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MIDDLEBY Corp - Quarter Report: 2016 April (Form 10-Q)



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, 2016
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 incorporation or organization)
(IRS Employer Identification Number)
 
 
 
1400 Toastmaster Drive, Elgin, Illinois
60120
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, 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 x 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 x   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 x
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 x
 
As of May 6, 2016, there were 57,539,766 shares of the registrant's common stock outstanding.




THE MIDDLEBY CORPORATION AND SUBSIDIARIES
 
QUARTER ENDED APRIL 2, 2016
  
INDEX
DESCRIPTION
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS APRIL 2, 2016 and JANUARY 2, 2016
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME APRIL 2, 2016 and APRIL 4, 2015
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS APRIL 2, 2016 and APRIL 4, 2015
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 2.
 
 
 
Item 6.




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)
 
ASSETS
Apr 2, 2016

 
Jan 2, 2016

Current assets:
 

 
 

Cash and cash equivalents
$
55,681

 
$
55,528

Accounts receivable, net of reserve for doubtful accounts of $9,758 and $8,839
300,907

 
282,534

Inventories, net
367,639

 
354,150

Prepaid expenses and other
43,604

 
39,801

Prepaid taxes
6,214

 
11,426

Current deferred taxes
51,902

 
51,723

Total current assets
825,947

 
795,162

Property, plant and equipment, net of accumulated depreciation of $102,849 and $100,345
199,081

 
199,750

Goodwill
983,998

 
983,339

Other intangibles, net of amortization of $147,921 and $139,279
734,795

 
749,430

Long-term deferred tax assets
10,833

 
11,438

Other assets
23,290

 
22,032

Total assets
$
2,777,944

 
$
2,761,151

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
57,046

 
$
32,059

Accounts payable
156,175

 
157,758

Accrued expenses
300,011

 
320,154

Total current liabilities
513,232

 
509,971

Long-term debt
706,074

 
734,002

Long-term deferred tax liability
121,675

 
113,010

Accrued pension benefits
182,343

 
207,564

Other non-current liabilities
30,284

 
29,774

Stockholders' equity:
 

 
 

Preferred stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none issued

 

Common stock, $0.01 par value; 95,000,000 shares authorized; 62,445,315 and 62,168,346 shares issued in 2016 and 2015, respectively
144

 
144

Paid-in capital
332,811

 
328,686

Treasury stock, at cost; 4,905,549 and 4,862,264 shares in 2016 and 2015, respectively
(205,280
)
 
(200,862
)
Retained earnings
1,169,812

 
1,115,274

Accumulated other comprehensive loss
(73,151
)
 
(76,412
)
Total stockholders' equity
1,224,336

 
1,166,830

Total liabilities and stockholders' equity
$
2,777,944

 
$
2,761,151

 


See accompanying notes

1



THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
 
 
 
Three Months Ended
 
Apr 2, 2016

 
Apr 4, 2015

Net sales
$
516,355

 
$
406,596

Cost of sales
319,582

 
249,034

Gross profit
196,773

 
157,562

Selling and distribution expenses
53,689

 
47,109

General and administrative expenses
56,103

 
39,273

Restructuring expenses
606

 
4,600

Income from operations
86,375

 
66,580

Interest expense and deferred financing amortization, net
5,276

 
3,749

Other (income) expense, net
(800
)
 
4,561

Earnings before income taxes
81,899

 
58,270

Provision for income taxes
27,361

 
20,039

Net earnings
$
54,538

 
$
38,231

 
 
 
 
Net earnings per share:
 
 
 
Basic
$
0.96

 
$
0.67

Diluted
$
0.96

 
$
0.67

Weighted average number of shares
 
 
 
Basic
57,051

 
56,917

Dilutive common stock equivalents1

 
1

Diluted
57,051

 
56,918

Comprehensive income
$
57,799

 
$
22,082

 


















1There were no anti-dilutive equity awards 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, 2016

 
Apr 4, 2015

Cash flows from operating activities--
 

 
 

Net earnings
$
54,538

 
$
38,231

Adjustments to reconcile net earnings to net cash provided by operating activities--
 

 
 

Depreciation and amortization
14,930

 
11,232

Non-cash share-based compensation
4,959

 
2,029

Deferred taxes
9,091

 
2,975

Changes in assets and liabilities, net of acquisitions
 

 
 

Accounts receivable, net
(19,576
)
 
(5,209
)
Inventories, net
(12,802
)
 
(15,023
)
Prepaid expenses and other assets
1,160

 
2,188

Accounts payable
(1,240
)
 
8,333

Accrued expenses and other liabilities
(36,555
)
 
(21,000
)
Net cash provided by operating activities
14,505

 
23,756

Cash flows from investing activities--
 

 
 

Additions to property and equipment
(7,693
)
 
(6,117
)
Acquisitions, net of cash acquired

 
(46,498
)
Net cash used in investing activities
(7,693
)
 
(52,615
)
Cash flows from financing activities--
 

 
 

Net (repayments) proceeds under current revolving credit facilities
(28,000
)
 
41,500

Net proceeds under foreign bank loan
26,313

 
432

Net repayments under other debt arrangement
(9
)
 
(9
)
Repurchase of treasury stock
(4,418
)
 
(4,836
)
Excess tax (detriment) benefit related to share-based compensation
(834
)
 
2,402

Net cash (used in) provided by financing activities
(6,948
)
 
39,489

Effect of exchange rates on cash and cash equivalents
289

 
(316
)
Changes in cash and cash equivalents--
 

 
 

Net increase in cash and cash equivalents
153

 
10,314

Cash and cash equivalents at beginning of year
55,528

 
43,945

Cash and cash equivalents at end of period
$
55,681

 
$
54,259

 

See accompanying notes

3



THE MIDDLEBY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 2, 2016
(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" or “Middleby”), 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 2015 Form 10-K. The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2016
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, 2016 and January 2, 2016, the results of operations for the three months ended April 2, 2016 and April 4, 2015 and cash flows for the three months ended April 2, 2016 and April 4, 2015.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long lived and intangible assets, warranty reserves, insurance reserves, income tax reserves and post-retirement obligations. Actual results could differ from the company's estimates.
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 $5.0 million and $2.0 million for the first quarter periods ended April 2, 2016 and April 4, 2015, respectively.
During the first quarter ended April 2, 2016, the company issued restricted shares under its 2011 Stock Incentive Plan. These amounts are contingent on the attainment of certain performance objectives. The aggregate grant-date fair value of these awards was $31.0 million, based on the closing share price of the company's stock at the date of the grant.
C)
Income Taxes
As of January 2, 2016, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $14.4 million (of which $14.1 million would impact the effective tax rate if recognized) plus approximately $1.9 million of accrued interest and $3.8 million of penalties. The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. As of April 2, 2016, the company recognized a tax expense of $0.9 million for unrecognized tax benefits related to current year tax exposures.
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. The company believes that it is reasonably possible that approximately $1.8 million of its remaining unrecognized tax benefits may be recognized over the next twelve months as a result of lapses of statutes of limitations.





4



A summary of the tax years that remain subject to examination in the company’s major tax jurisdictions are: 
United States - federal
2012 – 2015
United States - states
2006 – 2015
Australia
2011 – 2015
Brazil
2011 – 2015
Canada
2009 – 2015
China
2006 – 2015
Czech Republic
2013 – 2015
Denmark
2012 – 2015
France
2011 – 2015
Germany
2013 – 2015
India
2013 – 2015
Ireland
2009 – 2015
Italy
2011 – 2015
Luxembourg
2011 – 2015
Mexico
2011 – 2015
Netherlands
2004 – 2015
Philippines
2013 – 2015
Romania
2006 – 2015
South Korea
2011
Spain
2011 – 2015
Sweden
2009 – 2015
Switzerland
2008 – 2015
Taiwan
2010 – 2012
United Kingdom
2003 – 2015
 

5




D)
Fair Value Measures 
ASC 820 "Fair Value Measurements and Disclosures" 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 liabilities that are measured at fair value and are categorized using the fair value hierarchy are as follows (in thousands):
 
Fair Value
Level 1
 
Fair Value
Level 2
 
Fair Value
Level 3
 
Total
As of April 2, 2016
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
    Interest rate swaps
$

 
$
603

 
$

 
$
603

    Contingent consideration
$

 
$

 
$
10,663

 
$
10,663

 
 
 
 
 
 
 
 
As of January 2, 2016
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
    Interest rate swaps
$

 
$
412

 
$

 
$
412

    Contingent consideration
$

 
$

 
$
11,065

 
$
11,065

The contingent consideration as of April 2, 2016 and January 2, 2016, relates to the earnout provisions recorded in conjunction with the acquisitions of Spooner Vicars, PES, Concordia, Desmon, Goldstein Eswood and Induc.
The earnout provisions associated with these acquisitions are based upon performance measurements related to sales and earnings, as defined in the respective purchase agreements. On a quarterly basis the company assesses the projected results for each of the acquired businesses in comparison to the earnout targets and adjusts the liability accordingly.
E)    Consolidated Statements of Cash Flows
Cash paid for interest was $4.8 million and $3.3 million for the three months ended April 2, 2016 and April 4, 2015, respectively. Cash payments totaling $12.2 million and $16.1 million were made for income taxes for the three months ended April 2, 2016 and April 4, 2015, respectively.


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, food processing equipment and residential kitchen equipment industries.
The company has accounted for all business combinations using the acquisition 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 dates of acquisition.
Market Forge
On January 7, 2014, the company completed its acquisition of certain assets of Market Forge Industries, Inc. (“Market Forge”), a leading manufacturer of steam cooking equipment for the commercial foodservice industry, for a purchase price of approximately $7.0 million. During the first quarter of 2014, the company finalized the working capital provision provided for by the purchase agreement resulting in an additional payment to the seller of $0.2 million. Additional deferred payments of $3.0 million in aggregate were paid to the seller during the second and third quarters of 2014. An additional contingent payment of $1.5 million was paid to the seller during the first quarter of 2015 upon the achievement of certain financial targets for the fiscal year 2014.
The final allocation of cash paid for the Market Forge acquisition is summarized as follows (in thousands):
 
(as initially reported) Jan 7, 2014
 
Measurement Period Adjustments
 
(as adjusted) Jan 7, 2014
Current assets
$
2,051

 
$
(100
)
 
$
1,951

Property, plant and equipment
120

 

 
120

Goodwill
5,252

 
654

 
5,906

Other intangibles
4,191

 

 
4,191

Current liabilities
(4,374
)
 
(554
)
 
(4,928
)
 
 
 
 
 
 
Consideration paid at closing
$
7,240

 
$

 
$
7,240

 
 
 
 
 
 
Deferred payments
3,000

 

 
3,000

Contingent consideration
1,374

 
126

 
1,500

 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
11,614

 
$
126

 
$
11,740

The goodwill and $2.9 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 $1.1 million allocated to customer relationships, $0.2 million allocated to developed technology and less than $0.1 million allocated to backlog, which are to be amortized over periods of 4 years, 5 years and 3 months, respectively. Goodwill and other intangibles of Market Forge are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.



7



Viking Distributors 2014
The company, through Viking, purchased certain assets of two of Viking's former distributors ("Viking Distributors 2014"). The aggregate purchase price of these transactions as of January 31, 2014 was approximately $44.5 million. This included $6.0 million in forgiveness of liabilities owed to Viking resulting from pre-existing relationships with Viking.
The final allocation of cash paid for the Viking Distributors 2014 acquisition is summarized as follows (in thousands):
 
(as initially reported) Jan 31, 2014
 
Measurement Period Adjustments
 
(as adjusted) Jan 31, 2014
Current assets
$
35,909

 
$
(8,101
)
 
$
27,808

Property, plant and equipment
2,000

 
(291
)
 
1,709

Goodwill
7,552

 
8,647

 
16,199

Current liabilities
(1,005
)
 
(255
)
 
(1,260
)
 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
44,456

 
$

 
$
44,456

 
 
 
 
 
 
Forgiveness of liabilities owed to Viking
(5,971
)
 

 
(5,971
)


 
 
 
 
Consideration paid at closing
$
38,485

 
$

 
$
38,485

The goodwill is subject to the non-amortization provisions of ASC 350 and is allocated to the Residential Kitchen Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.


8



Process Equipment Solutions
On March 31, 2014, the company completed its acquisition of substantially all of the assets of Processing Equipment Solutions, Inc. ("PES"), a leading manufacturer of water jet cutting equipment for the food processing industry, for a purchase price of approximately $15.0 million. An additional payment is also due upon the achievement of certain financial targets. During the third quarter of 2014, the company finalized the working capital provision provided by the purchase agreement resulting in no adjustment to the original purchase price.
The final allocation of cash paid for the PES acquisition is summarized as follows (in thousands):
 
(as initially reported) Mar 31, 2014
 
Measurement Period Adjustments
 
(as adjusted) Mar 31, 2014
Current assets
$
2,211

 
$
(153
)
 
$
2,058

Property, plant and equipment
3,493

 

 
3,493

Goodwill
10,792

 
332

 
11,124

Other intangibles
1,600

 
18

 
1,618

Other assets
21

 
(21
)
 

Current liabilities
(816
)
 

 
(816
)
Other non-current liabilities
(2,301
)
 
(176
)
 
(2,477
)
 
 
 
 
 
 
Consideration paid at closing
$
15,000

 
$

 
$
15,000

 
 
 
 
 
 
Contingent consideration
2,301

 
176

 
2,477

 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
17,301

 
$
176

 
$
17,477

The goodwill is subject to the non-amortization provisions of ASC 350. Other intangibles includes $1.0 million allocated to customer relationships, $0.6 million allocated to developed technology and less than $0.1 million allocated to backlog, which are being amortized over periods of 5 years, 5 years and 3 months, respectively. Goodwill and other intangibles of PES are allocated to the Food Processing Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
The PES purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable within the first quarter of 2017, if PES exceeds certain sales targets for fiscal 2014, 2015 and 2016. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $2.5 million.

9



Concordia
On September 8, 2014, the company completed its acquisition of all of the capital stock of Concordia Coffee Company, Inc. ("Concordia"), a leading manufacturer of automated and self-service coffee and espresso machines for the commercial foodservice industry, for a purchase price of approximately $12.5 million, net of cash acquired. An additional payment is also due upon the achievement of certain financial targets. During the first quarter of 2015, the company finalized the working capital provision provided by the purchase agreement resulting in a return from the seller of $0.1 million.
The final allocation of cash paid for the Concordia acquisition is summarized as follows (in thousands):
 
(as initially reported) Sep 8, 2014
 
Measurement Period Adjustments
 
(as adjusted) Sep 8, 2014
Cash
$
345

 
$

 
$
345

Current deferred tax asset

 
726

 
726

Current assets
3,767

 
(497
)
 
3,270

Goodwill
11,255

 
(5,720
)
 
5,535

Other intangibles
4,500

 
(1,200
)
 
3,300

Long-term deferred tax asset

 
3,264

 
3,264

Current liabilities
(2,296
)
 
(842
)
 
(3,138
)
Other non-current liabilities
(4,710
)
 
4,189

 
(521
)
 
 
 
 
 
 
Consideration paid at closing
$
12,861

 
$
(80
)
 
$
12,781

 
 
 
 
 
 
Contingent consideration
4,710

 
(4,189
)
 
521

 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
17,571

 
$
(4,269
)
 
$
13,302

The current and long term deferred tax assets amounted to $0.7 million and $3.3 million, respectively. These net assets are comprised of $4.1 million related to federal net operating loss carry forwards, $1.1 million of assets arising from the difference between the book and tax basis of tangible asset and liability accounts, net of $1.2 million of deferred tax liabilities related to the difference between the book and tax basis of identifiable intangible assets. Federal net operating loss carry forwards are subject to carry forward limitations for income tax purposes.
The goodwill and $1.1 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles include $2.2 million allocated to customer relationships, which is being amortized over a period of 10 years. Goodwill and other intangibles of Concordia are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
The Concordia purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable within the first quarter of 2017 if Concordia exceeds certain sales targets for fiscal years 2015 and 2016. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $0.5 million.




10



U-Line
On November 5, 2014, the company completed its acquisition of all of the capital stock of U-Line Corporation ("U-Line"), a leading manufacturer of premium residential built-in modular ice making, refrigeration and wine preservation products for the residential industry, for a purchase price of approximately $142.0 million, net of cash acquired. During the first quarter of 2015, the company finalized the working capital provision provided by the purchase agreement resulting in a return from the seller of $0.3 million.
The final allocation of cash paid for the U-Line acquisition is summarized as follows (in thousands):
 
(as initially reported) Nov 5, 2014
 
Measurement Period Adjustments
 
(as adjusted) Nov 5, 2014
Cash
$
12,764

 
$

 
$
12,764

Current deferred tax asset
657

 
114

 
771

Current assets
12,237

 

 
12,237

Property, plant and equipment
3,376

 

 
3,376

Goodwill
89,501

 
(8,000
)
 
81,501

Other intangibles
57,500

 
17,700

 
75,200

Current liabilities
(6,032
)
 
(1,973
)
 
(8,005
)
Long-term deferred tax liability
(13,095
)
 
(4,657
)
 
(17,752
)
Other non-current liabilities
(2,111
)
 
(3,459
)
 
(5,570
)
 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
154,797

 
$
(275
)
 
$
154,522

The current deferred tax assets and long term deferred tax liabilities amounted to $0.8 million and $17.8 million, respectively. These net assets are comprised of $5.7 million related to federal and state net operating loss carry forwards, $1.5 million of assets arising from the difference between the book and tax basis of tangible asset and liability accounts, net of $24.2 million of deferred tax liabilities related to the difference between the book and tax basis of identifiable intangible assets. Federal and state net operating loss carry forwards are subject to carry forward limitations for income tax purposes.
The goodwill and $52.7 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles includes $20.7 million allocated to customer relationships and $1.8 million allocated to backlog, which are being amortized over a period of 6 years and 5 months, respectively. Goodwill and other intangibles of U-Line are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.








11



Desmon
On January 7, 2015, the company completed its acquisition of all of the capital stock of Desmon Food Service Equipment Company ("Desmon"), a leading manufacturer of blast chillers and refrigeration for the commercial foodservice industry located in Nusco, Italy, for a purchase price of approximately $13.5 million, net of cash acquired. An additional payment is also due upon the achievement of certain financial targets. During the fourth quarter of 2015, the company finalized the working capital provision provided by the purchase agreement resulting in a return from the seller of $0.4 million.
The final allocation of cash paid for the Desmon acquisition is summarized as follows (in thousands):
 
(as initially reported) Jan 7, 2015
 
Measurement Period Adjustments
 
(as adjusted) Jan 7, 2015
Cash
$
441

 
$
(12
)
 
$
429

Current deferred tax asset
535

 

 
535

Current assets
8,639

 
(1,105
)
 
7,534

Property, plant and equipment
7,989

 

 
7,989

Goodwill
7,175

 
53

 
7,228

Other intangibles
3,129

 
(899
)
 
2,230

Current liabilities
(8,668
)
 
998

 
(7,670
)
Long-term deferred tax liability
(2,389
)
 
282

 
(2,107
)
Other non-current liabilities
(2,463
)
 
269

 
(2,194
)
 
 
 
 
 
 
Consideration paid at closing
$
14,388

 
$
(414
)
 
$
13,974

 
 
 
 
 
 
Contingent consideration
2,416

 
(269
)
 
2,147

 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
16,804

 
$
(683
)
 
$
16,121

The current deferred tax assets and long term deferred tax liabilities amounted to $0.5 million and $2.1 million, respectively. These net liabilities are comprised of $0.7 million of deferred tax liabilities related to the difference between the book and tax basis of identifiable intangible assets, $1.1 million of liabilities arising from the difference between the book and tax basis of tangible asset and liability accounts, net of $0.2 million of assets related to foreign net operating loss carry forwards.
The goodwill and $1.3 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $0.6 million allocated to customer relationships and $0.3 million allocated to developed technology, which are to be amortized over periods of 9 years and 7 years, respectively. Goodwill and other intangibles of Desmon are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
The Desmon purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable within the second quarter of each of the fiscal years 2016, 2017 and 2018, respectively, if Desmon exceeds certain sales targets for fiscal 2015, 2016 and 2017, respectively. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $2.1 million.


12



Goldstein Eswood
On January 30, 2015, the company completed its acquisition of substantially all of the assets of J. Goldstein & Co. Pty. Ltd. ("Goldstein") and Eswood Australia Pty. Ltd. ("Eswood" and together with Goldstein, "Goldstein Eswood") for a purchase price of approximately $27.4 million. Goldstein is a leading manufacturer of cooking equipment including ranges, ovens, griddles, fryers and warming equipment and Eswood is a leading manufacturer of dishwashing equipment, both for the commercial foodservice industry and located in Smithfield, Australia. An additional payment is also due upon the achievement of certain financial targets. During the third quarter of 2015, the company finalized the working capital provision provided by the purchase agreement resulting in no adjustment to the original purchase price.
The final allocation of cash paid for the Goldstein acquisition is summarized as follows (in thousands):
 
(as initially reported) Jan 30, 2015
 
Measurement Period Adjustments
 
(as adjusted) Jan 30, 2015
Current assets
$
8,036

 
$

 
$
8,036

Property, plant and equipment
8,690

 

 
8,690

Goodwill
8,493

 
(2,727
)
 
5,766

Other intangibles
5,648

 
3,113

 
8,761

Current liabilities
(1,806
)
 
(202
)
 
(2,008
)
Other non-current liabilities
(1,655
)
 
(184
)
 
(1,839
)
 
 
 
 
 
 
Consideration paid at closing
$
27,406

 
$

 
$
27,406

 
 
 
 
 
 
Contingent consideration
1,655

 
183

 
1,838

 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
29,061

 
$
183

 
$
29,244

The goodwill and $2.8 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $5.9 million allocated to customer relationships and less than $0.1 million allocated to backlog, which are to be amortized over periods of 7 years and 3 months, respectively. Goodwill and other intangibles of Goldstein Eswood are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
The Goldstein Eswood purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable within the second quarter of each of the fiscal years 2016 and 2017, respectively, if Goldstein Eswood exceeds certain sales targets for fiscal 2015 and 2016, respectively. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $1.8 million.







13



Marsal
On February 10, 2015, the company completed its acquisition of certain assets of Marsal & Sons, Inc. ("Marsal"), a leading manufacturer of deck ovens for the commercial foodservice industry, for a purchase price of approximately $5.5 million. During the second quarter of 2015, the company finalized the working capital provision provided by the purchase agreement resulting in no adjustment to the purchase price.
The final allocation of cash paid for the Marsal acquisition is summarized as follows (in thousands):
 
(as initially reported) Feb 10, 2015
 
Measurement Period Adjustments
 
(as adjusted) Feb 10, 2015
Current assets
$
455

 
$

 
$
455

Property, plant and equipment
201

 
(6
)
 
195

Goodwill
3,012

 
6

 
3,018

Other intangibles
2,027

 

 
2,027

Current liabilities
(195
)
 

 
(195
)
 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
5,500

 
$

 
$
5,500

The goodwill and $1.3 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $0.5 million allocated to customer relationships, $0.1 million allocated to developed technology and less than $0.1 million allocated to backlog, which are to be amortized over periods of 4 years, 5 years and 3 months, respectively. Goodwill and other intangibles of Marsal are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.














14



Thurne
On April 7, 2015, the company completed its acquisition of certain assets of the High Speed Slicing business unit of Marel ("Thurne"), a leading manufacturer of slicing equipment for the food processing industry located in Norwich, United Kingdom, for a purchase price of approximately $12.6 million. During the second quarter of 2015, the company finalized the working capital provision provided for by the purchase agreement resulting in a refund from the seller of $2.7 million.
The final allocation of cash paid for the Thurne acquisition is summarized as follows (in thousands):
 
(as initially reported) Apr 7, 2015
 
Measurement Period Adjustments
 
(as adjusted) Apr 7, 2015
Current assets
$
3,419

 
$
(275
)
 
$
3,144

Property, plant and equipment
3,334

 

 
3,334

Goodwill
609

 
2,378

 
2,987

Other intangibles
3,625

 
(2,024
)
 
1,601

Current liabilities
(1,115
)
 

 
(1,115
)
 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
9,872

 
$
79

 
$
9,951

The goodwill and $0.4 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $0.6 million allocated to customer relationships, $0.6 million allocated to developed technology and $0.1 million allocated to backlog, which are to be amortized over periods of 9 years, 7 years, and 3 months, respectively. Goodwill and other intangibles of Thurne are allocated to the Food Processing Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.















15



Induc
On May 30, 2015, the company completed its acquisition of certain assets of the Induc Commercial Electronics Co. Ltd. ("Induc"), a leading manufacturer of induction cooking equipment for the commercial foodservice industry located in Qingdao, China, for a purchase price of approximately $10.6 million. An additional deferred payment of approximately $1.4 million is also due to the seller on the second anniversary of the acquisition. An additional payment is also due upon the achievement of certain financial targets. The purchase price is subject to adjustment based upon a working capital provision provided by the purchase agreement. The company expects to finalize this in the second quarter of 2016.
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) May 30, 2015
 
Preliminary Measurement Period Adjustments
 
(as adjusted) May 30, 2015
Current assets
$
1,705

 
$
(342
)
 
$
1,363

Property, plant and equipment
536

 
255

 
791

Goodwill
13,496

 
(393
)
 
13,103

Other intangibles
1,500

 
(300
)
 
1,200

Other assets
32

 
(32
)
 

Current liabilities
(854
)
 
854

 

Other non-current liabilities
(5,793
)
 
(42
)
 
(5,835
)
 
 
 
 
 
 
   Consideration paid at closing
$
10,622

 
$

 
$
10,622

 
 
 
 
 
 
Deferred payment
1,516

 
(85
)
 
1,431

Contingent consideration
4,276

 
127

 
4,403

 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
16,414

 
$
42

 
$
16,456

The goodwill and $0.5 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $0.7 million allocated to customer relationships, which is to be amortized over a period of 9 years, Goodwill and other intangibles of Induc are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
The Induc purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable within the first quarter of each of the fiscal years 2018, 2019 and 2020, respectively, if Induc exceeds certain sales and earnings targets for fiscal 2017, 2018 and 2019, respectively. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $4.4 million.
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. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.






16



AGA
On September 23, 2015, the company completed its acquisition of all of the capital stock of AGA Rangemaster Group plc ("AGA") a leading manufacturer of residential kitchen equipment including ranges, ovens and refrigeration for a purchase price of approximately $184.7 million, net of cash acquired. AGA is headquartered in Leamington Spa, United Kingdom. During the fourth quarter of 2015, the company completed the purchase of the minority interest of an AGA subsidiary for approximately $4.3 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) Sep 23, 2015
 
Preliminary Measurement Period Adjustments
 
(as adjusted) Sep 23, 2015
Cash
$
15,316

 
$
984

 
$
16,300

Current assets
163,216

 
(9,723
)
 
153,493

Property, plant and equipment
61,423

 
(2,688
)
 
58,735

Goodwill
144,645

 
(20,373
)
 
124,272

Other intangibles
190,000

 
30,000

 
220,000

Deferred tax asset
5,306

 
(5,306
)
 

Other assets
1,573

 
289

 
1,862

Current portion long-term debt
(30,703
)
 

 
(30,703
)
Current liabilities
(147,279
)
 
(5,726
)
 
(153,005
)
Long term debt
(138
)
 

 
(138
)
Long-term deferred tax liability

 
(143
)
 
(143
)
Other non-current liabilities
(202,312
)
 
12,686

 
(189,626
)
 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
201,047

 
$

 
$
201,047

The long-term deferred tax asset amounted to $0.1 million. These net assets are comprised of $33.6 million of assets related to pension liabilities, $0.9 million of assets related to foreign net operating loss, $1.7 million of assets related to federal net operating loss carry forwards and $5.2 million of assets related to the difference between the book and tax basis of tangible assets and liability accounts, net of $41.5 million of deferred tax liabilities related to the difference between the book and tax basis of identifiable intangible assets. Net operating loss carryforwards are subject to carryforward limitations.
The goodwill and $145.0 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $75.0 million allocated to customer relationships, which is to be amortized over a period of 8 years. Goodwill and other intangibles of AGA are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
The company estimated the fair value of the assets and liabilities of AGA on a preliminary basis at the time of acquisition based on third-party estimates used to assist in determining the fair market value for acquired tangible and intangible assets.  Changes to these allocations will occur as additional information becomes available. The company is in the process of obtaining third-party valuations related to the fair value of tangible and intangible assets, in addition to determining and recording the tax effects of the transaction to include all assets/liabilities as those are recorded at fair value. Acquired goodwill represents the premium paid over the fair value of assets acquired and liabilities assumed.
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. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.


17



Lynx
On December 15, 2015, the company completed its acquisition of all of the capital stock of Lynx Grills, Inc. ("Lynx"), a leading manufacturer of premium residential outdoor equipment located in Downey, California, for a purchase price of approximately $83.8 million, net of cash acquired. The purchase price is subject to adjustment based upon a working capital provision provided by the purchase agreement. The company expects to finalize this in the second quarter of 2016.
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) Dec 15, 2015
 
Preliminary Measurement Period Adjustments
 
(as adjusted) Dec 15, 2015
Cash
$
276

 
$

 
$
276

Current deferred tax asset
467

 

 
467

Current assets
18,630

 
(100
)
 
18,530

Property, plant and equipment
1,690

 

 
1,690

Goodwill
42,502

 
100

 
42,602

Other intangibles
39,800

 

 
39,800

Other assets
130

 

 
130

Current liabilities
(6,208
)
 

 
(6,208
)
Long term deferred tax liability
(12,589
)
 

 
(12,589
)
Other non-current liabilities
(666
)
 

 
(666
)
 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
84,032

 
$

 
$
84,032

The current deferred tax assets and long term deferred tax liabilities amounted to $0.5 million and $12.6 million, respectively. These net liabilities are comprised of $14.0 million of deferred tax liabilities related to the difference between book and tax basis of identifiable intangible assets, net of $1.6 million related to federal and state net operating loss carryforwards and $0.3 million of assets arising from the difference between the book and tax basis of tangible assets and liability accounts. Federal and state net operating loss carryforwards are subject to carryforward limitations.
The goodwill and $30.0 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $9.0 million allocated to customer relationships and $0.8 million allocated to backlog, which is to be amortized over a period of 5 years and 3 months respectively. Goodwill and other intangibles of Lynx are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. These assets are not 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. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.








18



Pro Forma Financial Information
 
In accordance with ASC 805 “Business Combinations”, the following unaudited pro forma results of operations for the years ended April 2, 2016 and April 4, 2015, assumes the 2015 acquisitions of Desmon, Goldstein Eswood, Marsal, Thurne, Induc, AGA and Lynx were completed on January 4, 2015 (first day of fiscal year 2015). The following pro forma results include adjustments to reflect additional interest expense to fund the acquisitions, amortization of intangibles associated with the acquisitions, and the effects of adjustments made to the carrying value of certain assets (in thousands, except per share data):
 
 
April 2, 2016
 
April 4, 2015
Net sales
$
516,355

 
$
553,114

Net earnings
54,538

 
28,091

 
 
 
 
Net earnings per share:
 

 
 

Basic
0.96

 
0.49

Diluted
0.96

 
0.49

 
The supplemental pro forma financial information presented above has been prepared for comparative purposes and is not necessarily indicative of either the results of operations that would have occurred had the acquisitions of these companies been effective on January 4, 2015 nor are they indicative of any future results. Also, the pro forma financial information does not reflect the costs which the company has incurred or may incur to integrate Desmon, Goldstein Eswood, Marsal, Thurne, Induc, AGA and Lynx.
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 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 pending litigation will have a material effect on its financial condition, results of operations or cash flows.
4)
Recently Issued Accounting Standards

In May 2014, the Financial Accounts Standards Board ("FASB") issued ASU No. 2014-09, “Revenue from Contracts with Customers”. This update amends the current guidance on revenue recognition related to contracts with customers. Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In early 2016, the FASB issued additional updates: ASU No. 2016-10, 2016-11 and 2016-12. These updates provide further guidance and clarification on specific items within the previously issued update. In July 2015, the FASB decided to delay the effective date of the new revenue standard to be effective for interim and annual periods beginning on or after December 15, 2017 for public companies. Companies may elect to adopt the standard at the original effective date for public entities, that is, for interim and annual periods beginning on or after December 15, 2016, but not earlier. The guidance can be applied using one of two retrospective application methods. The company is evaluating the impact the application of these ASU's will have, if any, on the company's financial position, results of operations or cash flows.




19



In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation”. This update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update is effective for annual and corresponding interim reporting periods beginning on or after December 15, 2015. Early adoption is permitted. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In January 2015, the FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items". This update eliminates the concept of extraordinary items from the current guidance. This update is effective for annual and corresponding interim reporting periods beginning after December 15, 2015. Early adoption is permitted provided the guidance is applied from the beginning of the fiscal year of adoption. Retrospective application is encouraged for all prior periods presented in the financial statements. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs to be recorded as a direct reduction of the debt liability on the balance sheet rather than as an asset. The standard is effective for fiscal years beginning after December 15, 2015 and early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-04, "Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets". This ASU is intended to provide a practical expedient for the measurement date of defined benefit plan assets and obligations. The practical expedient allows employers with fiscal year-end dates that do not fall on a calendar month-end (e.g., companies with a 52/53-week fiscal year) to measure pension and post-retirement benefit plan assets and obligations as of the calendar month-end date closest to the fiscal year-end. The FASB also provided a similar practical expedient for interim remeasurements for significant events. This ASU requires perspective application and is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest” which relates to the presentation of debt issuance costs. This standard clarifies the guidance set forth in FASB ASU 2015-03, which required that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability rather than as an asset. The new pronouncement clarifies that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The company does not expect the adoption of this standard to have a material impact on its consolidated balance sheets.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which is intended to simplify the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. Application of the standard, which should be applied prospectively, is required for the annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows.
    
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively.  Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date.  The ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.






20



In November 2015, the FASB issued ASU 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes". The amendments in ASU 2015-17 simplify the accounting for, and presentation of, deferred taxes by eliminating the need to separately classify the current amount of deferred tax assets or liabilities. Instead, aggregated deferred tax assets and liabilities are classified and reported as non-current assets or liabilities. The update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been issued. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". The amendments under this pronouncement will change the way all leases with a duration of one year of more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases are under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. This update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2018. The company is currently evaluating the impact this standard will have on its policies and procedures pertaining to its existing and future lease arrangements, disclosure requirements and on the company's financial position, results of operations or cash flows.
 
In March 2016, the FASB issued ASU No. 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships". The amendments in ASU 2016-05 clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of the hedging relationship provided that ll other hedge accounting criteria continue to be met. The amendments in this update may be applied on either a prospective basis or a modified retrospective basis. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2016. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows.
 
In March 2016, the FASB issues ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718)". The amendments in ASU-09 simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2016. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows.




21



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".
Changes in accumulated other comprehensive income(1) were as follows (in thousands):
 
Currency Translation Adjustment
 
Pension Benefit Costs
 
Unrealized Gain/(Loss) Interest Rate Swap
 
Total
Balance as of January 2, 2016
$
(52,842
)
 
$
(23,579
)
 
$
9

 
$
(76,412
)
Other comprehensive income before reclassification
(396
)
 
3,778

 
75

 
3,457

Amounts reclassified from accumulated other comprehensive income

 

 
(196
)
 
(196
)
Net current-period other comprehensive income
$
(396
)
 
$
3,778

 
$
(121
)
 
$
3,261

Balance as of April 2, 2016
$
(53,238
)
 
$
(19,801
)
 
$
(112
)
 
$
(73,151
)
(1) All amounts are net of tax.
Components of other comprehensive income were as follows (in thousands)
 
Three Months Ended
 
Apr 2, 2016
 
Apr 4, 2015
Net earnings
$
54,538

 
$
38,231

Currency translation adjustment
(396
)
 
(15,791
)
Pension liability adjustment, net of tax
3,778

 
114

Unrealized gain on interest rate swaps, net of tax
(121
)
 
(472
)
Comprehensive income
$
57,799

 
$
22,082

6)
Inventories
Inventories are composed of material, labor and overhead and are stated at the lower of cost or market. Costs for inventories 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 $37.5 million at April 2, 2016 and $35.6 million at January 2, 2016 and represented approximately 10.2% and 10.1% of the total inventory at each respective period. The amount of LIFO reserve at April 2, 2016 and January 2, 2016 was not material. 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, 2016 and January 2, 2016 are as follows: 
 
Apr 2, 2016
 
Jan 2, 2016
 
(in thousands)
Raw materials and parts
$
141,608

 
$
139,117

Work-in-process
33,599

 
34,771

Finished goods
192,432

 
180,262

 
$
367,639

 
$
354,150


22



7)
Goodwill
Changes in the carrying amount of goodwill for the three months ended April 2, 2016 are as follows (in thousands):
 
Commercial
Foodservice
 
Food
Processing
 
Residential Kitchen
 
Total
Balance as of January 2, 2016
$
473,127

 
$
134,092

 
$
376,120

 
$
983,339

Goodwill acquired during the year

 

 

 

Measurement period adjustments to goodwill acquired in prior year
83

 

 
100

 
183

Exchange effect
158

 
1,615

 
(1,297
)
 
476

Balance as of April 2, 2016
$
473,368

 
$
135,707

 
$
374,923

 
$
983,998

8)
Accrued Expenses
Accrued expenses consist of the following:
 
Apr 2, 2016
 
Jan 2, 2016
 
(in thousands)
Accrued payroll and related expenses
$
64,497

 
$
65,623

Advanced customer deposits
56,871

 
57,595

Accrued warranty
37,847

 
37,901

Accrued customer rebates
27,258

 
45,154

Accrued product liability and workers compensation
11,880

 
11,635

Accrued sales and other tax
9,690

 
13,537

Accrued agent commission
9,515

 
9,948

Accrued professional fees
8,317

 
7,019

Product recall
7,172

 
7,786

Restructuring
3,707

 
6,266

Other accrued expenses
63,257

 
57,690

 
 
 
 
 
$
300,011

 
$
320,154

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, 2016
 
(in thousands)
Balance as of January 2, 2016
$
37,901

Warranty reserve related to acquisitions

Warranty expense
11,535

Warranty claims
(11,589
)
Balance as of April 2, 2016
$
37,847


23



10)
Financing Arrangements
 
Apr 2, 2016
 
Jan 2, 2016
 
(in thousands)
Senior secured revolving credit line
$
705,000

 
$
733,000

Foreign loans
57,881

 
32,813

Other debt arrangement
239

 
248

     Total debt
$
763,120

 
$
766,061

Less:  Current maturities of long-term debt
57,046

 
32,059

     Long-term debt
$
706,074

 
$
734,002

On August 7, 2012, the company entered into a senior secured multi-currency credit facility. Terms of the company’s senior credit agreement provide for $1.0 billion of availability under a revolving credit line. As of April 2, 2016, the company had $705.0 million of borrowings outstanding under this facility. The company also had $6.5 million in outstanding letters of credit as of April 2, 2016, which reduces the borrowing availability under the revolving credit line. Remaining borrowing availability under this facility was $288.5 million at April 2, 2016.
At April 2, 2016, borrowings under the senior secured credit facility were assessed at an interest rate of 1.50% above LIBOR for long-term borrowings or at the higher of the Prime rate and the Federal Funds Rate. The average interest rate on the senior debt amounted to 2.00%. 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 0.25% as of April 2, 2016.
In September 2015, the company completed its acquisition of Aga Rangemaster Group plc in the United Kingdom. At the time of acquisition, credit facilities denominated in British Pounds, Euro and U.S. dollars, had been established to fund local working capital needs. At April 2, 2016, these facilities amounted to $50.5 million in U.S. dollars. The average interest rate assessed on these facilities was approximately 2.61%.
In addition, the company has other international credit facilities to fund working capital needs outside the United States and the United Kingdom. At April 2, 2016, these foreign credit facilities amounted to $7.4 million in U.S. dollars with a weighted average interest rate of approximately 7.92%.
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 consistent with current market conditions and therefore the carrying value of debt reflects the fair value. However, 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.
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 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 August 2017. 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 carrying value and estimated aggregate fair value, a level 2 measurement, based primarily on market prices, of debt is as follows (in thousands):
 
Apr 2, 2016
 
Jan 2, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Total debt
$
763,120

 
$
763,120

 
$
766,061

 
$
766,061




24



The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the revolving credit line. At April 2, 2016, the company had outstanding floating-to-fixed interest rate swaps totaling $65.0 million notional amount carrying an average interest rate of 0.82% maturing in less than 12 months and $110.0 million notional amount carrying an average interest rate of 0.94% that mature in more than 12 months but less than 24 months.
The senior revolving facility matures on August 7, 2017, and accordingly has been classified as a long-term liability on the consolidated balance sheet.
The company believes that its current capital resources, including cash and cash equivalents, cash expected to be generated from operations, funds available from its current lenders and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and expenditures for the foreseeable future.
The terms of the senior secured credit facility limit the ability of the company and its subsidiaries to, with certain exceptions: incur indebtedness; grant liens; engage in certain mergers, consolidations, acquisitions and dispositions; make restricted payments; enter into certain transactions with affiliates; and require, among other things, a maximum ratio of indebtedness to EBITDA of 3.5 and a fixed charge coverage ratio (as defined in the senior secured credit facility) of 1.25. The senior secured credit facility is secured by substantially all of the assets of Middleby Marshall, the company and the company's domestic subsidiaries and is unconditionally guaranteed by, subject to certain exceptions, the company and certain of the company's direct and indirect material domestic subsidiaries. The senior secured credit facility contains certain customary events of default, including, but not limited to, the failure to make required payments; bankruptcy and other insolvency events; the failure to perform certain covenants; the material breach of a representation or warranty; non-payment of certain other indebtedness; the entry of undischarged judgments against the company or any subsidiary for the payment of material uninsured amounts; the invalidity of the company guarantee or any subsidiary guaranty; and a change of control of the company. 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, 2016, the company was in compliance with all covenants pursuant to its borrowing agreements.
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 a derivative does qualify as a hedge under ASC 815, changes in the fair value will either be offset against the change in the 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 uses foreign currency forward and option purchase and sales 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 fair value of the forward and option contracts was a gain of $0.4 million at the end of the first quarter of 2016.
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, 2016, the fair value of these instruments was a liability of $0.6 million. The change in fair value of these swap agreements in the first three months of 2016 was a loss of $0.1 million, net of taxes.




25



The following tables summarize the company’s fair value of interest rate swaps (in thousands):
 
Condensed Consolidated
Balance Sheet Presentation
 
Apr 2, 2016

 
Jan 2, 2016

Fair value
Other non-current liabilities
 
$
(603
)
 
$
(412
)
The impact on earnings from interest rate swaps was as follows (in thousands):
 
 
 
Three Months Ended
 
Presentation of Gain/(loss)
 
Apr 2, 2016
 
Apr 4, 2015

Gain/(loss) recognized in accumulated other comprehensive income
Other comprehensive income
 
$
(519
)
 
$
(1,297
)
Gain/(loss) reclassified from accumulated other comprehensive income (effective portion)
Interest expense
 
$
(317
)
 
$
(485
)
Gain/(loss) recognized in income (ineffective portion)
Other expense
 
$
11

 
$
13

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.

26



12)
Segment Information
The company operates in three 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, Washington, Australia, China, Denmark, Italy, the Philippines and the United Kingdom. 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, charbroilers, catering equipment, fryers, toasters, hot food servers, food warming equipment, griddles, coffee and beverage dispensing equipment, professional refrigerators, coldrooms, ice machines, freezers and kitchen processing and ventilation equipment. These products are sold and marketed under the brand names: Anets, Beech, Blodgett, Blodgett Combi, Blodgett Range, Bloomfield, Britannia, CTX, Carter-Hoffmann, Celfrost, Concordia, CookTek, Desmon, Doyon, Eswood, Frifri, Giga, Goldstein, Holman, Houno, IMC, Induc, Jade, Lang, Lincat, MagiKitch’n, Market Forge, Marsal, Middleby Marshall, MPC, Nieco, Nu-Vu, PerfectFry, Pitco, Southbend, Star, Toastmaster, TurboChef, Wells and Wunder-Bar.
The Food Processing Equipment Group manufactures preparation, cooking, packaging, food handling and food safety equipment for the food processing industry. This business segment has manufacturing operations in Georgia, Illinois, Iowa, North Carolina, Texas, Virginia, Wisconsin, France, Germany and the United Kingdom. Principal product lines of this group include batch ovens, belt ovens, continuous processing ovens, frying systems, automated thermal processing systems, automated loading and unloading systems, meat presses, breading, battering, mixing, water cutting systems, forming, grinding and slicing equipment, food suspension, reduction and emulsion systems, defrosting equipment, packaging and food safety equipment. These products are sold and marketed under the brand names: Alkar, Armor Inox, Auto-Bake, Baker Thermal Solutions, Cozzini, Danfotech, Drake, Maurer-Atmos, MP Equipment, RapidPak, Spooner Vicars, Stewart Systems and Thurne.
The Residential Kitchen Equipment Group manufactures, sells and distributes kitchen equipment for the residential market. This business segment has manufacturing facilities in California, Michigan, Mississippi, Wisconsin, France, Ireland, Romania, and the United Kingdom. Principal product lines of this group include ranges, cookers, ovens, refrigerators, dishwashers, microwaves, cooktops and outdoor equipment. These products are sold and marketed under the brand names of AGA, AGA Cookshop, Brigade, Falcon, Fired Earth, Grange, Heartland, La Cornue, Leisure Sinks, Lynx, Marvel, Mercury, Rangemaster, Rayburn, Redfyre, Sedona, Stanley, TurboChef, U-Line and Viking.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief operating decision maker evaluates individual segment performance based on operating income.
Net Sales Summary
(dollars in thousands)
 
Three Months Ended
 
Apr 2, 2016
 
Apr 4, 2015
 
Sales
 
Percent
 
Sales
 
Percent
Business Segments:
 
 
 
 
 
 
 
Commercial Foodservice
$
278,986

 
54.0
%
 
$
262,216

 
64.5
%
Food Processing
78,636

 
15.2

 
69,819

 
17.2

Residential Kitchen
158,733

 
30.8

 
74,561

 
18.3

    Total
$
516,355

 
100.0
%
 
$
406,596

 
100.0
%

27



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

 
Food Processing

 
Residential Kitchen

 
Corporate
and Other(2)

 
Total

Three Months Ended April 2, 2016
 
 
 
 
 
 
 
 
 
Net sales
$
278,986

 
$
78,636

 
$
158,733

 
$

 
$
516,355

Income (loss) from operations
76,569

 
17,863

 
9,851

 
(17,908
)
 
86,375

Depreciation and amortization expense
4,371

 
1,438

 
8,704

 
417

 
14,930

Net capital expenditures
4,184

 
1,798

 
1,711

 

 
7,693

 
 
 
 
 
 
 
 
 
 
Total assets
$
1,132,939

 
$
325,373

 
$
1,235,772

 
$
83,860

 
$
2,777,944

 
 
 
 
 
 
 
 
 
 
Three Months Ended April 4, 2015
 
 
 
 
 
 
 
 
 
Net sales
$
262,216

 
$
69,819

 
$
74,561

 


 
$
406,596

Income (loss) from operations
63,726

 
13,310

 
4,941

 
(15,397
)
 
66,580

Depreciation and amortization expense
5,266

 
1,437

 
4,129

 
400

 
11,232

Net capital expenditures
4,624

 
355

 
1,060

 
78

 
6,117

 
 
 
 
 
 
 
 
 
 
Total assets
$
1,117,585

 
$
309,829

 
$
635,388

 
$
80,034

 
$
2,142,836

 
 
 
 
 
 
 
 
 
 

(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.
















28



Geographic Information
Long-lived assets, not including goodwill and other intangibles (in thousands):
 
Apr 2, 2016
 
Apr 4, 2015
United States and Canada
$
153,284

 
$
129,397

Asia
18,011

 
13,727

Europe and Middle East
60,795

 
22,596

Latin America
1,114

 
1,473

Total international
$
79,920

 
$
37,796

 
$
233,204

 
$
167,193

Net sales (in thousands):
 
Three Months Ended
 
Apr 2, 2016

 
Apr 4, 2015

United States and Canada
$
325,941

 
$
296,484

Asia
37,794

 
48,529

Europe and Middle East
136,604

 
42,984

Latin America
16,016

 
18,599

Total international
$
190,414

 
$
110,112

 
$
516,355

 
$
406,596

13)
Employee Retirement Plans
(a)
Pension Plans

U.S. 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 company maintains a non-contributory defined benefit plan for its employees at the Smithville, Tennessee facility, which was acquired as part of the 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 also maintains a retirement benefit agreement with its Chairman ("Chairman Plan"). The retirement benefits are based upon a percentage of the Chairman’s final base salary.

Non-U.S. Plans:

The company maintains a defined benefit plan for its employees at the Wrexham, the United Kingdom facility, which was acquired as part of the Lincat acquisition. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2010 prior to Middleby’s acquisition of the company. 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, 2010 upon reaching retirement age.





29



The company maintains several pension plans related to AGA and its subsidiaries (collectively, the "AGA Group"), the most significant being the Aga Rangemaster Group Pension Scheme, which covers the majority of employees in the United Kingdom.  Membership in the plan on a defined benefit basis of pension provision was closed to new entrants in 2001.  The plan became open to new entrants on a defined contribution basis of pension provision in 2002, but was generally closed to new entrants on this basis during 2014. 

The other, much smaller, defined benefit pension plans operating within the AGA Group cover employees in France, Ireland and the United Kingdom.  All pension plan assets are held in separate trust funds although the net defined benefit pension obligations are included in the company's consolidated balance sheet.

During the three months period ended April 2, 2016, the company recorded net periodic pension cost related to the AGA Group pension plans including the following components; an expected return on plan assets of $17.6 million, interest cost of $10.7 million and a service cost of $0.9 million. The pension costs for all other plans of the company were not material during the period.

(b)
Defined Contribution 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 also maintains defined contribution plans for its U.K. based employees.

14)
Restructuring

Residential Kitchen Equipment Group:

During fiscal year 2015, the company took actions to improve the operations of Viking and undertook acquisition integration initiatives related to AGA within the Residential Kitchen Equipment Group. These initiatives included organizational restructuring and headcount reductions, consolidation and disposition of certain facilities and business operations. The company recorded additional expense of $0.6 million in the three months period ended April 2, 2016. This expense is reflected in restructuring expenses in the consolidated statements of comprehensive income. The cumulative expenses incurred to date for these initiatives is approximately $21.0 million. The company estimates that these restructuring initiatives will result in future cost savings of approximately $24.1 million annually, beginning in fiscal year 2016, primarily related to compensation and facility costs. The company anticipates that all severance obligations for the Residential Kitchen Equipment Group will be satisfied by the end of fiscal of 2016. The lease obligations extend through July 2020.
 
 
Severance/Benefits
 
Facilities/Operations
 
Other
 
Total
Balance as of January 2, 2016
 
$
15,661

 
$
4,642

 
$
120

 
$
20,423

Expenses
 
245

 
388

 
(27
)
 
606

Exchange
 
(150
)
 
81

 
40

 
(29
)
Payments
 
(10,276
)
 
(2,024
)
 
(14
)
 
(12,314
)
Balance as of April 2, 2016
 
$
5,480

 
$
3,087

 
$
119

 
$
8,686





30



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 2015 Annual Report on Form 10-K.
 
Net Sales Summary
(dollars in thousands)
 
 
Three Months Ended
 
Apr 2, 2016
 
Apr 4, 2015
 
Sales
 
Percent
 
Sales
 
Percent
Business Segments:
 
 
 
 
 
 
 
Commercial Foodservice
$
278,986

 
54.0
%
 
$
262,216

 
64.5
%
Food Processing
78,636

 
15.2

 
69,819

 
17.2

Residential Kitchen
158,733

 
30.8

 
74,561

 
18.3

    Total
$
516,355

 
100.0
%
 
$
406,596

 
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, 2016
 
Apr 4, 2015
Net sales
100.0
%
 
100.0
%
Cost of sales
61.9

 
61.2

Gross profit
38.1

 
38.8

Selling, general and administrative expenses
21.3

 
21.3

Restructuring expenses
0.1

 
1.1

Income from operations
16.7

 
16.4

Interest expense and deferred financing amortization, net
1.0

 
0.9

Other (income) expense, net
(0.2
)
 
1.1

Earnings before income taxes
15.9

 
14.4

Provision for income taxes
5.3

 
4.9

Net earnings
10.6
%

9.5
%







31



Three Months Ended April 2, 2016 as compared to Three Months Ended April 4, 2015
 
NET SALES. Net sales for the three months period ended April 2, 2016 increased 27.0% to $516.4 million as compared to $406.6 million in the three months period ended April 4, 2015. Of the $109.8 million increase in net sales, $106.6 million or 26.2%, was attributable to acquisition growth, resulting from the fiscal 2015 acquisitions of Goldstein Eswood, Marsal, Induc, Thurne, AGA and Lynx. Excluding acquisitions, net sales increased $3.2 million or 0.8%, from the prior year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the three months period ended April 2, 2016 reduced net sales by approximately $6.4 million or 1.6%. Excluding the impact of foreign exchange, organic sales growth amounted to 2.3% for the year, including a net sales increase of 7.5% at the Commercial Foodservice Equipment Group, a net sales increase of 5.9% at the Food Processing Equipment Group and a net sales decrease of 19.2% at the Residential Kitchen Equipment Group.
 
Net sales of the Commercial Foodservice Equipment Group increased by $16.8 million or 6.4%, to $279.0 million in the three months period ended April 2, 2016, as compared to $262.2 million in the prior year period. Net sales resulting from the acquisitions of Goldstein Eswood, Marsal and Induc which were acquired on January 30, 2015, February 10, 2015, and May 30, 2015, respectively, accounted for an increase of $2.2 million during the three months period ended April 2, 2016. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group increased $14.6 million, or 5.6%, as compared to the prior year period. On a constant currency basis, organic net sales increased 7.5% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales decrease of $1.1 million, or 0.6%, to $184.6 million, as compared to $185.7 million in the prior year period. This includes an increase of $0.6 million from recent acquisitions. Domestic sales in the prior year included revenues from several large restaurant customer equipment rollouts, resulting in lesser growth in comparison to the prior year quarter. Excluding the acquisitions, the net decrease was $1.7 million, or 0.9%. International sales increased $17.9 million, or 23.4%, to $94.4 million, as compared to $76.5 million in the prior year period. This includes an increase of $1.7 million from the recent acquisitions, offset by $5.1 million related to the unfavorable impact of exchange rates. The change in both domestic and international net sales also includes the favorable impact of increased prices over the prior year, which is estimated to have increased net sales by 2.0% to 3.0% as compared to the prior year.

Net sales of the Food Processing Equipment Group increased by $8.8 million or 12.6%, to $78.6 million in the three months period ended April 2, 2016, as compared to $69.8 million in the prior year period.  Net sales from the acquisition of Thurne, which was acquired on April 7, 2015, accounted for an increase of $5.6 million during the three months period ended April 2, 2016.  Excluding the impact of this acquisition, net sales of the Food Processing Equipment Group increased $3.2 million, or 4.6%. On a constant currency basis, organic net sales increased 5.9% at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $19.6 million, or 50.3%, to $58.6 million, as compared to $39.0 million in the prior year quarter. This includes an increase of $5.3 million from the recent acquisition. International sales decreased $10.8 million, or 35.1%, to $20.0 million, as compared to $30.8 million in the prior year period. This includes of $0.3 million from the recent acquisition, and offset by $0.9 million related to the unfavorable impact of exchange rates. The variability between domestic and international sales reflects the nature of the large projects at this business segment, which may occur in different geographic segments in comparative periods. Due to the nature of competitive bidding on large jobs and variability of equipment mix in comparison to the prior year, the impact of price changes are not estimated to be a significant or meaningful factor in the change in net sales from the prior year.

Net sales of the Residential Kitchen Equipment Group increased by $84.1 million or 112.7%, to $158.7 million in the three months period ended April 2, 2016, as compared to $74.6 million in the prior year period. Net sales from the acquisitions of AGA and Lynx, which were acquired on September 23, 2015, and December 15, 2015, respectively, accounted for an increase of $98.8 million during the three months period ended April 2, 2016. Excluding the impact of these acquisitions, net sales of the Residential Kitchen Equipment Group decreased $14.7 million, or 19.7%. On a constant currency basis, organic net sales decreased 19.2% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales increase of $10.9 million, or 15.2%, to $82.7 million, as compared to $71.8 million in the prior year quarter. This includes an increase of $25.0 million from the recent acquisitions. International sales increased $73.2 million, or 2,614.3%, to $76.0 million, as compared to $2.8 million in the prior year quarter, including a reduction of $0.4 million related to the impact of unfavorable exchange rates. Organic sales growth for the quarter was adversely impacted by lower sales at U-Line due to a prior year new product launch resulting in higher sales to dealers for new product showroom displays. Additionally, sales continued to be affected by the recall of certain Viking products manufactured prior to 2013 and Middleby's acquisition of Viking. The net organic decrease in sales is net of price increases, which are estimated to have added approximately 3.0% to net sales in comparison to the prior year.


32



GROSS PROFIT. Gross profit increased to $196.8 million in the three months period ended April 2, 2016 from $157.6 million in the prior year period. The increase in the gross profit reflects the impact of increased sales from acquisitions, offset by the impact of foreign exchange rates, which reduced gross profit by $1.8 million. The gross margin rate was 38.8% in the three months period ended April 4, 2015 as compared to 38.1% in the current year period.
 
Gross profit at the Commercial Foodservice Equipment Group increased by $10.7 million, or 10.2%, to $115.9 million in the three months period ended April 2, 2016, as compared to $105.2 million in the prior year period. Gross profit from the acquisitions of Goldstein Eswood, Marsal and Induc accounted for approximately $0.9 million of the increase in gross profit during the period. Excluding the recent acquisitions, gross profit increased by approximately $9.8 million on higher sales volumes. The impact of foreign exchange rates reduced gross profit by approximately $1.3 million. The gross margin rate increased to 41.5%, as compared to 40.1% in the prior year period, due primarily to changes in sales mix, as compared to the prior year period.

Gross profit at the Food Processing Equipment Group increased by $5.4 million, or 20.7%, to $31.5 million in the three months period ended April 2, 2016, as compared to $26.1 million in the prior year period.  Gross profit from the acquisition of Thurne accounted for approximately $3.0 million of the increase in gross profit during the period. The impact of foreign exchange rates reduced gross profit by approximately $0.4 million. Excluding the recent acquisitions, the gross profit increased by approximately $2.4 million on higher sales volume. The gross profit margin rate increased to 40.1%, as compared to 37.4% in the prior year period. The increase in the gross margin rate reflects the favorable impact of ongoing integration initiatives related to recent acquisitions and favorable sales mix.

Gross profit at the Residential Kitchen Equipment Group increased by $21.8 million, or 79.0%, to $49.4 million in the three months period ended April 2, 2016, as compared to $27.6 million in the prior year period. Gross profit from the acquisitions of AGA and Lynx accounted for approximately $27.6 million of the increase in gross profit during the period. The impact of foreign exchange rates reduced gross profit by approximately $0.1 million. The gross margin rate decreased to 31.1%, as compared to 37.0% in the prior year period, due to the impact of lower gross margins at the recent acquisitions of AGA and Lynx, offsetting improved margins at Viking related to initiatives related to profitability improvement.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses increased from $91.0 million in the three months period ended April 4, 2015 to $110.4 million in the three months period ended April 2, 2016.  As a percentage of net sales, operating expenses were 22.3% in the three months period ended April 4, 2015, as compared to 21.4% in the three months period ended April 2, 2016.

Selling expenses increased from $47.1 million in the three months period ended April 4, 2015 to $53.7 million in the three months period ended April 2, 2016. Selling expenses reflected increased costs of $11.8 million associated with the Goldstein Eswood, Thurne, Induc, AGA and Lynx acquisitions. These expenses were offset by a $1.1 million reduction in compensation and $1.8 million of lower trade show and advertising costs. The impact of foreign exchange rates had a favorable impact, reducing selling expenses by approximately $0.9 million.

General and administrative expenses increased from $39.3 million in the three months period ended April 4, 2015 to $56.1 million in the three months period ended April 2, 2016. General and administrative expenses reflect $14.1 million of increased costs associated with the Goldstein Eswood, Thurne, Induc, AGA and Lynx acquisitions, including $3.5 million of non-cash intangible amortization expense. Additionally, general and administrative expenses increased $3.0 million related to non-cash share-based compensation. The impact of foreign exchange rates had a favorable impact, reducing general and administrative expenses by approximately $0.6 million.

Restructuring expenses decreased $4.0 million from $4.6 million three months period ended April 4, 2015 to $0.6 million in the three months period ended April 2, 2016. The prior year quarter included expenses associated with the closure of facilities and warehouse consolidations at the Residential Kitchen Equipment Group.
 
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were $5.3 million in the three months period ended April 2, 2016, as compared to $3.7 million in the prior year period, reflecting increased interest on higher debt balances associated with acquisition investments. Other income was $0.8 million in the three months period ended April 2, 2016, as compared to other expense of $4.6 million in the prior year period, and consists mainly of foreign exchange gains and losses. In the prior year period foreign exchange losses were attributable to the strengthening of the U.S. Dollar in the quarter, as compared to the Euro, Brazilian Real, Australian Dollar and Canadian Dollar.
 


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INCOME TAXES. A tax provision of $27.4 million, at an effective rate of 33.4%, was recorded during the three months period ended April 2, 2016, as compared to $20.0 million at an effective rate of 34.4%, in the prior year period. In comparison to the prior year, the tax provision reflects a lower effective tax rate on increased earnings in lower foreign and state taxed jurisdictions and an increase in tax credits.
Financial Condition and Liquidity
During the three months ended April 2, 2016, cash and cash equivalents increased by $0.2 million to $55.7 million at April 2, 2016 from $55.5 million at January 2, 2016. Net borrowings decreased from $766.1 million at January 2, 2016 to $763.1 million at April 2, 2016.
OPERATING ACTIVITIES. Net cash provided by operating activities was $14.5 million for the three months ended April 2, 2016, compared to $23.8 million for the three months ended April 4, 2015.
During the three months ended April 2, 2016, increased working capital levels reduced operating cash flows by $68.9 million. These changes in working capital levels included a $19.6 million increase in accounts receivable on increased sales. Inventory increased $12.8 million due to several factors including the timing of large orders for the Food Processing Equipment Group, investments in inventories at the Residential Kitchen Equipment Group in connection with new product introductions and cyclical working capital requirements for the Commerical Foodservice Group. Changes in working capital also included a $36.6 million decrease in accrued expenses and other non-current liabilities primarily related to the $14.4 million funding payment for the AGA pension plan, funding of severance obligations associated with AGA restructuring initiatives and the payment of 2015 annual rebate programs.
INVESTING ACTIVITIES. During the three months ended April 2, 2016, net cash used in investing activities included $7.7 million of additions and upgrades of production equipment and manufacturing facilities.
FINANCING ACTIVITIES. Net cash flows used by financing activities were $6.9 million during the three months ended April 2, 2016. The company’s borrowing activities included $28.0 million of net repayments under its $1.0 billion revolving credit facility and $26.3 million of net borrowings under its foreign banking facilities.
The company repurchased $4.4 million of Middleby common shares during the three months ended April 2, 2016. This was comprised of $3.9 million used to repurchase 38,011 that were surrendered to the company by employees in lieu of cash for payment for withholding taxes related to restricted stock vestings that occurred during the three months ended April 2, 2016 and $0.5 million used to repurchase 5,274 shares of its common stock under a stock repurchase program.
Financing activities also included $0.8 million of excess tax detriment associated with the vesting of restricted stock grants.
At April 2, 2016, the company was in compliance with all covenants pursuant to its borrowing agreements. 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, acquisitions, product development and integration expenditures for the foreseeable future.
Recently Issued Accounting Standards

In May 2014, the Financial Accounts Standards Board ("FASB") issued ASU No. 2014-09, “Revenue from Contracts with Customers”. This update amends the current guidance on revenue recognition related to contracts with customers. Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In early 2016, the FASB issued additional updates: ASU No. 2016-10, 2016-11 and 2016-12. These updates provide further guidance and clarification on specific items within the previously issued update. In July 2015, the FASB decided to delay the effective date of the new revenue standard to be effective for interim and annual periods beginning on or after December 15, 2017 for public companies. Companies may elect to adopt the standard at the original effective date for public entities, that is, for interim and annual periods beginning on or after December 15, 2016, but not earlier. The guidance can be applied using one of two retrospective application methods. The company is evaluating the impact the application of these ASU's will have, if any, on the company's financial position, results of operations or cash flows.


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In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation”. This update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update is effective for annual and corresponding interim reporting periods beginning on or after December 15, 2015. Early adoption is permitted. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In January 2015, the FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items". This update eliminates the concept of extraordinary items from the current guidance. This update is effective for annual and corresponding interim reporting periods beginning after December 15, 2015. Early adoption is permitted provided the guidance is applied from the beginning of the fiscal year of adoption. Retrospective application is encouraged for all prior periods presented in the financial statements. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs to be recorded as a direct reduction of the debt liability on the balance sheet rather than as an asset. The standard is effective for fiscal years beginning after December 15, 2015 and early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-04, "Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets". This ASU is intended to provide a practical expedient for the measurement date of defined benefit plan assets and obligations. The practical expedient allows employers with fiscal year-end dates that do not fall on a calendar month-end (e.g., companies with a 52/53-week fiscal year) to measure pension and post-retirement benefit plan assets and obligations as of the calendar month-end date closest to the fiscal year-end. The FASB also provided a similar practical expedient for interim remeasurements for significant events. This ASU requires perspective application and is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest” which relates to the presentation of debt issuance costs. This standard clarifies the guidance set forth in FASB ASU 2015-03, which required that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability rather than as an asset. The new pronouncement clarifies that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The company does not expect the adoption of this standard to have a material impact on its consolidated balance sheets.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which is intended to simplify the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. Application of the standard, which should be applied prospectively, is required for the annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows.
    
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively.  Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date.  The ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.








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In November 2015, the FASB issued ASU 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes". The amendments in ASU 2015-17 simplify the accounting for, and presentation of, deferred taxes by eliminating the need to separately classify the current amount of deferred tax assets or liabilities. Instead, aggregated deferred tax assets and liabilities are classified and reported as non-current assets or liabilities. The update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been issued. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". The amendments under this pronouncement will change the way all leases with a duration of one year of more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases are under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. This update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2018. The company is currently evaluating the impact this standard will have on its policies and procedures pertaining to its existing and future lease arrangements, disclosure requirements and on the company's financial position, results of operations or cash flows.
 
In March 2016, the FASB issued ASU No. 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships". The amendments in ASU 2016-05 clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of the hedging relationship provided that ll other hedge accounting criteria continue to be met. The amendments in this update may be applied on either a prospective basis or a modified retrospective basis. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2016. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows.
 
In March 2016, the FASB issues ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718)". The amendments in ASU-09 simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2016. The company is evaluating the impact the application of this ASU will have, if any, 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 significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions and any such differences could be material to our consolidated financial statements. 
Revenue Recognition. At the Commercial Foodservice Group and the Residential Kitchen Equipment Group, the company recognizes revenue on the sale of its products where title transfers and when risk of loss has passed to the customer, which occurs at the time of shipment, and collectability 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.




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At the Food Processing Equipment Group, the company enters into long-term sales contracts for certain products that are often significant relative to the business. 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. Revenue for sales of products and services not covered by long-term sales contracts is recognized when risk of loss has passed to the customer, which occurs at the time of shipment and collectability 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.
Inventories. Inventories are stated at the lower of cost or market using the first-in, first-out method for the majority of the company’s inventories.  The company evaluates the need to record valuation adjustments for inventory on a regular basis.  The company’s policy is to evaluate all inventories including raw material, work-in-process, finished goods, and spare parts.  Inventory in excess of estimated usage requirements is written down to its estimated net realizable value.  Inherent in the estimates of net realizable value are estimates related to our future manufacturing schedules, customer demand, possible alternative uses, and ultimate realization of potentially excess inventory. 
Goodwill and Other Intangibles. The company’s business acquisitions result in the recognition of goodwill and other intangible assets, which are a significant portion of the company’s total assets. The company recognizes goodwill and other intangible assets under the guidance of ASC Topic 350-10, “Intangibles — Goodwill and Other”.  Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. Identifiable intangible assets are recognized separately from goodwill and include trademarks and trade names, technology, customer relationships and other specifically identifiable assets.  Trademarks and trade names are deemed to be indefinite-lived. Goodwill and indefinite-lived intangible assets are not amortized, but are subject to impairment testing. On an annual basis, or more frequently if triggering events occur, the company compares the estimated fair value to the carrying value to determine if a potential goodwill impairment exists. If the fair value is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of goodwill. In estimating the fair value of specific intangible assets, management relies on a number of factors, including operating results, business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and management’s judgment in applying them in the impairment tests of goodwill and other intangible assets. 

Pension Benefits. The company provides pension benefits to certain employees and accounts for these benefits in accordance with ASC 715, Compensation-Retirement Benefits. For financial reporting purposes, long-term assumptions are developed through consultations with actuaries. Such assumptions include the expected long-term rate of return on plan assets, discount rates.

The amount of unrecognized actuarial gains and losses recognized in the current year’s operations is based on amortizing the unrecognized gains or losses for each plan that exceed the larger of 10% of the projected benefit obligation or the fair value of plan assets, also known as the corridor. The amount of unrecognized gain or loss that exceeds the corridor is amortized over the average future service of the plan participants or the average life expectancy of inactive plan participants for plans where all or almost all of the plan participants are inactive. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension obligations and our future expense.







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Income Taxes. The company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The company’s deferred and other tax balances are based on management’s interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Income tax expense and liabilities recognized by the company also reflect its best estimates and assumptions regarding, among other things, the level of future taxable income, the effect of the company’s various tax planning strategies and uncertain tax positions. Future tax authority rulings and changes in tax laws, changes in projected levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the company. The company follows the provisions under ASC 740-10-25 that provides a recognition threshold and measurement criteria for the financial statement recognition of a tax benefit taken or expected to be taken in a tax return. Tax benefits are recognized only when it is more likely than not, based on the technical merits, that the benefits will be sustained on examination. Tax benefits that meet the more-likely-than-not recognition threshold are measured using a probability weighting of the largest amount of tax benefit that has greater than 50% likelihood of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a particular tax benefit is a matter of judgment based on the individual facts and circumstances evaluated in light of all available evidence as of the balance sheet date.



38



Item 3.   Quantitative and Qualitative Disclosures About Market Risk 
Interest Rate Risk 
The company is exposed to market risk related to changes in interest rates. The following table summarizes the maturity of the company’s debt obligations:
Twelve Month Period Ending
 
Variable Rate
Debt
 
 
 
April 2, 2017
 
$
57,046

April 2, 2018
 
705,311

April 2, 2019
 
107

April 2, 2020
 
107

April 2, 2021 and thereafter
 
549

 
 
$
763,120

On August 7, 2012, the company entered into a senior secured multi-currency credit facility. Terms of the company’s senior credit agreement provide for $1.0 billion of availability under a revolving credit line. As of April 2, 2016, the company had $705.0 million of borrowings outstanding under this facility. The company also had $6.5 million in outstanding letters of credit as of April 2, 2016, which reduces the borrowing availability under the revolving credit line. Remaining borrowing availability under this facility was $288.5 million at April 2, 2016.
At April 2, 2016, borrowings under the senior secured credit facility were assessed at an interest rate of 1.50% above LIBOR for long-term borrowings or at the higher of the Prime rate and the Federal Funds Rate. The average interest rate on the senior debt amounted to 2.00%. 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 0.25% as of April 2, 2016.
In September 2015, the company completed its acquisition of AGA Rangemaster Group plc in the United Kingdom. At the time of acquisition, credit facilities denominated in British Pounds, Euro and U.S. dollars, had been established to fund local working capital needs. At April 2, 2016, these facilities amounted to $50.5 million in U.S. dollars. The average interest rate assessed on these facilities was approximately 2.61%.
In addition, the company has other international credit facilities to fund working capital needs outside the United States and the United Kingdom. At April 2, 2016, these foreign credit facilities amounted to $7.4 million in U.S. dollars with a weighted average interest rate of approximately 7.92%.
The company believes that its current capital resources, including cash and cash equivalents, cash expected to be generated from operations, funds available from its current lenders and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and expenditures for the foreseeable future.
The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the revolving credit line. At April 2, 2016, the company had outstanding floating-to-fixed interest rate swaps totaling $65.0 million notional amount carrying an average interest rate of 0.82% maturing in less than 12 months and $110.0 million notional amount carrying an average interest rate of 0.94% that mature in more than 12 months but less than 24 months.






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The terms of the senior secured credit facility limit the ability of the company and its subsidiaries to, with certain exceptions: incur indebtedness; grant liens; engage in certain mergers, consolidations, acquisitions and dispositions; make restricted payments; enter into certain transactions with affiliates; and require, among other things, a maximum ratio of indebtedness to EBITDA of 3.5 and a fixed charge coverage ratio (as defined in the senior secured credit facility) of 1.25. The senior secured credit facility is secured by substantially all of the assets of Middleby Marshall, the company and the company's domestic subsidiaries and is unconditionally guaranteed by, subject to certain exceptions, the company and certain of the company's direct and indirect material domestic subsidiaries. The senior secured credit facility contains certain customary events of default, including, but not limited to, the failure to make required payments; bankruptcy and other insolvency events; the failure to perform certain covenants; the material breach of a representation or warranty; non-payment of certain other indebtedness; the entry of undischarged judgments against the company or any subsidiary for the payment of material uninsured amounts; the invalidity of the company guarantee or any subsidiary guaranty; and a change of control of the company. 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 potential loss on fair value for the company's debt obligations from a hypothetical 10% adverse change in quoted interest rates would not have a material impact on the company's financial position, results of operations and cash flows. At April 2, 2016, the company was in compliance with all covenants pursuant to its borrowing agreements.
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, 2016, the fair value of these instruments was a liability of $0.6 million. The change in fair value of these swap agreements in the first three months of 2016 was a loss of $0.1 million, net of taxes. The potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted interest rates would not have a material impact on the company's financial position, results of operations and cash flows.
Foreign Exchange Derivative Financial Instruments
The company uses foreign currency forward and option purchase and sales 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 potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted foreign exchange rates would not have a material impact on the company's financial position, results of operations and cash flows. The fair value of the forward and option contracts was a gain of $0.4 million at the end of the first quarter of 2016.
 

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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, 2016, 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, 2016, 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, 2016, 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 (1)

January 3 to January 30, 2016
38,011

 
$
102.45

 
3,894,227

 
2,572,036

January 31 to February 27, 2016

 

 

 
2,572,036

February 28 to April 2, 2016
5,274

 
99.23

 
523,351

 
2,566,762

Quarter ended April 2, 2016
43,285

 
$
102.06

 
4,417,578

 
2,566,762

(1) In July 1998, the company's Board of Directors adopted a stock repurchase program and subsequently authorized the purchase of common shares in open market purchases. During 2013, the company's Board of Directors authorized the purchase of additional common shares in open market purchases. As of April 2, 2016, the total number of shares authorized for repurchase under the program is 4,570,266. As of April 2, 2016, 2,003,504 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, 2016, filed on May 12, 2016, 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, 2016
 
By:
/s/  Timothy J. FitzGerald
 
 
 
 
Timothy J. FitzGerald
 
 
 
 
Vice President,
 
 
 
 
Chief Financial Officer

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