K.
In the
opinion of management, the financial statements contain all adjustments
necessary to present fairly the financial position of the company as of April 2,
2005 and January 1, 2005, and the results of operations for the three months
ended April 2, 2005 and April 3, 2004 and cash flows for the three months ended
April 2, 2005 and April 3, 2004.
| B) | Stock-Based Compensation |
The
company maintains a 1998 Stock Incentive Plan (the "Plan"), as amended on
December 15, 2003, under which the Company's Board of Directors issues stock
options and stock grants to key employees. Stock options issued under the plan
provide key employees with rights to purchase shares of common stock at
specified exercise prices. Options may be exercised upon certain vesting
requirements being met, but expire to the extent unexercised within a maximum of
ten years from the date of grant. During the first quarter of 2005 the company
issued 100,000 stock options with a strike price of $53.93 per share. Stock
grants issued are issued under the plan to key employees and are transferable
upon certain vesting requirements being met. During the first quarter ended
April 2, 2005, a total of 150,000 restricted stock grants were issued, all of
which were unvested.
As
permitted under Statement of Financial Accounting Standards ("SFAS") No 123:
"Accounting for Stock Based Compensation", the company has elected to follow APB
Opinion No. 25: "Accounting for Stock Issued to Employees" in accounting for
stock-based awards to employees and directors. In accordance with APB No. 25,
the company establishes the value of restricted stock grants based upon the
market value of the stock at the time of issuance. The value of the restricted
stock grant is reflected as a separate component reducing shareholders' equity
with an offsetting increase to Paid-in Capital. The value of the stock grant is
amortized and recorded as compensation expense over the applicable vesting
period. During the first quarter of 2005, the restricted stock grants issued
amounted to $7.5 million. Additionally, the company recorded compensation
expense associated with stock grants amounting to $0.8 million.
In
accordance with APB No. 25, the company has not recorded compensation expense
related to issued stock options in the financial statements for all periods
presented because the exercise price of the stock options is equal to or greater
than the market price of the underlying stock on the date of grant. Pro forma
information regarding net earnings and earnings per share is required by SFAS
No. 123. This information is required to be determined as if the company had
accounted for its employee and director stock options granted subsequent to
December 31, 1994 under the fair value method of that statement.
The
company has utilized Black-Scholes and binomial option valuation models to
estimate the fair value of issued stock options. These option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the company’s options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options.
-4-
For
purposes of these interim pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options’ vesting periods. The company’s
pro forma net earnings and per share data utilizing a fair value based method is
as follows:
|
Three
Months Ended |
|||||||
|
Apr.
2, 2005 |
Apr. 3, 2004 |
||||||
|
(in
thousands, except per share data) |
|||||||
|
Net
income -as reported |
$ |
6,348 |
$ |
5,591 |
|||
|
Less:
Stock-based employee compensation expense, net of taxes |
(132 |
) |
(114 |
) | |||
|
Net
income - pro forma |
$ |
6,216 |
$ |
5,477 |
|||
|
Earnings
per share - as reported: |
|||||||
|
Basic |
$ |
0.85 |
$ |
0.61 |
|||
|
Diluted |
0.79 |
0.56 |
|||||
|
Earnings
per share - pro forma: |
|||||||
|
Basic |
$ |
0.83 |
$ |
0.59 |
|||
|
Diluted |
0.78 |
0.55 |
|||||
|
2) |
Acquisition |
On
January 7, 2005, the company completed its acquisition of the assets of Nu-Vu
Foodservice Systems ("Nu-Vu"), a leading manufacturer of baking ovens, from
Win-Holt Equipment Corporation ("Win-Holt") for an aggregate purchase price of
$12.0 million in cash. The purchase price is subject to adjustment based upon a
working capital provision within the purchase agreement.
|
The
company has accounted for this business combination using the purchase
method to record a new cost basis for the assets acquired and liabilities
assumed. The difference between the purchase price and the preliminary
estimate of the fair value of the assets acquired and liabilities assumed
has been recorded as goodwill in the April 2, 2005 financial statements.
The allocation of the purchase price to the assets, liabilities and
intangible assets is under review and is subject to change based upon the
results of further evaluation. Under SFAS No. 142, "Goodwill and Other
Intangible Assets," goodwill in conjunction with the Nu-Vu acquisition is
subject to the nonamortization provisions of this statement from the date
of acquisition. |
|
The
allocation of net cash paid for the Nu-Vu acquisition as of April 2, 2005
is summarized as follows (in thousands): |
|
Current
assets |
$ |
2,555 |
||
|
Property,
plant and equipment |
1,178 |
|||
|
Deferred
taxes |
3,637 |
|||
|
Goodwill |
6,755 |
| ||
|
Liabilities |
(2,125 |
) | ||
|
Total
purchase price |
$ |
12,000 |
|
The
goodwill associated with the Nu-Vu acquisition is allocable to the Cooking
Systems Group for purposes of segment reporting (see footnote 12 for
further discussion). Goodwill associated with this transaction is
anticipated to be deductible for income
taxes. |
-5-
|
3) |
Litigation
Matters |
From time
to time, the company is subject to proceedings, lawsuits and other claims
related to products, suppliers, employees, customers and competitors. The
company maintains insurance to cover product liability, workers compensation,
property and casualty, and general liability matters. The company is
required to assess the likelihood of any adverse judgments or outcomes to these
matters as well as potential ranges of probable losses. A determination of
the amount of accrual required, if any, for these contingencies is made after
assessment of each matter and the related insurance coverage. The required
accrual may change in the future due to new developments or changes in approach
such as a change in settlement strategy in dealing with these matters. The
company does not believe that any such matter will have a material adverse
effect on its financial condition, results of opertions or cash flows of the
company.
|
4) |
New
Accounting Pronouncements |
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of
ARB No. 43, Chapter 4". This statement amends the guidance in ARB No. 43,
Chapter 4 to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. This statement requires
that these items be recognized as current period costs and also requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The company will apply this guidance prospectively. The
company is in the process of determining what impact the application of this
guidance will have on the company's financial position, results of operations or
cash flows.
In
December 2004, the FASB issued a revision to SFAS No. 123 "Accounting for Stock
Based Compensation". This statement established standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services and addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of those equity
instruments. This statement is effective for annual periods beginning after June
15, 2005. The company will apply this guidance prospectively. The company is in
the process of determining what impact the application of this guidance will
have on the company's financial position, results of operations or cash
flows.
-6-
| 5) | Other Comprehensive Income |
The
company reports changes in equity during a period, except those resulting from
investment by owners and distribution to owners, in accordance with SFAS No.
130, "Reporting Comprehensive Income."
Components
of other comprehensive income were as follows (in thousands):
|
Three
Months Ended |
|||||||
|
Apr.
2, 2005 |
Apr.
3, 2004 |
||||||
|
Net
earnings |
$ |
6,348 |
$ |
5,591 |
|||
|
Cumulative
translation adjustment |
(356 |
) |
21 |
||||
|
Minimum
pension liability |
-- |
10 |
|||||
|
Unrealized
gain on interest rate swap, net of tax of $334 and $26,
respectively |
503 |
65 |
|||||
|
Comprehensive
income |
$ |
6,495 |
$ |
5,687 |
|||
Accumulated
other comprehensive loss is comprised of minimum pension liability of $1.0
million as of April 2, 2005 and January 1, 2005, foreign currency translation
adjustments of $0.3 million as of April 2, 2005 and $0.6 million as of January
1, 2005, and an unrealized gain on a interest rate swap of $0.5 million as of
April 2, 2005 and less than $0.1 million as of January 1, 2005.
|
6) |
Inventories |
Inventories
are composed of material, labor and overhead and are stated at the lower of cost
or market. Costs for inventory at two of the company's manufacturing facilities
have been determined using the last-in, first-out ("LIFO") method. These
inventories under the LIFO method amounted to $15.5 million at April 2, 2005 and
$14.4 million at January 1, 2005 and represented approximately 42% and 44% of
the total inventory in each respective period. Costs for all other inventory
have been determined using the first-in, first-out ("FIFO") method. The company
estimates reserves for inventory obsolescence and shrinkage based on its
judgment of future realization. Inventories at April 2, 2005 and January 1, 2005
are as follows:
|
Apr.
2, 2005 |
Jan.
1, 2005 |
||||||
|
(in
thousands) |
|||||||
|
Raw
materials and parts |
$ |
7,942 |
$ |
7,091 |
|||
|
Work-in-process |
5,456 |
5,492 |
|||||
|
Finished
goods |
23,801 |
19,971 |
|||||
|
37,199 |
32,554 |
||||||
|
LIFO
adjustment |
(13 |
) |
218 |
||||
$ |
37,186 |
$ |
32,772 |
||||
-7-
| 7) | Accrued Expenses |
Accrued
expenses consist of the following:
|
Apr.
2, 2005 |
Jan.
1, 2005 |
||||||
|
(in
thousands) |
|||||||
|
Accrued
warranty |
$ |
11,023 |
$ |
10,563 |
|||
|
Accrued
payroll and related expenses |
7,016 |
12,493 |
|||||
|
Accrued
customer rebates |
4,912 |
9,350 |
|||||
|
Accrued
income taxes |
4,723 |
4,321 |
|||||
|
Accrued
pension settlement |
-- |
3,637 |
|||||
|
Accrued
product liability and workers comp |
2,543 |
1,828 |
|||||
|
Other
accrued expenses |
10,290 |
9,119 |
|||||
$ |
40,507 |
$ |
51,311 |
||||
| 8) | Warranty Costs |
In the
normal course of business the company issues product warranties for specific
product lines and provides for the estimated future warranty cost in the period
in which the sale is recorded. The estimate of warranty cost is based on
contract terms and historical warranty loss experience that is periodically
adjusted for recent actual experience. Because warranty estimates are forecasts
that are based on the best available information, claims costs may differ from
amounts provided. Adjustments to initial obligations for warranties are made as
changes in the obligations become reasonably estimable.
A
rollforward of the warranty reserve is as follows:
|
Three
Months Ended |
||||
|
Apr.
2, 2005 |
||||
|
(in
thousands) |
||||
|
Beginning
balance |
$ |
10,563 |
||
|
Warranty
expense |
2,482 |
|||
|
Warranty
claims |
(2,022 |
) | ||
|
Ending
balance |
$ |
11,023 |
||
| 9) | Financing Arrangements |
|
Apr.
2, 2005 |
Jan.
1, 2005 |
||||||
|
(in
thousands) |
|||||||
|
Senior
secured revolving credit line |
$ |
68,545 |
$ |
51,265 |
|||
|
Senior
secured bank term loans |
67,500 |
70,000 |
|||||
|
Other
note |
2,417 |
2,458 |
|||||
|
|
|||||||
|
Total
debt |
$ |
138,462 |
$ |
123,723 |
|||
|
Less:
Current maturities of long-term debt |
11,105 |
10,480 |
|||||
|
Long-term
debt |
$ |
127,357 |
$ |
113,243 |
|||
-8-
As of
April 2, 2005, the company had $136.0 million outstanding under its senior
banking facility, including $68.5 million of borrowings under the revolving
credit line. The company also had $3.9 million in outstanding letters of
credit. As of April 2, 2005, the company had $17.6 million of
availability under the revolving credit line.
Borrowings
under the senior secured credit facility are assessed at an interest rate of
1.5% above LIBOR for long-term borrowings or at the higher of the Prime rate and
the Federal Funds Rate plus 0.5% for short term borrowings. At April 2, 2005 the
average interest rate on the senior debt amounted to 4.58%. The interest rates
on borrowings under the senior bank facility may be adjusted quarterly based on
the company’s defined indebtedness ratio on a rolling four-quarter basis.
Additionally, a commitment fee, based upon the indebtedness ratio is charged on
the unused portion of the revolving credit line. This variable commitment fee
amounted to 0.30% as of April 2, 2005.
The
company has historically entered into interest rate swap agreements to
effectively fix the interest rate on its outstanding debt. In February 2003, the
company entered into an interest rate swap agreement for a notional amount of
$10.0 million. This agreement swaps one-month LIBOR for a fixed rate of 2.36%
and remains in effect through December 2005. In January 2005, the company
entered into an interest rate swap agreement for a notional amount of $70.0
million. This agreement swaps one-month LIBOR for a fixed rate of 3.78%. The
notional amount amortizes consistent with the repayment schedule of the
company's term loan maturing November 2009. The unamortized notational amount of
this swap as of April 2, 2005 was $67.5 million.
In 2004,
the company entered into a $2.5 million promissory note in conjunction with the
release and early termination of obligations under a lease agreement relative to
a manufacturing facility in Shelburne, Vermont. The note is assessed interest at
4.0% above LIBOR with an interest rate cap of 9.0%. At April 2, 2005, the
interest rate on the note was approximately 6.7%. The note amortizes monthly and
matures in December 2009.
The terms
of the senior secured credit facility limit the paying of dividends, capital
expenditures and leases, and require, among other things, certain ratios of
indebtedness and fixed charge coverage. The credit agreement also provides that
if a material adverse change in the company’s business operations or conditions
occurs, the lender could declare an event of default. Under terms of the
agreement a material adverse effect is defined as (a) a material adverse change
in, or a material adverse effect upon, the operations, business properties,
condition (financial and otherwise) or prospects of the company and its
subsidiaries taken as a whole; (b) a material impairment of the ability of the
company to perform under the loan agreements and to avoid any event of default;
or (c) a material adverse effect upon the legality, validity, binding effect or
enforceability against the company of any loan document. A material adverse
effect is determined on a subjective basis by the company's creditors. At April
2, 2005, the company was in compliance with all covenants pursuant to its
borrowing agreements.
-9-
|
10) |
Acquisition
Integration |
On
December 21, 2001, the company established reserves through purchase accounting
associated with severance related obligations and facility exit costs related to
the acquired Blodgett business operations.
Reserves
for facility closure costs predominately relate to a lease obligation for a
manufacturing facility that was exited in 2001. During the second quarter of
2001, prior to the acquisition, reserves were established for lease obligations
associated with a manufacturing facility in Quakertown, Pennsylvania that was
exited when production at this facility was relocated to an existing facility in
Bow, New Hampshire. The lease associated with the exited facility extends
through December 11, 2014. The facility is currently subleased for a portion of
the lease term through April 2006. The remaining reserve balance is reflected
net of anticipated sublease income.
The
forecast of sublease income could differ from actual amounts, which are subject
to the occupancy by a subtenant and a negotiated sublease rental rate. If the
company's estimates or underlying assumptions change in the future, the company
would be required to adjust the reserve amount accordingly.
All
actions pertaining to the company’s integration initiatives have been completed.
At this time, management believes the remaining reserve balance is adequate to
cover the remaining costs identified at April 2, 2005.
A summary
of the reserve balance activity related to facility closure and lease obligation
is as follows:
|
Three
Months Ended |
||||
|
Apr.
2, 2005 |
||||
|
(in
thousands) |
||||
|
Beginning
balance |
$ |
2,788 |
||
|
Cash
payments |
42 |
|||
|
Ending
balance |
$ |
2,746 |
||
| 11) | Financial Instruments |
In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments. The statement requires an entity
to recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. Derivatives that do not qualify as a hedge must be
adjusted to fair value in earnings. If the derivative does qualify as a hedge
under SFAS No. 133, changes in the fair value will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments or
recognized in other accumulated comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a hedge's change in fair
value will be immediately recognized in earnings.
Foreign
Exchange: The
company has entered into derivative instruments, principally forward contracts
to reduce exposures pertaining to fluctuations in foreign exchange rates. As of
April 2, 2005 the company had forward contracts to purchase $3.7 million U.S.
Dollars with various foreign currencies, all of which mature in the next fiscal
quarter. The fair value of these forward contracts was $0.1 million at the end
of the quarter.
-10-
Interest
Rate: In
February 2003 in accordance with the senior bank agreement, the company entered
into an interest rate swap agreement with a notional amount of $10.0 million to
fix the interest rate applicable to certain of its variable-rate debt. The
agreement swaps one-month LIBOR for a fixed rate of 2.36% and is in effect
through December 30, 2005. The company designated the swap as a cash flow hedge
at its inception and all changes in the fair value of the swap are recognized in
accumulated other comprehensive income. As of April 2, 2005, the fair value of
this instrument was $0.1 million. The change in fair value of this swap
agreement in the first three months of 2005 was a gain of $0.1
million.
In
January 2005, the company entered into another interest rate swap with a
notional amount of $70.0 million to fix the interest rate applicable to certain
of its variable-rate debt. The notional amount of the swap amortizes consistent
with the repayment schedule of the company's senior term loan maturing in
November 2009. As of April 2, 2005, the unamortized balance of the interest rate
swap was $67.5 million. The agreement swaps one-month LIBOR for a fixed rate of
3.78% and is in effect through November 2009. The company designated the swap as
a cash flow hedge at its inception and all changes in the fair value of the swap
are recognized in accumulated other comprehensive income. As of April 2, 2005,
the fair value of this instrument was $0.8 million. The change in fair value of
this swap agreement in the first three months of 2005 was a gain of $0.8
million.
| 12) | Segment Information |
The
company operates in two reportable operating segments defined by management
reporting structure and operating activities.
The
worldwide manufacturing divisions operate through the Cooking Systems Group.
This business segment has manufacturing facilities in Illinois, Michigan, New
Hampshire, North Carolina, Vermont and the Philippines. This business segment
supports four major product groups, including conveyor oven equipment, core
cooking equipment, counterline cooking equipment, and international specialty
equipment.
Principal
product lines of the core cooking equipment product group include the Southbend
product lines of ranges, convection ovens, broilers and steam cooking equipment,
the Blodgett product lines of ranges, convection ovens, combi ovens and steam
cooking equipment, MagiKitch'n charbroilers and catering equipment, the Nu-Vu
product lines of proofing and baking ovens and the Pitco Frialator product line
of fryers. Principal product lines of the conveyor oven product group include
Middleby Marshall ovens, Blodgett ovens and CTX ovens. The counterline cooking
and warming equipment product group includes toasters, hot food servers,
foodwarmers and griddles distributed under the Toastmaster brand name. The
international specialty equipment product group is primarily comprised of food
preparation tables, undercounter refrigeration systems, ventilation systems and
component parts for the U.S. manufacturing operations.
The
International Distribution Division provides integrated sales, export
management, distribution and installation services through its operations in
Canada, China, India, South Korea, Mexico, the Philippines, Spain, Taiwan and
the United Kingdom. The division sells the company’s product lines and certain
non-competing complementary product lines throughout the world. For a local
country distributor or dealer, the company is able to provide a centralized
source of foodservice equipment with complete export management and product
support services.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The chief decision maker evaluates
individual segment performance based on operating income. Management believes
that intersegment sales are made at established arms-length transfer
prices.
-11-
Net
Sales Summary
(dollars
in thousands)
|
Three
Months Ended |
|||||||||||||
|
Apr.
2, 2005 |
Apr.
3, 2004 |
||||||||||||
|
Sales |
Percent |
Sales |
Percent |
||||||||||
|
Business
Divisions: |
|||||||||||||
|
Cooking
Systems Group: |
|||||||||||||
|
Core
cooking equipment |
$ |
55,302 |
73.9 |
$ |
43,934 |
70.3 |
|||||||
|
Conveyor
oven equipment |
12,838 |
17.1 |
11,918 |
19.1 |
|||||||||
|
Counterline
cooking equipment |
2,877 |
3.8 |
2,618 |
4.2 |
|||||||||
|
International
specialtyequipment |
2,470 |
3.3 |
1,685 |
2.7 |
|||||||||
|
Cooking
Systems Group |
73,487 |
98.1 |
60,155 |
96.3 |
|||||||||
|
International
Distribution Division
(1) |
12,144 |
16.2 |
9,972 |
16.0 |
|||||||||
|
Intercompany
sales (2) |
(10,742 |
) |
(14.3 |
) |
(7,664 |
) |
(12.3 |
) | |||||
|
Total |
$ |
74,889 |
100.0 |
% |
$ |
62,463 |
100.0 |
% | |||||
| (1) | Consists of sales of products manufactured by Middleby and products manufactured by third parties. |
| (2) | Represents the elimination of sales amongst the Cooking Systems Group and from the Cooking Systems Group to the International Distribution Division. |
The
following table summarizes the results of operations for the company's business
segments(1)(in
thousands):
|
Cooking |
||||||||||||||||
|
Systems |
International |
Corporate |
||||||||||||||
|
Group |
Distribution |
and
Other |
Elimination(3) |
Total |
||||||||||||
|
Three
months ended April 2, 2005 |
||||||||||||||||
|
Net
sales |
$ |
73,487 |
$ |
12,144 |
$ |
-- |
$ |
(10,742 |
) |
$ |
74,889 |
|||||
|
Operating
income |
15,372 |
665 |
(2,888 |
) |
(1,146 |
) |
12,003 |
|||||||||
|
Depreciation
expense |
819 |
37 |
11 |
-- |
867 |
|||||||||||
|
Net
capital expenditures |
366 |
(5 |
) |
(40 |
) |
-- |
321 |
|||||||||
|
Total
assets |
194,166 |
24,837 |
9,137 |
(4,785 |
) |
223,355 |
||||||||||
|
Long-lived
assets(4) |
129,009 |
361 |
4,522 |
-- |
133,892 |
|||||||||||
|
Three
months ended April 3, 2004 |
||||||||||||||||
|
Net
sales |
$ |
60,155 |
$ |
9,972 |
$ |
-- |
$ |
(7,664 |
) |
$ |
62,463 |
|||||
|
Operating
income |
11,768 |
416 |
(1,930 |
) |
(150 |
) |
10,104 |
|||||||||
|
Depreciation
expense |
891 |
33 |
(65 |
) |
-- |
859 |
||||||||||
|
Net
capital expenditures |
14 |
48 |
9 |
-- |
71 |
|||||||||||
|
Total
assets |
174,652 |
20,558 |
13,945 |
(10,982 |
) |
198,173 |
||||||||||
|
Long-lived
assets(4) |
123,032 |
390 |
3,201 |
-- |
126,623 |
|||||||||||
| (1) | Non-operating expenses are not allocated to the operating segments. Non-operating expenses consist of interest expense and deferred financing amortization, gains and losses on acquisition financing derivatives, and other income and expenses items outside of income from operations. |
| (2) | Includes corporate and other general company assets and operations. |
| (3) | Includes elimination of intercompany sales, profit in inventory and intercompany receivables. Intercompany sale transactions are predominantly from the Cooking Systems Group to the International Distribution Division. |
| (4) | Long-lived assets of the Cooking Systems Group includes assets located in the Philippines which amounted to $2,134 and $2,327 in 2005 and 2004, respectively. |
-12-
Net sales
by major geographic region, including those sales from the Cooking Systems Group
direct to international customers, were as follows (in thousands):
|
Three
Months Ended |
|||||||
|
Apr.
2, 2005 |
Apr.
3, 2004 |
||||||
|
United
States and Canada |
$ |
61,315 |
$ |
51,212 |
|||
|
Asia |
5,426 |
4,068 |
|||||
|
Europe
and Middle East |
6,128 |
5,638 |
|||||
|
Latin
America |
2,020 |
1,545 |
|||||
|
Net
sales |
$ |
74,889 |
$ |
62,463 |
|||
| 13) | Employee Retirement Plans |
The
company maintains a non-contributory defined benefit plan for its union
employees at the Elgin, Illinois facility. Benefits are determined based upon
retirement age and years of service with the company. This defined benefit plan
was frozen on April 30, 2002 and no further benefits accrue to the participants
beyond this date. Plan participants will receive or continue to receive payments
for benefits earned on or prior to April 30, 2002 upon reaching retirement age.
The employees participating in the defined benefit plan were enrolled in a newly
established 401K savings plan on July 1, 2002. The defined benefit plan
continues to be funded in accordance with provisions of the Employee Retirement
Income Security Act of 1974. Company funding contributions amounted to $216,000
in fiscal 2004 and $280,000 in fiscal 2003. The anticipated minimum funding
requirement for fiscal 2005 is approximately $285,000 of which $71,000 was
funded during the three-month period ended April 2, 2005.
The
company also maintains a retirement benefit agreement with its Chairman. The
retirement benefits are based upon a percentage of the Chairman’s final base
salary. Additionally, the company maintains a retirement plan for non-employee
directors. The plan provides for an annual benefit upon retirement from the
Board of Directors at age 70, equal to 100% of the director’s last annual
retainer, payable for a number of years equal to the director’s years of service
up to a maximum of 10 years. Company funding contributions are made at the
discretion of the board of directors in consideration of the plan requirements
and company's cash flows.
The net
pension expense for the first three months of 2005 for these plans was as
follows:
|
Union |
Directors |
||||||
|
Plan |
Plans |
||||||
|
Service
cost |
$ |
-- |
$ |
113,795 |
|||
|
Interest
on benefit obligations |
60,816 |
3,564 |
|||||
|
Return
on assets |
(53,651 |
) |
- |
||||
|
Net
amortization and deferral |
32,956 |
-- |
|||||
|
Net
pension expense |
$ |
40,122 |
$ |
117,359 |
|||
-13-
Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Informational
Note
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;
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 filings,
including the 2004 report on Form 10-K.
-14-
Net
Sales Summary
(dollars
in thousands)
|
Three
Months Ended |
|||||||||||||
|
Apr.
2, 2005 |
Apr.
3, 2004 |
||||||||||||
|
Sales |
Percent |
Sales |
Percent |
||||||||||
|
Business
Divisions: |
|||||||||||||
|
Cooking
Systems Group: |
|||||||||||||
|
Core
cooking equipment |
$ |
55,302 |
73.9 |
$ |
43,934 |
70.3 |
|||||||
|
Conveyor
oven equipment |
12,838 |
17.1 |
11,918 |
19.1 |
|||||||||
|
Counterline
cooking equipment |
2,877 |
3.8 |
2,618 |
4.2 |
|||||||||
|
International
specialty equipment |
2,470 |
3.3 |
1,685 |
2.7 |
|||||||||
|
Cooking
Systems Group |
73,487 |
98.1 |
60,155 |
96.3 |
|||||||||
|
International
DistributionDivision
(1) |
12,144 |
16.2 |
9,972 |
16.0 |
|||||||||
|
Intercompany
sales (2) |
(10,742 |
) |
(14.3 |
) |
(7,664 |
) |
(12.3 |
) | |||||
|
Total |
$ |
74,889 |
100.0 |
% |
$ |
62,463 |
100.0 |
% | |||||
| (1) | Consists of sales of products manufactured by Middleby and products manufactured by third parties. |
| (2) | Represents the elimination of sales amongst the Cooking Systems Group and from the Cooking Systems Group to the International Distribution Division. |
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 |
|||||||
|
Apr.
2, 2005 |
Apr.
3, 2004 |
||||||
|
Net
sales |
100.0
|
% |
100.0
|
% | |||
|
Cost
of sales |
63.9 |
62.9 |
|||||
|
Gross
profit |
36.1 |
37.1 |
|||||
|
Selling,
general and administrative expenses |
20.1 |
20.9 |
|||||
|
Income
from operations |
16.0 |
16.2 |
|||||
|
Interest
expense and deferred financing amortization, net |
2.4 |
1.4 |
|||||
|
Gain
on acquisition financings derivatives |
-- |
-- |
|||||
|
Other
(income) expense, net |
(0.3 |
) |
0.3 |
||||
|
Earnings
before income taxes |
13.9 |
14.5 |
|||||
|
Provision
for income taxes |
5.4 |
5.5 |
|||||
|
Net
earnings |
8.5 |
% |
9.0 |
% | |||
-15-
Three
Months Ended April 2, 2005 Compared to Three Months Ended April 3,
2004
NET
SALES. Net sales
for the first quarter of fiscal 2005 were $74.9 million as compared to $62.5
million in the first quarter of 2004.
Net sales
at the Cooking Systems Group amounted to $73.5 million in the first quarter of
2005 as compared to $60.2 million in the prior year quarter.
| · |
Core
cooking equipment sales increased by $11.4 million to $55.3 million from
$43.9 million, primarily due to increased fryer, convection oven, and
cooking range sales resulting from new product introductions and increased
purchases from major and regional restaurant chain customers due to new
store openings and increased replacement business. The increase in sales
includes $3.3 million of sales associated with the Nu-Vu product lines,
which were acquired on January 7, 2005. |
| · |
Conveyor
oven equipment sales increased $0.9 million to $12.8 million from $11.9
million in the prior year quarter, reflecting higher sales of new oven
models. |
| · |
Counterline
cooking equipment sales increased to $2.9 million from $2.6 million in the
prior year quarter due to an increase in toaster sales with a major
restaurant chain customer. |
| · |
International
specialty equipment sales increased to $2.5 million compared to $1.7
million in the prior year quarter due to the introduction of a new product
line of counter griddles and charbroilers. |
Net sales
at the International Distribution Division increased by $2.1 million to $12.1
million, reflecting higher sales in Asia, Latin America and Europe.
International sales benefited from expansion of the U.S. chains overseas and
increased business with local and regional restaurant chains in developing
markets.
GROSS
PROFIT. Gross
profit increased to $27.1 million from $23.2 million in the prior year period,
reflecting the impact of higher sales volumes. The gross margin rate was 36.1%
in the quarter as compared to 37.1% in the prior year quarter. The net decrease
in the gross margin rate reflects:
| · |
The
adverse impact from higher steel prices. |
| · |
Lower
gross margins associated with the newly acquired Nu-Vu Foodservice Systems
product lines. |
| · |
Increased
sales volumes that benefited manufacturing efficiencies and provided for
greater leverage of fixed manufacturing
costs. |
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES. Combined
selling, general, and administrative expenses increased from $13.1 million in
the first quarter of 2004 to $15.1 million in the first quarter of 2005. As a
percentage of net sales operating expenses amounted to 20.1% in the first
quarter of 2005 versus 20.9% in the first quarter of 2004 reflecting greater
leverage on higher sales volumes. Selling expenses increased from $7.4 million
to $8.2 million, reflecting higher commission costs associated with the
increased sales volumes. General and administrative expenses increased from $5.7
million to $6.9 million due to an increase in non-cash equity based compensation
and increased costs associated with the newly acquired Nu-Vu Foodservice
operations.
-16-
NON-OPERATING
EXPENSES. Interest
and deferred financing amortization costs increased to $1.8 million from $0.9
million in the prior year as a result of higher debt balances resulting from the
December 2004 share repurchase transaction. Other income was $0.2 million in the
current year related to foreign exchange gains compared to other expense of $0.2
million in the prior year and primarily consisted of foreign exchange
losses.
INCOME
TAXES. A tax
provision of $4.1 million, at an effective rate of 39%, was recorded during the
quarter as compared to a $3.4 million provision at a 38% effective rate in the
prior year quarter.
Financial
Condition and Liquidity
During
the three months ended April 2, 2005, cash and cash equivalents decreased by
$1.2 million to $2.6 million at April 2, 2005 from $3.8 million at January 1,
2005. Net borrowings increased from $123.7 million at January 1, 2005 to $138.5
million at April 2, 2005.
OPERATING
ACTIVITIES. Net cash
used in operating activities after changes in assets and liabilities was $3.9
million as compared to net cash provided of $2.3 million in the prior year
period.
During
the three months ended April 2, 2005, working capital levels increased due to
the higher sales volumes and increased seasonal working capital needs, which
historically peak in the second quarter. The changes in working capital included
a $4.4 million increase in accounts receivable, a $3.2 million increase in
inventory, a $2.3 million decrease in prepaid expenses and a $3.6 million
increase in accounts payable. Accrued expenses and other liabilities decreased
by $10.6 million primarily as a result of the payment of annual rebate programs
and incentive programs related to fiscal 2004. The reduction in accrued
liabilities also includes a decrease in accrued pension liabilities associated
with the payout of the former Chairman's retirement obligations.
INVESTING
ACTIVITIES. During
the three months ending April 2, 2005, net cash used in investing activities was
$12.3 million. This included $12.0 million associated with the acquisition of
the assets of Nu-Vu Foodservice Systems and $0.3 million of property
additions.
FINANCING
ACTIVITIES. Net cash
flows provided by financing activities were $15.0 million during the three
months ending April 2, 2005. The company borrowed $17.3 million to fund the
$12.0 million purchase of Nu-Vu Foodservice Systems, to fund operating
activities and to make $2.5 million of repayments of term debt.
At April
2, 2005, the company was in compliance with all covenants pursuant to its
borrowing agreements. Management believes that future cash flows from operating
activities and borrowing availability under the revolving credit facility will
provide the company with sufficient financial resources to meet its anticipated
requirements for working capital, capital expenditures and debt amortization for
the foreseeable future.
-17-
New
Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of
ARB No. 43, Chapter 4". This statement amends the guidance in ARB No. 43,
Chapter 4 to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. This statement requires
that these items be recognized as current period costs and also requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The company will apply this guidance prospectively. The company is in the
process of determining what impact the application of this guidance will have on
the company's financial position, results of operations or cash
flows.
In
December 2004, the FASB issued a revision to SFAS No. 123 "Accounting for Stock
Based Compensation". This statement established standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services and addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of those equity
instruments. This statement is effective for annual periods beginning after June
15, 2005. The company will apply this guidance prospectively. The company is in
the process of determining what impact the application of this guidance will
have on 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 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.
-18-
Property
and equipment: Property
and equipment are depreciated or amortized on a straight-line basis over their
useful lives based on management's estimates of the period over which the assets
will be utilized to benefit the operations of the company. The useful lives are
estimated based on historical experience with similar assets, taking into
account anticipated technological or other changes. The company
periodically reviews these lives relative to physical factors, economic factors
and industry trends. If there are changes in the planned use of property and
equipment or if technological changes were to occur more rapidly than
anticipated, the useful lives assigned to these assets may need to be shortened,
resulting in the recognition of increased depreciation and amortization expense
in future periods.
Long-lived
assets: Long-lived
assets (including goodwill and other intangibles) are reviewed for impairment
annually and whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In assessing the
recoverability of the company's long-lived assets, the company considers changes
in economic conditions and makes assumptions regarding estimated future cash
flows and other factors. Estimates of future cash flows are judgments
based on the company's experience and knowledge of operations. These
estimates can be significantly impacted by many factors including changes in
global and local business and economic conditions, operating costs, inflation,
competition, and consumer and demographic trends. If the company's
estimates or the underlying assumptions change in the future, the company may be
required to record impairment charges.
Warranty: In the
normal course of business the company issues product warranties for specific
product lines and provides for the estimated future warranty cost in the period
in which the sale is recorded. The estimate of warranty cost is based on
contract terms and historical warranty loss experience that is periodically
adjusted for recent actual experience. Because warranty estimates are forecasts
that are based on the best available information, claims costs may differ from
amounts provided. Adjustments to initial obligations for warranties are made as
changes in the obligations become reasonably estimable.
Litigation: From time
to time, the company is subject to proceedings, lawsuits and other claims
related to products, suppliers, employees, customers and competitors. The
company maintains insurance to cover product liability, workers compensation,
property and casualty, and general liability matters. The company is
required to assess the likelihood of any adverse judgments or outcomes to these
matters as well as potential ranges of probable losses. A determination of
the amount of accrual required, if any, for these contingencies is made after
assessment of each matter and the related insurance coverage. The reserve
requirements may change in the future due to new developments or changes in
approach such as a change in settlement strategy in dealing with these
matters. The company does not believe that any such matter will have a
material adverse effect on its financial condition or results of operations.
Income
taxes: The
company operates in numerous foreign and domestic taxing jurisdictions where it
is subject to various types of tax, including sales tax and income tax.
The company's tax filings are subject to audits and adjustments. Because of the
nature of the company’s operations, the nature of the audit items can be
complex, and the objectives of the government auditors can result in a tax on
the same transaction or income in more than one state or country. As part
of the company's calculation of the provision for taxes, the company establishes
reserves for the amount that it expects to incur as a result of audits. The
reserves may change in the future due to new developments related to the various
tax matters.
-19-
Contractual
Obligations
The
company's contractual cash payment obligations are set forth below (in
thousands):
|
|
Total |
||||||||||||
|
|
Idle |
Contractual |
|||||||||||
|
Long-term |
Operating |
Facility |
Cash |
||||||||||
|
Debt |
Leases |
Leases |
Obligations |
||||||||||
|
Less
than 1 year |
$ |
11,105 |
$ |
779 |
$ |
374 |
$ |
12,258 |
|||||
|
1-3
years |
29,085 |
897 |
739 |
30,721 |
|||||||||
|
4-5
years |
98,272 |
536 |
772 |
99,580 |
|||||||||
|
After
5 years |
-- |
187
|
2,100 |
2,287 |
|||||||||
$ |
138,462 |
$ |
2,399 |
$ |
3,985 |
$ |
144,846 |
||||||
Idle
facility lease consists of an obligation for a manufacturing location that was
exited in conjunction with the company's manufacturing consolidation efforts.
This lease obligation continues through December 2014. This facility has been
subleased. The obligation presented above does not reflect any anticipated
sublease income from the facilities.
The
company maintains a non-contributory defined benefit plan for its union
employees at the Elgin, Illinois facility. Benefits are determined based upon
retirement age and years of service with the company. This defined benefit plan
was frozen on April 30, 2002 and no further benefits accrue to the participants
beyond this date. Plan participants will receive or continue to receive payments
for benefits earned on or prior to April 30, 2002 upon reaching retirement age.
The employees participating in the defined benefit plan were enrolled in a newly
established 401K savings plan on July 1, 2002. As of January 1, 2005, the
unfunded benefit obligation under the pension plan was $1.0 million. The defined
benefit plan continues to be funded in accordance with provisions of the
Employee Retirement Income Security Act of 1974. Company funding contributions
amounted to $216,000 in fiscal 2004 and $280,000 in fiscal 2003. The anticipated
minimum funding requirement for fiscal 2005 is approximately $285,000 of which
$71,000 was funded during the three-month period ending April 2,
2005.
The
company also maintains a retirement benefit agreement with its Chairman. The
retirement benefits are based upon a percentage of the Chairman’s final base
salary. Additionally, the company maintains a retirement plan for non-employee
directors. The plan provides for an annual benefit upon retirement from the
Board of Directors at age 70, equal to 100% of the director’s last annual
retainer, payable for a number of years equal to the director’s years of service
up to a maximum of 10 years. As of January 1, 2005, the unfunded benefit
obligation under these plans amounted to $4.3 million, of which $3.6 million was
funded in the first quarter of 2005 associated with the settlement and payment
of pension obligations due to the former Chairman. The company will make future
contributions to this plan as retirement obligations become due.
The
company has $3.9 million in outstanding letters of credit, which expire on March
30, 2006 with an automatic one-year renewal, to secure potential obligations
under insurance programs.
The
company places purchase orders with its suppliers in the ordinary course of
business. These purchase orders are generally to fulfill short-term
manufacturing requirements of less than 90 days and most are cancelable with a
restocking penalty. The company has no long-term purchase contracts or minimum
purchase obligations with any supplier.
The
company has contractual obligations under its various debt agreements to make
interest payments. These amounts are subject to the level of borrowings in
future periods and the interest rate for the applicable periods, and
therefore the amounts of these payments is not determinable.
The
company has no activities, obligations or exposures associated with off-balance
sheet arrangements.
-20-
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.
|
Fixed |
Variable |
||||||
|
Rate |
Rate |
||||||
|
Twelve
Month Period Ending |
Debt |
Debt |
|||||
|
(in
thousands) |
|||||||
|
March
31, 2006 |
$ |
-- |
$ |
11,105 |
|||
|
March
31, 2007 |
-- |
13,605 |
|||||
|
March
31, 2008 |
--
|
15,480 |
|||||
|
March
31, 2009 |
--
|
16,105 |
|||||
|
March
31, 2010 |
-- |
82,167 |
|||||
|
|
$ | -- | $ |
138,462 |
|||
During
the fourth quarter of 2004, the company entered into a new $160.0 million senior
secured credit facility in order to increase the company's borrowing
availability. Terms of the agreement provide for $70.0 million of term loans and
$90.0 million of availability under a revolving credit line. As of April 2,
2005, the company had $136.0 million outstanding under this facility, including
$68.5 million of borrowings under the revolving credit line.
Borrowings
under the senior secured credit facility are assessed at an interest rate at
1.5% above LIBOR for long-term borrowings or at the higher of the Prime rate and
the Federal Funds Rate plus 0.5% for short-term borrowings. At April 2, 2005 the
average interest rate on the senior debt amounted to 4.58%. The interest rates
on borrowings under the senior bank facility may be adjusted quarterly based on
the company’s defined indebtedness ratio on a rolling four-quarter basis.
Additionally, a commitment fee, based upon the indebtedness ratio is charged on
the unused portion of the revolving credit line. This variable commitment fee
amounted to 0.30% as of April 2, 2005.
In
November 2004, the company entered into a $2.5 million promissory note in
conjunction with the release and early termination of obligations under a lease
agreement relative to a manufacturing facility in Shelburne, Vermont. The note
is assessed interest at 4.0% above LIBOR with an interest rate cap of 9.0%. At
April 2, 2005, the interest rate on the note was approximately 6.7%. The note
amortizes monthly and matures in December 2009.
The
company has historically entered into interest rate swap agreements to
effectively fix the interest rate on its outstanding debt. In February 2003, the
company entered into an interest rate swap agreement for a notional amount of
$10.0 million. This agreement swaps one-month LIBOR for a fixed rate of 2.36%
and remains in effect through December 2005. In January 2005, the company
entered into an interest rate swap agreement for a notional amount of $70.0
million. This agreement swaps one-month LIBOR for a fixed rate of 3.78%. The
notional amount amortizes consistent with the repayment schedule of the
company's term loan maturing November 2009. The unamortized notational amount of
this swap as of April 2, 2005 was $67.5 million.
-21-
The terms
of the senior secured credit facility limit the paying of dividends, capital
expenditures and leases, and require, among other things, certain ratios of
indebtedness and fixed charge coverage. The credit agreement also provides that
if a material adverse change in the company’s business operations or conditions
occurs, the lender could declare an event of default. Under terms of the
agreement a material adverse effect is defined as (a) a material adverse change
in, or a material adverse effect upon, the operations, business properties,
condition (financial and otherwise) or prospects of the company and its
subsidiaries taken as a whole; (b) a material impairment of the ability of the
company to perform under the loan agreements and to avoid any event of default;
or (c) a material adverse effect upon the legality, validity, binding effect or
enforceability against the company of any loan document. A material adverse
effect is determined on a subjective basis by the company's creditors. At April
2, 2005, the company was in compliance with all covenants pursuant to its
borrowing agreements.
Financing
Derivative Instruments
In
February 2003, the company entered into an interest rate swap agreement with a
notional amount of $10.0 million to fix the interest rate applicable to certain
of its variable-rate debt. The agreement swaps one-month LIBOR for a fixed rate
of 2.36% and is in effect through December 30, 2005. The company designated the
swap as a cash flow hedge at its inception and all changes in the fair value of
the swap are recognized in accumulated other comprehensive income. As of April
2, 2005, the fair value of this instrument was less than $0.1 million. The
change in fair value of this swap agreement in the first three months of 2004
was a gain of less than $0.1 million.
In
January 2005, the company entered into another interest rate swap with a
notional amount of $70.0 million to fix the interest rate applicable to certain
of its variable-rate debt. The notional amount of the swap amortizes consistent
with the repayment schedule of the company's senior term loan maturing in
November 2009. The agreement swaps one-month LIBOR for a fixed rate of 3.78% and
is in effect through November 2009. The company designated the swap as a cash
flow hedge at its inception and all changes in the fair value of the swap are
recognized in accumulated other comprehensive income. As of April 2, 2005, the
fair value of this instrument was $0.8 million. The change in fair value of this
swap agreement in the first three months of 2005 was a gain of $0.8
million.
Foreign
Exchange Derivative Financial Instruments
The
company uses foreign currency forward purchase and sale contracts with terms of
less than one year, 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 following table
summarizes the forward and option purchase contracts outstanding at April 2,
2005, the fair value of these forward contracts was $0.1 million at the end of
the quarter:
|
Sell |
Purchase |
Maturity |
||||||||
|
1,400,000 |
Euro |
$ | 1,876,420 |
U.S. Dollars |
April 11, 2005 |
|||||
|
1,000,000 |
British Pounds |
$ | 1,921,000 |
U.S. Dollars |
April
11, 2005 |
|||||
-22-
Item
4. Controls and Procedures
The
company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the company's Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
As of
April 2, 2005, the company carried out an evaluation, under the supervision and
with the participation of the company's management, including the company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the company's disclosure controls and procedures. Based
on the foregoing, the company's Chief Executive Officer and Chief Financial
Officer concluded that the company's
disclosure controls and procedures were effective as of the end of this
period.
During
the quarter ended April 2, 2005, there have been no significant changes in the
company's internal controls over financial reporting or in other factors that
could significantly affect the internal controls subsequent to the date the
company completed its evaluation.
-23-
PART
II. OTHER INFORMATION
The
company was not required to report the information pursuant to Items 1 through 6
of Part II of Form 10-Q for the three months ended April 2, 2005, except as
follows:
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
| c) | During the first quarter of fiscal 2005, the company issued 2,000 shares of the company's common stock to a division executive, 18,000 shares to a former company director and 15,500 shares to executive and former executive officers pursuant to the exercise of stock options, for $11,800.00, $144,030.00 and $109,468.75, respectively. Such options were granted at exercise prices of $5.90, from $7.50 to $10.51 and $7.0625 per share, respectively. As certificates for the shares were legended and stop transfer instructions were given to the transfer agent, the issuance of such shares was exempt under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, as transactions by an issuer not involving a public offering. |
Item
6. Exhibits
Exhibits
- The following exhibits are filed herewith:
Exhibit
10.1 - Letter Agreement by and between The Middleby Corporation and William F.
Whitman, Jr., dated February 15, 2005 incorporated by reference to the company's
Form 8-K Exhibit 10.1, dated February 15, 2005, filed on February 18,
2005.
Exhibit
10.2 - Amended and Restated Management Incentive Compensation Plan dated January
1, 2005, incorporated by reference to the company's Form 8-K Exhibit 10.1, dated
February 25, 2005, filed on March 3, 2005.
Exhibit
10.3 - Employment Agreement by and between The Middleby Corporation, Middleby
Marshall, Inc. and Timothy J. FitzGerald, dated March 7, 2005, incorporated by
reference to the company's Form 8-K Exhibit 10.1, dated March 7, 2005, filed on
March 8, 2005.
Exhibit
10.4 - 1998 Stock Incentive Plan Restricted Stock Agreement by and between The
Middleby Corporation, Middleby Marshall, Inc. and Selim A. Bassoul, dated
January 5, 2005, incorporated by reference to the company's Form 8-K Exhibit
10.2, dated March 7, 2005, filed on March 8, 2005.
Exhibit
31.1 - Rule 13a-14(a)/15d -14(a) Certification of the Chief Executive Officer as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit
31.2 - Rule 13a-14(a)/15d -14(a) Certification of the Chief Financial Officer as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit
32.1 -
Certification by the Principal Executive Officer of The Middleby Corporation
Pursuant to Rule 13A-14(b) under the Exchange Act and Section 906 of the
Sarbanes-Oxley Act of 2002(18 U.S.C. 1350).
Exhibit
32.2 -
Certification by the Principal Financial Officer of The Middleby Corporation
Pursuant to Rule 13A-14(b) under the Exchange Act and Section 906 of the
Sarbanes-Oxley Act of 2002(18 U.S.C. 1350).
-24-
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
THE MIDDLEBY
CORPORATION
(Registrant) | ||
| |
|
|
| Date: May 12, 2005 | By: | /s/ Timothy J. FitzGerald |
|
| ||
|
Timothy J.
FitzGerald
Vice President, Chief Financial
Officer | ||
-25-