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MIDDLEBY Corp - Quarter Report: 2011 April (Form 10-Q)

Unassociated Document
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(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, 2011

or
¨ 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 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 ý No  o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes ý  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No  ý

As of May 6, 2011 there were 18,739,633 shares of the registrant's common stock outstanding.

 
 

 

THE MIDDLEBY CORPORATION AND SUBSIDIARIES

QUARTER ENDED APRIL 2, 2011

INDEX

DESCRIPTION
  
PAGE
     
PART I.  FINANCIAL INFORMATION
 
       
Item 1.
Condensed Consolidated Financial Statements (unaudited)
   
       
 
CONDENSED CONSOLIDATED BALANCE SHEETS April 2, 2011 and January 1, 2011
 
1
       
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS April 2, 2011 and April 3, 2010
  2
       
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS April 2, 2011 and April 3, 2010
  3
       
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
4
       
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
22
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
30
       
Item 4.
Controls and Procedures
 
33
       
PART II. OTHER INFORMATION
   
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
34
       
Item 6.
Exhibits
 
35

 
 

 

PART I.  FINANCIAL INFORMATION
 
Item 1.   Condensed Consolidated Financial Statements

THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)

   
April 2, 2011
   
January 1, 2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 9,258     $ 7,656  
Accounts receivable, net of reserve for doubtful accounts of $7,925 and $7,975
    111,774       112,049  
Inventories, net
    116,225       106,463  
Prepaid expenses and other
    10,308       11,971  
Current deferred taxes
    25,667       25,520  
Total current assets
    273,232       263,659  
                 
Property, plant and equipment, net of accumulated depreciation of $50,480 and $47,355
    44,268       43,656  
Goodwill
    370,752       369,989  
Other intangibles
    187,085       189,254  
Other assets
    6,427       6,614  
Total assets
  $ 881,764     $ 873,172  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Current maturities of long-term debt
  $ 6,141     $ 5,097  
Accounts payable
    46,780       52,945  
Accrued expenses
    102,517       125,810  
Total current liabilities
    155,438       183,852  
                 
Long-term debt
    233,455       208,920  
Long-term deferred tax liability
    12,672       11,858  
Other non-current liabilities
    44,245       43,629  
Stockholders' equity:
               
Preferred stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none issued
           
Common stock, $0.01 par value; 47,500,000 shares authorized; 23,086,993 and 22,691,821 shares issued in 2011 and 2010, respectively
      137         137  
Paid-in capital
    181,611       179,575  
Treasury stock at cost; 4,347,360 and 4,233,810 shares in 2011 and 2010, respectively
    (120,472 )     (111,019 )
Retained earnings
    378,079       360,254  
Accumulated other comprehensive income
    (3,401 )     (4,034 )
Total stockholders' equity
    435,954       424,913  
Total liabilities and stockholders' equity
  $ 881,764     $ 873,172  

See accompanying notes

 
1

 

THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Per Share Data)
(Unaudited)

   
Three Months Ended
 
   
Apr 2, 2011
   
Apr 3, 2010
 
             
Net sales
  $ 182,572     $ 160,683  
Cost of sales
    110,742       97,210  
Gross profit
    71,830       63,473  
Selling expenses
    20,568       17,625  
General and administrative expenses
    19,898       19,413  
Income from operations
    31,364       26,435  
Net interest expense and deferred financing amortization
    2,060       2,475  
Other (income) expense, net
     (162 )     344  
Earnings before income taxes
    29,466       23,616  
Provision for income taxes
    11,641       9,854  
Net earnings
  $ 17,825     $ 13,762  
                 
Net earnings per share:
               
Basic
  $ 1.00     $ 0.78  
Diluted
  $ 0.97     $ 0.74  
                 
Weighted average number of shares
               
Basic
    17,901       17,754  
Dilutive stock options1
    544       962  
Diluted
    18,445       18,716  

 
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, 2011
   
Apr 3, 2010
 
             
Cash flows from operating activities-
           
Net earnings
  $ 17,825     $ 13,762  
                 
Adjustments to reconcile net earnings to cash provided by operating activities:
               
Depreciation and amortization
    4,047       3,916  
Deferred taxes
    (300 )     (83 )
Non-cash share-based compensation
    1,956       3,234  
Unrealized gain on derivative financial instruments
    (40 )     (7 )
Changes in assets and liabilities, net of acquisitions
               
Accounts receivable, net
    524       (5,588 )
Inventories, net
    (10,309 )     552  
Prepaid expenses and other assets
    2,005       6,435  
Accounts payable
    (6,870 )     741  
Accrued expenses and other liabilities
    (18,379 )     (16,156 )
                 
Net cash (used in) provided by operating activities
    (9,541 )     6,806  
                 
Cash flows from investing activities-
               
Net additions to property and equipment
    (1,703 )     (1,401 )
Acquisition of Giga
    (1,025 )     (1,621 )
Acquisition of Cozzini
    (2,000 )      
                 
                 
Net cash (used in) investing activities
    (4,728 )     (3,022 )
                 
Cash flows from financing activities-
               
Net proceeds (repayments) under revolving credit facilities
    24,450       (4,800 )
Net proceeds (repayments) under foreign bank loan
    623       514  
Repurchase of treasury stock
    (9,453 )      
Net proceeds from stock issuances
    80       270  
                 
Net cash provided by (used in) financing activities
    15,700       (4,016 )
                 
Effect of exchange rates on cash and cash equivalents
    171       164  
                 
Changes in cash and cash equivalents-
               
Net increase (decrease) in cash and cash equivalents
    1,602       (68 )
                 
Cash and cash equivalents at beginning of year
    7,656       8,363  
                 
Cash and cash equivalents at end of the three-month period
  $ 9,258     $ 8,295  
                 
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 1,727     $ 2,475  
Income tax payments
  $ 2,646     $ 2,156  

See accompanying notes

 
3

 

THE MIDDLEBY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

April 2, 2011
(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 2010 Form 10-K.  The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2011.

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, 2011 and January 1, 2011, and the results of operations for the three months ended April 2, 2011 and April 3, 2010 and cash flows for the three months ended April 2, 2011 and April 3, 2010.

 
B)
Non-Cash Share-Based Compensation

The company estimates the fair value of market-based stock awards and stock options at the time of grant and recognizes compensation cost over the vesting period of the awards and options.  Non-cash share-based compensation expense was $2.0 million and $3.2 million for the first quarter of 2011 and 2010, respectively.

 
C)
Income Tax Contingencies

As of January 1, 2011, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $17.8 million (of which $15.9 million would impact the effective tax rate if recognized) plus approximately $2.1 million of accrued interest and $2.4 million of penalties. The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. Interest of $0.1 million and less than $0.1 million were recognized in the first quarter of 2011 and 2010, respectively. Penalties of less than $0.1 million were recognized in the first quarter of 2011 and 2010, respectively. As of April 2, 2011, there were no significant changes in the total amount of liability for unrecognized tax benefits.

 
4

 

It is reasonably possible that the amounts of unrecognized tax benefits associated with state, federal and foreign tax positions may decrease over the next twelve months due to expiration of a statute or completion of an audit. While a reasonable range of the amount cannot be determined, the company believes such decrease would not be material.

The company operates in multiple taxing jurisdictions, both within the United States and outside of the United States, and faces audits from various tax authorities. The company remains subject to examination until the statute of limitations expires for the respective tax jurisdiction.  Within specific countries, the company and its operating subsidiaries may be subject to audit by various tax authorities and may be subject to different statute of limitations expiration dates. A summary of the tax years that remain subject to examination in the company’s major tax jurisdictions are:

United States – federal
 
2008 - 2010
United States – states
 
2003 - 2010
Brazil
 
2010
Canada
 
2009 - 2010
China
 
2002 - 2010
Denmark
 
2006 - 2010
Italy
 
2008 - 2010
Mexico
 
2005 - 2010
Philippines
 
2006 - 2010
South Korea
 
2005 - 2010
Spain
 
2007 - 2010
Taiwan
 
2007 - 2010
United Kingdom
  
2007 - 2010

 
5

 

D)           Fair Value Measures

Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements.

ASC 820 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into the following levels:

Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3 – Unobservable inputs based on our own assumptions.

The company’s financial assets and liabilities that are measured at fair value and are categorized using the fair value hierarchy are as follows (in thousands):

   
Fair Value
   
Fair Value
   
Fair Value
       
   
Level 1
   
Level 2
   
Level 3
   
Total
 
As of April 2, 2011
                       
Financial Assets:
                       
None
                    $  
                                 
Financial Liabilities:
                               
Interest rate swaps
        $ 1,990           $ 1,990  
Contingent consideration
              $ 3,579     $ 3,579  
                                 
As of January 1, 2011
                               
Financial Assets:
                               
None
                    $  
                                 
Financial Liabilities:
                               
Interest rate swaps
        $ 2,196           $ 2,196  
Contingent consideration
              $ 5,579     $ 5,579  

The remaining contingent consideration relates to earnout provisions recorded in conjunction with the acquisition of CookTek LLC.

 
6

 

2)
Acquisitions and Purchase Accounting

The company operates in a highly fragmented industry and has completed numerous acquisitions over the past several years as a component of its growth strategy.  The company has acquired industry leading brands and technologies to position itself as a leader in the commercial foodservice equipment and food processing equipment industries.

The company has accounted for all business combinations 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 fair value of the assets acquired and liabilities assumed has been recorded as goodwill in the financial statements.  The results of operations are reflected in the consolidated financial statements of the company from the date of acquisition.

CookTek

On April 26, 2009, the company completed its acquisition of substantially all of the assets and operations of CookTek LLC (“CookTek”), a leading manufacturer of induction cooking and warming systems for a purchase price of $8.0 million in cash.  An additional deferred payment of $1.0 million was made during the second quarter of 2010 as provided in the purchase agreement. Additional contingent payments are also payable over the course of four years upon the achievement of certain sales targets as described below.

The final allocation of cash paid for the CookTek acquisition is summarized as follows (in thousands):

   
Apr 26, 2009
 
       
Current assets
  $ 2,583  
Property, plant and equipment
    152  
Goodwill
    5,895  
Other intangibles
    6,622  
Current liabilities
    (3,263 )
Other non-current liabilities
    (3,989 )
         
Consideration paid at closing
  $ 8,000  
         
Deferred cash payment
    1,000  
Contingent consideration
    4,700  
         
Net assets acquired and liabilities assumed
  $ 13,700  

The CookTek purchase agreement included an earnout provision providing for contingent payments due to the sellers to the extent certain financial targets are exceeded.  The earnout amounts are payable in the four consecutive years subsequent to the acquisition date if CookTek is to exceed certain sales targets for each of those years.  The earnout payment will amount to 10% of the sales in excess of the target for each of the respective years.  There is no cap on the potential earnout payment, however, the company’s estimated probable range of the contingent consideration is between $0 and $8 million.  The fair value of the contractual obligation associated with the contingent earnout provision recognized as of April 2, 2011 is $3.6 million.  This amount was determined based on an income approach.

 
7

 

The goodwill and $3.5 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350 “Intangibles – Goodwill and Other”.  Other intangibles also includes less than $0.1 million allocated to backlog, $0.7 million allocated to developed technology and $2.4 million allocated to customer relationships which are to be amortized over periods of 3 months, 6 years and 5 years, respectively.  Goodwill and other intangibles of CookTek are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are deductible for tax purposes.

Anets

On April 30, 2009, the company completed its acquisition of substantially all of the assets and operations of Anetsberger Brothers, Inc. (“Anets”), a leading manufacturer of griddles, fryers and dough rollers, for a purchase price of $3.4 million in cash. An additional deferred payment of $0.5 million was made in the second quarter of 2010 upon the achievement of certain transition objectives.

The final allocation of cash paid for the Anets acquisition is summarized as follows (in thousands):

   
Apr 30, 2009
 
       
Current assets
  $ 2,210  
Goodwill
    3,342  
Other intangibles
    1,085  
Current liabilities
    (3,129 )
Other non-current liabilities
    (150 )
         
Consideration paid at closing
  $ 3,358  
         
Deferred cash payment
    500  
         
Net assets acquired and liabilities assumed
  $ 3,858  

The goodwill and $0.9 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350.  Other intangibles also includes less than $0.1 million allocated to developed technology and $0.2 million allocated to customer relationships, both of which are to be amortized over a period of 3 years.  Goodwill and other intangibles of Anets are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are deductible for tax purposes.

 
8

 

Doyon

On December 14, 2009, the company completed its acquisition of Doyon Equipment, Inc. (“Doyon”), a leading Canadian manufacturer of baking ovens for the commercial foodservice industry, for a purchase price of approximately $6.4 million.

The final allocation of cash paid for the Doyon acquisition is summarized as follows (in thousands):

   
Dec 14, 2009
 
       
Current assets
  $ 5,004  
Property, Plant and Equipment
    1,876  
Goodwill
    1,522  
Other intangibles
    2,273  
Current maturities of long-term debt
    (285 )
Current liabilities
    (2,426 )
Long-term debt
    (1,081 )
Other non-current liabilities
    (487 )
         
Net assets acquired and liabilities assumed
  $ 6,396  

The goodwill and $1.4 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350.  Other intangibles also includes $0.1 million allocated to developed technology and $0.8 million allocated to customer relationships which are to be amortized a period of 5 years.  Goodwill and other intangibles of Doyon are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not deductible for tax purposes.

PerfectFry

On July 13, 2010, the company completed its acquisition of substantially all of the assets and operations of PerfectFry Company LTD (“PerfectFry”), a leading manufacturer of ventless countertop frying units for the commercial foodservice industry for a purchase price of approximately $4.9 million.

The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):

   
(as initially reported)
   
Measurement Period
   
(as adjusted)
 
   
Jul 13, 2010
   
Adjustments
   
Jul 13, 2010
 
                   
                   
Cash
  $ 247     $     $ 247  
Current assets
    1,949       (316 )     1,633  
Goodwill
    2,502       (296 )     2,206  
Other intangibles
    1,653             1,653  
Current liabilities
    (1,497 )     612       (885 )
                         
Net assets acquired and liabilities assumed
  $ 4,854     $     $ 4,854  

 
9

 

The goodwill and $1.2 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350.  Other intangibles also include $0.1 million allocated to developed technology and $0.3 million allocated to customer relationships which are to be amortized over a period of 5 years.  Goodwill and other intangibles of PerfectFry are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.

The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the company is waiting for additional information necessary to finalize those fair values.  Thus, the provisional measurements of fair value set forth above are subject to change.  Such changes are not expected to be significant. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

Cozzini

On September 21, 2010, the company completed its acquisition of the food processing equipment business of Cozzini, Inc. (“Cozzini”), a leading manufacturer of equipment solutions for the food processing industry, for an aggregate purchase price of approximately $19.2 million, net of cash acquired, including $17.4 million in cash and 34,263 shares of Middleby common stock valued at $1.8 million.  An additional contingent payment of $2.0 million was made in the first quarter of 2011 upon the achievement of certain sales targets. The purchase price is subject to adjustment based upon a working capital provision within the purchase agreement.

The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):

   
(as initially reported)
   
Measurement Period
   
(as adjusted)
 
   
Sep 21, 2010
   
Adjustments
   
Sep 21, 2010
 
                   
Cash
  $ 557     $ 30     $ 587  
Current assets
    13,601       (191 )     13,410  
Property, Plant and Equipment
    863       (30 )     833  
Goodwill
    9,601       (1,279 )     8,322  
Other intangibles
    6,691       1,120       7,811  
Other assets
    636       71       707  
Current liabilities
    (11,859 )     (35 )     (11,894 )
                         
Consideration paid at closing
  $ 20,090     $ (314 )   $ 19,776  
                         
Contingent consideration
    2,000             2,000  
                         
Net assets acquired and liabilities assumed
  $ 22,090     $ (314 )   $ 21,776  

 
10

 

The goodwill and $3.6 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350.  Other intangibles also include $2.7 million allocated to customer relationships and $1.4 million allocated to backlog which are to be amortized over the periods of 4 years and 3 months respectively.  Goodwill and other intangibles of Cozzini are allocated to the Food Processing Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.

The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the company is waiting for additional information necessary to finalize those fair values.  Thus, the provisional measurements of fair value set forth above are subject to change.  Such changes are not expected to be significant. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

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 partially 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 requirement 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 pending litigation will have a material adverse effect on its financial condition, results of operations or cash flows.

4)
Recently Issued Accounting Standards

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-29, Business Combinations (Topic 805).  ASU No. 2010-29 clarifies the disclosures required for pro forma information for business combinations.  ASU No. 2010-29 specifies if comparative financial statements are presented, revenue and earnings of a combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendments in ASU 2010-29 are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  The company adopted the provisions of ASU No. 2010-29 on January 2, 2011.  The adoption of ASU No. 2010-29 did not have any impact on the company’s financial position, results of operations or cash flow.  As the company had no material acquisitions during the first quarter of 2011, there were no disclosures required.

 
11

 

5)           Other Comprehensive Income

The company reports changes in equity during a period, except those resulting from investments by owners and distributions to owners, in accordance with ASC 220, "Comprehensive Income."

Components of other comprehensive income were as follows (in thousands):

   
Three Months Ended
 
   
Apr 2, 2011
   
Apr 3, 2010
 
             
Net earnings
  $ 17,825     $ 13,762  
Currency translation adjustment
    559       (709 )
Unrealized gain on interest rate swaps, net of tax
    74       63  
                 
Comprehensive income
  $ 18,458     $ 13,116  

Accumulated other comprehensive income is comprised of unrecognized pension benefit costs of $2.5 million, net of taxes as of April 2, 2011 and January 1, 2011, cumulative foreign currency translation gains of $0.1 million as of April 2, 2011 and losses of $0.5 million as of January 1, 2011 and an unrealized loss on interest rate swaps of $1.0 million and $1.1 million, net of taxes as of April 2, 2011 and January 1, 2011.

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 $19.6 million at April 2, 2011 and $17.5 million at January 1, 2011 and represented approximately 17% and 16% 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, 2011 and January 1, 2011 are as follows:
 
   
Apr 2, 2011
   
Jan 1, 2011
 
   
(in thousands)
 
             
Raw materials and parts
  $ 65,110     $ 60,452  
Work-in-process
    14,269       12,292  
Finished goods
    36,559       33,432  
 
   
115,938
      106,176  
LIFO reserve
    287       287  
                 
    $ 116,225     $ 106,463  

 
12

 
 
7)
Goodwill

Changes in the carrying amount of goodwill for the three months ended April 2, 2011 are as follows (in thousands):

   
Commercial
   
Food
       
   
Foodservice
   
Processing
   
Total
 
                   
Balance as of January 1, 2011
  $ 330,501     $ 39,488     $ 369,989  
                         
Adjustments to prior year acquisitions
          360       360  
Foreign exchange rate effect
    615       (212 )     403  
                         
Balance as of April 2, 2011
  $ 331,116     $ 39,636     $ 370,752  

8)           Accrued Expenses

 
Accrued expenses consist of the following:

   
Apr 2, 2011
   
Jan 1, 2011
 
   
(in thousands)
 
             
Accrued payroll and related expenses
  $ 18,455     $ 32,625  
Accrued warranty
    13,743       14,468  
Advanced customer deposits
    11,998       13,357  
Accrued product liability and workers compensation
    10,648       9,711  
Accrued customer rebates
    7,694       18,086  
Accrued agent commission
    7,021       7,824  
Accrued professional services
    5,721       5,944  
Other accrued expenses
    27,237       23,795  
                 
    $ 102,517     $ 125,810  

 
13

 

9)           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, actual 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, 2011
 
   
(in thousands)
 
       
Beginning balance
  $ 14,468  
Warranty reserve related to acquisitions
    537  
Warranty expense
    5,510  
Warranty claims
    (6,772 )
Ending balance
  $ 13,743  

10)         Financing Arrangements

   
Apr 2, 2011
   
Jan 1, 2011
 
   
(in thousands)
 
             
Senior secured revolving credit line
  $ 231,700     $ 207,250  
Foreign loan
    7,896       6,767  
Total debt
  $ 239,596     $ 214,017  
                 
Less:  Current maturities of long-term debt
    6,141       5,097  
                 
Long-term debt
  $ 233,455     $ 208,920  

Terms of the company’s senior credit agreement provide for $497.8 million of availability under a revolving credit line.  As of April 2, 2011, the company had $231.7 million of borrowings outstanding under this facility.  The company also has $5.6 million in outstanding letters of credit as of April 2, 2011, which reduces the borrowing availability under the revolving credit line.  Remaining borrowing availability under this facility, which is also reduced by the company’s foreign borrowings, was $252.6 million at April 2, 2011.

At April 2, 2011, borrowings under the senior secured credit facility are assessed at an interest rate of 0.875% above LIBOR for long-term borrowings or at the higher of the Prime rate and the Federal Funds Rate.  At April 2, 2011 the average interest rate on the senior debt amounted to 1.44%. The interest rates on borrowings under the senior secured credit facility may be adjusted quarterly based on the company’s 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 0.175% as of April 2, 2011.

 
14

 

In August 2006, the company completed its acquisition of Houno A/S in Denmark. This acquisition was funded in part with locally established debt facilities with borrowings in Danish Krone.  On April 2, 2011 these facilities amounted to $3.8 million in U.S. dollars, including $1.9 million outstanding under a revolving credit facility and $1.9 million of a term loan.  The interest rate on the revolving credit facility is assessed at 1.25% above Euro LIBOR, which amounted to 4.0% on April 2, 2011. The term loan matures in 2013 and the interest rate is assessed at 5.0%.

In April 2008, the company completed its acquisition of Giga Grandi Cucine S.r.l in Italy. This acquisition was funded in part with locally established debt facilities with borrowings denominated in Euro.  On April 2, 2011 these facilities amounted to $4.1 million in U.S. dollars.  The interest rate on the credit facilities is tied to six-month Euro LIBOR. At April 2, 2011, the average interest rate on these facilities was approximately 3.0%. The facilities mature in April of 2015.
 
The company’s debt is reflected on the balance sheet at cost. Based on current market conditions, the company believes its interest rate margins on its existing debt are below the rate available in the market, which causes the fair value of debt to fall below the carrying value.  The company believes the current interest rate margin is approximately 1.0% below current market rates.  However, as the interest rate margin is based upon numerous factors, including but not limited to the credit rating of the borrower, the duration of the loan, the structure and restrictions under the debt agreement, current lending policies of the counterparty, and the company’s relationships with its lenders, there is no readily available market data to ascertain the current market rate for an equivalent debt instrument.  As a result, the current interest rate margin is based upon the company’s best estimate based upon discussions with its lenders.

The company estimated the fair value of its loans by calculating the upfront cash payment a market participant would require to assume the company’s obligations.  The upfront cash payment is the amount that a market participant would be able to lend at April 2, 2011 to achieve sufficient cash inflows to cover the cash outflows under the company’s senior revolving credit facility assuming the facility was outstanding in its entirety until maturity.  Since the company maintains its borrowings under a revolving credit facility and there is no predetermined borrowing or repayment schedule, for purposes of this calculation the company calculated the fair value of its obligations assuming the current amount of debt at the end of the period was outstanding until the maturity of the company’s senior revolving credit facility in December 2012.  Although borrowings could be materially greater or less than the current amount of borrowings outstanding at the end of the period, it is not practical to estimate the amounts that may be outstanding during future periods.  The fair value of the company’s senior debt obligations as estimated by the company based upon its assumptions is approximately $235.5 million at April 2, 2011, as compared to the carrying value of $239.6 million.
 
 
15

 

The carrying value and estimated aggregate fair value, based primarily on market prices, of debt is as follows (in thousands):
 
   
April 2, 2011
   
January 1, 2011
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
Total debt
  $ 239,596     $ 235,465     $ 214,017     $ 209,808  

The company believes that its current capital resources, including cash and cash equivalents, cash generated from operations, funds available from its revolving credit facility and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and integration expenditures for the foreseeable future.

The company has historically entered into interest rate swap agreements to effectively fix the interest rate on its outstanding debt.  The agreements swap one-month LIBOR for fixed rates. As of April 2, 2011 the company had the following interest rate swaps in effect:

     
Fixed
       
Notional
   
Interest
 
Effective
 
Maturity
Amount
   
Rate
 
Date
 
Date
               
$ 10,000,000       3.590 %
06/10/08
 
06/10/11
  10,000,000       3.460 %
09/08/08
 
09/06/11
  25,000,000       3.670 %
11/23/08
 
09/23/11
  15,000,000       1.220 %
11/23/09
 
11/23/11
  20,000,000       1.800 %
11/23/09
 
11/23/12
  20,000,000       1.560 %
03/11/10
 
12/11/12
  10,000,000       1.120 %
03/11/10
 
03/11/12
  15,000,000       0.950 %
08/06/10
 
12/06/12
  25,000,000       1.610 %
02/23/11
 
02/24/14
  25,000,000       2.520 %
02/23/11
 
02/23/16

The terms of the senior secured credit facility limit the paying of dividends, capital expenditures and leases, and require, among other things, a maximum ratio of indebtedness of 3.5 debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) and a minimum fixed charge coverage of 1.25 EBITDA to fixed charges. 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.  The credit facility is secured by the capital stock of the company’s domestic subsidiaries, 65% of the capital stock of the company’s foreign subsidiaries and substantially all other assets of the company.  At April 2, 2011, the company was in compliance with all covenants pursuant to its borrowing agreements.

 
16

 

11)         Financial Instruments

ASC 815 “Derivatives and Hedging” 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 ASC 815, 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, 2011, the company had forward contracts to sell $3.0 million Euro dollars for $4.1 million U.S dollars which mature in the next fiscal quarter. As of April 2, 2011, the fair value of the forward contract was $0.2 million.

Sell
 
Purchase
 
Maturity
3,000,000 Euro
  
4,116,000 U.S Dollars
  
June 29, 2011

Interest Rate:  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 of April 2, 2011, the fair value of these instruments was a loss of $2.0 million.  The change in fair value of these swap agreements in the first three months of 2011 was a gain of $0.1 million, net of taxes.

The following tables summarize the company’s fair value of interest rate swaps (in thousands):

   
Condensed Consolidated
     
   
Balance Sheet Presentation
 
Apr 2, 2011
   
Jan 1, 2011
 
                 
Fair value
 
Other non-current liabilities
  $ (1,990 )   $ (2,186 )

The impact on earnings from interest rate swaps was as follows (in thousands):

   
Presentation of
 
Three Months Ended
 
   
gain/(loss)
 
Apr 2, 2011
   
Apr 3, 2010
 
             
 
 
Gain/(loss) recognized in other comprehensive income
 
Other comprehensive income
  $ (634 )   $ (876 )
Gain/(loss) reclassified from accumulated other comprehensive income (effective portion)
 
Interest expense
  $ (790 )   $ (991 )
Gain recognized in income (ineffective portion)
 
Other expense
  $  40     $ 7  

 
17

 
 
Interest rate swaps are subject to default risk to the extent the counterparties are unable to satisfy their settlement obligations under the interest rate swap agreements.  The company reviews the credit profile of the financial institutions and assesses its creditworthiness prior to entering into the interest rate swap agreements.  The interest rate swap agreements typically contain provisions that allow the counterparty to require early settlement in the event that the company becomes insolvent or is unable to maintain compliance with its covenants under its existing debt agreements.
 
12) 
Segment Information

The company operates in two reportable operating segments defined by management reporting structure and operating activities.

The Commercial Foodservice Equipment Group manufactures, sells and distributes cooking equipment for the restaurant and institutional kitchen industry.  This business segment has manufacturing facilities in California, Illinois, Michigan, New Hampshire, North Carolina, Tennessee, Texas, Vermont, China, Denmark, Italy and the Philippines.  Principal product lines of this group include conveyor ovens, ranges, steamers, convection ovens, combi-ovens, broilers and steam cooking equipment, induction cooking systems, baking and proofing ovens, griddles, charbroilers, catering equipment, fryers, toasters, hot food servers, foodwarming equipment, griddles and coffee and beverage dispensing equipment.  These products are sold and marketed under the brand names: Anets, Blodgett, Blodgett Combi, Blodgett Range, Bloomfield, CTX, Carter-Hoffmann, CookTek, Doyon, Frifri, Giga, Holman, Houno, Jade, Lang, MagiKitch’n, Middleby Marshall, Nu-Vu, PerfectFry, Pitco, Southbend, Star, Toastmaster, TurboChef and Wells.

The Food Processing Equipment Group manufactures preparation, cooking, packaging and food safety equipment for the food processing industry.  This business division has manufacturing operations in Illinois, Iowa, Wisconsin and Mexico.  Its principal products include batch ovens, belt ovens and conveyorized cooking systems sold under the Alkar brand name; grinding and slicing equipment and food suspension, reduction and emulstion systems sold under the Cozzini brand name; breading, battering, mixing, slicing and forming equipment sold under the MP Equipment brand name and packaging and food safety equipment sold under the RapidPak brand name.

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.

Net Sales Summary
(dollars in thousands)

   
Three Months Ended
 
   
Apr 2, 2011
   
Apr 3, 2010
 
   
Sales
   
Percent
   
Sales
   
Percent
 
                         
Business Divisions:
                       
Commercial Foodservice
  $ 153,733       84.2     $ 140,537       87.5  
Food Processing
    28,839       15.8       20,146       12.5  
                                 
Total
  $ 182,572       100.0 %   $ 160,683       100.0 %
 
 
18

 
 
The following table summarizes the results of operations for the company's business segments(1)(in thousands):

   
Commercial
   
Food
   
Corporate
       
   
Foodservice
   
Processing
   
and Other(2)
   
Total
 
Three months ended April 2, 2011
                       
Net sales
  $ 153,733     $ 28,839     $     $ 182,572  
Income from operations
    35,835       4,787       (9,258 )     31,364  
Depreciation and amortization expense
    3,323       551       173       4,047  
Net capital expenditures
    1,533       26       144       1,703  
                                 
Total assets
    720,061       99,769       61,934       881,764  
Long-lived assets
    520,059       57,502       30,971       608,532  
                                 
Three months ended April 3, 2010
                               
Net sales
  $ 140,537     $ 20,146     $     $ 160,683  
Income from operations
    31,335       4,372       (9,272 )     26,435  
Depreciation and amortization expense
    3,433       358       125       3,916  
Net capital expenditures
    1,339       62             1,401  
                                 
Total assets
    693,823       68.880       47,957       810,660  
Long-lived assets
    524,190       43,445       29,386       597,021  

 
(1) 
Non-operating expenses are not allocated to the operating segments.  Non-operating expenses consist of interest expense and deferred financing amortization, foreign exchange gains and losses and other income and expense items outside of income from operations.

 
(2) 
Includes corporate and other general company assets and operations.

Long-lived assets by major geographic region are as follows (in thousands):
 
   
Apr 2, 2011
   
Apr 3, 2010
 
United States and Canada
 
$
584,750
   
$
570,621
 
Asia
   
1,778
     
1,916
 
Europe and Middle East
   
21,174
     
24,279
 
Latin America
   
830
     
205
 
Total international
 
$
23,782
   
$
26,400
 
                 
   
$
608,532
   
$
597,021
 
 
 
19

 
 
Net sales by major geographic region were as follows (in thousands):

 
 
Three Months Ended
 
   
Apr 2, 2011
   
Apr 3, 2010
 
United States and Canada
  $ 140,631     $ 128,929  
Asia
    10,296       8,913  
Europe and Middle East
    21,910       18,825  
Latin America
    9,735       4,016  
Total international
  $ 41,941     $ 31,754  
                 
    $ 182,572     $ 160,683  

13) 
Employee Retirement Plans

(a)           Pension Plans

The company maintains a non-contributory defined benefit plan for its employees at the Smithville, Tennessee facility, which was acquired as part of the New Star International Holdings, Inc. (“Star”) acquisition. Benefits are determined based upon retirement age and years of service with the company.  This defined benefit plan was frozen on April 1, 2008 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 1, 2008 upon reaching retirement age.
 
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, further described below.
 
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 who served on the Board of Directors prior to 2004.  In November 2010, the Board of Directors approved a revision to the directors’ compensation program that resulted in the plan being frozen and the benefits being distributed to the plan participants. Benefit distributions were made in December 2010 and January 2011. As of April 2, 2011, there were no longer any participants in the plan for non-employee directors. This plan is not available to any new non-employee directors.
 
 
20

 
 
(b)           401K Savings Plans

The company maintains two separate defined contribution 401K savings plans covering all employees in the United States.  These two plans separately cover the union employees at the Elgin, Illinois facility and all other remaining union and non-union employees in the United States.  The company makes profit sharing contributions to the various plans in accordance with the requirements of the plan.   Profit sharing contributions for the Elgin Union 401K savings plans are made in accordance with the agreement.

14) 
Subsequent Events

On March 23, 2011, the company announced that it had entered into an agreement to acquire Lincat Group PLC (“Lincat”).  Under terms of the agreement, Lincat shareholders will receive 1,050 pence or approximately $17.16 U.S. dollars in cash per share for each share held.  As of the agreement date, there were approximately 5,525,000 shares outstanding.  The approximate total purchase price is $94.8 million U.S. dollars. Lincat is a leading manufacturer of equipment for the commercial foodservice industry in the United Kingdom.

On April 12, 2011, the company completed its acquisition of Beech Ovens, Pty. Ltd (“Beech”), for approximately $13.5 million U.S. dollars.  Beech is a leading manufacturer of stone hearth ovens for the commercial foodservice industry located in Brisbane, Australia.
 
 
21

 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

Informational Notes

This report contains forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.  The company cautions readers that these projections are based upon future results or events and are highly dependent upon a variety of important factors which could cause such results or events to differ materially from any forward-looking statements which may be deemed to have been made in this report, or which are otherwise made by or on behalf of the company.  Such factors include, but are not limited to, volatility in earnings resulting from goodwill impairment losses which may occur irregularly and in varying amounts; variability in financing costs; quarterly variations in operating results; dependence on key customers; international exposure; foreign exchange and political risks affecting international sales; ability to protect trademarks, copyrights and other intellectual property; changing market conditions; the impact of competitive products and pricing; the timely development and market acceptance of the company’s products; the availability and cost of raw materials; and other risks detailed herein and from time-to-time in the company’s Securities and Exchange Commission (“SEC”) filings, including the company’s 2010 Annual Report on Form 10-K.
 
 
22

 
 
Net Sales Summary
(dollars in thousands)
 
   
Three Months Ended
 
   
Apr 2, 2011
   
Apr 3, 2010
 
   
Sales
   
Percent
   
Sales
   
Percent
 
                         
Business Divisions:
                       
Commercial Foodservice
  $ 153,733       84.2     $ 140,537       87.5  
Food Processing
    28,839       15.8       20,146       12.5  
                                 
Total
  $ 182,572       100.0 %   $ 160,683       100.0 %

Results of Operations

The following table sets forth certain consolidated statements of earnings items as a percentage of net sales for the periods.

   
Three Months Ended
 
   
Apr 2, 2011
   
Apr 3, 2010
 
Net sales
    100.0 %     100.0 %
Cost of sales
    60.7       60.5  
Gross profit
    39.3       39.5  
Selling, general and administrative expenses
    22.1       23.0  
Income from operations
    17.2       16.5  
Net interest expense and deferred financing amortization
    1.1       1.6  
Other (income) expense, net
    (0.1 )     0.2  
Earnings before income taxes
    16.2       14.7  
Provision for income taxes
    6.4       6.1  
Net earnings
    9.8 %     8.6 %
 
 
23

 
 
Three Months Ended April 2, 2011 Compared to Three Months Ended April 3, 2010

NET SALES. Net sales for the first quarter of fiscal 2011 were $182.6 million as compared to $160.7 million in the first quarter of 2010.

 
·
Net sales at the Commercial Foodservice Equipment Group amounted to $153.7 million in the first quarter of 2011 as compared to $140.5 million in the prior year quarter.  Net sales resulting from the acquisition of PerfectFry, which was acquired on July 13, 2010, accounted for an increase of $0.9 million during the first quarter of 2011. Excluding the impact of this acquisition, net sales of commercial foodservice equipment increased $12.3 million in the first quarter of 2011.  The improvement in net sales reflects an improvement in market conditions as commercial restaurant customers increased their spending on replacement of equipment.  Additionally, net sales reflects increased market penetration resulting from new product introductions and increased sales activities focused on major restaurant chain accounts and the emerging markets. 

 
·
Net sales for the Food Processing Equipment Group amounted to $28.8 million in the first quarter of 2011 as compared to $20.1 million in the prior year quarter. Net sales resulting from the Cozzini acquisition, which was acquired on September 21, 2010 accounted for an increase of $9.3 million. Excluding the impact of this acquisition, net sales of food processing equipment decreased by $0.6 million due to timing of customer orders.

GROSS PROFIT. Gross profit increased to $71.8 million in the first quarter of 2011 from $63.5 million in the prior year period, reflecting the impact of higher sales volumes.  The gross margin rate was 39.3% in the first quarter of 2011 as compared to 39.5% in the prior year quarter.  The net decrease in the gross margin rate reflects:

 
·
The impact of rising material costs.

 
·
Lower margins at newly acquired companies which unfavorably impacted the margin rate.

 
·
The benefit of increased sales volumes.
 
 
24

 
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general, and administrative expenses increased from $37.0 million in the first quarter of 2010 to $40.5 million in the first quarter of 2011.  As a percentage of net sales, operating expenses decreased from 23.0% in the first quarter of 2010 to 22.1% in the first quarter of 2011. Selling expenses increased from $17.6 million in the first quarter of 2010 to $20.6 million in the first quarter of 2011.  Selling expenses reflect increased costs of $1.4 million associated with the Cozzini acquisition, $0.9 million associated with trade show expenses and $0.7 million associated with commission expense due to higher sales volumes. General and administrative expenses increased from $19.4 million in the first quarter of 2010 to $19.9 million in the first quarter of 2011.  General and administrative expenses reflect $1.0 million of increased costs associated with the Cozzini acquisition offset by lower employee compensation costs. 
 
NON-OPERATING EXPENSES.  Interest and deferred financing amortization costs decreased to $2.1 million in the first quarter of 2011 as compared to $2.5 million in the first quarter of 2010, due to lower interest rates on lower average debt balances.  Other income was $0.2 million in the first quarter of 2011 as compared to $0.3 million of other expense in the prior year first quarter and primarily consisted of foreign exchange gains and losses.

INCOME TAXES. A tax provision of $11.6 million, at an effective rate of 40%, was recorded during the first quarter of 2011, as compared to a $9.9 million provision at a 42% effective rate in the prior year quarter.  The reduced effective rate reflects increased deductions for qualified manufacturing activities.
 
 
25

 
 
Financial Condition and Liquidity

During the three months ended April 2, 2011, cash and cash equivalents increased by $1.6 million to $9.3 million at April 3, 2010 from $7.7 million at January 1, 2011.  Net borrowings increased from $214.0 million at January 1, 2011 to $239.6 million at April 2, 2011.

OPERATING ACTIVITIES. Net cash used by operating activities was $9.5 million for the three month period ended April 2, 2011, compared to net cash provided by operating activities of $6.8 million for the three-month period ended April 3, 2010.

During the three months ended April 2, 2011, working capital levels changed due to increased seasonal working capital needs.  These changes in working capital levels included a $10.3 million increase in inventory, due to several factors including increased steel purchases ahead of anticipated price increases, increased inventory levels during build out periods in conjunction with plant consolidation efforts and higher levels of stock associated with foreign sourcing initiatives.  Changes in working capital levels also included a $0.5 million decrease in accounts receivable, a $2.0 million decrease in prepaid expenses and other assets and a $6.9 million decrease in accounts payable.  Accrued expenses and other non-current liabilities decreased by $18.4 million primarily due to the payment of 2010 annual rebate and incentive compensation programs in the first quarter of 2011.

INVESTING ACTIVITIES. During the three months ended April 2, 2011, net cash used in investing activities amounted to $4.7 million.  Investing activities include deferred payments of $3.0 million related to the Giga and Cozzini acquisitions completed in prior years.  The company also had net capital expenditures of $1.7 million primarily associated with additions and upgrades of production equipment.

FINANCING ACTIVITIES.  Net cash flows provided by financing activities amounted to $15.7 million during the three months ended April 2, 2011.  The company’s borrowing activities included $24.5 million of proceeds under its $497.8 million revolving credit facility and $0.6 million of proceeds of foreign borrowings.  Related to restricted stock vestings during the first quarter of 2011, the company used $9.5 million to repurchase 113,550 shares of its common stock that were surrendered to the company by employees in lieu of cash for payment of withholding taxes.

At April 2, 2011, 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.
 
 
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Recently Issued Accounting Standards

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-29, Business Combinations (Topic 805).  ASU No. 2010-29 clarifies the disclosures required for pro forma information for business combinations.  ASU No. 2010-29 specifies if comparative financial statements are presented, revenue and earnings of a combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendments in ASU 2010-29 are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  The company adopted the provisions of ASU No. 2010-29 on January 2, 2011.  The adoption of ASU No. 2010-29 did not have any impact on the company’s financial position, results of operations or cash flow.  As the company had no material acquisitions during the first quarter of 2011, there were no disclosures required.

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.

Revenue Recognition. The company recognizes revenue on the sale of its products when risk of loss has passed to the customer, which occurs at the time of shipment, and collectibility is reasonably assured.  The sale prices of the products sold are fixed and determinable at the time of shipment.  Sales are reported net of sales returns, sales incentives and cash discounts based on prior experience and other quantitative and qualitative factors.

At the Food Processing Equipment Group, the company enters into long-term sales contracts for certain products.  Revenue under these long-term sales contracts is recognized using the percentage of completion method defined within ASC 605-35 “Construction-Type and Production-Type Contracts” due to the length of time to fully manufacture and assemble the equipment.  The company measures revenue recognized based on the ratio of actual labor hours incurred in relation to the total estimated labor hours to be incurred related to the contract.  Because estimated labor hours to complete a project are based upon forecasts using the best available information, the actual hours may differ from original estimates.  The percentage of completion method of accounting for these contracts most accurately reflects the status of these uncompleted contracts in the company's financial statements and most accurately measures the matching of revenues with expenses.  At the time a loss on a contract becomes known, the amount of the estimated loss is recognized in the consolidated financial statements.
 
 
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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 partially 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 pending litigation 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.
 
 
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Contractual Obligations

The company's contractual cash payment obligations as of April 2, 2011 are set forth below (in thousands):

   
Amounts
   
 
               
Total
 
   
Due Sellers
   
 
   
 
   
Idle
   
Contractual
 
   
From
   
Long-term
   
Operating
   
Facility
   
Cash
 
   
Acquisitions
   
Debt
   
Leases
   
Leases
   
Obligations
 
                               
Less than 1 year
  $ 720     $ 6,141     $ 4,094     $ 641     $ 11,596  
1-3 years
    3,437       231,956       5,288       734       241,415  
3-5 years
          281       2,340       404       3,025  
After 5 years
          1,218       1,782             3,000  
                                         
    $ 4,157     $ 239,596     $ 13,504     $ 1,779     $ 259,036  

The company has obligations to make $4.2 million of purchase price payments to the sellers of CookTek and Giga that were deferred in conjunction with the acquisitions.

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 $5.6 million in outstanding letters of credit, which expire on April 2, 2012, to secure potential obligations under various business programs.

Idle facility leases consist of obligations for manufacturing locations that were exited in conjunction with the company's manufacturing consolidation efforts.  These lease obligations continue through June 2015. The obligations presented above do not reflect any anticipated sublease income from the facilities.

The projected benefit obligation of the company’s defined benefit plans exceeded the plans’ assets by $11.5 million at the end of 2010.  The unfunded benefit obligations were comprised of a $3.7 million underfunding of the company’s Smithville plan, which was acquired as part of the Star acquisition, $0.8 million underfunding of the company's Elgin union plan and $7.0 million of underfunding of the company's director plans.  The company does not expect to contribute to the director plans in 2011.  The company expects to continue to make minimum contributions to the Smithville and Elgin plan as required by the Employee Retirement Income Security Act of 1974, which are expected to be $0.3 million and $0.1 million, respectively in 2011.

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 no activities, obligations or exposures associated with off-balance sheet arrangements.
 
 
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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)  
             
April 2, 2012
  $     $ 6,141  
April 2, 2013
          231,826  
April 2, 2014
          130  
April 2, 2015
          137  
April 2, 2016 and thereafter
          1,362  
                 
 
  $     $ 239,596  

Terms of the company’s senior credit agreement provide for $497.8 million of availability under a revolving credit line.  As of April 2, 2011, the company had $231.7 million of borrowings outstanding under this facility.  The company also has $5.6 million in outstanding letters of credit as of April 2, 2011, which reduces the borrowing availability under the revolving credit line.  Remaining borrowing availability under this facility, which is also reduced by the company’s foreign borrowings, was $252.6 million at April 2, 2011.

At April 2, 2011, borrowings under the senior secured credit facility are assessed at an interest rate 0.875% above LIBOR for long-term borrowings or at the higher of the Prime rate and the Federal Funds Rate.  At April 2, 2011 the average interest rate on the senior debt amounted to 1.44%. The interest rates on borrowings under the senior secured credit facility may be adjusted quarterly based on the company’s 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 0.175% as of April 2, 2011.

In August 2006, the company completed its acquisition of Houno A/S in Denmark. This acquisition was funded in part with locally established debt facilities with borrowings in Danish Krone.  On April 2, 2011 these facilities amounted to $3.8 million in U.S. dollars, including $1.9 million outstanding under a revolving credit facility and $1.9 million of a term loan.  The interest rate on the revolving credit facility is assessed at 1.25% above Euro LIBOR, which amounted to 4.0% on April 2, 2011. The term loan matures in 2013 and the interest rate is assessed at 5.0%.

In April 2008, the company completed its acquisition of Giga Grandi Cucine S.r.l in Italy. This acquisition was funded in part with locally established debt facilities with borrowings denominated in Euro.  On April 2, 2011 these facilities amounted to $4.1 million in U.S. dollars.  The interest rate on the credit facilities is tied to six-month Euro LIBOR. At April 2, 2011, the average interest rate on these facilities was approximately 3.0%. The facilities mature in April of 2015.
 
 
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The company believes that its current capital resources, including cash and cash equivalents, cash generated from operations, funds available from its revolving credit facility and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and integration expenditures for the foreseeable future.

The company has historically entered into interest rate swap agreements to effectively fix the interest rate on its outstanding debt.  The agreements swap one-month LIBOR for fixed rates. As of April 2, 2011 the company had the following interest rate swaps in effect:

     
Fixed
       
Notional
   
Interest
 
Effective
 
Maturity
Amount
   
Rate
 
Date
 
Date
               
$ 10,000,000       3.590 %
06/10/08
 
06/10/11
  10,000,000       3.460 %
09/08/08
 
09/06/11
  25,000,000       3.670 %
11/23/08
 
09/23/11
  15,000,000       1.220 %
11/23/09
 
11/23/11
  20,000,000       1.800 %
11/23/09
 
11/23/12
  20,000,000       1.560 %
03/11/10
 
12/11/12
  10,000,000       1.120 %
03/11/10
 
03/11/12
  15,000,000       0.950 %
08/06/10
 
12/06/12
  25,000,000       1.610 %
02/23/11
 
02/24/14
  25,000,000       2.520 %
02/23/11
 
02/23/16

The terms of the senior secured credit facility limit the paying of dividends, capital expenditures and leases, and require, among other things, a maximum ratio of indebtedness of 3.5 debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) and a minimum fixed charge coverage of 1.25 EBITDA to fixed charges. 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.  The credit facility is secured by the capital stock of the company’s domestic subsidiaries, 65% of the capital stock of the company’s foreign subsidiaries and substantially all other assets of the company.  At April 2, 2011, the company was in compliance with all covenants pursuant to its borrowing agreements.
 
 
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Financing Derivative Instruments

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 of April 2, 2011, the fair value of these instruments was a loss of $2.0 million.  The change in fair value of these swap agreements in the first three months of 2011 was a gain of $0.1 million, net of taxes.

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, 2011. The fair value of the forward contract was $0.2 million at the end of the first quarter of 2011.

Sell
 
Purchase
 
Maturity
3,000,000 Euro
 
4,116,000 U.S Dollars
 
June 29, 2011
 
 
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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, 2011, 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 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, 2011, there has been no change in the company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
 
 
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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, 2011, except as follows:
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

c)   Issuer Purchases of Equity Securities

    
 
 
Total
Number of
Shares
Purchased
   
 
 
 
Average
Price Paid
per Share
   
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plan or
Program
   
Maximum
Number of
Shares that May
Yet be
Purchased
Under the Plan
or Program
 
January 2 to January 29, 2011
    2,831     $ 84.42       2,831       463,435  
January 30 to February 26, 2011
                      463,435  
February 27, 2011 to April 2, 2011
    113,550       83.25       113,550       349,885  
Quarter ended April 2, 2011
    116,381     $ 83.27       116,381       349,885  

In July 1998, the company's Board of Directors adopted a stock repurchase program that authorized the purchase of common shares in open market purchases.  As of April 2, 2011, 1,450,115 shares had been purchased under the 1998 stock repurchase program.
 
 
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 Item 6.  Exhibits

Exhibits – The following exhibits are filed herewith:
 
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).
   
Exhibit 101 –
Financial statements on Form 10-Q for the quarter ended April 2, 2011, filed on May 12, 2011, formatted in Extensive Business Reporting Language (XBRL); (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of earnings, (iii) condensed statements of cash flows, (iv) notes to the condensed consolidated financial statements.
 
 
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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, 2011
 
By:
/s/  Timothy J. FitzGerald
 
       
Timothy J. FitzGerald
 
       
Vice President,
 
       
Chief Financial Officer
 

 
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