MIDDLEBY Corp - Annual Report: 2021 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | ||||
For the Fiscal Year Ended January 2, 2021
or
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
Commission File No. 1-9973
THE MIDDLEBY CORPORATION
(Exact name of Registrant as specified in its charter)
| Delaware | 36-3352497 | |||||||
| (State or other jurisdiction of 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 | ||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | |||||||||||||||
| Common stock, | par value $0.01 per share | MIDD | NASDAQ Global Select Market | ||||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “accelerated filer," "large accelerated filer," "smaller reporting company," and "emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of June 27, 2020 was approximately $4,004,674,379.
The number of shares outstanding of the Registrant’s class of common stock, as of March 1, 2021, was 55,638,477 shares.
Documents Incorporated by Reference
Part III of Form 10-K incorporates by reference the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A in connection with the 2021 annual meeting of stockholders.
THE MIDDLEBY CORPORATION
JANUARY 2, 2021
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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| PART I | ||||||||
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| Item 2. | ||||||||
| Item 3. | ||||||||
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| PART II | ||||||||
| Item 5. | ||||||||
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| Item 7A. | ||||||||
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| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| PART III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| PART IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
PART I
Item 1. Business
General
The Middleby Corporation, a Delaware corporation (“Middleby” or the “company”), through its operating subsidiary Middleby Marshall Inc., a Delaware corporation (“Middleby Marshall”) and its subsidiaries, is a leader in the design, manufacture, marketing, distribution, and service of a broad line of (i) foodservice equipment used in all types of commercial restaurants and institutional kitchens, (ii) food preparation, cooking, baking, chilling and packaging equipment for food processing operations, and (iii) premium kitchen equipment including ranges, ovens, refrigerators, ventilation and dishwashers primarily used in the residential market.
Founded in 1888 as a manufacturer of baking ovens, Middleby Marshall Oven Company was acquired in 1983 by TMC Industries Ltd., a publicly traded company that changed its name in 1985 to The Middleby Corporation. The company has established itself as a leading provider of (i) commercial restaurant equipment, (ii) food processing equipment and (iii) residential kitchen equipment as a result of its acquisition of industry leading brands and through the introduction of innovative products within each of these segments.
The company's annual reports on Form 10-K, including this Form 10-K, as well as the company's quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to such reports are available, free of charge, on the company's internet website, www.middleby.com. These reports are available as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).
Business Segments and Products
The company conducts its business through three principal business segments: the Commercial Foodservice Equipment Group, the Food Processing Equipment Group and the Residential Kitchen Equipment Group. See Note 10 to the Consolidated Financial Statements for further information on the company's business segments.
Commercial Foodservice Equipment Group
The Commercial Foodservice Equipment Group has a broad portfolio of foodservice equipment, which enable it to serve virtually any cooking, warming, holding, refrigeration, freezing and beverage application within a commercial kitchen or foodservice operation. This equipment is used across all types of foodservice operations, including quick-service restaurants, full-service restaurants, ghost kitchens, convenience stores, supermarkets, retail outlets, hotels and other institutions.
This commercial foodservice equipment is marketed under a portfolio of sixty-six brands, including Anets, APW Wyott, Bakers Pride, Beech, BKI, Blodgett, Blodgett Combi, Bloomfield, Britannia, Carter-Hoffmann, Celfrost, Concordia, CookTek, Crown, CTX, Desmon, Deutsche Beverage, Doyon, Eswood, EVO, Firex, Follett, Frifri, Giga, Globe, Goldstein, Holman, Houno, IMC, Induc, Ink Kegs, Inline Filling Systems, Jade, JoeTap, Josper, L2F, Lang, Lincat, MagiKitch’n, Market Forge, Marsal, Meheen, Middleby Marshall, MPC, Nieco, Nu-Vu, PerfectFry, Pitco, QualServ, RAM, Southbend, Ss Brewtech, Star, Starline, Sveba Dahlen, Synesso, Tank, Taylor, Thor, Toastmaster, TurboChef, Ultrafryer, Varimixer, Wells, Wild Goose and Wunder-Bar.
The products offered by this group include conveyor ovens, combi-ovens, convection ovens, baking ovens, proofing ovens, deck ovens, speed cooking ovens, hydrovection ovens, ranges, fryers, rethermalizers, steam cooking equipment, food warming equipment, catering equipment, heated cabinets, charbroilers, ventless cooking systems, kitchen ventilation, induction cooking equipment, countertop cooking equipment, toasters, griddles, charcoal grills, professional mixers, stainless steel fabrication, custom millwork, professional refrigerators, blast chillers, coldrooms, ice machines, freezers, soft serve ice cream equipment, coffee and beverage dispensing equipment, home and professional craft brewing equipment, fry dispensers, bottle filling and canning equipment, and IoT solutions.
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Food Processing Equipment Group
The Food Processing Equipment Group offers a broad portfolio of processing solutions for customers producing protein products, such as bacon, salami, hot dogs, dinner sausages, poultry and lunchmeats and bakery products, such as muffins, cookies, crackers, pies, bread and buns. Through its broad line of products, the company is able to deliver a wide array of food preparation, thermal processing and slicing/packaging solutions to service a variety of food processing requirements demanded by its customers. The company can offer highly integrated full processing line solutions that provide a food processing operation a uniquely integrated solution providing for the highest level of food quality, product consistency, and reduced operating costs resulting from increased product yields, increased capacity, greater throughput and reduced labor costs through automation.
This food processing equipment is marketed under a portfolio of twenty-one brands, including Alkar, Armor Inox, Auto-Bake, Baker Thermal Solutions, Burford, Cozzini, CV-Tek, Danfotech, Deutsche Process, Drake, Glimek, Hinds-Bock, Maurer-Atmos, MP Equipment, Pacproinc, RapidPak, Scanico, Spooner Vicars, Stewart Systems, Thurne and Ve.Ma.C.
The products offered by this group include a wide array of cooking and baking solutions, including batch ovens, baking ovens, proofing ovens, conveyor belt ovens, continuous processing ovens, frying systems and automated thermal processing systems. The company also provides a comprehensive portfolio of complementary food preparation equipment such as grinders, slicers, reduction and emulsion systems, mixers, blenders, formers, battering equipment, breading equipment, seeding equipment, water cutting systems, food presses, food suspension equipment, filling and depositing solutions and forming equipment, as well as a variety of automated loading and unloading systems, food safety, food handling, freezing, defrosting and packaging equipment. This portfolio of equipment can be integrated to provide customers a highly efficient and customized solution.
Residential Kitchen Equipment Group
The Residential Kitchen Equipment Group manufactures, sells and distributes kitchen equipment for the residential market. Principal product lines of this group are ranges, cookers, stoves, cooktops, microwaves, ovens, refrigerators, dishwashers, undercounter refrigeration, wine cellars, ice machines, ventilation equipment and outdoor equipment. These products are sold and marketed under a portfolio of seventeen brands, including AGA, AGA Cookshop, Brava, EVO, La Cornue, Leisure Sinks, Lynx, Marvel, Mercury, Rangemaster, Rayburn, Redfyre, Sedona, Stanley, TurboChef, U-Line and Viking.
Acquisition Strategy
The company has pursued a strategy to acquire and assemble a leading portfolio of brands and technologies for each of its three business segments. Over the past two years, the company has completed thirteen acquisitions to add to its portfolio of brands and technologies of the Commercial Foodservice Equipment Group, the Food Processing Equipment Group and the Residential Kitchen Equipment Group. These acquisitions have added seventeen brands to the Middleby portfolio and positioned the company as a leading provider of equipment in each respective industry. Significant acquisitions included Cooking Solutions Group Inc., acquired for a purchase price of $106.1 million, net of cash acquired. All other acquisitions were acquired for an aggregate purchase price totaling $297.8 million, net of cash acquired.
Commercial Foodservice Equipment Group
•December 2018: The company completed its acquisition of all of the capital stock of EVO America, Inc. ("EVO"), a leading design and manufacturer of ventless cooking equipment for the commercial foodservice industry, located near Portland, Oregon.
•April 2019: The company completed its acquisition of all of the capital stock of Cooking Solutions Group, Inc. ("Cooking Solutions Group") from Standex International Corporation, which consists of the brands APW Wyott, Bakers Pride, BKI and Ultrafryer and locations in Texas, South Carolina and Mexico.
•April 2019: The company completed the acquisition of all of the capital stock of Powerhouse Dynamics, Inc. ("Powerhouse"), a leader in cloud-based IoT solutions for the commercial foodservice industry located near Boston.
•April 2019: The company completed the acquisition of all of the assets related to the Starline Product line ("Starline") non-carbonated beverage dispensers for the commercial foodservice industry.
•June 2019: The company completed the acquisition of substantially all of the assets of Ss Brewtech, a market leader in professional craft brewing and beverage equipment based in Santa Ana, California.
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•November 2019: The company completed the acquisition of all of the capital stock of Synesso, Inc. ("Synesso"), a designer and manufacturer of semi-automatic espresso machines for the commercial foodservice industry, located in Seattle, Washington.
•January 2020: The company completed its acquisition of the RAM fry dispenser product line ("RAM"), a leader in automated fry dispensers, located in Red Wing, Minnesota.
•February 2020: The company completed its acquisition of all of the capital stock of DBT Holdings, LLC ("Deutsche"), a leader in beverage brewing and processing systems located in Charlotte, North Carolina.
•December 2020: The company completed its acquisition of all of the capital stock of MEP FMS Holdings, LLC ("Wild Goose"), a leader in the craft beer industry focused on providing the best canning and bottling integrity in the industry, located in Louisville, Colorado and Venice, Florida.
•December 2020: The company completed its acquisition of the properties and assets used to conduct the business of United Foodservice Equipment Limited, a business that purchases and sells foodservice equipment located in Hong Kong, and its affiliate, Zhuhai United Foodservice Equipment Limited (collectively, "United Foodservice Equipment Zhuhai"), a business that manufactures and sells foodservice equipment located in China.
Food Processing Equipment Group
•July 2019: The company completed the acquisition of all of the capital stock of Packaging Progressions, Inc. ("Pacproinc"), a market leader in automated packaging technologies for customers in the protein and baker segments based in Souderton, Pennsylvania.
Residential Kitchen Equipment Group
•November 2019: The company completed its acquisition of Brava Home, Inc. ("Brava"), a company known for its advanced residential light cooking technology located in Redwood City, California.
The Customers and Market
Commercial Foodservice Equipment Industry
The company's end-user customers include: (i) fast food, fast casual and quick-service restaurants, including ghost kitchens, (ii) full-service restaurants, including casual-theme restaurants, (iii) retail outlets, such as convenience stores, supermarkets and department stores and (iv) public and private institutions, such as hotels, resorts, schools, hospitals, long-term care facilities, correctional facilities, stadiums, airports, corporate cafeterias, college and universities, military facilities and government agencies. The company's domestic sales are primarily through independent dealers and distributors and are marketed by the company's sales personnel and network of independent manufacturers' representatives. Many of the dealers in the U.S. belong to buying groups that negotiate sales terms with the company. Certain large multi-national restaurant and hotel chain customers have purchasing organizations that manage product procurement for their systems. Included in these customers are several large multi-national restaurant chains, which account for a meaningful portion of the company's business, although no single customer accounts for more than 10% of net sales.
Over the past several decades, the commercial foodservice equipment industry has enjoyed steady growth in the United States due to the development of new quick-service and casual-theme restaurant chain concepts, the expansion of foodservice into nontraditional locations such as convenience stores and retail outlets, as well as store equipment modernization driven by efforts to improve efficiencies within foodservice operations. In the international markets, foodservice equipment manufacturers have been experiencing growth due to expanding international economies and increased opportunity for expansion by U.S. chains into developing regions.
The company believes that the worldwide commercial foodservice equipment market has sales in excess of $35.0 billion. The company believes that continuing growth in demand for foodservice equipment will result from the development of new restaurant concepts in the U.S. and the expansion of U.S. and foreign chains into international markets, the replacement and upgrade of existing equipment and new equipment requirements resulting from menu changes, menu diversity and consumer food trends.
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Food Processing Equipment Industry
The company's customers include a diversified base of leading food processors. Customers include several large international food processing companies, which account for a significant portion of the revenues of this business segment, although none of which is greater than 10% of net sales. A large portion of the company's revenues have been generated from producers of protein products such as bacon, salami, hot dogs, dinner sausages, poultry, and lunchmeats and producers of bakery products, such as muffins, cookies, crackers, pies, bread and buns; however, the company believes that it can leverage its expertise and product development capabilities in thermal processing to organically grow into new end markets and offers unique full processing line solutions.
Food processing has quickly become a highly competitive landscape dominated by a few large conglomerates that possess a variety of food brands. The consolidation of food processing plants associated with industry consolidation drives a need for more flexible and efficient equipment that is capable of processing large volumes in quicker cycle times. In recent years, food processors have had to conform to the demands of “big-box” retailers and the restaurant industry, including, most importantly, greater product consistency and exact package weights. Food processors are beginning to realize that their old equipment is no longer capable of efficiently producing adequate uniformity in the large product volumes required, and they are turning to equipment manufacturers that offer better process control for proven product consistency, innovative packaging designs and other solutions. To protect their own brands and reputations, retailers and large restaurant chains are also dictating food safety standards that are often stricter than government regulations.
A number of factors, including raw material prices, cost of ownership of their equipment, labor and health care costs, are driving food processors to focus on ways to improve their generally thin profitability margins. In order to increase the profitability and efficiency in processing plants, food processors pay increasingly more attention to the performance of their machinery and the flexibility in the functionality of the equipment. Food processors are continuously looking for ways to make their plants safer and reduce labor-intensive activities. Food processors have begun to recognize the value of new technology as an important vehicle to drive productivity and profitability in their plants. Due to customer requirements, food processors are expected to continue to demand new and innovative equipment that addresses food safety, food quality, automation and flexibility.
Improving living standards in developing countries is spurring increased worldwide demand for pre-cooked and convenience food products. As industrializing countries create more jobs, consumers in these countries will have the means to buy pre-cooked food products. In industrialized regions, such as Western Europe and the U.S., consumers are demanding more pre-cooked and convenience food products, such as deli tray variety packs, frozen food products and ready-to-eat varieties of ethnic foods.
The global food processing equipment industry is highly fragmented, large and growing. The company estimates demand for food processing equipment is in excess of $50.0 billion worldwide.
Residential Kitchen Equipment Industry
The company’s end-users include customers with high-end residential kitchens. The market potential for such equipment has continued to broaden due to an increase in interest from the consumer to have professional styled appliances with commercial inspired, higher performing features in their home. The kitchen has been the main area in which consumers have invested the most money over the past several decades to increase the personal satisfaction and the value of their home. Other important factors which affect the market size and growth include the level of new home starts, increase in home renovations and general macro-economic factors. Macro-economic factors such as GDP growth, employment rates, inflation and consumer confidence, which impact the overall economy, impact the residential kitchen equipment industry and cause variability in the revenues at this segment. The residential kitchen appliance industry is estimated to be in excess of $230 billion worldwide.
Backlog
Commercial Foodservice Equipment Group
The backlog of orders for the Commercial Foodservice Equipment Group was $238.2 million at January 2, 2021, most all of which is expected to be filled during 2021. The Commercial Foodservice Equipment Group's backlog was $128.7 million at December 28, 2019. The acquired Deutsche and Wild Goose businesses accounted for $27.9 million of the backlog. The backlog is not necessarily indicative of the level of business expected for the year, as there is generally a short time between order receipt and shipment for the majority of this segment's products.
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Food Processing Equipment Group
The backlog of orders for the Food Processing Equipment Group was $131.2 million at January 2, 2021, all of which is expected to be filled during 2021. The Food Processing Equipment Group's backlog was $137.8 million at December 28, 2019.
Residential Kitchen Equipment Group
The backlog of orders for the Residential Kitchen Equipment Group was $153.3 million at January 2, 2021, all of which is expected to be filled during 2021. The Residential Kitchen Equipment Group's backlog was $41.0 million at December 28, 2019.
Marketing and Distribution
Commercial Foodservice Equipment Group
Middleby's products and services are marketed in the U.S. and in over 100 countries through a combination of the company's sales and marketing personnel, together with an extensive network of independent dealers, distributors, consultants, sales representatives and agents.
In the United States, the company distributes its products to independent end-users primarily through a network of non-exclusive dealers nationwide, who are supported by manufacturers' marketing representatives. Sales are made direct to certain large restaurant chains that have established their own procurement and distribution organization for their franchise system. The company's relationships with major restaurant chains are primarily handled through an integrated effort of top-level executive and sales management at the corporate and business division levels to best serve each customer's needs. International sales are primarily made through a network of company owned and local independent distributors and dealers.
Food Processing Equipment Group
The company maintains a direct sales force to market the brands and maintain direct relationships with each of its customers. In North America, the company employs regional sales managers, each with responsibility for a group of customers and a particular region. This sales force is complimented with involvement of executive management to maintain relationships with customer executives and facilitate coordination amongst the brands for the key global accounts. Internationally, the company maintains sales and distribution offices along with global sales managers supported by a network of independent sales representatives.
The company’s sale process is highly consultative due to the highly technical nature of the equipment, especially in the case of the full processing line solutions. During a typical sales process, sales people make several visits to the customer’s facility to conceptually discuss the production requirements, footprint and configuration of the proposed equipment. The company employs a technically proficient sales force, many of whom have previous technical experience with the company as well as education backgrounds in food science. The sales strategy of the company is fostered with Protein and Bakery Innovation Centers in Chicago, Dallas and India, that are available for development with technical performance and product testing for customers.
Residential Kitchen Equipment Group
The company’s products are marketed through a network of distributors, dealers, designers, select online retailers and home builders to the residential customers. The company markets and sells its products to these channels through a company-employed sales force. The company’s products are distributed through a combination of an independent network of distributors and its wholly owned distribution operations. The company's wholly owned distribution operations include two primary customer support centers and regional warehouse and logistic operations, which stock products and service parts for the respective region. To supplement the sales and distribution network, the company has invested in residential showrooms in Chicago, New York City, Orange County and Dallas (coming soon in 2021).
Marketing support is provided to and coordinated with its network of dealers, designers, and home builders sales partners to allow for coordinated efforts to market jointly to the end-user customers. The company in certain cases offers incentive based financial programs to invest in local marketing activities with these sales partners.
5
Services and Product Warranty
The company is an industry leader in equipment installation programs and after-sales support and service. The company provides a warranty on its products typically for a one-year period and in certain instances greater periods. The emphasis on global service increases the likelihood of repeat business and enhances Middleby's image as a partner and provider of quality products and services.
Commercial Foodservice Equipment Group
The company's domestic service network consists of over 100 authorized service parts distributors and 3,000 independent certified technicians who have been formally trained and certified by the company through its factory training school and on-site installation training programs. Technicians work through service parts distributors, which are required to provide around-the-clock service. The company provides real-time technical support to the technicians in the field through factory-based technical service engineers. The company maintains sufficient service parts inventory to ensure short lead times for service calls.
Food Processing Equipment Group
The company maintains a technical service group of employees that oversees and performs installation and startup of equipment and completes warranty and repair work. This technical service group provides services for customers both domestically and internationally. Service technicians are trained regularly on new equipment to ensure the customer receives a high level of customer service. From time to time the company utilizes trained third-party technicians supervised by company employees to supplement company employees on large projects.
Residential Kitchen Equipment Group
The company maintains a network of independent authorized service agents throughout North America. Authorized service agents are supported and trained by regional factory-support centers of the company. Trained technical support personnel are available to support independent service agents with technical information and assist in repair issues. The factory-support centers also dispatch service technicians to the customer and provide follow-up and monitoring to ensure field issues are resolved. The company's independent service agents maintain a stock of factory-supplied parts to allow for a high first-call completion rate for service and warranty repairs. The company maintains a substantial amount of service parts at each of its manufacturing operations and distribution operations to provide for quick ship of parts to service agents and end-user customers when necessary.
Internationally, the company has a network of company owned and independent distributors that provide sales and technical service support in their respective markets. These distributors are required to have a team of factory-trained service technicians and maintain a required stock of service parts to support the equipment in the market. The factory supports the international distributors with technical trainers which travel to the various markets to provide on-hands training and monitoring of the distributor service operations.
Competition
The commercial foodservice, food processing and residential kitchen equipment industries are highly competitive and fragmented. Within a given product line the company may compete with a variety of companies, including companies that manufacture a broad line of products and those that specialize in a particular product category. Competition is based upon many factors, including brand recognition, product features, reliability, quality, price, delivery lead times, serviceability and after-sale service. The company believes that its ability to compete depends on strong brand equity, exceptional product performance, short lead-times and timely delivery, competitive pricing and superior customer service support. In the international markets, the company competes with U.S. manufacturers and numerous global and local competitors.
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The company believes that it is one of the largest multiple-line manufacturers of commercial kitchen, food processing and residential kitchen equipment in the U.S. and worldwide although some of its competitors are units of operations that are larger than the company and possess greater financial and personnel resources. Among the company's major competitors to the Commercial Foodservice Equipment Group are the Ali Group S.r.l.; Duke Manufacturing; Electrolux; Groen, a subsidiary of Dover Corporation; Haier Group; Hobart Corporation and Vulcan-Hart, subsidiaries of Illinois Tool Works Inc.; Midea Group; Panasonic Corporation; Rational AG; SMEG S.p.A.; and Welbilt, Inc. Major competitors to the Food Processing Equipment Group include AMF Bakery Systems, The GEA Group, JBT Technologies, Marel, and Provisur. The residential kitchen appliance sector is highly competitive and includes a number of large global competitors including, Electrolux, GE Appliances, LG Corporation, Panasonic Corporation, Samsung Group and Whirlpool Corporation. However, within the premium segment of this kitchen equipment market, there are fewer full line competitors and the company’s competition includes Bertazzoni; Bosch, Gaggenau, and Thermador, subsidiaries of Bosch Siemens; Dacor, subsidiary of Samsung Electronics America; Haier Group; Midea Group; Miele; SMEG S.p.A.; and Sub-Zero and Wolf, subsidiaries of Sub-Zero Group, Inc.
Manufacturing and Quality Control
The company’s manufacturing operations provide for an expertise in the design and production of specific products for each of the three business segments. The company has from time to time either consolidated manufacturing facilities producing similar product or transferred production of certain products to another existing operation with a higher level of expertise or efficiency.
The Commercial Foodservice Equipment Group manufactures its products in twenty-three domestic and nineteen international production facilities. The Food Processing Equipment Group manufactures its products in eleven domestic and six international production facilities. The Residential Kitchen Equipment Group manufactures its products in six domestic and four international production facilities. See Item 2. Properties for a list of the principal domestic and international manufacturing facilities by segment.
Metal fabrication, finishing, sub-assembly and assembly operations are typically conducted at each manufacturing facility. Equipment installed at individual manufacturing facilities includes numerically controlled turret presses and machine centers, shears, press brakes, welding equipment, polishing equipment, CAD/CAM systems and product testing and quality assurance measurement devices. The company's CAD/CAM systems enable virtual electronic prototypes to be created, reviewed and refined before the first physical prototype is built.
Detailed manufacturing drawings are quickly and accurately derived from the model and passed electronically to manufacturing for programming and optimal parts nesting on various numerically controlled punching cells. The company believes that this integrated product development and manufacturing process is critical to assuring product performance, customer service and competitive pricing.
The company has established comprehensive programs to ensure the quality of products, to analyze potential product failures and to certify vendors for continuous improvement. Products manufactured by the company are tested prior to shipment to ensure compliance with company standards.
Sources of Supply
The company purchases its raw materials and component parts from a number of suppliers. The majority of the company’s material purchases are standard commodity-type materials, such as stainless steel, electrical components and hardware. These materials and parts generally are available in adequate quantities from numerous suppliers. Some component parts are obtained from sole sources of supply. In such instances, management believes it can substitute other suppliers as required. The majority of fabrication is done internally through the use of automated equipment. Certain equipment and accessories are manufactured by other suppliers for sale by the company. The company believes it enjoys good relationships with its suppliers and considers the present sources of supply to be adequate for its present and anticipated future requirements.
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Research and Development
The company believes its future success will depend in part on its ability to develop new products and to improve existing products. Much of the company's research and development efforts at the Commercial Foodservice Equipment Group, the Food Processing Equipment Group and the Residential Kitchen Equipment Group are directed to the development and improvement of products designed to reduce cooking and processing time, increase capacity or throughput, reduce energy consumption, minimize labor costs, improve product yield and improve customer, employee and environmental safety, while maintaining consistency and quality of cooking production and food preparation. The company's efforts have also been focused on IoT solutions which allow customers to connect, analyze and control equipment, while delivering operational efficiencies. The company has identified these issues as key concerns for most of its customers. The company often identifies product improvement opportunities by working closely with customers on specific applications. Most research and development activities are performed by the company's technical service and engineering staff located at each manufacturing location. On occasion, the company will contract outside engineering firms to assist with the development of certain technical concepts and applications. See Note 3(n) to the Consolidated Financial Statements for further information on the company's research and development activities.
Seasonality
The company’s revenues at the Commercial Foodservice Equipment Group historically have been slightly stronger in the second and third quarters due to increased purchases from customers involved with the catering business and institutional customers, particularly schools, during the summer months. Revenues at the Residential Kitchen Equipment Group are historically stronger in the second and third quarters, due to increased purchases of outdoor cooking equipment and greater new home construction and remodels during the summer months, and the fourth quarter, due to increased holiday purchases in the European markets. As a result of the COVID-19 pandemic, typical patterns of seasonality as previously mentioned were disrupted.
Trademarks, Patents and Licenses
The company has developed, acquired and assembled a leading portfolio of trademarks and trade names. The company believes that these trademarks and trade names help the company compete in the marketplace due to their recognition with customers, restaurant operators, distribution partners, sales and service agents, and foodservice consultants that specify foodservice equipment.
The company's leading portfolio of trade names of its Commercial Foodservice Equipment Group include Anets, APW Wyott, Bakers Pride, Beech, BKI, Blodgett, Blodgett Combi, Bloomfield, Britannia, Carter-Hoffmann, Celfrost, Concordia, CookTek, Crown, CTX, Desmon, Deutsche Beverage, Doyon, Eswood, EVO, Firex, Follett, Frifri, Giga, Globe, Goldstein, Holman, Houno, IMC, Induc, Ink Kegs, Inline Filling Systems, Jade, JoeTap, Josper, L2F, Lang, Lincat, MagiKitch’n, Market Forge, Marsal, Meheen, Middleby Marshall, MPC, Nieco, Nu-Vu, PerfectFry, Pitco, QualServ, RAM, Southbend, Ss Brewtech, Star, Starline, Sveba Dahlen, Synesso, Tank, Taylor, Thor, Toastmaster, TurboChef, Ultrafryer, Varimixer, Wells, Wild Goose and Wunder-Bar.
The company’s leading portfolio of trade names of its Food Processing Equipment Group include Alkar, Armor Inox, Auto-Bake, Baker Thermal Solutions, Burford, Cozzini, CV-Tek, Danfotech, Deutsche Process, Drake, Glimek, Hinds-Bock, Maurer-Atmos, MP Equipment, Pacproinc, RapidPak, Scanico, Spooner Vicars, Stewart Systems, Thurne and Ve.Ma.C.
The company’s leading portfolio of trade names of its Residential Kitchen Equipment Group include AGA, AGA Cookshop, Brava, EVO, La Cornue, Leisure Sinks, Lynx, Marvel, Mercury, Rangemaster, Rayburn, Redfyre, Sedona, Stanley, TurboChef, U-Line and Viking.
The company holds a broad portfolio of patents and licenses covering technology and applications related to various products, equipment and systems. Management believes the expiration of any one of these patents would not have a material adverse effect on the overall operations or profitability of the company.
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Human Capital
As of January 2, 2021, 9,289 persons were employed by the company and its subsidiaries among the various groups as described below. 5,413 employees are located in the United States and the remaining employees are located outside of the United States. Unionized employees accounted for approximately 6% of the company’s workforce as of January 2, 2021. Management believes that the relationships between employees and management are good.
The company believes its success is a direct result of the people employed around the world. The company strives to create a culture that encourages and celebrates collaboration, creativity and confidence while maintaining an environment based on ethical values. The goal is to create a workplace that enables employees to develop their individual paths toward their career goals and encourages a long-term working relationship with the company.
Commercial Foodservice Equipment Group
As of January 2, 2021, 5,427 persons were employed within the Commercial Foodservice Equipment Group. Of this amount, 2,298 were management, administrative, sales, engineering and supervisory personnel; 2,720 were hourly production non-union workers; and 409 were hourly production union members. Included in these totals were 2,109 individuals employed outside of the United States, of which 1,105 were management, sales, administrative and engineering personnel, 880 were hourly production non-union workers and 124 were hourly production union workers, who participate in an employee cooperative. At its Windsor, California facility, the company has a union contract with the Sheet Metal Workers International Association that expired on December 31, 2020. Contract negotiations have extended into 2021 and are ongoing. At its Elgin, Illinois facility, the company has a union contract with the International Brotherhood of Teamsters that expires on July 31, 2022. At its Easton, Pennsylvania facility, the company has a union contract with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union that expires on May 4, 2023. The company also has a union workforce at its manufacturing facility in the Philippines, under a contract that expires on June 30, 2021. Management believes that the relationships between employees, unions and management are good.
Food Processing Equipment Group
As of January 2, 2021, 1,520 persons were employed within the Food Processing Equipment Group. Of this amount, 786 were management, administrative, sales, engineering and supervisory personnel; 615 were hourly production non-union workers; and 119 were hourly production union members. Included in these totals were 647 individuals employed outside of the United States, of which 374 were management, sales, administrative and engineering personnel and 273 were hourly production non-union workers. At its Lodi, Wisconsin facility, the company has a contract with the International Association of Bridge, Structural, Ornamental and Reinforcing Ironworkers that expires on December 31, 2021. At its Algona, Iowa facility, the company has a union contract with the United Food and Commercial Workers that expires on December 31, 2022. Management believes that the relationships between employees, unions and management are good.
Residential Kitchen Equipment Group
As of January 2, 2021, 2,301 persons were employed within the Residential Kitchen Equipment Group. Of this amount, 977 were management, administrative, sales, engineering and supervisory personnel and 1,324 were hourly production workers. Included in these totals were 1,120 individuals employed outside of the United States, of which 572 were management, sales, administrative and engineering personnel and 548 were hourly non-union production workers. Management believes that the relationships between employees and management are good.
Corporate
As of January 2, 2021, 41 persons were employed at the corporate office.
Employee Advancement
The company believes offering opportunities for career development within the company is integral to building and retaining an outstanding workforce. The company is dedicated to the professional development of all employees. Through a commitment to a diverse and engaging culture, the company is able to build a platform that promotes equal opportunities for advancement for everyone.
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Employee Safety
The company is dedicated to providing a safe and healthy workplace by operating in accordance with established health and safety protocols. In response to the COVID-19 pandemic, the company implemented procedures at its manufacturing locations and offices, including enhanced workplace sanitation, travel minimization, social distancing, staggered shifts and established work-at-home protocols for non-production employees.
Diversity
Fostering a culture that supports diversity among employees as well as professional growth and advancement is an integral part of the company’s identity. The company has a commitment to build its workforce from diverse backgrounds, experiences and talents among race, religion, language, nationality, disability, age and gender. Through our diverse workforce the company is able to attract the best talent, which allows better alignment with customers and creative and efficient development of new products for the marketplace. As a global corporation, the company embraces and celebrates differences and endeavors to cultivate an environment where diversity and inclusion are core values of the organization.
A Focus on Ethics
The company is dedicated to promoting integrity, honesty, and professionalism in all of the business activities within the company. The company strongly believes that business success is a direct correlation of its reputation for fairness and integrity. Accordingly, it is essential that the company’s board members and employees practice the highest standards of conduct and professionalism in any interactions with stakeholders including customers, creditors, stockholders, suppliers and other employees.
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Item 1A. Risk Factors
The company’s business, results of operations, cash flows and financial condition are subject to various risks including, but not limited to, those set forth below. Any of these risks, as well as risks not currently known to the company or that are currently deemed to be immaterial, may adversely affect the company’s business, results of operations, cash flows and financial condition. These risk factors should be carefully considered together with the other information in this Annual Report on Form 10-K, including the risks and uncertainties described under the heading Special Note Regarding Forward-Looking Statements.
Economic Risks
Current and future economic conditions could adversely affect the company’s business and financial performance.
The company’s operating results are impacted by the health of the North American, European, Asian and Latin American economies. The company’s business and financial performance, including collection of its accounts receivable, may be adversely affected by current and future economic conditions that may cause a decline in business and consumer spending, a reduction in the availability of credit and decreased growth of its existing customers, resulting in customers electing to delay the replacement of aging equipment. Higher energy costs, rising interest rates, weakness in the residential construction, housing and home improvement markets, financial market volatility, recession and acts of terrorism may also adversely affect the company’s business and financial performance. Additionally, the company may experience difficulties in scaling its operations due to economic pressures in the U.S. and international markets.
Uncertainty surrounding the terms of the United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions, financial markets or the Company’s business.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. On January 31, 2020, the U.K. officially exited the European Union and entered into a transition period to negotiate the final terms of Brexit. The transition period ended on December 31, 2020. The potential future impact of Brexit remains unclear and could adversely impact certain areas of labor and trade in addition to creating further short-term uncertainty and currency volatility. In the absence of a future trade deal, the U.K.’s trade with the European Union and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. Additionally, the movement of goods between the U.K. and the remaining member states of the European Union will be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure. These changes to the trading relationship between the U.K. and European Union would likely result in increased cost of goods imported into and exported from the U.K. and may decrease the profitability of the company's U.K. and other operations. Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into the U.K. and may decrease the profitability of the company's U.K. operations. Currency exchange rates for the British pound and the euro with respect to each other and to the U.S. dollar may be negatively affected by Brexit, which could cause volatility in our financial results. With a range of outcomes still possible, the impact from Brexit remains uncertain and will depend, in part, on the final outcome of tariff, trade, regulatory and other negotiations.
The company is subject to currency fluctuations and other risks from its operations outside the United States.
The company has manufacturing and distribution operations located in Asia, Europe and Latin America. The company’s operations are subject to the impact of economic downturns, political instability and foreign trade restrictions, which may adversely affect the company’s business, financial condition and operating results. The company anticipates that international sales will continue to account for a significant portion of consolidated net sales in the foreseeable future. Some sales and operating costs of the company’s foreign operations are realized in local currencies, and an increase in the relative value of the U.S. dollar against such currencies would lead to a reduction in consolidated sales and earnings. Additionally, foreign currency exposures are not fully hedged, and there can be no assurance that the company’s future results of operations will not be adversely affected by currency fluctuations. Furthermore, currency fluctuations may affect the prices paid to the company’s suppliers for materials the company uses in production. As a result, operating margins may also be negatively impacted by worldwide currency fluctuations that result in higher costs for certain cross-border transactions.
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Business and Operational Risks
The COVID-19 pandemic has, and likely will continue to, adversely impact and pose risks to the company, the nature and extent of which are highly uncertain and unpredictable.
The company is monitoring the global outbreak of the COVID-19 pandemic and taking steps to mitigate the risks posed by its spread, including working with its customers, employees, suppliers and other stakeholders. The pandemic is adversely affecting, and is expected to continue to adversely affect, the company's financial results, condition and outlook. Certain elements of the company's business (including its supply chain, distribution systems, production levels and research and development activities) and operations have been negatively impacted due to significant portions of the company's workforce being unable to work effectively due to quarantines, government orders and guidance, facility closures, illness, travel restrictions, implementation of precautionary measures and other restrictions. The company also has experienced, and expects to continue to experience, volatility in demand given disruptions in global health, economic and market conditions, consumer behavior and global restaurant operations. If the pandemic continues and conditions worsen, the company expects to experience additional adverse impacts on operational and commercial activities, costs, customer orders and purchases and collections of accounts receivable, which may be material, and the extent of these exposures remains uncertain even if conditions begin to improve. The pandemic has also increased the risk related to the company's ability to ensure business continuity during a potential disruption, including increased cybersecurity attacks related to the work-from-home environment. Furthermore, the pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates and interest rates, all of which could continue to negatively impact the company. Due to the speed with which the situation is developing, the global breadth of the pandemic's spread and the range of governmental and community reactions, there is uncertainty around the pandemic's ultimate impact and the timing of recovery. Therefore, the pandemic could lead to an extended disruption of economic activity and the impact on the company's consolidated results of operations, financial position and cash flows could be material. In addition, the continuation or a resurgence of the pandemic could exacerbate the other risk factors.
The company’s level of indebtedness could adversely affect its business, results of operations and growth strategy.
The company now has and may continue to have a significant amount of indebtedness. At January 2, 2021, the company had $1,729.6 million of borrowings and $10.9 million in letters of credit outstanding. In August 2020, the company issued $747.5 million aggregate principal amount of 1.00% Convertible Senior Notes due 2025 (the "Convertible Notes"), which bear interest semi-annually in arrears and mature on September 1, 2025 unless they are redeemed, repurchased or converted prior to such date in accordance with their terms. Upon conversion, the company can elect to pay or deliver, cash, shares of common stock or a combination of cash and shares of common stock, in respect of the remainder, if any, of the company's conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. Under certain circumstances, the holders of the Convertible Notes may require the company to repay all or a portion of the principal and interest outstanding under the Convertible Notes in cash prior to the maturity date, which could have an adverse effect on the company's financial results.
To the extent the company requires additional capital resources, there can be no assurance that such funds will be available on favorable terms, or at all. The unavailability of funds could have a material adverse effect on the company’s financial condition, results of operations and ability to expand the company’s operations.
The company’s level of indebtedness could have adverse consequences to its business and operations, including the following:
•the company may be unable to obtain additional financing for working capital, capital expenditures, product development, acquisitions and other general corporate purposes;
•a significant portion of the company’s cash flow from operations must be dedicated to debt service, which reduces the amount of cash the company has available for other purposes;
•the company may be more vulnerable in the event of a downturn in the company’s business or general economic and industry conditions and have limited flexibility in planning for, or reacting to, changes in its business and/or industry;
•the company may be disadvantaged compared to its competitors that are less leveraged and thereby have greater financial flexibility; and
•the company may be restricted in its ability to make strategic acquisitions and to pursue new business opportunities.
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The company’s current credit agreement limits its ability to conduct business, which could negatively affect the company’s ability to finance future capital needs and engage in other business activities.
The covenants in the company’s existing credit agreement contain a number of significant limitations on its ability to, among other things:
•pay dividends;
•incur additional indebtedness;
•create liens on the company’s assets;
•engage in new lines of business;
•make investments;
•make capital expenditures and enter into leases; and
•acquire or dispose of assets.
These restrictive covenants, among others, could negatively affect the company’s ability to finance its future capital needs, engage in other business activities or withstand a future downturn in the company’s business or the economy.
Under the company’s current credit agreement, the company is required to maintain certain specified financial ratios and meet financial tests, including certain ratios of leverage and interest coverage. The company’s ability to comply with these requirements may be affected by matters beyond its control, and, as a result, there can be no assurance that the company will be able to meet these ratios and tests. A breach of any of these covenants would prevent the company from being able to draw under the company's revolver and would result in a default under the company’s current credit agreement. In the event of a default under the company’s current credit agreement, the lenders could terminate their commitments and declare all amounts borrowed, together with accrued interest and other fees, to be immediately due and payable. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may also be accelerated and become due and payable at such time. The company may be unable to pay these debts in these circumstances.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect the company's financial condition and operating results.
In the event the conditional conversion feature of the Convertible Notes is triggered, holders of the Convertible Notes will be entitled to convert their Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless the company elects to satisfy the conversion obligation by delivering solely shares of its common stock (other than paying cash in lieu of delivering any fractional share), the company would be required to settle any converted principal through the payment of cash, which could adversely affect the company's liquidity. To the extent the company satisfies the conversion obligation by delivering shares of common stock, the company would be required to deliver a significant number of shares, which would cause dilution to its existing stockholders. In addition, even if holders do not elect to convert their Convertible Notes in such circumstances, the company could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction in net working capital.
The capped call transactions expose the company to counterparty risk and may affect the value of the company's common stock.
In connection with the issuance of the Convertible Notes, the company entered into capped call transactions with certain financial institutions, referred to as the capped call counterparties. The capped call transactions are expected generally to reduce or offset the potential dilution upon conversion of the Convertible Notes and/or offset any cash payments the company is required to make in excess of the principal amount of the Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap. From time to time, the capped call counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to the company's common stock and/or purchasing or selling the company's common stock in secondary market transactions prior to the maturity of the Convertible Notes. This activity could cause a decrease in the market price of the company's common stock.
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In addition, the capped call counterparties are financial institutions, and the company is subject to the risk that one or more of the capped call counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the capped call transactions. The company's exposure to the credit risk of the capped call counterparties is not secured by any collateral. If a capped call counterparty becomes subject to insolvency proceedings, the company will become an unsecured creditor in those proceedings with a claim equal to the exposure at the time under such transaction. The company's exposure will depend on many factors but, generally, the exposure will increase if the market price or the volatility of the company's common stock increases. In addition, upon a default or other failure to perform, or a termination of obligations, by a capped call counterparty, the company may suffer more dilution than currently anticipated with respect to the company's common stock. The company can provide no assurances as to the financial stability or viability of the capped call counterparties.
Fluctuations in interest rates could adversely affect the company's results of operations and financial position.
The company's profitability may be adversely affected during any periods of unexpected or rapid increases in interest rates. The company maintains a revolving credit facility, which, at January 2, 2021, bore interest at 2.00% above LIBOR per annum. A significant increase in any of the forgoing rates would significantly increase the company's cost of borrowings, reduce the availability and increase the cost of obtaining new debt and refinancing existing indebtedness and/or negatively impact the market price of the company's common stock. For additional detail related to this risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosure About Market Risk."
The company has a significant amount of goodwill and indefinite life intangibles could suffer losses due to asset impairment charges.
The company’s balance sheet includes a significant amount of goodwill and indefinite life intangible assets, which represent approximately 37% and 20%, respectively, of its total assets as of January 2, 2021. The excess of the purchase price over the fair value of assets acquired, including identifiable intangible assets, and liabilities assumed in conjunction with acquisitions is recorded as goodwill. In accordance with Accounting Standards Codification (“ASC”) 350 Intangibles-Goodwill and Other, the company’s long-lived assets (including goodwill and other intangibles) are reviewed for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of long-lived assets, the company considers changes in economic conditions and makes assumptions regarding estimated future cash flows and other factors. Various uncertainties, including continued adverse conditions in the capital markets or changes in general economic conditions, could impact the future operating performance at one or more of the company’s businesses, which could significantly affect the company’s valuations and could result in additional future impairments. Also, estimates of future cash flows are judgments based on the company’s experience and knowledge of operations. These estimates could be significantly impacted by many factors, including changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If the company’s estimates or the underlying assumptions change in the future, the company may be required to record impairment charges that, if incurred, could have a material adverse effect on the company’s reported net earnings.
The company's defined benefit pension plans are subject to financial market risks that could adversely affect the company's results of operations and cash flows.
The performance of the financial markets and interest rates impact our defined benefit pension plan expenses and funding obligations. Significant changes in market interest rates, decreases in fair value of plan assets, investment losses on plan assets, relevant legislative and regulatory changes relating to defined benefit plan funding and changes in interest rates may increase the company's funding obligations and adversely impact its results of operations and cash flows. In addition, upward pressure on the cost of providing healthcare coverage to current employees and retirees may increase the company's future funding obligations and adversely affect its results of operations and cash flows.
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The company faces intense competition in the commercial foodservice, food processing, and residential kitchen equipment industries and failure to successfully compete could impact the company’s results of operations and cash flows.
The company operates in highly competitive industries. In each of the company’s three business segments, competition is based on a variety of factors including product features and design, brand recognition, reliability, durability, technology, energy efficiency, breadth of product offerings, price, customer relationships, delivery lead-times, serviceability and after-sale service. The company has numerous competitors in each business segment. Many of the company’s competitors are substantially larger and enjoy substantially greater financial, marketing, technological and personnel resources. These factors may enable them to develop similar or superior products, to provide lower cost products and to carry out their business strategies more quickly and efficiently than the company can. In addition, some competitors focus on particular product lines or geographic regions or emphasize their local manufacturing presence or local market knowledge. Some competitors have different pricing structures and may be able to deliver their products at lower prices. Although the company believes that the performance and price characteristics of its products will provide competitive solutions for its customers’ needs, there can be no assurance that the company’s customers will continue to choose the company’s products over products offered by its competitors.
Further, the markets for the company’s products are characterized by changing technology and evolving industry standards. The company’s ability to compete successfully will depend, in large part, on its ability to enhance and improve its existing products, to continue to bring innovative products to market in a timely fashion, to adapt the company’s products to the needs and standards of its current and potential customers and to continue to improve operating efficiencies and lower manufacturing costs. Moreover, competitors may develop technologies or products that render the company’s products obsolete or less marketable. If the company is unable to successfully compete in this highly competitive environment, the company’s business, financial condition and operating results will be materially harmed.
The company is subject to risks associated with developing products and technologies, which could delay product introductions and result in significant expenditures.
The product, program and service needs of the company’s customers change and evolve regularly, and the company invests substantial amounts in research and development efforts to pursue advancements in a wide range of technologies, products and services. Also, the company continually seeks to refine and improve upon the performance, utility and physical attributes of its existing products and to develop new products. As a result, the company’s business is subject to risks associated with new product and technological development, including unanticipated technical or other problems, meeting development, production, certification and regulatory approval schedules, execution of internal and external performance plans, availability of supplier- and internally-produced parts and materials, performance of suppliers and subcontractors, hiring and training of qualified personnel, achieving cost and production efficiencies, identification of emerging technological trends in the company’s target end-markets, validation of innovative technologies, the level of customer interest in new technologies and products, and customer acceptance of the company’s products and products that incorporate technologies that the company develops. These factors involve significant risks and uncertainties. Also, any development efforts divert resources from other potential investments in the company’s businesses, and these efforts may not lead to the development of new technologies or products on a timely basis or meet the needs of the company’s customers as fully as competitive offerings. In addition, the markets for the company’s products or products that incorporate the company’s technologies may not develop or grow as the company anticipates. The company or its suppliers and subcontractors may encounter difficulties in developing and producing these new products and services, and may not realize the degree or timing of benefits initially anticipated. Due to the design complexity of the company's products, the company may in the future experience delays in completing the development and introduction of new products. Any delays could result in increased development costs or deflect resources from other projects. The occurrence of any of these risks could cause a substantial change in the design, delay in the development, or abandonment of new technologies and products. Consequently, there can be no assurance that the company will develop new technologies superior to the company’s current technologies or successfully bring new products to market.
Additionally, there can be no assurance that new technologies or products, if developed, will meet the company’s current price or performance objectives, be developed on a timely basis, or prove to be as effective as products based on other technologies. The inability to successfully complete the development of a product, or a determination by the company, for financial, technical or other reasons, not to complete development of a product, particularly in instances in which the company has made significant expenditures, could have a material adverse effect on the company’s financial condition and operating results.
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The company depends on key customers for a material portion of its revenues. As a result, changes in the purchasing patterns or loss of one or more key customers could adversely impact the company’s operating results.
Many of the company’s key customers are large restaurant chains and major food processing companies. The demand for the company’s equipment can vary from period to period depending on the company’s customers’ internal growth plans, construction, seasonality and other factors. In addition, an adverse change to the financial condition of key customers could cause such key customers to open fewer facilities and defer purchases of new equipment for existing operations or otherwise change the purchasing patterns of such key customers. Any of these conditions or the loss of key customers could have a material adverse effect on the company’s financial condition and results of operations.
Price increases in some materials and disruptions in supply could affect the company’s profitability.
The company uses large amounts of stainless steel, aluminized steel and other commodities in the manufacture of its products. A significant increase in the price of steel or any other commodity, due to tariffs or otherwise, would adversely affect the company’s operating results. In addition, unanticipated delays in delivery of raw materials and component inventories by suppliers—including delays due to capacity constraints, labor disputes, impaired financial condition of suppliers, natural disasters, extreme weather patterns and climate change, pandemics or other events outside our control— may increase the company's production costs, cause delays in the shipment of products or impair the ability of the company to satisfy customer demand. An interruption in or the cessation of an important supply by any third party and the company’s inability to make alternative arrangements in a timely manner, or at all, could have a material adverse effect on the company’s business, financial condition and operating results.
The company faces risks related to health epidemics and other widespread outbreaks of contagious disease, which could significantly disrupt its operations and impact its operating results.
The spread of COVID-19 and other contagious diseases, or other adverse public health developments, could have a material and adverse effect on our business operations. These could include disruptions or restrictions on our ability to travel, as well as temporary closures of our facilities or the facilities of our suppliers or customers. Any disruption of our suppliers or customers would likely impact our sales and operating results.
The company may be the subject of product liability claims or product recalls, and it may be unable to obtain or maintain insurance adequate to cover potential liabilities.
Product liability is a significant commercial risk to the company. The company’s business exposes it to potential liability risks that arise from the manufacturing, marketing and selling of the company’s products. In addition to direct expenditures for damages, settlement and defense costs, there is a possibility of adverse publicity as a result of product liability claims. Plaintiffs in some jurisdictions have received substantial damage awards against companies based upon claims for injuries allegedly caused by the use of their products. In addition, it may be necessary for the company to recall products that do not meet approved specifications, which could result in adverse publicity as well as costs connected to the recall and loss of revenue.
The company cannot be certain that a product liability claim or series of claims brought against it would not have an adverse effect on the company’s business, financial condition or results of operations. If any claim is brought against the company, regardless of the success or failure of the claim, there can be no assurance that the company will be able to obtain or maintain product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities or the cost of a recall. The company currently maintains insurance programs consisting of self-insurance up to certain limits and excess insurance coverage for claims over established limits. There can be no assurance that the company's insurance programs will provide adequate protection against actual losses. In addition, the company is subject to the risk that one or more of its insurers may become insolvent or become unable to pay claims that may be made in the future.
An increase in warranty expenses could adversely affect the company’s financial performance.
The company offers purchasers of its products warranties covering workmanship and materials typically for one year and, in certain circumstances, for periods of up to ten years, during which periods the company or an authorized service representative will make repairs and replace parts that have become defective in the course of normal use. The company estimates and records its future warranty costs based upon past experience. These warranty expenses may increase in the future and may exceed the company’s warranty reserves, which, in turn, could adversely affect the company’s financial performance.
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The company’s financial performance is subject to significant fluctuations.
The company’s financial performance is subject to quarterly and annual fluctuations due to a number of factors, including:
• general economic conditions;
•the lengthy, unpredictable sales cycle for the commercial foodservice equipment, food processing equipment and residential kitchen equipment groups;
• the gain or loss of significant customers;
• unexpected delays in new product introductions;
•the level of market acceptance of new or enhanced versions of the company’s products;
• unexpected changes in the levels of the company’s operating expenses; and
• competitive product offerings and pricing actions.
Each of these factors could result in a material and adverse change in the company’s business, financial condition and results of operations.
The company may be unable to manage its growth.
The company has recently experienced rapid growth in its business. Continued growth could place a strain on the company’s management, operations and financial resources. There also will be additional demands on the company’s sales, marketing and information systems and on the company’s administrative infrastructure as it develops and offers additional products and enters new markets. The company cannot be certain that the company’s operating and financial control systems, administrative infrastructure, outsourced and internal production capacity, facilities and personnel will be adequate to support the company’s future operations or to effectively adapt to future growth. If the company cannot manage the company’s growth effectively, the company’s business may be harmed.
Strategic and Organizational Risks
The company’s acquisition, investment and alliance strategy involves risks. If the company is unable to effectively manage these risks, its business will be materially harmed.
To achieve the company’s strategic objectives, the company has pursued and may continue to pursue strategic acquisitions of and investments in other companies, businesses or technologies. Acquisitions and investments entail numerous risks, including, among others:
• difficulties in the assimilation of acquired businesses or technologies and the inability to fully realize some of the expected synergies or otherwise achieve anticipated revenues and profits;
• inability to operate acquired businesses or utilize acquired technologies profitably;
• the significant amount of management time and attention needed to identify, execute and integrate any acquired businesses;
• potential assumption of unknown material liabilities;
• failure to achieve financial or operating objectives;
• unanticipated costs relating to acquisitions or to the integration of acquired businesses;
• loss of customers, suppliers, or key employees; and
• the impact on the company's internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002.
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The company may not be able to successfully integrate any operations, personnel, services or products that it has acquired or may acquire in the future.
The company may seek to expand or enhance some of its operations by forming joint ventures or alliances with various strategic partners throughout the world. Entering into joint ventures and alliances also entails risks, including difficulties in developing and expanding the businesses of newly formed joint ventures, exercising influence over the activities of joint ventures in which the company does not have a controlling interest and potential conflicts with the company’s joint venture or alliance partners. The company cannot assure that any joint venture or alliance entered into or that may be entered into in the future will be successful.
An inability to identify or complete future acquisitions could adversely affect future growth.
The company intends to continue its growth strategy of identifying and acquiring businesses with complementary products and services by pursuing acquisitions that provide opportunities for profitable growth. While the company continues to evaluate potential acquisitions, it may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory terms, obtain regulatory approval for certain acquisitions, or otherwise complete acquisitions in the future. An inability to identify or complete future acquisitions could limit the company’s growth.
Expansion of the company’s international operations involves special challenges that it may not be able to meet. The company’s failure to meet these challenges could adversely affect its business, financial condition and operating results.
The company plans to continue to expand its international operations. The company faces certain risks inherent in doing business in international markets. These risks include:
•extensive regulations and oversight, tariffs, including with respect to certain products imported from China or exported to China, retaliatory tariffs by China and certain other countries in response to tariffs implemented by the United States, and other trade barriers;
• withdrawal from or renegotiation of international trade agreements and other restrictions on trade between the United States and China, the European Union, Canada, Mexico and other countries;
• effects of the United Kingdom's decision to exit the European Union and related potential disruption to trade;
• uncertain impact on operations, suppliers and customers related to business disruptions and restrictions due to the COVID-19 pandemic;
• reduced protection for intellectual property rights;
• difficulties in staffing and managing foreign operations;
• potentially adverse tax consequences;
• limitations on ownership and on repatriation of earnings;
• transportation delays and interruptions;
• political, social, and economic instability and disruptions;
• labor unrests;
• potential for nationalization of enterprises; and
• limitations on the company’s ability to enforce legal rights and remedies.
In addition, the company is and will be required to comply with the laws and regulations of foreign governmental and regulatory authorities of each country in which the company conducts business.
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There can be no assurance that the company will be able to succeed in marketing its products and services in international markets. The company may also experience difficulty in managing its international operations because of, among other things, competitive conditions overseas, management of foreign exchange risk, established domestic markets, and language and cultural differences. Any of these factors could have a material adverse effect on the success of the company’s international operations and, consequently, on the company’s business, financial condition and operating results.
The impact of future transactions on the company’s common stock is uncertain.
The company periodically reviews potential transactions related to products or product rights and businesses complementary to the company’s business. Such transactions could include mergers, acquisitions, joint ventures, alliances or licensing agreements. In the future, the company may choose to enter into such transactions at any time. The impact of transactions on the market price of a company’s stock is often uncertain and may include substantial fluctuations. Consequently, any announcement of any such transaction could have a material adverse effect upon the market price of the company’s common stock. Moreover, depending upon the nature of any transaction, the company may experience a charge to earnings, which could be material and have an adverse impact upon the market price of the company’s common stock.
The company’s business could suffer in the event of a work stoppage by its unionized labor force.
Because the company has a significant number of workers whose employment is subject to collective bargaining agreements and labor union representation, the company is vulnerable to possible organized work stoppages and similar actions. Unionized employees accounted for approximately 6% of the company’s workforce as of January 2, 2021. The company has union contracts with employees at its facilities in Windsor, California; Algona, Iowa; Elgin, Illinois; Easton, Pennsylvania and Lodi, Wisconsin that extend through December 2021, December 2022, July 2022, May 2023 and December 2021, respectively. The company also has a union workforce at its manufacturing facility in the Philippines under a contract that extends through June 2021. Approximately 1% of the company's workforce is covered by collective bargaining agreements that expire within one year. Any future strikes, employee slowdowns or similar actions by one or more unions, in connection with labor contract negotiations or otherwise, could have a material adverse effect on the company’s ability to operate the company’s business.
The company depends significantly on its key personnel.
The company depends significantly on the company’s executive officers and certain other key personnel, whom could be difficult to replace. While the company has employment agreements with certain key executives, the company cannot be certain that it will succeed in retaining this personnel or their services under existing agreements. The incapacity, inability or unwillingness of certain of these people to perform their services may have a material adverse effect on the company. There is intense competition for qualified personnel within the company’s industry, and there can be no assurance that the company will be able to continue to attract, motivate and retain personnel with the skills and experience needed to successfully manage the company's business and operations.
Technology and Cybersecurity Risks
The company may not be able to adequately protect its intellectual property rights, which may materially harm its business.
The company relies primarily on trade secret, copyright, service mark, trademark and patent law and contractual protections to protect the company’s proprietary technology and other proprietary rights. The company has filed numerous patent applications covering the company’s proprietary technology. Notwithstanding the precautions the company takes to protect its intellectual property rights, it is possible that third parties may copy or otherwise obtain and use the company’s proprietary technology without authorization or may otherwise infringe on the company’s rights. In some cases, including with respect to a number of the company’s most important products, there may be no effective legal recourse against duplication by competitors as the legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection. This could make it difficult for us to stop the infringement of our patents and future patents we may own, or, generally, prevent the marketing of competing products in violation of our proprietary rights. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. In the future, the company may have to rely on litigation to enforce its intellectual property rights, protect its trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs to the company and diversions of the company’s resources, either of which could adversely affect the company’s business.
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Any infringement by the company of a third party's patent rights could result in litigation and adversely affect its ability to provide, or could increase the cost of providing, the company’s products and services.
Patents of third parties may have an important bearing on the company’s ability to offer some of its products and services. The company’s competitors, as well as other companies and individuals, may obtain patents related to the types of products and services the company offers or plans to offer. There can be no assurance that the company is or will be aware of all patents containing claims that may pose a risk of infringement by its products and services. In addition, some patent applications in the United States are confidential until a patent is issued and, therefore, the company cannot evaluate the extent to which its products and services may be covered or asserted to be covered by claims contained in pending patent applications. In general, if one or more of the company’s products or services were to infringe patents held by others, the company may be required to stop developing or marketing the products or services, to obtain licenses from the holders of the patents to develop and market the services, or to redesign the products or services in such a way as to avoid infringing on the patent claims. The company cannot assess the extent to which it may be required in the future to obtain licenses with respect to patents held by others, whether such licenses would be available or, if available, whether it would be able to obtain such licenses on commercially reasonable terms. If the company is unable to obtain such licenses, it also may not be able to redesign the company’s products or services to avoid infringement, which could materially adversely affect the company’s business, financial condition and operating results.
The company may be subject to information technology system failures, network disruptions, cybersecurity attacks and breaches in data security, which may materially adversely affect the company’s operations, financial condition and operating results.
The company depends on information technology as an enabler to improve the effectiveness of its operations and to interface with its customers, as well as to maintain financial accuracy and efficiency. Information technology system failures, including suppliers’ or vendors’ system failures, could disrupt the company’s operations by causing transaction errors, processing inefficiencies, delays or cancellation of customer orders, the loss of customers, impediments to the manufacture or shipment of products, other business disruptions, or the loss of or damage to intellectual property through a security breach.
The company’s information systems, or those of its third-party service providers, could also be penetrated by outside parties intent on extracting information, corrupting information or disrupting business processes. Such unauthorized access could disrupt the company’s business, increase costs and/or result in the loss of assets. Cybersecurity attacks are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, corruption or destruction of data and other manipulation or improper use of systems or networks. These events could negatively impact the company’s customers and/or reputation and lead to financial losses from remediation actions, loss of business, production downtimes, operational delays or potential liability, penalties, fines or other increases in expense, all of which may have a material adverse effect on the company’s business. In addition, as security threats and cybersecurity and data privacy and protection laws and regulations, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personally identifiable information, continue to evolve and become more sophisticated, we may invest additional resources in the security of our systems. Any such increased level of investment could adversely affect our financial condition or results of operations. Further, as governmental authorities around the world continue to consider legislative and regulatory proposals concerning data protection, we may face substantial penalties if we fail to comply with regulations and laws regarding data protection.
Tax, Legal and Regulatory Risks
The company may be subject to litigation, tax, and other legal compliance risks.
In addition to product liability claims, the company is subject to a variety of litigation, tax, and other legal compliance risks. These risks include, among other things, possible liability relating to personal injuries, intellectual property rights, contract-related claims, taxes and compliance with U.S. and foreign export laws, competition laws, and laws governing improper business practices. The company or one of its business units could be charged with wrongdoing as a result of such matters. If convicted or found liable, the company could be subject to significant fines, penalties, repayments or other damages.
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The company’s reputation, ability to do business, and results of operations may be impaired by the improper conduct of any of its employees, agents, or business partners.
While the company strives to maintain high standards, the company cannot provide assurance that its internal controls and compliance systems will always protect the company from acts committed by its employees, agents, or business partners that violate U.S. and/or foreign laws or fail to protect the company’s confidential information, including the laws governing payments to government officials, bribery, fraud, anti-kickback and false claims rules, competition, export and import compliance, money laundering, and data privacy laws, as well as the improper use of proprietary information or social media. Any such violations of law or improper actions could subject the company to civil or criminal investigations in the United States and in other jurisdictions, lead to substantial civil or criminal, monetary and non-monetary penalties, and related shareholder lawsuits, lead to increased costs of compliance and damage the company’s reputation.
The company is subject to potential liability under environmental laws.
The company’s operations are regulated by a number of federal, state and local environmental laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of these materials. Compliance with these environmental laws and regulations is a significant consideration for the company because it uses hazardous materials in its manufacturing processes. In addition, because the company is a generator of hazardous wastes, even if it fully complies with applicable environmental laws, it may be subject to financial exposure for costs associated with an investigation and remediation of sites at which it has arranged for the disposal of hazardous wastes if these sites become contaminated. In the event of a violation of environmental laws, the company could be held liable for damages and for the costs of remedial actions. Environmental laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation, which could negatively affect the company’s operating results. There can be no assurance that identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory authorities or other unanticipated events will not arise in the future resulting in additional environmental liabilities, compliance costs and penalties that could be material. Environmental laws and regulations are constantly evolving, and it is impossible to accurately predict the effect they may have upon the financial condition, results of operations, or cash flows of the company.
We are subject to risks associated with possible climate change legislation, regulation and international accords.
Government mandates, standards or regulations intended to reduce greenhouse gas emissions or projected climate change impacts have resulted in, and are likely to continue resulting in, increased energy, manufacturing, transportation and raw material costs. Governmental requirements directed at regulating greenhouse gas emissions could cause us to incur expenses that we cannot recover or that will require us to increase the price of products we sell to the point that it impacts demand for those products.
Unfavorable tax law changes and tax authority rulings may adversely affect financial results.
The company is subject to income taxes in the United States and in various foreign jurisdictions. Domestic and international tax liabilities are based on the income and expenses in various tax jurisdictions. The amount of the company’s income and other tax liability is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts recorded, future financial results may include unfavorable tax adjustments.
The trading price of the company's common stock has been volatile, and investors in the company's common stock may experience substantial losses.
The trading price of the company's common stock has been volatile and may become volatile again in the future. The trading price of the company's common stock could decline or fluctuate in response to a variety of factors, including:
•the company's failure to meet the performance estimates of securities analysts;
•changes in buy/sell recommendations by securities analysts;
•fluctuations in the company's operating results;
•substantial sales of the company's common stock;
•general stock market conditions; or
21
•other economic or external factors.
Item 1B. Unresolved Staff Comments
Not applicable.
22
Item 2. Properties
The company's principal executive offices are located in Elgin, Illinois. The company operates forty manufacturing facilities in the U.S. and twenty-nine manufacturing facilities internationally.
The principal properties of the company used to conduct business operations are listed below:
| Location | Principal Function | Square Footage | Owned/ Leased | Lease Expiration | ||||||||||||||||||||||
| Commercial Foodservice: | ||||||||||||||||||||||||||
| Fort Smith, AR | Manufacturing, Warehousing and Offices | 440,200 | Leased | Aug-31 | ||||||||||||||||||||||
| Brea, CA | Manufacturing, Warehousing and Offices | 86,600 | Leased | Sep-26 | ||||||||||||||||||||||
| Vacaville, CA | Manufacturing, Warehousing and Offices | 81,200 | Leased | May-27 | ||||||||||||||||||||||
| Windsor, CA | Manufacturing, Warehousing and Offices | 75,000 | Leased | Apr-32 | ||||||||||||||||||||||
| Louisville, CO | Manufacturing, Warehousing and Offices | 37,700 | Leased | Jul-28 | ||||||||||||||||||||||
| Venice, FL | Manufacturing, Warehousing and Offices | 21,500 | Leased | May-24 | ||||||||||||||||||||||
| Elgin, IL | Manufacturing, Warehousing and Offices | 207,000 | Owned | N/A | ||||||||||||||||||||||
| Mundelein, IL | Manufacturing, Warehousing and Offices | 70,000 | Owned | N/A | ||||||||||||||||||||||
| Rockton, IL | Manufacturing, Warehousing and Offices | 339,400 | Owned | N/A | ||||||||||||||||||||||
| South Beloit, IL | Warehousing | 128,500 | Leased | Jun-23 | ||||||||||||||||||||||
| Menominee, MI | Manufacturing, Warehousing and Offices | 60,000 | Owned | N/A | ||||||||||||||||||||||
| Bow, NH | Manufacturing, Warehousing and Offices | 100,000 | Owned | N/A | ||||||||||||||||||||||
| Concord, NH | Warehousing | 39,000 | Leased | Mar-21 | ||||||||||||||||||||||
| Pembroke, NH | Warehousing | 136,000 | Leased | Jul-24 | ||||||||||||||||||||||
| Charlotte, NC | Manufacturing, Warehousing and Offices | 44,000 | Leased | Feb-24 | ||||||||||||||||||||||
| Fuquay-Varina, NC | Manufacturing, Warehousing and Offices | 183,900 | Owned | N/A | ||||||||||||||||||||||
| Dayton, OH | Manufacturing, Warehousing and Offices | 37,700 | Owned | N/A | ||||||||||||||||||||||
| Tualatin, OR | Manufacturing, Warehousing and Offices | 29,500 | Leased | May-28 | ||||||||||||||||||||||
| Bethlehem, PA | Manufacturing, Warehousing and Offices | 72,900 | Leased | Dec-24 | ||||||||||||||||||||||
| Easton, PA | Manufacturing, Warehousing and Offices | 156,700 | Owned | N/A | ||||||||||||||||||||||
| Smithville, TN | Manufacturing, Warehousing and Offices | 268,000 | Owned | N/A | ||||||||||||||||||||||
| Allen, TX | Warehousing | 33,100 | Leased | Feb-24 | ||||||||||||||||||||||
| Carrollton, TX | Manufacturing, Warehousing and Offices | 132,400 | Leased | Aug-22 | ||||||||||||||||||||||
| Essex Junction, VT | Manufacturing, Warehousing and Offices* | 270,000 | Owned | N/A | ||||||||||||||||||||||
| Redmond, WA | Manufacturing, Warehousing and Offices | 42,400 | Leased | May-22 | ||||||||||||||||||||||
| Seattle, WA | Manufacturing, Warehousing and Offices | 16,100 | Leased | Aug-22 | ||||||||||||||||||||||
| New South Wales, Australia | Manufacturing, Warehousing and Offices | 204,900 | Owned | N/A | ||||||||||||||||||||||
| Toronto, Canada | Manufacturing, Warehousing and Offices* | 87,700 | Owned | N/A | ||||||||||||||||||||||
| Humen, China | Manufacturing, Warehousing | 6,600 | Leased | Mar-22 | ||||||||||||||||||||||
| Qingdao City, China | Manufacturing, Warehousing and Offices | 113,500 | Leased | Jul-29 | ||||||||||||||||||||||
| Zhuhai, China | Manufacturing, Warehousing and Offices | 104,500 | Leased | May-22 | ||||||||||||||||||||||
| Brøndby, Denmark | Manufacturing, Warehousing and Offices | 50,900 | Owned | N/A | ||||||||||||||||||||||
| Randers, Denmark | Manufacturing, Warehousing and Offices | 50,100 | Owned | N/A | ||||||||||||||||||||||
| Viljandi, Estonia | Manufacturing and Offices | 47,000 | Owned | N/A | ||||||||||||||||||||||
| Nusco, Italy | Manufacturing, Warehousing and Offices | 260,600 | Owned | N/A | ||||||||||||||||||||||
| Scandicci, Italy | Manufacturing, Warehousing and Offices | 39,300 | Leased | Apr-25 | ||||||||||||||||||||||
| Sedico, Italy | Manufacturing, Warehousing and Offices | 52,500 | Leased | Feb-24 | ||||||||||||||||||||||
| Nogales, Mexico | Manufacturing, Warehousing and Offices | 129,000 | Owned | N/A | ||||||||||||||||||||||
| Laguna, the Philippines | Manufacturing, Warehousing and Offices | 115,200 | Owned | N/A | ||||||||||||||||||||||
| Wiślina, Poland | Manufacturing, Warehousing and Offices | 77,500 | Owned | N/A | ||||||||||||||||||||||
| Pineda de Mar, Spain | Manufacturing, Warehousing and Offices | 57,100 | Owned | N/A | ||||||||||||||||||||||
| Fristad, Sweden | Manufacturing, Warehousing and Offices | 173,800 | Owned | N/A | ||||||||||||||||||||||
| Lincoln, the United Kingdom | Manufacturing, Warehousing and Offices | 100,000 | Owned | N/A | ||||||||||||||||||||||
| Wrexham, the United Kingdom | Manufacturing, Warehousing and Offices | 62,600 | Owned | N/A | ||||||||||||||||||||||
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| Location | Principal Function | Square Footage | Owned/ Leased | Lease Expiration | ||||||||||||||||||||||
| Food Processing: | ||||||||||||||||||||||||||
| Gainesville, GA | Manufacturing, Warehousing and Offices | 107,400 | Owned | N/A | ||||||||||||||||||||||
| Algona, IA | Manufacturing, Warehousing and Offices | 70,100 | Owned | N/A | ||||||||||||||||||||||
| Elgin, IL | Manufacturing, Warehousing and Offices | 25,000 | Owned | N/A | ||||||||||||||||||||||
| Elk Grove, IL | Manufacturing, Warehousing and Offices | 101,500 | Leased | Nov-29 | ||||||||||||||||||||||
| Clayton, NC | Manufacturing, Warehousing and Offices | 65,000 | Leased | Oct-24 | ||||||||||||||||||||||
| Maysville, OK | Manufacturing, Warehousing and Offices | 36,700 | Owned | N/A | ||||||||||||||||||||||
| Souderton, PA | Manufacturing, Warehousing and Offices | 35,000 | Owned | N/A | ||||||||||||||||||||||
| Plano, TX | Manufacturing, Warehousing and Offices | 339,100 | Leased | Apr-22 | ||||||||||||||||||||||
| Waynesboro, VA | Manufacturing, Warehousing and Offices | 26,400 | Owned | N/A | ||||||||||||||||||||||
| Bothell, WA | Manufacturing, Warehousing and Offices | 23,600 | Leased | May-25 | ||||||||||||||||||||||
| Lodi, WI | Manufacturing, Warehousing and Offices | 114,600 | Owned | N/A | ||||||||||||||||||||||
| Aalborg, Denmark | Manufacturing, Warehousing and Offices | 68,300 | Leased | Dec-22 | ||||||||||||||||||||||
| Mauron, France | Manufacturing, Warehousing and Offices | 112,400 | Leased | Dec-22 | ||||||||||||||||||||||
| Reichenau, Germany | Manufacturing, Warehousing and Offices | 57,900 | Owned | N/A | ||||||||||||||||||||||
| Bangalore, India | Manufacturing, Warehousing and Offices | 75,000 | Leased | Mar-24 | ||||||||||||||||||||||
| Castelnuovo Rangone, Italy | Manufacturing, Warehousing and Offices | 26,800 | Leased | Dec-23 | ||||||||||||||||||||||
| Norwich, the United Kingdom | Manufacturing, Warehousing and Offices | 30,000 | Owned | N/A | ||||||||||||||||||||||
| Residential Kitchen: | ||||||||||||||||||||||||||
| Chino, CA | Warehousing and Offices | 100,000 | Leased | Feb-22 | ||||||||||||||||||||||
| Redwood City, CA | Warehousing and Offices | 20,600 | Leased | Jul-24 | ||||||||||||||||||||||
| Buford, GA | Warehousing and Offices | 178,100 | Leased | Feb-23 | ||||||||||||||||||||||
| Greenville, MI | Manufacturing, Warehousing and Offices | 225,000 | Owned | N/A | ||||||||||||||||||||||
| Greenwood, MS | Manufacturing, Warehousing and Offices** | 738,000 | Owned | N/A | ||||||||||||||||||||||
| Brown Deer, WI | Manufacturing, Warehousing and Offices | 161,900 | Leased | May-22 | ||||||||||||||||||||||
| Saint Ouen L'aumone, France | Manufacturing, Warehousing | 30,400 | Owned | N/A | ||||||||||||||||||||||
| Waterford, Ireland | Warehousing and Offices | 73,000 | Leased | Jul-27 | ||||||||||||||||||||||
| Ketley, the United Kingdom | Manufacturing and Offices | 217,300 | Owned | N/A | ||||||||||||||||||||||
| Leamington Spa, the United Kingdom | Manufacturing and Offices | 270,200 | Owned | N/A | ||||||||||||||||||||||
| Leamington Spa, the United Kingdom | Warehousing and Offices | 100,300 | Leased | Aug-29 | ||||||||||||||||||||||
| Nottingham, the United Kingdom | Manufacturing and Offices | 153,100 | Owned | N/A | ||||||||||||||||||||||
* Contains two separate manufacturing facilities.
** Contains four separate manufacturing facilities.
At various other locations the company leases small amounts of space for administrative, manufacturing, distribution and sales functions, and in certain instances limited short-term inventory storage. These locations are in Australia, Brazil, Canada, China, Czech Republic, Denmark, Dubai, France, India, Italy, Mexico, Philippines, Russia, Spain, the United Kingdom and various locations in the United States.
Management believes that these facilities are adequate for the operation of the company's business as presently conducted.
Item 3. Legal Proceedings
The company is routinely involved in litigation incidental to its business, including product liability claims, which are partially covered by insurance or in certain cases by indemnification provisions under purchase agreements for recently acquired companies. Such routine claims are vigorously contested and management does not believe that the outcome of any such pending litigation will have a material effect upon the financial condition, results of operations or cash flows of the company.
Item 4. Mine Safety Issues
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Principal Market
The company's Common Stock trades on the Nasdaq Global Select Market under the symbol "MIDD".
Stockholders
The company estimates there were approximately 43,609 record holders of the company's common stock as of March 1, 2021.
Dividends
The company does not currently pay cash dividends on its common stock. Any future payment of cash dividends on the company’s common stock will be at the discretion of the company’s Board of Directors and will depend upon the company’s results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors. The company’s Board of Directors currently intends to retain any future earnings to support its operations and to finance the growth and development of the company’s business and does not intend to declare or pay cash dividends on its common stock for the foreseeable future. In addition, the company’s revolving credit facility limits its ability to declare or pay dividends on its common stock.
Securities Authorized for Issuance under Equity Compensation Plans
For information pertaining to securities authorized for issuance under equity compensation plans and the related weighted
average exercise price, see Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.”
Unregistered Sales of Equity Securities in connection with Strategic Transactions
On June 29, 2020, in connection with the company’s minority investment in Bluezone Products, Inc. (“Bluezone”), the company issued 46,365 unregistered shares of the company’s common stock to a certain stockholder of Bluezone (“Bluezone Stockholder”) in exchange for 36,764 shares of series A preferred stock of Bluezone. The shares of company common stock were issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended ("Securities Act"). The company relied on such exemption based in part upon representations made by the Bluezone Stockholder, including its status as an accredited investor, as such term is defined in Rule 501 of the Securities Act.
On December 23, 2020, in connection with the company’s purchase of assets from Appliance Innovation, Inc. ("Appliance"), the company issued 93,392 unregistered shares of the company’s common stock to Appliance. The shares of company common stock were issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act. The company relied on such exemption based in part upon representations made by Appliance, including its status as an accredited investor, as such term is defined in Rule 501 of the Securities Act.
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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) | ||||||||||||||||||||
| September 27, 2020 to October 24, 2020 | — | $ | — | — | 1,476,835 | ||||||||||||||||||
| October 25, 2020 to November 21, 2020 | — | — | — | 1,476,835 | |||||||||||||||||||
| November 22, 2020 to January 2, 2021 | — | — | — | 1,476,835 | |||||||||||||||||||
| Quarter ended January 2, 2021 | — | $ | — | — | 1,476,835 | ||||||||||||||||||
(1) In November 2017, the company's Board of Directors approved a stock repurchase program. This program authorizes the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock in open market purchases or negotiated transactions. As of January 2, 2021, 1,023,165 shares had been purchased under the 2017 stock repurchase program. At January 2, 2021, the company had a total of 8,013,296 shares in treasury amounting to $537.1 million.
In the consolidated financial statements, the company also treats shares withheld for tax purposes on behalf of employees in connection with the vesting of restricted share grants as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. These withheld shares are not considered common stock repurchases under the authorized common stock repurchase plan and accordingly are not included in the common stock repurchase totals in the preceding table.
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Item 6. Selected Financial Data
(amounts in thousands, except per share data)
Fiscal Year Ended(1, 2)
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| Income Statement Data: | |||||||||||||||||||||||||||||
| Net sales | $ | 2,513,257 | $ | 2,959,446 | $ | 2,722,931 | $ | 2,335,542 | $ | 2,267,852 | |||||||||||||||||||
| Cost of sales | 1,631,209 | 1,855,949 | 1,718,791 | 1,422,801 | 1,366,672 | ||||||||||||||||||||||||
| Gross profit | 882,048 | 1,103,497 | 1,004,140 | 912,741 | 901,180 | ||||||||||||||||||||||||
| Selling, general, and administrative expenses | 531,897 | 593,813 | 538,842 | 468,219 | 471,638 | ||||||||||||||||||||||||
| Restructuring expenses | 12,375 | 10,480 | 19,332 | 19,951 | 10,524 | ||||||||||||||||||||||||
| Gain on litigation settlement | — | (14,839) | — | — | — | ||||||||||||||||||||||||
| Gain on sale of plant | (1,982) | — | — | (12,042) | — | ||||||||||||||||||||||||
| Impairments | 15,327 | — | — | 58,000 | — | ||||||||||||||||||||||||
| Income from operations | 324,431 | 514,043 | 445,966 | 378,613 | 419,018 | ||||||||||||||||||||||||
| Interest expense and deferred financing amortization, net | 78,617 | 82,609 | 58,742 | 25,983 | 23,880 | ||||||||||||||||||||||||
| Net periodic pension benefit (other than service costs & curtailment) | (39,996) | (29,722) | (39,020) | (35,033) | (30,409) | ||||||||||||||||||||||||
| Curtailment loss | 14,682 | 865 | 906 | 3,305 | 3,202 | ||||||||||||||||||||||||
| Other expense (income), net | 3,071 | (2,328) | 1,825 | 829 | 1,040 | ||||||||||||||||||||||||
| Earnings before income taxes | 268,057 | 462,619 | 423,513 | 383,529 | 421,305 | ||||||||||||||||||||||||
| Provision for income taxes | 60,763 | 110,379 | 106,361 | 85,401 | 137,089 | ||||||||||||||||||||||||
| Net earnings | $ | 207,294 | $ | 352,240 | $ | 317,152 | $ | 298,128 | $ | 284,216 | |||||||||||||||||||
| Net earnings per share: | |||||||||||||||||||||||||||||
| Basic | $ | 3.76 | $ | 6.33 | $ | 5.71 | $ | 5.26 | $ | 4.98 | |||||||||||||||||||
| Diluted | $ | 3.76 | $ | 6.33 | $ | 5.70 | $ | 5.26 | $ | 4.98 | |||||||||||||||||||
| Weighted average number of shares outstanding: | |||||||||||||||||||||||||||||
| Basic | 55,093 | 55,647 | 55,576 | 56,715 | 57,030 | ||||||||||||||||||||||||
| Diluted | 55,136 | 55,656 | 55,604 | 56,719 | 57,085 | ||||||||||||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||||||||||||
| Working capital | $ | 570,235 | $ | 616,059 | $ | 502,642 | $ | 458,236 | $ | 323,290 | |||||||||||||||||||
| Total assets | 5,202,474 | 5,002,143 | 4,549,781 | 3,339,713 | 2,917,136 | ||||||||||||||||||||||||
| Total debt | 1,729,596 | 1,873,140 | 1,892,105 | 1,028,881 | 732,126 | ||||||||||||||||||||||||
| Stockholders' equity | 1,976,649 | 1,946,814 | 1,665,203 | 1,361,148 | 1,265,318 | ||||||||||||||||||||||||
(1)The company's fiscal year ends on the Saturday nearest to December 31.
(2)The company has acquired numerous businesses in the periods presented. Please see Note 2 in the Notes to Consolidated Financial Statements for further information.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
This report contains "forward-looking statements" subject to the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which could cause the company's actual results, performance or outcomes to differ materially from those expressed or implied in the forward-looking statements. The following are some of the important factors that could cause the company's actual results, performance or outcomes to differ materially from those discussed in the forward-looking statements:
•changing market conditions;
•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;
•risks associated with the company's foreign operations, including market acceptance and demand for the company's products and the company's ability to manage the risk associated with the exposure to foreign currency exchange rate fluctuations;
•the company's ability to protect its trademarks, copyrights and other intellectual property;
•the impact of competitive products and pricing;
•the impact of announced management and organizational changes;
•the state of the residential construction, housing and home improvement markets;
•the state of the credit markets, including mortgages, home equity loans and consumer credit;
•intense competition in the company's business segments including the impact of both new and established global competitors;
•unfavorable tax law changes and tax authority rulings;
•cybersecurity attacks and other breaches in security;
•the continued ability to realize profitable growth through the sourcing and completion of strategic acquisitions;
•the timely development and market acceptance of the company's products; and
•the availability and cost of raw materials.
The company cautions readers to carefully consider the statements set forth in the section entitled "Item 1A. Risk Factors" of this filing and discussion of risks included in the company's SEC filings.
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NET SALES SUMMARY
(dollars in thousands)
Fiscal Year Ended(1) | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| Sales | Percent | Sales | Percent | Sales | Percent | ||||||||||||||||||||||||||||||
| Business Segments: | |||||||||||||||||||||||||||||||||||
| Commercial Foodservice | $ | 1,510,279 | 60.1 | % | $ | 1,984,345 | 67.1 | % | $ | 1,729,814 | 63.5 | % | |||||||||||||||||||||||
| Food Processing | 437,272 | 17.4 | 400,951 | 13.5 | 389,594 | 14.3 | |||||||||||||||||||||||||||||
| Residential Kitchen | 565,706 | 22.5 | 574,150 | 19.4 | 603,523 | 22.2 | |||||||||||||||||||||||||||||
| Total | $ | 2,513,257 | 100.0 | % | $ | 2,959,446 | 100.0 | % | $ | 2,722,931 | 100.0 | % | |||||||||||||||||||||||
(1)The company's fiscal year ends on the Saturday nearest to December 31.
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Results of Operations
The following table sets forth certain items in the consolidated statements of earnings as a percentage of net sales for the periods presented:
Fiscal Year Ended(1) | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
| Cost of sales | 64.9 | 62.7 | 63.1 | ||||||||||||||
| Gross profit | 35.1 | 37.3 | 36.9 | ||||||||||||||
| Selling, general and administrative expenses | 21.2 | 20.1 | 19.8 | ||||||||||||||
| Restructuring | 0.5 | 0.3 | 0.7 | ||||||||||||||
| Gain on litigation settlement | — | (0.5) | — | ||||||||||||||
| Gain on sale of plant | (0.1) | — | — | ||||||||||||||
| Impairments | 0.6 | — | — | ||||||||||||||
| Income from operations | 12.9 | 17.4 | 16.4 | ||||||||||||||
| Interest expense and deferred financing amortization, net | 3.1 | 2.9 | 2.2 | ||||||||||||||
| Net periodic pension benefit (other than service cost & curtailment) | (1.6) | (1.0) | (1.4) | ||||||||||||||
| Curtailment loss | 0.6 | — | — | ||||||||||||||
| Other expense (income), net | 0.1 | (0.1) | 0.1 | ||||||||||||||
| Earnings before income taxes | 10.7 | 15.6 | 15.5 | ||||||||||||||
| Provision for income taxes | 2.4 | 3.7 | 3.9 | ||||||||||||||
| Net earnings | 8.3 | % | 11.9 | % | 11.6 | % | |||||||||||
(1)The company's fiscal year ends on the Saturday nearest to December 31.
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Fiscal Year Ended January 2, 2021 as Compared to December 28, 2019
NET SALES. Net sales in fiscal 2020 decreased by $446.1 million, or 15.1%, to $2,513.3 million as compared to $2,959.4 million in fiscal 2019. Net sales increased by $72.3 million, or 2.4%, from the fiscal 2019 acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Pacproinc, Brava, and Synesso and the fiscal 2020 acquisitions of RAM, Deutsche, Wild Goose, and United Foodservice Equipment Zhuhai. Excluding acquisitions, net sales decreased $518.4 million, or 17.5%, from the prior year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for fiscal 2020 increased net sales by approximately $0.2 million. Excluding the impact of foreign exchange and acquisitions, sales decreased 17.5% for the year, including a net sales decrease of 26.5% 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 2.9% at the Residential Kitchen Equipment Group.
•Net sales of the Commercial Foodservice Equipment Group decreased by $474.0 million, or 23.9%, to $1,510.3 million in fiscal 2020 as compared to $1,984.3 million in fiscal 2019. Net sales from the acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Synesso, RAM, Deutsche, Wild Goose, and United Foodservice Equipment Zhuhai, which were acquired on April 1, 2019, April 1, 2019, June 15, 2019, November 27, 2019, January 13, 2020, March 2, 2020, December 7, 2020, and December 18, 2020, respectively, accounted for an increase of $53.1 million during fiscal 2020. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group decreased $527.1 million, or 26.6%, as compared to the prior year. Excluding the impact of foreign exchange and acquisitions, net sales decreased $525.6 million, or 26.5% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales decrease of $266.9 million, or 20.0%, to $1,067.9 million, as compared to $1,334.8 million in the prior year. This includes an increase of $43.0 million from recent acquisitions. Excluding acquisitions, the net decrease in domestic sales was $309.9 million, or 23.2%. International sales decreased $207.1 million, or 31.9%, to $442.4 million, as compared to $649.5 million in the prior year. This includes the increase of $10.1 million from recent acquisitions and a decrease of $1.5 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales decrease in international sales was $215.7 million, or 33.2%. The decline in both domestic and international sales reflects the impacts of COVID-19. This was most prevalent in the second quarter of 2020 and despite decline over prior year gradually recovered in the second half of the year.
•Net sales of the Food Processing Equipment Group increased by $36.3 million, or 9.1%, to $437.3 million in fiscal 2020, as compared to $401.0 million in fiscal 2019. Excluding the impact of foreign exchange and the acquisition of Pacproinc, acquired July 16, 2019, net sales increased $23.8 million, or 5.9% at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $64.5 million, or 26.2%, to $311.1 million, as compared to $246.6 million in the prior year. Excluding the acquisition, net sales increased $51.8 million, or 21.0%. The increase in domestic sales reflects growth in protein equipment sales. International sales decreased $28.2 million, or 18.3%, to $126.2 million, as compared to $154.4 million in the prior year. This includes a decrease of $1.1 million related to the unfavorable impact of exchange rates. Excluding the acquisition and foreign exchange, the net sales decrease in international sales was $28.0 million, or 18.1%. The decrease in international revenues reflects declines in sales primarily due to the disruptive impact of COVID-19 on our customers' operations.
•Net sales of the Residential Kitchen Equipment Group decreased by $8.4 million, or 1.5%, to $565.7 million in fiscal 2020, as compared to $574.1 million in fiscal 2019. Excluding the impact of foreign exchange, the acquisition of Brava, acquired November, 19, 2019, net sales decreased $16.8 million, or 2.9% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales increase of $11.2 million, or 3.1%, to $373.9 million, as compared to $362.7 million in the prior year. Excluding the acquisition, net sales increased $5.6 million, or 1.5%. The increase in domestic sales is primarily related to strong consumer demand in the last six months of the year, offset by the impacts of COVID-19 in the first half of the year. International sales decreased $19.6 million, or 9.3% to $191.8 million, as compared to $211.4 million in the prior year. This includes an increase of $2.8 million related to the favorable impact of exchange rates. Excluding foreign exchange, the net sales decrease in international sales was $22.4 million, or 10.6%, primarily in the European market, reflecting the impacts of Brexit and the outbreak of COVID-19 partially offset by strong consumer demand in the last six months of the year.
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GROSS PROFIT. Gross profit decreased by $221.5 million to $882.0 million in fiscal 2020 from $1,103.5 million in fiscal 2019, primarily reflecting the lower sales volumes related to COVID-19, lower margins at recent acquisitions, offset by the favorable impact of foreign exchange rates of $1.7 million. The gross margin rate decreased from 37.3% in 2019 to 35.1% in 2020. The gross margin rate in fiscal 2020 excluding acquisitions and impact of foreign exchange was 35.3%.
•Gross profit at the Commercial Foodservice Equipment Group decreased by $224.4 million, or 30.1%, to $522.2 million in fiscal 2020 as compared to $746.6 million in fiscal 2019. Gross profit from the acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Synesso, RAM, Deutsche, Wild Goose, and United Foodservice Equipment Zhuhai, accounted for an approximately $13.0 million increase in gross profit during fiscal 2020. Excluding acquisitions, the gross profit decreased by approximately $237.4 million largely due to lower sales volumes. The impact of foreign exchange rates increased gross profit by approximately $0.1 million. The gross profit margin rate decreased to 34.6% as compared to 37.6% in the prior year, primarily due to lower margins at recent acquisitions. The gross margin rate in fiscal 2020 excluding acquisitions and the impact of foreign exchange was 34.9%.
•Gross profit at the Food Processing Equipment Group increased by $14.9 million, or 10.5%, to $157.1 million in fiscal 2020 as compared to $142.2 million in fiscal 2019. Excluding the acquisition, gross profit increased by approximately $10.6 million. The impact of foreign exchange rates increased gross profit by approximately $0.4 million. The gross profit margin rate increased to 35.9% in fiscal 2020 as compared to 35.5% in the prior year. The gross margin rate in fiscal 2020 excluding the acquisition and the impact of foreign exchange was 35.9%.
•Gross profit at the Residential Kitchen Equipment Group decreased by $12.5 million, or 5.8%, to $204.3 million in fiscal 2020 as compared to $216.8 million in fiscal 2019. The impact of foreign exchange rates increased gross profit by approximately $1.2 million. The gross margin rate decreased to 36.1% in fiscal 2020 as compared to 37.8% in the prior year, primarily related to lower sales volumes and the impact of facility consolidations.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Combined selling, general, and administrative expenses decreased by $61.9 million to $531.9 million in fiscal 2020 from $593.8 million in 2019. As a percentage of net sales, selling, general and administrative expenses amounted to 21.2% in fiscal 2020 and 20.1% in fiscal 2019.
Selling, general and administrative expenses reflect increased costs of $30.2 million associated with acquisitions, including $7.2 million of non-cash intangible amortization expense. Selling, general and administrative expenses decreased $35.7 million related to compensation costs and commissions and $59.2 million due to controllable cost reductions primarily within professional fees, travel and entertainment, convention costs, and advertising. Foreign exchange rates had a favorable impact of $0.5 million. The decreases were partially offset by a $11.5 million increase related to higher non-cash share based compensation and$5.8 million related to increased allowances for doubtful accounts given the current market conditions. The prior year expenses also included $10.1 million related to transition costs with the former Chairman and CEO upon his retirement in February 2019.
RESTRUCTURING EXPENSES. Restructuring expenses increased $1.9 million to $12.4 million from $10.5 million in the prior year period. In fiscal 2020, restructuring expenses related primarily to headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group. During fiscal 2019, restructuring charges related primarily to headcount reductions and cost reduction initiatives related to facility consolidations at the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group.
GAIN ON LITIGATION SETTLEMENT. In fiscal 2019, the company reached a settlement with respect to a lawsuit filed by the company arising from a prior acquisition included in the Residential Kitchen Equipment Group. The gain associated with this settlement, which is net of the release of funds in escrow, is reflected in the consolidated statement of earnings.
IMPAIRMENTS. In fiscal 2020, the company recognized impairment of $11.6 million associated with several tradenames in conjunction with the diminution of value as we assessed current market conditions and future business plans. See Note 3 (f) to the Consolidated Financial Statements for further information on the annual impairment testing. In addition the company recorded an impairment charge of approximately $2.9 million to reflect the fair market value of assets held for sale for a non-core business within the Residential Kitchen Equipment Group. See Note 13, Restructuring and Acquisition Integration Initiatives, in the Notes to the Consolidated Financial Statements for further information on restructuring initiatives.
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INCOME FROM OPERATIONS. Income from operations decreased $189.6 million to $324.4 million in fiscal 2020 from $514.0 million in fiscal 2019. Operating income as a percentage of net sales amounted to 12.9% in 2020 as compared to 17.4% in 2019. The decrease in operating income resulted from the impacts of COVID-19. Operating income in fiscal 2019 included the gain on litigation settlement, offset by the transition costs related to the former Chairman and CEO. Operating income in fiscal 2020 included impairment charges related to intangible assets, fixed assets, and assets held for sale.
Income from operations in 2020 included $127.7 million of non-cash expenses, including $39.1 million of depreciation expense, $69.0 million of intangible amortization related to acquisitions and $19.6 million of stock based compensation. This compares to $110.0 million of non-cash expenses in the prior year, including $37.9 million of depreciation expense, $64.0 million of intangible amortization related to acquisitions and $8.1 million of stock based compensation costs.
NON-OPERATING EXPENSES. Non-operating expenses increased $5.0 million to $56.4 million of expense in fiscal 2020 from $51.4 million of income in fiscal 2019. Net interest expense and deferred financing decreased $4.0 million to $78.6 million in fiscal 2020 from $82.6 million in fiscal 2019 reflecting the reduction in the average interest rates under the Credit Facility and benefit from the Convertible Notes, offset by higher non-cash interest from the lower interest rate on Convertible Notes. Net periodic pension benefit (other than service costs and curtailment) increased $10.3 million to $40.0 million in fiscal 2020 from $29.7 million in fiscal 2019, related to the increase in discount rate used to calculate the interest cost and lower expected returns on assets driven by lower asset values for fiscal 2019. During fiscal 2020 a curtailment cost of approximately $14.7 million was recognized as a result of closing the AGA Group Pension Scheme to future pension accruals.
INCOME TAXES. A tax provision of $60.8 million, at an effective rate of 22.7%, was recorded for fiscal 2020 as compared to $110.4 million at an effective rate of 23.9%, in fiscal 2019. In comparison to the prior year, the tax provision reflects favorable tax adjustments for deferred tax rate changes and adjustments for the finalization of 2019 tax returns. The effective rates in 2020 and 2019 are higher than the federal tax rate of 21% primarily due to state taxes and foreign tax rate differentials.
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Fiscal Year Ended December 28, 2019 as Compared to December 29, 2018
NET SALES. Net sales in fiscal 2019 increased by $236.5 million, or 8.7%, to $2,959.4 million as compared to $2,722.9 million in fiscal 2018. The increase in net sales of $278.9 million, or 10.2%, was attributable to acquisition growth, resulting from the fiscal 2018 acquisitions of Hinds-Bock, Ve.Ma.C, Firex, Josper, Taylor, M-TEK, and Crown and the fiscal 2019 acquisitions of EVO, Cooking Solutions Group, Powerhouse, Ss Brewtech, Pacproinc, Synesso, and Brava. Excluding acquisitions and closure of a non-core business, net sales decreased $33.3 million, or 1.2%, from the prior year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for fiscal 2019 decreased net sales by approximately $36.1 million or 1.3%. Excluding the impact of foreign exchange, acquisitions and closure of a non-core business, sales increased 0.1% for the year, including a net sales increase of 1.6% at the Commercial Foodservice Equipment Group, a net sales decrease of 3.3% at the Food Processing Equipment Group and a net sales decrease of 2.0% at the Residential Kitchen Equipment Group.
•Net sales of the Commercial Foodservice Equipment Group increased by $254.5 million, or 14.7%, to $1,984.3 million in fiscal 2019 as compared to $1,729.8 million in fiscal 2018. Net sales from the acquisitions of Firex, Josper, Taylor, Crown, EVO, Cooking Solutions Group, Powerhouse, Ss Brewtech, and Synesso, which were acquired on April 27, 2018, May 10, 2018, June 22, 2018, December 3, 2018, December 31, 2018, April 1, 2019, April 1, 2019, June 15, 2019, and November 27, 2019, respectively, accounted for an increase of $247.1 million during fiscal 2019. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group increased $7.4 million, or 0.4%, as compared to the prior year. Excluding the impact of foreign exchange and acquisitions, net sales increased $27.2 million, or 1.6% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $158.8 million, or 13.5%, to $1,334.8 million, as compared to $1,176.0 million in the prior year. This includes an increase of $158.3 million from recent acquisitions. Excluding acquisitions, net sales were relatively flat. International sales increased $95.7 million, or 17.3%, to $649.5 million, as compared to $553.8 million in the prior year. This includes the increase of $88.8 million from recent acquisitions and a decrease of $19.8 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales increase in international sales was $26.7 million, or 4.8%. The increase in international revenues reflects strengthening of sales in the Asian and Latin American markets.
•Net sales of the Food Processing Equipment Group increased by $11.4 million, or 2.9%, to $401.0 million in fiscal 2019, as compared to $389.6 million in fiscal 2018. Net sales from the acquisitions of Hinds-Bock, Ve.Ma.C, M-TEK and Pacproinc, which were acquired on February 16, 2018, April 3, 2018, October 1, 2018, and July 16, 2019 respectively, accounted for an increase of $29.3 million. Excluding the impact of acquisitions, net sales of the Food Processing Equipment Group decreased $17.9 million, or 4.6%. Excluding the impact of foreign exchange and acquisitions net sales decreased $12.7 million, or 3.3% at the Food Processing Equipment Group. Domestically, the company realized a sales decrease of $17.1 million, or 6.5%, to $246.6 million, as compared to $263.7 million in the prior year. This includes an increase of $24.1 million from recent acquisitions. Excluding acquisitions, net sales decreased $41.2 million, or 15.6%. International sales increased $28.5 million, or 22.6%, to $154.4 million, as compared to $125.9 million in the prior year. This includes the increase of $5.2 million from the recent acquisitions and a decrease of $5.2 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales decrease in international sales was $28.5 million, or 22.6%. Revenues for the Food Processing Equipment Group have been affected by the timing and deferral of certain larger projects.
•Net sales of the Residential Kitchen Equipment Group decreased by $29.4 million, or 4.9%, to $574.1 million in fiscal 2019, as compared to $603.5 million in fiscal 2018. Excluding the impact of foreign exchange, the acquisition of Brava, acquired November, 19, 2019, and closure of a non-core business, net sales decreased $11.7 million, or 2.0% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales decrease of $4.0 million, or 1.1%, to $362.7 million, as compared to $366.7 million in the prior year. Excluding acquisitions and closure of a non-core business the net sales decrease in domestic sales was $4.7 million, or 1.3%. International sales decreased $25.4 million, or 10.7% to $211.4 million, as compared to $236.8 million in the prior year. This includes an unfavorable impact of exchange rates of $11.1 million. Excluding the impact of foreign exchange, acquisition, and closure of a non-core business the net sales decrease in international sales was$7.0 million, or 3.1%. The decrease in international revenues reflects decline of sales in the European market.
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GROSS PROFIT. Gross profit increased by $99.4 million to $1,103.5 million in fiscal 2019 from $1,004.1 million in fiscal 2018, reflecting the impact of increased sales from acquisitions and unfavorable impact of foreign exchange rates of $12.1 million. The gross margin rate increased from 36.9% in 2018 to 37.3% in 2019. The gross margin rate in fiscal 2019 excluding acquisitions and impact of foreign exchange was 37.9%.
•Gross profit at the Commercial Foodservice Equipment Group increased by $88.1 million, or 13.4%, to $746.6 million in fiscal 2019 as compared to $658.5 million in fiscal 2018. Gross profit from the acquisitions of Firex, Josper, Taylor, Crown, EVO, Cooking Solutions Group, Powerhouse, Ss Brewtech, and Synesso accounted for approximately $73.3 million of the increase in gross profit during fiscal 2019. Excluding acquisitions, the gross profit increased by approximately $14.8 million largely due to selling prices. The impact of foreign exchange rates decreased gross profit by approximately $6.1 million. The gross profit margin rate decreased to 37.6% as compared to 38.1% in the prior year, primarily due to lower margins at recent acquisitions. The gross margin rate in fiscal 2019 excluding acquisitions and impact of foreign exchange was 38.7%.
•Gross profit at the Food Processing Equipment Group increased by $8.6 million, or 6.4%, to $142.2 million in fiscal 2019 as compared to $133.6 million in fiscal 2018. Gross profit from the acquisitions of Hinds-Bock, Ve.Ma.C, M-TEK and Pacproinc accounted for approximately $12.8 million of the increase in gross profit during fiscal 2019. Excluding acquisitions, the gross profit decreased by approximately $4.2 million based on lower sales volumes. The impact of foreign exchange rates decreased gross profit by approximately $2.1 million. The gross profit margin rate increased to 35.5% in fiscal 2019 as compared to 34.3% in the prior year, reflecting the impact of acquisitions. The gross margin rate in fiscal 2019 excluding acquisitions and impact of foreign exchange was 34.9%.
•Gross profit at the Residential Kitchen Equipment Group decreased by $0.3 million, or 0.1%, to $216.8 million in fiscal 2019 as compared to $217.1 million in fiscal 2018. Gross profit was offset by unfavorable foreign exchange rates of $3.9 million. The gross margin rate increased to 37.8% in fiscal 2019 as compared to 36.0% in the prior year. The gross margin rate in fiscal 2019 excluding acquisitions and impact of foreign exchange was 37.7%.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Combined selling, general, and administrative expenses increased by $55.0 million to $593.8 million in fiscal 2019 from $538.8 million in 2018. As a percentage of net sales, selling, general and administrative expenses amounted to 20.1% in fiscal 2019 and 19.8% in fiscal 2018.
Selling, general and administrative expenses reflect increased costs of $64.3 million associated with the fiscal 2018 acquisitions of Hinds-Bock, Ve.Ma.C, Firex, Josper, Taylor, M-TEK, and Crown and the fiscal 2019 acquisitions of EVO, Cooking Solutions Group, Powerhouse, Ss Brewtech, Pacproinc, Synesso, and Brava, including $19.6 million of non-cash intangible amortization expense. Selling, general and administrative expenses increased by $10.0 million related to transition costs with the former Chairman and CEO upon his retirement in February 2019 and $5.6 million related to higher non-cash share based compensation. The increase was offset by the favorable impact of foreign exchange rates of $7.6 million and $13.6 million related to lower compensation costs.
RESTRUCTURING EXPENSES. Restructuring expenses decreased $8.8 million to $10.5 million from $19.3 million in the prior year period. In fiscal 2019, restructuring charges related primarily to headcount reductions and cost reduction initiatives related to facility consolidations at the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group. During fiscal 2018, restructuring charges related primarily to exiting operations of a non-core business in the Residential Kitchen Equipment Group, as well as headcount reductions at the Commercial Foodservice Equipment Group and additional cost reduction initiatives related to the AGA Group.
GAIN ON LITIGATION SETTLEMENT. During the fourth quarter, we reached a settlement with respect to a lawsuit filed by the Company arising from a prior acquisition included in the Residential Kitchen Equipment Group. The gain associated with this settlement, which is net of the release of funds in escrow, is reflected in the consolidated statement of earnings.
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INCOME FROM OPERATIONS. Income from operations increased $68.0 million to $514.0 million in fiscal 2019 from
$446.0 million in fiscal 2018. Operating income as a percentage of net sales amounted to 17.4% in 2019 as compared to 16.4% in 2018. The increase in operating income resulted from the increase in net sales and gross profit, offset partially by increased operating expenses. Operating income in fiscal 2019 included the gain on litigation settlement, offset by the transition costs related to the former Chairman and CEO. Excluding the impact of restructuring expenses and gain on litigation settlement, offset by the transition costs related to the former Chairman and CEO, operating income increased $54.5 million to $519.8 million in fiscal 2019 from $465.3 million in fiscal 2018. Operating income as a percentage of net sales, excluding those items, amounted to 17.6% in 2019 in comparison to 17.1% in 2018.
Income from operations in 2019 included $110.0 million of non-cash expenses, including $37.9 million of depreciation expense, $64.0 million of intangible amortization related to acquisitions and $8.1 million of stock based compensation. This compares to $98.3 million of non-cash expenses in the prior year, including $35.8 million of depreciation expense, $60.0 million of intangible amortization related to acquisitions and $2.5 million of stock based compensation costs.
NON-OPERATING EXPENSES. Non-operating expenses increased $29.0 million to $51.4 million of expense in fiscal 2019 from $22.4 million of income in fiscal 2018. Net interest expense and deferred financing increased $23.9 million to $82.6 million in fiscal 2019 from $58.7 million in fiscal 2018 reflecting higher interest rates and higher debt balances related to the funding of acquisitions. Net periodic pension benefit (other than service costs) increased $9.2 million to $28.9 million in fiscal 2019 from $38.1 million in fiscal 2018, related to the increase in discount rate used to calculate the interest cost and lower expected returns on assets driven by lower asset values for fiscal 2019.
INCOME TAXES. A tax provision of $110.4 million, at an effective rate of 23.9%, was recorded for fiscal 2019 as compared to $106.4 million at an effective rate of 25.1%, in fiscal 2018. In comparison to the prior year the tax provision reflects favorable tax adjustments for a refund of foreign taxes, enacted tax rate changes in several foreign jurisdictions and adjustments for the finalization of 2018 tax returns. The effective rates in 2019 and 2018 are higher than the federal tax rate of 21% primarily due to state taxes, non-deductible expenses and foreign tax rate differentials.
36
Financial Condition and Liquidity
Total cash and cash equivalents increased by $173.6 million to $268.1 million at January 2, 2021 from $94.5 million at December 28, 2019. Total debt, excluding the unamortized debt discount associated with the Convertible Notes, decreased to $1.8 billion at January 2, 2021 from $1.9 billion at December 28, 2019.
OPERATING ACTIVITIES. Net cash provided by operating activities after changes in assets and liabilities amounted to $524.8 million as compared to $377.4 million in the prior year.
During fiscal 2020, sales volumes were significantly lower as compared to 2019 due to the impacts of the COVID-19 pandemic, primarily in the Commercial Foodservice Equipment Group. Lower earnings generated less income and associated cash flows. However, reductions in working capital requirements generated more than offsetting cash flow benefits. Net cash used to fund changes in assets and liabilities amounted to $174.9 million in 2020, primarily related to lower receivables, reductions in inventory levels, the amount and timing of payments, as well as increases in employer payroll tax accruals from the CARES Act.
In connection with the company’s acquisition activities during the year, the company added assets and liabilities from the opening balance sheets of the acquired businesses in its consolidated balance sheets and accordingly these amounts are not reflected in the net change in working capital.
INVESTING ACTIVITIES. During 2020, net cash used for investing activities amounted to $106.8 million. This included $79.6 million primarily for the 2020 acquisitions of RAM, Deutsche, Wild Goose and United Foodservice Equipment Zhuhai. Additionally, $34.8 million was expended, primarily associated with additions and upgrades of production equipment, manufacturing facilities and residential and commercial showrooms, and was offset by $14.1 million in proceeds on the sale of properties following facility consolidations actions.
FINANCING ACTIVITIES. Net cash flows used for financing activities amounted to $252.5 million in 2020. On January 31, 2020, the company entered into an amended and restated five-year, $3.5 billion multi-currency senior secured credit agreement (the "Credit Facility"). On August 21, 2020, the company issued $747.5 million aggregate principal amount of 1.00% Convertible Senior Notes due 2025, and incurred $17.6 million of issuance costs. The company then entered into privately negotiated capped call transactions (the "Capped Call Transactions") in an aggregate amount of $104.7 million. A portion of the net proceeds from the offering of the Convertible Notes was used to prepay $400.0 million aggregate principal amount of its term loan obligations and to execute an amendment to the Credit Facility. The company incurred approximately $11.0 million of debt issuance costs, in aggregate, for amendments to the Credit Facility. The company’s borrowing activities during 2020 included $48.5 million of net repayments under its Credit Facility.
Additionally, the company repurchased $85.9 million of Middleby common shares during 2020. This was comprised of $16.2 million to repurchase 176,242 shares of Middleby common stock that were surrendered to the company for withholding taxes related to restricted stock vestings and $69.7 million used to repurchase 896,965 shares of its common stock under a repurchase program.
At January 2, 2021, the company was in compliance with all covenants pursuant to its borrowing agreements. The company has run various scenarios to estimate the impact of the COVID-19 pandemic and continues to believe that its future cash generated from operations, together with its capacity under its Credit Facility and its cash on hand, will provide adequate resources to meet its working capital needs and cash requirements and maintain compliance with financial covenants in its Credit Facility for at least the next 12 months.
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Contractual Obligations
The company's contractual cash payment obligations are set forth below (dollars in thousands):
| Amounts Due Sellers From Acquisition | Debt | Estimated Interest on Debt | Operating Leases | Total Contractual Cash Obligations | |||||||||||||||||||||||||
| Less than 1 year | $ | 13,787 | $ | 22,944 | $ | 55,755 | $ | 24,675 | $ | 117,161 | |||||||||||||||||||
| 1-3 years | 17,972 | 38,317 | 99,712 | 37,880 | 193,881 | ||||||||||||||||||||||||
| 4-5 years | 1,137 | 1,668,091 | 57,556 | 22,529 | 1,749,313 | ||||||||||||||||||||||||
| After 5 years | 1,875 | 244 | 580 | 23,446 | 26,145 | ||||||||||||||||||||||||
| $ | 34,771 | $ | 1,729,596 | $ | 213,603 | $ | 108,530 | $ | 2,086,500 | ||||||||||||||||||||
The company has obligations to make $34.8 million of estimated contingent purchase price payments to the sellers that were deferred in conjunction with various acquisitions.
As of January 2, 2021, the company had $1.1 billion outstanding under its Credit Facility. The average interest rate on this debt, inclusive of hedging instruments, amounted to 3.97% at the end of the period. As of January 2, 2021, the company also has $4.4 million of debt outstanding under various foreign credit facilities and $1.4 million of other debt arrangements. The estimated interest payments reflected in the table above assume that the level of debt and average interest rate on the company’s revolving credit line under its Credit Facility does not change until the facility reaches maturity. The estimated payments also assume that relative to the company’s foreign borrowings and other debt arrangements: all scheduled term loan payments are made; the level of borrowings does not change; and the average interest rates remain at their January 2, 2021 rates. As of January 2, 2021, the company has $747.5 million aggregate principal amount of Convertible Notes outstanding that bear interest semi-annually in arrears at a rate of 1.00% per annum. The Convertible Notes will mature on September 1, 2025 unless they are redeemed, repurchased or converted prior to such date in accordance with their terms. Also reflected in the table above is $17.4 million of payments to be made related to the company’s interest rate swap agreements in 2021.
As indicated in Note 11 to the consolidated financial statements, the company’s projected benefit obligation under its defined benefit plans exceeded the plans’ assets by $469.5 million at the end of 2020 as compared to $289.1 million at the end of 2019. The unfunded benefit obligations were comprised of a $21.4 million underfunding of the company's U.S. Plans and $448.1 million underfunding of the company’s Non-U.S. Plans. The company made minimum contributions required by the Employee Retirement Income Security Act of 1974 (“ERISA”) of $1.6 million and $1.2 million in 2020 and 2019, respectively, to the company’s U.S. Plans. The company expects to continue to make minimum contributions to the U.S. Plans as required by ERISA, of $0.6 million in 2021. The company expects to contribute $4.7 million to the Non-U.S. Plans in 2021.
The company places purchase orders with its suppliers in the ordinary course of business. These purchase orders are generally to fulfill short-term manufacturing requirements of less than 90 days and most are cancelable with a restocking penalty. The company has no material long-term purchase contracts or minimum purchase obligations with any supplier.
Off-Balance Sheet Arrangements
The company has no activities, obligations or exposures associated with off-balance sheet arrangements.
Related Party Transactions
From December 29, 2019 through the date hereof, there were no transactions between the company, its directors and executive officers that are required to be disclosed pursuant to Item 404 of Regulation S-K, promulgated under the Securities and Exchange Act of 1934, as amended.
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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
Revenue is recognized when the control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and represents the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The company’s contracts can have multiple performance obligations or just a single performance obligation. For contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation using the company’s best estimate of the standalone selling price of each distinct good or service in the contract.
Within the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups, the estimated standalone selling price of equipment is based on observable prices. Within the Food Processing Equipment Group, the company estimates the standalone selling price based on expected cost to manufacture the good or complete the service plus an appropriate profit margin.
Control may pass to the customer over time or at a point in time. In general, the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups recognize revenue at the point in time control transfers to their customers based on contractual shipping terms. Revenue from equipment sold under our long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. Installation services provided in connection with the delivery of the equipment are also generally recognized as those services are rendered. Over time transfer of control is measured using an appropriate input measure (e.g., costs incurred or direct labor hours incurred in relation to total estimate). These measures include forecasts based on the best information available and therefore reflect the company's judgment to faithfully depict the transfer of the goods.
Inventories
Inventories are stated at the lower of cost or net realizable value 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 Indefinite-Life 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. 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 on the first day of the fourth quarter, or more frequently if triggering events occur, the company performs an impairment assessment for goodwill and indefinite-lived intangible assets. The company considers qualitative factors to assess if it is more likely than not that the fair value of goodwill and indefinite-lived intangible assets is below the carrying value.
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In conducting a qualitative assessment, the company analyzes a variety of events or factors that may influence the fair value of the reporting unit including, but not limited to: the results of prior quantitative assessments performed; changes in the carrying amount of the reporting unit; actual and projected revenue and operating margin; relevant market data for both the company and its peer companies; industry outlooks; macroeconomic conditions; liquidity; changes in key personnel; and the company's competitive position. Significant judgment is used to evaluate the totality of these events and factors to make the determination of whether it is more likely than not that the fair value of the reporting unit or indefinite-life intangible is less than its carrying value.
Goodwill Valuations
The reporting units at which we test goodwill for impairment are our operating segments. These consist of the Commercial Foodservice Equipment Group, the Food Processing Equipment Group and the Residential Kitchen Equipment Group. 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 performing a quantitative assessment, if required, the company estimates each reporting unit's fair value under an income approach using a discounted cash flow model. The income approach uses each reporting unit's projection of estimated operating results and cash flows that are discounted using a market participant discount rate based on a weighted-average cost of capital. The financial projections reflect management's best estimate of economic and market conditions over the projected period including forecasted revenue growth, operating margins, tax rate, capital expenditures, depreciation, amortization and changes in working capital requirements. Other assumptions include discount rate and terminal growth rate. The estimated fair value of each reporting unit is compared to their respective carrying values. Additionally, the company validates the estimates of fair value under the income approach by comparing the fair value estimate using a market approach. A market approach estimates fair value by applying cash flow multiples to the reporting unit's operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting units. The company considers the implied control premium and conclude whether it is reasonable based on other recent market transactions.
The company performed a qualitative assessment as of September 27, 2020 over all three reporting units and determined it is more likely than not that the fair value of our reporting units are greater than the carrying amounts. As a result of the financial performance indicators for the Commercial Foodservice reporting unit, the company completed a quantitative analysis. The fair value of the reporting unit exceeded its carrying value by more than 100% and no impairment of goodwill was recognized. As a result of the qualitative assessment for the other two segments, the company determined it is more likely than not that the fair value of our reporting units are greater than the carrying amounts.
In estimating the fair value of its reporting units, 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. If actual results are not consistent with management's estimate and assumptions, a material impairment could have an adverse effect on the company's financial condition and results of operations.
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Indefinite-Life Intangible Valuations
In performing a quantitative assessment of indefinite-life intangible assets other than goodwill, primarily trademarks and trade names, we estimate the fair value of these intangible assets using the relief-from-royalty method which requires assumptions related to projected revenues from our long-range plans; assumed royalty rates that could be payable if we did not own the trademark; and a discount rate using a market based weighted-average cost of capital. If the estimated fair value of the indefinite-life intangible asset is less than its carrying value, we would recognize an impairment loss.
Based on the qualitative assessment as of September 27, 2020, the company identified several trademarks and trade names with indicators of potential risk for impairment and performed quantitative assessment. In performing the quantitative analysis on these trademark assets, significant assumptions used in our relief-from-royalty model included revenue growth rates, assumed royalty rates and the discount rate, which are discussed further below.
•Revenue growth rates relate to projected revenues from our long-range plans and vary from brand to brand. Adverse changes in the operating environment or our inability to grow revenues at the forecasted rates may result in a material impairment charge.
•In determining royalty rates for the valuation of our trademarks, we considered factors that affect the assumed royalty rates that would hypothetically be paid for the use of the trademarks. The most significant factors in determining the assumed royalty rates include the overall role and importance of the trademarks in the particular industry, the profitability of the products utilizing the trademarks, and the position of the trademarked products in the given market segment.
•In developing discount rates for the valuation of our trademarks, we used the market based weighted average cost of capital, adjusted for higher relative level of risks associated with doing business in other countries, as applicable, as well as the higher relative levels of risks associated with intangible assets.
As a result of quantitative testing the company recognized $11.6 million of impairment charges associated with several trademarks, none of which were individually material. The gross value of the trademarks tested, including the impaired trademarks, was approximately $90.0 million. The fair values of the other trademarks tested with no impairment per the analyses, exceeded their carrying values by more than 20%. The company believes the assumptions utilized within the quantitative analysis are reasonable.
The company performed a qualitative assessment as of September 27, 2020 over all the other trademarks and trade names and determined it is more likely than not that the fair value of its other indefinite-life intangible assets are greater than the carrying amounts.
The company continues to monitor the global outbreak of the COVID-19 pandemic to assess the outlook for demand of its products and the impact on its business and financial performance. If actual results are not consistent with management's estimate and assumptions, a material impairment charge of our trademarks and trade names could occur, which could have an adverse effect on the company's financial condition and results of operations.
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Convertible Debt
The company issued convertible debt with debt and equity components. The company evaluated the different components and features of the hybrid instrument and determined whether certain elements were embedded derivative instruments which require bifurcation. Components of convertible debt instruments that upon conversion may be settled fully in cash or partly in cash based on a net-share settlement basis are accounted for separately as long-term debt and equity when the conversion feature of the convertible bonds constitute an embedded equity instrument. When an equity instrument is identified, proceeds from issuance are allocated between debt and equity by measuring first the liability component and then determining the equity component as a residual amount. The liability component is measured as the fair value of a similar nonconvertible debt, which results in the recognition of a debt discount. In subsequent periods, the company will amortize the debt discount to interest expense, net within the Consolidated Statements of Earnings, using the effective interest method based on the expected maturity of the debt. The equity component is reported in additional paid-in capital within the Consolidated Statement of Changes in Stockholders' Equity and is not remeasured as long as it continues to meet the conditions for equity classification.
The company allocated transaction costs related to the issuance of convertible debt using the same proportions as the proceeds from the convertible debt. Transaction costs attributable to the liability component are recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheets and are amortized to interest expense, net within the Consolidated Statements of Earnings over the term of the convertible debt using the effective interest rate method. Transaction costs attributable to the equity component are netted within additional paid-in capital within the Consolidated Statement of Stockholders' Equity.
For additional information regarding the company's convertible debt, see Note 5, Financing Arrangements, in the Notes to the Consolidated Financial Statements.
Pension Benefits
The company sponsors pension benefits to certain employees. The accounting for these plans depends on assumptions made by management, which are used by actuaries the company engages to calculate the projected and accumulated obligations and the annual expense recognized for these plans. These assumptions include expected long-term rate of return on plan assets and 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.
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.
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New Accounting Pronouncements
See Note 3(r) to the Consolidated Financial Statements for further information on the new accounting pronouncements.
Certain Risk Factors That May Affect Future Results
An investment in shares of the company's common stock involves risks. The company believes the risks and uncertainties described in "Item 1A. Risk Factors" and in "Special Note Regarding Forward-Looking Statements" are the material risks it faces. Additional risks and uncertainties not currently known to the company or that it currently deems immaterial may impair its business operations. If any of the risks identified in "Item 1A. Risk Factors" actually occurs, the company's business, results of operations and financial condition could be materially adversely affected, and the trading price of the company's common stock could decline.
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Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The company is exposed to certain market risks that exist as part of its ongoing business operations, including fluctuations in changes in interest rates, foreign currency exchange rates and price volatility for certain commodities. The company does not hold or issue derivative financial instruments for trading or speculative purposes.
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:
| Variable Rate Debt | |||||
| 2021 | $ | 22,944 | |||
| 2022 | 19,261 | ||||
| 2023 | 19,056 | ||||
| 2024 | 19,069 | ||||
| 2025 and thereafter | 1,649,266 | ||||
| $ | 1,729,596 | ||||
The company is exposed to interest rate risk on its floating-rate debt. The company has entered into interest rate swaps to fix the interest rate applicable to certain of its variable-rate debt. The agreements swap one-month LIBOR for fixed rates. The company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income. As of January 2, 2021, the fair value of these instruments was a liability of $51.1 million. The change in fair value of these swap agreements in the first twelve months of 2020 was a loss of $20.7 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.
In August 2020, the company issued $747.5 million aggregate principal amount of Convertible Notes in a private offering pursuant to the Indenture. The company does not have economic interest rate exposure as the Convertible Notes have a fixed annual rate of 1.00%. The fair value of the Convertible Notes is subject to interest rate risk, market risk and other factors due to its conversion feature. The fair value of the Convertible Notes is also affected by the price and volatility of the company’s common stock and will generally increase or decrease as the market price of our common stock changes. The interest and market value changes affect the fair value of the Convertible Notes but do not impact the company’s financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, the company carries the Convertible Notes at face value, less any unamortized discount on the balance sheet and presents the fair value for disclosure purposes only.
Foreign Exchange Derivative Financial Instruments
The company uses derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The potential 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.
Derivative financial instruments are recognized on the balance sheet as either an asset or a liability measured at fair value. Changes in the market value and the related foreign exchange gains and losses are recorded in the statement of earnings.
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Item 8. Financial Statements and Supplementary Data
| Page | |||||
| The following consolidated financial statement schedule is included in response to Item 15 | |||||
All other schedules for which provision is made to applicable regulation of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and, therefore, have been omitted.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Middleby Corporation
Opinion on Internal Control over Financial Reporting
We have audited The Middleby Corporation’s internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), (the COSO criteria). In our opinion, The Middleby Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 2, 2021, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of RAM, Deutsche, Wild Goose and United Foodservice Equipment Zhuhai, which are included in the 2020 consolidated financial statements of the Company and constituted 2.7% and 0.0% of total and net assets, respectively, as of January 2, 2021 and 0.6% and (3.1%) of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of RAM, Deutsche, Wild Goose and United Foodservice Equipment Zhuhai.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 2, 2021 and December 28, 2019, the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended January 2, 2021, and the related notes and financial statement schedule listed in the Index at Item 8 and our report dated March 3, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
March 3, 2021
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Middleby Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Middleby Corporation (the Company) as of January 2, 2021 and December 28, 2019, the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended January 2, 2021, and the related notes and financial statement schedule listed in the Index at Item 8, (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 2, 2021 and December 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 3, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the account or disclosure to which it relates.
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| Impairment tests of indefinite-lived intangible assets | |||||
| Description of the Matter | At January 2, 2021, the Company's indefinite-lived intangible assets consist of trademarks and tradenames with an aggregate carrying value of approximately $1,026 million and represented 19.7% of total assets. As described in Note 3 of the consolidated financial statements, trademarks and tradenames with indefinite lives are tested by the Company’s management for impairment at least annually, in the fiscal fourth quarter, unless there are indications of impairment at other points throughout the year. If the fair value of the intangible asset is less than its carrying amount, an impairment loss is recognized in an amount equal to the difference. Auditing the impairment tests of indefinite–lived intangible assets is complex due to the significant management judgments and estimates required to determine the fair value of the trademarks and tradenames, including assumptions as to forecasted net sales, discount rates and royalty rates, all of which are sensitive to and affected by economic, industry and company-specific qualitative factors. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over the impairment tests of indefinite-lived intangible assets. This included evaluating controls over the Company’s process used to develop the forecasts of future net sales and the selection of royalty rates and discount rates used in estimating the fair value of the trademarks and tradenames with indefinite lives. We also tested controls over management’s review of the completeness and accuracy of data used in their valuation models. To test the estimated fair value of the Company’s trademarks and tradenames, we performed audit procedures that included, among others, assessing the methodologies, testing the significant assumptions discussed above and testing the completeness and accuracy of the underlying data. We compared the significant assumptions used by management to current industry and economic trends, the Company’s historical results and other guideline companies within the same industry and evaluated whether changes in the Company’s business would affect the significant assumptions. We assessed the historical accuracy of management’s estimates by comparing them to actual operating results and performed sensitivity analyses of significant assumptions to evaluate the change in the fair value of the trademarks and tradenames with indefinite lives resulting from changes in these assumptions. We involved our specialist to assist in reviewing the valuation methodology and testing the discount rates and royalty rates. | ||||
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2012.
Chicago, Illinois
March 3, 2021
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THE MIDDLEBY CORPORATION
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 2021 AND DECEMBER 28, 2019
(amounts in thousands, except share data)
| 2020 | 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 268,103 | $ | 94,500 | |||||||
Accounts receivable, net of reserve for doubtful accounts of $19,225 and $14,886 | 363,361 | 447,612 | |||||||||
| Inventories, net | 540,198 | 585,699 | |||||||||
| Prepaid expenses and other | 81,049 | 61,224 | |||||||||
| Prepaid taxes | 17,782 | 20,161 | |||||||||
| Total current assets | 1,270,493 | 1,209,196 | |||||||||
Property, plant and equipment, net of accumulated depreciation of $229,871 and $197,629 | 344,482 | 352,145 | |||||||||
| Goodwill | 1,934,261 | 1,849,747 | |||||||||
Other intangibles, net of amortization of $403,347 and $333,507 | 1,450,381 | 1,443,381 | |||||||||
| Long-term deferred tax assets | 76,052 | 36,932 | |||||||||
| Other assets | 126,805 | 110,742 | |||||||||
| Total assets | $ | 5,202,474 | $ | 5,002,143 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current maturities of long-term debt | $ | 22,944 | $ | 2,894 | |||||||
| Accounts payable | 182,773 | 173,693 | |||||||||
| Accrued expenses | 494,541 | 416,550 | |||||||||
| Total current liabilities | 700,258 | 593,137 | |||||||||
| Long-term debt | 1,706,652 | 1,870,246 | |||||||||
| Long-term deferred tax liability | 147,224 | 133,500 | |||||||||
| Accrued pension benefits | 469,500 | 289,086 | |||||||||
| Other non-current liabilities | 202,191 | 169,360 | |||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none issued | — | — | |||||||||
Common stock, $0.01 par value; 63,651,773 and 63,129,775 shares issued in 2020 and 2019, respectively | 147 | 145 | |||||||||
| Paid-in capital | 433,308 | 387,402 | |||||||||
Treasury stock, at cost; 8,013,296 and 6,940,089 shares in 2020 and 2019 | (537,134) | (451,262) | |||||||||
| Retained earnings | 2,568,756 | 2,361,462 | |||||||||
| Accumulated other comprehensive loss | (488,428) | (350,933) | |||||||||
| Total stockholders' equity | 1,976,649 | 1,946,814 | |||||||||
| Total liabilities and stockholders' equity | $ | 5,202,474 | $ | 5,002,143 | |||||||
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
49
THE MIDDLEBY CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE FISCAL YEARS ENDED JANUARY 2, 2021, DECEMBER 28, 2019
AND DECEMBER 29, 2018
(amounts in thousands, except per share data)
| 2020 | 2019 | 2018 | |||||||||||||||
| Net sales | $ | 2,513,257 | $ | 2,959,446 | $ | 2,722,931 | |||||||||||
| Cost of sales | 1,631,209 | 1,855,949 | 1,718,791 | ||||||||||||||
| Gross profit | 882,048 | 1,103,497 | 1,004,140 | ||||||||||||||
| Selling, general, and administrative expenses | 531,897 | 593,813 | 538,842 | ||||||||||||||
| Restructuring expenses | 12,375 | 10,480 | 19,332 | ||||||||||||||
| Gain on litigation settlement | — | (14,839) | — | ||||||||||||||
| Gain on sale of plant | (1,982) | — | — | ||||||||||||||
| Impairments | 15,327 | — | — | ||||||||||||||
| Income from operations | 324,431 | 514,043 | 445,966 | ||||||||||||||
| Interest expense and deferred financing amortization, net | 78,617 | 82,609 | 58,742 | ||||||||||||||
| Net periodic pension benefit (other than service cost & curtailment) | (39,996) | (29,722) | (39,020) | ||||||||||||||
| Curtailment loss | 14,682 | 865 | 906 | ||||||||||||||
| Other expense (income), net | 3,071 | (2,328) | 1,825 | ||||||||||||||
| Earnings before income taxes | 268,057 | 462,619 | 423,513 | ||||||||||||||
| Provision for income taxes | 60,763 | 110,379 | 106,361 | ||||||||||||||
| Net earnings | $ | 207,294 | $ | 352,240 | $ | 317,152 | |||||||||||
| Net earnings per share: | |||||||||||||||||
| Basic | $ | 3.76 | $ | 6.33 | $ | 5.71 | |||||||||||
| Diluted | $ | 3.76 | $ | 6.33 | $ | 5.70 | |||||||||||
| Weighted average number of shares | |||||||||||||||||
| Basic | 55,093 | 55,647 | 55,576 | ||||||||||||||
| Dilutive common stock equivalents | 43 | 9 | 28 | ||||||||||||||
| Diluted | 55,136 | 55,656 | 55,604 | ||||||||||||||
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
50
THE MIDDLEBY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE FISCAL YEARS ENDED JANUARY 2, 2021, DECEMBER 28, 2019
AND DECEMBER 29, 2018
(amounts in thousands)
| 2020 | 2019 | 2018 | |||||||||||||||
| Net earnings | $ | 207,294 | $ | 352,240 | $ | 317,152 | |||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||
| Foreign currency translation adjustments | 55,744 | 7,066 | (43,050) | ||||||||||||||
| Pension liability adjustment, net of tax | (172,583) | (57,398) | 32,125 | ||||||||||||||
| Unrealized (loss) gain on interest rate swaps, net of tax | (20,656) | (24,125) | 868 | ||||||||||||||
| Other comprehensive (loss) income: | $ | (137,495) | $ | (74,457) | $ | (10,057) | |||||||||||
| Comprehensive income | $ | 69,799 | $ | 277,783 | $ | 307,095 | |||||||||||
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
51
THE MIDDLEBY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 2, 2021, DECEMBER 28, 2019
AND DECEMBER 29, 2018
(amounts in thousands)
| Common Stock | Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income/(loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Balance, December 30, 2017 | $ | 145 | $ | 374,922 | $ | (445,118) | $ | 1,697,618 | $ | (266,419) | $ | 1,361,148 | |||||||||||||||||||||||
| Net earnings | — | — | — | 317,152 | — | 317,152 | |||||||||||||||||||||||||||||
Adoption of ASU 2018-02 (1) | — | — | — | (1,132) | 1,132 | — | |||||||||||||||||||||||||||||
Adoption of ASU 2014-09 (2) | — | — | — | (4,405) | — | (4,405) | |||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | (43,050) | (43,050) | |||||||||||||||||||||||||||||
Change in unrecognized pension benefit costs, net of tax of $6,386 | — | — | — | — | 32,612 | 32,612 | |||||||||||||||||||||||||||||
Unrealized gain on interest rate swap, net of tax of $(81) | — | — | — | — | (751) | (751) | |||||||||||||||||||||||||||||
| Stock compensation | — | 2,497 | — | — | — | 2,497 | |||||||||||||||||||||||||||||
| Balance, December 29, 2018 | $ | 145 | $ | 377,419 | $ | (445,118) | $ | 2,009,233 | $ | (276,476) | $ | 1,665,203 | |||||||||||||||||||||||
| Net earnings | — | — | — | 352,240 | — | 352,240 | |||||||||||||||||||||||||||||
Adoption of ASU 2017-12 (3) | — | — | — | (11) | 11 | — | |||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | 7,066 | 7,066 | |||||||||||||||||||||||||||||
Change in unrecognized pension benefit costs, net of tax of $(11,914) | — | — | — | — | (57,398) | (57,398) | |||||||||||||||||||||||||||||
Unrealized loss on interest rate swap, net of tax of $(8,516) | — | — | — | — | (24,136) | (24,136) | |||||||||||||||||||||||||||||
| Stock compensation | — | 8,133 | — | — | — | 8,133 | |||||||||||||||||||||||||||||
| Stock issuance | — | 1,850 | — | — | — | 1,850 | |||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | (6,144) | — | — | (6,144) | |||||||||||||||||||||||||||||
| Balance, December 28, 2019 | $ | 145 | $ | 387,402 | $ | (451,262) | $ | 2,361,462 | $ | (350,933) | $ | 1,946,814 | |||||||||||||||||||||||
| Net earnings | $ | — | $ | — | $ | — | $ | 207,294 | $ | — | $ | 207,294 | |||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | 55,744 | 55,744 | |||||||||||||||||||||||||||||
Change in unrecognized pension benefit costs, net of tax of $(40,426) | — | — | — | — | (172,583) | (172,583) | |||||||||||||||||||||||||||||
Unrealized loss on interest rate swap, net of tax of $(7,147) | — | — | — | — | (20,656) | (20,656) | |||||||||||||||||||||||||||||
| Stock compensation | — | 19,613 | — | — | — | 19,613 | |||||||||||||||||||||||||||||
| Stock issuance | 2 | 25,985 | — | — | — | 25,987 | |||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | (85,872) | — | — | (85,872) | |||||||||||||||||||||||||||||
| Equity component of issuance of convertible notes | — | 308 | — | — | — | 308 | |||||||||||||||||||||||||||||
| Balance, January 2, 2021 | $ | 147 | $ | 433,308 | $ | (537,134) | $ | 2,568,756 | $ | (488,428) | $ | 1,976,649 | |||||||||||||||||||||||
(1) As of December 31, 2017, the company adopted ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The adoption of this guidance resulted in the reclassification of $1.1 million, including $1.6 million related to interest rate swap and $(0.5) million related to pensions, of stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings.
(2) As of December 31, 2017, the company adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606) using the modified retrospective method to contracts that were not completed as of December 30, 2017. The adoption of this guidance resulted in the recognition of $(4.4) million as an adjustment to the opening balance of retained earnings.
(3) As of December 30, 2018, the company adopted ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" using the modified retrospective method. The adoption of this guidance resulted in the recognition of less than $(0.1) million as an adjustment to the opening balance of retained earnings.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
52
THE MIDDLEBY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 2, 2021, DECEMBER 28, 2019
AND DECEMBER 29, 2018
(amounts in thousands)
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash flows from operating activities— | |||||||||||||||||
| Net earnings | $ | 207,294 | $ | 352,240 | $ | 317,152 | |||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities | |||||||||||||||||
| Depreciation and amortization | 110,532 | 103,428 | 97,238 | ||||||||||||||
| Amortization of discount and issuance costs on convertible notes | 7,971 | — | — | ||||||||||||||
| Non-cash share-based compensation | 19,613 | 8,133 | 2,497 | ||||||||||||||
| Deferred income taxes | 16,421 | 22,212 | 20,489 | ||||||||||||||
| Net periodic pension benefit (other than service costs) | (25,314) | (28,857) | (38,114) | ||||||||||||||
| Gain on sale of plant | (1,982) | — | — | ||||||||||||||
| Impairments | 15,327 | — | 783 | ||||||||||||||
| Non-cash restructuring | — | — | 5,637 | ||||||||||||||
| Changes in assets and liabilities, net of acquisitions | |||||||||||||||||
| Accounts receivable, net | 90,399 | (27,748) | (25,347) | ||||||||||||||
| Inventories, net | 66,690 | (28,288) | (28,378) | ||||||||||||||
| Prepaid expenses and other assets | 782 | 5,067 | 18,145 | ||||||||||||||
| Accounts payable | (3,015) | (29,396) | 13,611 | ||||||||||||||
| Accrued expenses and other liabilities | 20,067 | 634 | (14,799) | ||||||||||||||
| Net cash provided by operating activities | 524,785 | 377,425 | 368,914 | ||||||||||||||
| Cash flows from investing activities— | |||||||||||||||||
| Net additions to property, plant and equipment | (34,849) | (46,609) | (36,040) | ||||||||||||||
| Proceeds on sale of property, plant and equipment | 14,147 | — | — | ||||||||||||||
| Purchase of intangible assets | (7,052) | — | (5,399) | ||||||||||||||
| Acquisitions, net of cash acquired | (79,003) | (281,058) | (1,197,984) | ||||||||||||||
| Net cash used in investing activities | (106,757) | (327,667) | (1,239,423) | ||||||||||||||
| Cash flows from financing activities— | |||||||||||||||||
| Proceeds under Credit Facility | 2,567,305 | 543,294 | 1,611,110 | ||||||||||||||
| Repayments under Credit Facility | (3,345,770) | (560,363) | (746,281) | ||||||||||||||
| Proceeds from issuance of convertible notes, net of issuance costs | 729,933 | — | — | ||||||||||||||
| Premiums paid for capped call | (104,650) | — | — | ||||||||||||||
| Net repayments under foreign bank loan | 1,305 | (405) | (7,088) | ||||||||||||||
| Net repayments under other debt arrangement | (45) | (179) | (3) | ||||||||||||||
| Payments of deferred purchase price | (3,700) | (1,648) | (1,234) | ||||||||||||||
| Repurchase of treasury stock | (85,872) | (6,144) | — | ||||||||||||||
| Debt issuance costs | (10,974) | — | (375) | ||||||||||||||
| Net cash (used in) provided by financing activities | (252,468) | (25,445) | 856,129 | ||||||||||||||
| Effect of exchange rates on cash and cash equivalents | 8,043 | (1,514) | (3,573) | ||||||||||||||
| Changes in cash and cash equivalents— | |||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 173,603 | 22,799 | (17,953) | ||||||||||||||
| Cash and cash equivalents at beginning of year | 94,500 | 71,701 | 89,654 | ||||||||||||||
| Cash and cash equivalents at end of year | $ | 268,103 | $ | 94,500 | $ | 71,701 | |||||||||||
| Non-cash investing and financing activities: | |||||||||||||||||
| Stock issuance related to acquisition and purchase of intangible assets | 15,869 | — | — | ||||||||||||||
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
53
THE MIDDLEBY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 2, 2021, DECEMBER 28, 2019
AND DECEMBER 29, 2018
(1)NATURE OF OPERATIONS
The Middleby Corporation (the "company") is engaged in the design, manufacture and sale of commercial foodservice, food processing equipment and residential kitchen equipment. The company manufactures and assembles this equipment at forty U.S. and twenty-nine international manufacturing facilities. The company operates in three business segments: 1) the Commercial Foodservice Equipment Group, 2) the Food Processing Equipment Group and 3) the Residential Kitchen Equipment Group.
The Commercial Foodservice Equipment Group has a broad portfolio of foodservice equipment, which enable it to serve virtually any cooking, warming, refrigeration, freezing and beverage application within a commercial kitchen or foodservice operation. This equipment is used across all types of foodservice operations, including quick-service restaurants, full-service restaurants, convenience stores, retail outlets, hotels and other institutions. The products offered by this group include conveyor ovens, combi-ovens, convection ovens, baking ovens, proofing ovens, deck ovens, speed cooking ovens, hydrovection ovens, ranges, fryers, rethermalizers, steam cooking equipment, food warming equipment, catering equipment, heated cabinets, charbroilers, ventless cooking systems, kitchen ventilation, induction cooking equipment, countertop cooking equipment, toasters, griddles, charcoal grills, professional mixers, stainless steel fabrication, custom millwork, professional refrigerators, blast chillers, coldrooms, ice machines, freezers, soft serve ice cream equipment, coffee and beverage dispensing equipment, home and professional craft brewing equipment, fry dispensers, bottle filling and canning equipment, and IoT solutions.
The Food Processing Equipment Group offers a broad portfolio of processing solutions for customers producing pre-cooked meat products, such as hot dogs, dinner sausages, poultry and lunchmeats and baked goods such as muffins, cookies and bread. Through its broad line of products, the company is able to deliver a wide array of cooking solutions to service a variety of food processing requirements demanded by its customers. The company can offer highly integrated solutions that provide a food processing operation a uniquely integrated solution providing for the highest level of food quality, product consistency, and reduced operating costs resulting from increased product yields, increased capacity and greater throughput and reduced labor costs through automation. The products offered by this group include a wide array of cooking and baking solutions, including batch ovens, baking ovens, proofing ovens, conveyor belt ovens, continuous processing ovens, frying systems and automated thermal processing systems. The company also provides a comprehensive portfolio of complementary food preparation equipment such as grinders, slicers, reduction and emulsion systems, mixers, blenders, formers, battering equipment, breading equipment, seeding equipment, water cutting systems, food presses, food suspension equipment, filling and depositing solutions, and forming equipment, as well as a variety of automated loading and unloading systems, food safety, food handling, freezing, defrosting and packaging equipment. This portfolio of equipment can be integrated to provide customers a highly efficient and customized solution.
The Residential Kitchen Equipment Group has a broad portfolio of innovative and professional-style residential kitchen equipment. The products offered by this group include ranges, cookers, stoves, cooktops, microwaves, ovens, refrigerators, dishwashers, undercounter refrigeration, wine cellars, ice machines, ventilation equipment and outdoor equipment.
54
(2) ACQUISITIONS AND PURCHASE ACCOUNTING
The following represents the company's significant acquisitions in 2020 and 2019 as well as summarized information on various acquisitions that were not individually material. The company also made smaller acquisitions not presented below which are individually and collectively immaterial.
Cooking Solutions Group
On April 1, 2019, the company completed its acquisition of all of the capital stock of Cooking Solutions Group, Inc. ("Cooking Solutions Group") from Standex International Corporation, which consists of the brands APW Wyott, Bakers Pride, BKI and Ultrafryer with locations in Texas, South Carolina and Mexico for a purchase price of approximately $106.1 million, net of cash acquired. During the third quarter of 2019, the company finalized the working capital and purchase price allocation provided for by the purchase agreement resulting in a payment due to the sellers of $0.1 million.
The final allocation of consideration paid for the Cooking Solutions Group acquisition is summarized as follows (in thousands):
| Preliminary Opening Balance Sheet | Measurement Period Adjustments | Adjusted Opening Balance Sheet | |||||||||||||||
| Cash | $ | 843 | $ | — | $ | 843 | |||||||||||
| Current assets | 33,666 | (1,625) | 32,041 | ||||||||||||||
| Property, plant and equipment | 15,959 | (58) | 15,901 | ||||||||||||||
| Goodwill | 31,207 | 6,330 | 37,537 | ||||||||||||||
| Other intangibles | 53,450 | (5,850) | 47,600 | ||||||||||||||
| Other assets | — | 1,470 | 1,470 | ||||||||||||||
| Current liabilities | (15,130) | (1,583) | (16,713) | ||||||||||||||
| Long-term deferred tax liability | (13,082) | 2,553 | (10,529) | ||||||||||||||
| Other non-current liabilities | — | (1,163) | (1,163) | ||||||||||||||
| Net assets acquired and liabilities assumed | $ | 106,913 | $ | 74 | $ | 106,987 | |||||||||||
The long term deferred tax liability amounted to $10.5 million. The net deferred tax liability is comprised of $11.6 million of deferred tax liability related to the difference between the book and tax basis on identifiable intangible asset and liability accounts and $1.1 million of deferred tax asset related to the difference between the book and tax basis on identifiable tangible assets and liability accounts.
The goodwill and $24.7 million of other intangibles associated with the trade name is subject to the non-amortization provisions of ASC 350. Other intangibles also include $22.5 million allocated to customer relationships and $0.4 million allocated to backlog, which are being amortized over periods of 9 years and 3 months, respectively. Goodwill and other intangibles of Cooking Solutions Group are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
55
Other 2019 Acquisitions
During 2019 the company completed various other acquisitions that were not individually material. The final allocation of consideration paid for the other 2019 acquisitions is summarized as follows (in thousands):
| Preliminary Opening Balance Sheet | Measurement Period Adjustments | Adjusted Opening Balance Sheet | |||||||||||||||
| Cash | $ | 2,683 | $ | (10) | $ | 2,673 | |||||||||||
| Current assets | 21,525 | 920 | 22,445 | ||||||||||||||
| Property, plant and equipment | 8,920 | (166) | 8,754 | ||||||||||||||
| Goodwill | 99,838 | (11,117) | 88,721 | ||||||||||||||
| Other intangibles | 64,019 | 11,363 | 75,382 | ||||||||||||||
| Long-term deferred tax asset | 1,288 | 1,428 | 2,716 | ||||||||||||||
| Other assets | 137 | 854 | 991 | ||||||||||||||
| Current liabilities | (20,437) | (348) | (20,785) | ||||||||||||||
| Other non-current liabilities | (6,170) | (4,129) | (10,299) | ||||||||||||||
| Consideration paid at closing | $ | 171,803 | $ | (1,205) | $ | 170,598 | |||||||||||
| Deferred payments | 2,404 | — | 2,404 | ||||||||||||||
| Contingent consideration | 4,258 | 3,600 | 7,858 | ||||||||||||||
| Net assets acquired and liabilities assumed | $ | 178,465 | $ | 2,395 | $ | 180,860 | |||||||||||
The long-term deferred tax asset amounted to $2.7 million. The net deferred tax asset is comprised of $2.9 million of deferred tax asset related to tax loss carryforwards, $1.0 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets and $0.8 million of deferred tax asset related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $33.8 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $27.9 million allocated to customer relationships, $12.3 million allocated to developed technology and $1.4 million allocated to backlog, which are being amortized over periods of 5 to 10 years, 5 to 12 years, and 3 months, respectively. Goodwill of $42.5 million and other intangibles of $35.5 million of the companies are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. Goodwill of $34.9 million and other intangibles of $30.1 million are allocated to the Food Processing Equipment Group for segment reporting purposes. Goodwill of $11.3 million and other intangibles of $9.8 million are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Of these assets, goodwill of $77.9 million and intangibles of $64.8 million are expected to be deductible for tax purposes.
Two purchase agreements include deferred payments and earnout provisions providing for contingent payments due to the sellers to the extent certain financial targets are exceeded. The deferred payments are payable between 2020 and 2022. The contractual obligations associated with the deferred payments on the acquisition dates amount to $2.4 million. The earnouts are payable between 2021 and 2030, if the companies exceed certain sales and earnings targets. The contractual obligations associated with the contingent earnout provisions recognized on the acquisition dates amount to $7.9 million.
56
2020 Acquisitions
For the year ended January 2, 2021, the company has completed various acquisitions that were not individually material. The following estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition dates for the acquisitions and are summarized as follows (in thousands):
| Preliminary Opening Balance Sheet | Preliminary Measurement Period Adjustments | Adjusted Opening Balance Sheet | |||||||||||||||
| Cash | $ | 14,647 | $ | — | $ | 14,647 | |||||||||||
| Current assets | 43,670 | (13,674) | 29,996 | ||||||||||||||
| Property, plant and equipment | 3,014 | (241) | 2,773 | ||||||||||||||
| Goodwill | 55,335 | 1,438 | 56,773 | ||||||||||||||
| Other intangibles | 63,201 | — | 63,201 | ||||||||||||||
| Other assets | 6,121 | — | 6,121 | ||||||||||||||
| Current liabilities | (54,478) | 12,477 | (42,001) | ||||||||||||||
| Long-term deferred tax liability | (123) | — | (123) | ||||||||||||||
| Other non-current liabilities | (21,902) | — | (21,902) | ||||||||||||||
| Consideration paid at closing | $ | 109,485 | $ | — | $ | 109,485 | |||||||||||
| Deferred payments | 8,666 | — | 8,666 | ||||||||||||||
| Contingent consideration | 16,144 | — | 16,144 | ||||||||||||||
| Net assets acquired and liabilities assumed | $ | 134,295 | $ | — | $ | 134,295 | |||||||||||
The long-term deferred tax liability amounted to $0.1 million and is related to the difference between the book and tax basis on other assets and liability accounts.
The goodwill and $23.1 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $14.0 million allocated to customer relationships, $20.7 million allocated to developed technology and $5.4 million allocated to backlog, which are being amortized over periods of 7 years, 7 to 12 years, and 3 to 9 months, respectively. Goodwill of $56.8 million and other intangibles of $63.2 million of the companies are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. Of these assets, goodwill of $20.0 million and all other intangibles are expected to be deductible for tax purposes.
Several purchase agreements include deferred payment and earnout provisions providing for contingent payments due to the sellers to the extent certain financial targets are exceeded. The deferred payments are payable between 2020 and 2022. The contractual obligations associated with the deferred payments on the acquisition date amount to $8.7 million. The earnouts are payable between 2021 and 2023, if the company exceeds certain sales and earnings targets. The contractual obligations associated with the contingent earnout provisions recognized on the acquisition date amount to $16.1 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 for substantially all 2020 acquisitions to date. 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.
57
Pro Forma Financial Information
In accordance with ASC 805 Business Combinations, the following unaudited pro forma results of operations for the twelve months ended January 2, 2021 and December 28, 2019, assumes the 2019 and 2020 acquisitions described above were completed on December 30, 2018 (first day of fiscal year 2019). The following pro forma results include adjustments to reflect amortization of intangibles associated with the acquisition and the effects of adjustments made to the carrying value of certain assets (in thousands, except per share data):
| Twelve Months Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Net sales | $ | 2,563,195 | $ | 3,119,550 | |||||||
| Net earnings | 213,866 | 338,343 | |||||||||
| Net earnings per share: | |||||||||||
| Basic | $ | 3.88 | $ | 6.08 | |||||||
| Diluted | $ | 3.88 | $ | 6.08 | |||||||
The historical consolidated financial information of the Company and the acquisitions have been adjusted in the pro forma information to give effect to pro forma events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. Pro forma data may not be indicative of the results that would have been obtained had these acquisitions occurred at the beginning of the periods presented, nor is it intended to be a projection of future results. Additionally, the pro forma financial information does not reflect the costs which the company has incurred or may incur to integrate the acquired businesses.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)Basis of Presentation
The consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. Significant items that are subject to such estimates and judgments include 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. On an ongoing basis, the company evaluates its estimates and assumptions 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.
The company's fiscal year ends on the Saturday nearest December 31. Fiscal years 2020, 2019, and 2018 ended on January 2, 2021, December 28, 2019 and December 29, 2018, respectively, and included 53, 52 and 52 weeks, respectively.
(b)Cash and Cash Equivalents
The company considers all short-term investments with original maturities of three months or less when acquired to be cash equivalents. The company’s policy is to invest its excess cash in interest-bearing deposits with major banks that are subject to minimal credit and market risk.
(c)Accounts Receivable
Accounts receivable, as shown in the consolidated balance sheets, are net of allowances for doubtful accounts of $19.2 million and $14.9 million at January 2, 2021 and December 28, 2019, respectively. At January 2, 2021, all accounts receivable are expected to be collected within one year.
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(d) Inventories
Inventories are composed of material, labor and overhead and are stated at the lower of cost or net realizable value. Costs for 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 January 2, 2021 and December 28, 2019 are as follows (in thousands):
| 2020 | 2019 | ||||||||||
| Raw materials and parts | $ | 263,200 | $ | 277,394 | |||||||
| Work in process | 55,104 | 58,663 | |||||||||
| Finished goods | 221,894 | 249,642 | |||||||||
| $ | 540,198 | $ | 585,699 | ||||||||
(e)Property, Plant and Equipment
Property, plant and equipment are carried at cost as follows (in thousands):
| 2020 | 2019 | ||||||||||
| Land | $ | 40,707 | $ | 43,467 | |||||||
| Building and improvements | 245,435 | 229,025 | |||||||||
| Furniture and fixtures | 68,063 | 67,992 | |||||||||
| Machinery and equipment | 220,148 | 209,290 | |||||||||
| 574,353 | 549,774 | ||||||||||
| Less accumulated depreciation | (229,871) | (197,629) | |||||||||
| $ | 344,482 | $ | 352,145 | ||||||||
Property, plant and equipment are depreciated or amortized on a straight-line basis over their useful lives based on management's estimates of the period over which the assets will be utilized to benefit the operations of the company. The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. The company periodically reviews these lives relative to physical factors, economic factors and industry trends. If there are changes in the planned use of property and equipment or if technological changes were to occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods.
Following is a summary of the estimated useful lives:
| Description | Life | |||||||
| Building and improvements | 20 to 40 years | |||||||
| Furniture and fixtures | 3 to 7 years | |||||||
| Machinery and equipment | 3 to 10 years | |||||||
Depreciation expense amounted to $39.1 million, $37.9 million and $35.8 million in fiscal 2020, 2019 and 2018, respectively.
Expenditures which significantly extend useful lives are capitalized. Maintenance and repairs are charged to expense as incurred. Asset impairments are recorded whenever events or changes in circumstances indicate that the recorded value of an asset is greater than the sum of its expected future undiscounted cash flows.
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(f)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. 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.
The company performs the annual impairment assessment for goodwill and indefinite-lived intangible assets as of first day of the fourth quarter and more frequently if indicators of impairment exist. The goodwill impairment test is performed at the reporting unit level. The company initially performs a qualitative analysis to determine if it is more likely than not that the goodwill balance or indefinite-life intangible asset is impaired. In conducting a qualitative assessment, the company analyzes a variety of events or factors that may influence the fair value of the reporting unit or indefinite-life intangible, including, but not limited to: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, share price and other relevant factors.
If an indicator of impairment is determined from the qualitative analysis, then the company will perform a quantitative analysis. The fair value of each reporting unit is compared to its carrying value. If the fair value of the reporting unit is less than its carrying value, the resulting difference will be a charge to impairment of goodwill in the Consolidated Statements of Earnings in the period in which the determination is made. Fair value is determined using a combination of present value techniques and market prices of comparable businesses.
The company completed its annual impairment test for goodwill as of September 27, 2020. The company performed a qualitative assessment to evaluate goodwill for all reporting units. As a result of the financial performance indicators for the Commercial Foodservice reporting unit, the company completed a quantitative analysis. The fair value of the reporting unit exceeded its carrying value by more than 100% and no impairment of goodwill was recognized. Based on the qualitative assessment for all other reporting units it was determined there was no impairment of goodwill. The company has not recognized any goodwill impairments and therefore there are no accumulated impairment losses.
Goodwill is allocated to the business segments as follows (in thousands):
| Commercial Foodservice | Food Processing | Residential Kitchen | Total | ||||||||||||||||||||
| Balance as of December 29, 2018 | $ | 1,102,067 | $ | 219,054 | $ | 422,054 | $ | 1,743,175 | |||||||||||||||
| Goodwill acquired during the year | 81,339 | 43,613 | 9,503 | 134,455 | |||||||||||||||||||
| Measurement period adjustments to goodwill acquired in prior year | (27,929) | (3,722) | — | (31,651) | |||||||||||||||||||
| Exchange effect | (1,925) | (1,266) | 6,959 | 3,768 | |||||||||||||||||||
| Balance as of December 28, 2019 | $ | 1,153,552 | $ | 257,679 | $ | 438,516 | $ | 1,849,747 | |||||||||||||||
| Goodwill acquired during the year | 56,773 | — | — | 56,773 | |||||||||||||||||||
| Measurement period adjustments to goodwill acquired in prior year | (56) | (8,732) | 1,770 | (7,018) | |||||||||||||||||||
| Exchange effect | 18,167 | 6,851 | 9,741 | 34,759 | |||||||||||||||||||
| Balance as of January 2, 2021 | $ | 1,228,436 | $ | 255,798 | $ | 450,027 | $ | 1,934,261 | |||||||||||||||
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Intangible assets consist of the following (in thousands):
| January 2, 2021 | December 28, 2019 | ||||||||||||||||||||||||||||||||||
| Estimated Weighted Avg Remaining Life | Gross Carrying Amount | Accumulated Amortization | Estimated Weighted Avg Remaining Life | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||||||||||||
| Amortized intangible assets: | |||||||||||||||||||||||||||||||||||
| Customer relationships | 8.5 | $ | 735,264 | $ | (347,029) | 9.2 | $ | 717,397 | $ | (283,846) | |||||||||||||||||||||||||
| Backlog | 0.3 | 34,729 | (31,924) | 1.3 | 29,426 | (28,283) | |||||||||||||||||||||||||||||
| Developed technology | 10.0 | 56,931 | (24,394) | 5.2 | 32,999 | (21,378) | |||||||||||||||||||||||||||||
| $ | 826,924 | $ | (403,347) | $ | 779,822 | $ | (333,507) | ||||||||||||||||||||||||||||
| Indefinite-lived assets: | |||||||||||||||||||||||||||||||||||
| Trademarks and tradenames | $ | 1,026,804 | $ | 997,066 | |||||||||||||||||||||||||||||||
The company completed its annual impairment for other intangibles as of September 27, 2020. We identified indicators of impairment associated with certain tradenames within all three of our business segments based on the qualitative assessment, which required the completion of a quantitative impairment assessment. The primary indicators of impairment were lower than expected revenue performance in the current year, forecasted revenues for future periods and market conditions. Based on the results of the quantitative assessment, the company recorded impairment charges of $11.6 million associated with several tradenames, none of which were individually material. The company recorded charges of $5.3 million associated with trademarks within the Commercial Foodservice Equipment Group, $5.4 million for the Food Processing Equipment Group and $0.9 million for the Residential Kitchen Equipment Group. The gross value of the trademarks tested was approximately $90.0 million and the fair values of the other trademarks tested with no impairment per the analyses, exceeded their carrying values by more than 20%.
In performing the quantitative assessment of indefinite-life intangible assets, primarily tradenames, the company estimated the fair value using the relief-from-royalty method which requires assumptions related to projected revenues; assumed royalty rates that could be payable if we did not own the brand; and a market participant discount rate based on a weighted-average cost of capital.
The company elected to perform a qualitative assessment on the other indefinite-life intangible assets noting no events that indicated that the fair value was less than carrying value that would require a quantitative impairment assessment.
The estimates of future cash flows used in determining the fair value of goodwill and intangible assets involve significant management judgment and are based upon assumptions about expected future operating performance, economic conditions, market conditions and cost of capital. Inherent in estimating the future cash flows are uncertainties beyond our control, such as changes in capital markets. The actual cash flows could differ materially from management's estimates due to changes in business conditions, operating performance and economic conditions.
The company continues to monitor the global outbreak of the COVID-19 pandemic to assess the outlook for demand of its products and the impact on its business and financial performance. The potential impact of the COVID-19 pandemic on demand, production levels, and operating results in the short-term is uncertain, but the company remains committed to the strategic actions necessary to realize long-term revenue and cash flow growth. The potential negative demand effect on revenues is also uncertain given the volatile environment, but demand and production levels are anticipated to continue to recover.
The aggregate intangible amortization expense was $69.0 million, $64.0 million and $60.0 million in 2020, 2019 and 2018, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands):
| 2021 | $ | 68,413 | |||
| 2022 | 62,050 | ||||
| 2023 | 56,058 | ||||
| 2024 | 44,587 | ||||
| 2025 | 38,226 | ||||
| 2026 and thereafter | 154,243 | ||||
| $ | 423,577 | ||||
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(g) Accrued Expenses
Accrued expenses consist of the following at January 2, 2021 and December 28, 2019, respectively (in thousands):
| 2020 | 2019 | ||||||||||
| Accrued payroll and related expenses | $ | 93,926 | $ | 80,621 | |||||||
| Contract liabilities | 93,871 | 74,511 | |||||||||
| Accrued warranty | 69,667 | 66,374 | |||||||||
| Accrued customer rebates | 43,703 | 51,709 | |||||||||
| Accrued short-term leases | 22,493 | 21,827 | |||||||||
| Accrued liabilities held for sale | 22,313 | — | |||||||||
| Accrued sales and other tax | 22,030 | 19,862 | |||||||||
| Accrued interest rate swaps | 14,075 | — | |||||||||
| Accrued product liability and workers compensation | 12,909 | 15,164 | |||||||||
| Accrued professional fees | 12,133 | 13,368 | |||||||||
| Accrued agent commission | 11,105 | 13,816 | |||||||||
| Accrued restructuring | 2,686 | 1,121 | |||||||||
| Other accrued expenses | 73,630 | 58,177 | |||||||||
| $ | 494,541 | $ | 416,550 | ||||||||
(h)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 such matter will have a material adverse effect on its financial condition, results of operations or cash flows of the company.
During 2019, we reached a settlement with respect to a lawsuit filed by the company arising from a prior acquisition included our Residential Kitchen Equipment Segment. The gain associated with this settlement, which is net of the release of funds in escrow, is reflected in the consolidated statement of earnings.
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(i)Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of accumulated other comprehensive income (loss) as reported in the consolidated balance sheets (in thousands):
| 2020 | 2019 | ||||||||||
Unrecognized pension benefit costs, net of tax of $(89,059) and $(48,633) | $ | (400,919) | $ | (228,336) | |||||||
Unrealized gain on interest rate swap, net of tax of $(13,120) and $(5,973) | (37,548) | (16,892) | |||||||||
| Currency translation adjustments | (49,961) | (105,705) | |||||||||
| $ | (488,428) | $ | (350,933) | ||||||||
Changes in accumulated other comprehensive income (loss) (1) were as follows (in thousands):
| Currency Translation Adjustment | Pension Benefit Costs | Unrealized Gain/(Loss) Interest Rate Swap | Total | ||||||||||||||||||||
| Balance as of December 29, 2018 | $ | (112,771) | $ | (170,938) | $ | 7,233 | $ | (276,476) | |||||||||||||||
Adoption of ASU 2017-12 (2) | — | — | 11 | 11 | |||||||||||||||||||
| Other comprehensive income before reclassification | 7,066 | (59,238) | (22,880) | (75,052) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | 1,840 | (1,256) | 584 | |||||||||||||||||||
| Net current-period other comprehensive income | $ | 7,066 | $ | (57,398) | $ | (24,125) | $ | (74,457) | |||||||||||||||
| Balance as of December 28, 2019 | $ | (105,705) | $ | (228,336) | $ | (16,892) | $ | (350,933) | |||||||||||||||
| Other comprehensive income before reclassification | 55,744 | (174,826) | (36,170) | (155,252) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | 2,243 | 15,514 | 17,757 | |||||||||||||||||||
| Net current-period other comprehensive income | $ | 55,744 | $ | (172,583) | $ | (20,656) | $ | (137,495) | |||||||||||||||
| Balance as of January 2, 2021 | $ | (49,961) | $ | (400,919) | $ | (37,548) | $ | (488,428) | |||||||||||||||
(1) As of January 2, 2021 pension and interest rate swap amounts are net of tax of $(89.1) million and $(13.1) million, respectively. During the twelve months ended January 2, 2021, the adjustments to pension benefit costs and unrealized gain/(loss) interest rate swap were net of tax of $(40.4) million and $(7.1) million, respectively.
(2) As of December 30, 2018, the company adopted ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" using the modified retrospective method. The adoption of this guidance resulted in the recognition of less than $(0.1) million as an adjustment to the opening balance of retained earnings.
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(j) 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 assets and liabilities that are measured at fair value are categorized using the fair value hierarchy at January 2, 2021 and December 28, 2019 are as follows (in thousands):
| Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | Total | ||||||||||||||||||||
| As of January 2, 2021 | |||||||||||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | 51,093 | $ | — | $ | 51,093 | |||||||||||||||
| Contingent consideration | $ | — | $ | — | $ | 25,558 | $ | 25,558 | |||||||||||||||
| Foreign exchange derivative contracts | $ | — | $ | 2,191 | $ | — | $ | 2,191 | |||||||||||||||
| As of December 28, 2019 | |||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | 1,830 | $ | — | $ | 1,830 | |||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | 25,120 | $ | — | $ | 25,120 | |||||||||||||||
| Contingent consideration | $ | — | $ | — | $ | 6,697 | $ | 6,697 | |||||||||||||||
| Foreign exchange derivative contracts | $ | — | $ | 901 | $ | — | $ | 901 | |||||||||||||||
The contingent consideration, as of January 2, 2021 and December 28, 2019, relates to the earnout provisions recorded in conjunction with various purchase agreements.
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 acquisitions in comparison to the earnout targets and adjusts the liability accordingly. During fiscal 2020 the increase in contingent consideration was associated with 2020 acquisitions and there were no material performance assumption adjustments.
(k)Foreign Currency
The income statements of the company’s foreign operations are translated at the monthly average rates. Assets and liabilities of the company’s foreign operations are translated at exchange rates at the balance sheet date. These translation adjustments are not included in determining net income for the period but are disclosed and accumulated in a separate component of stockholders’ equity. Exchange gains and losses on foreign currency transactions are included in determining net income for the period in which they occur. These transactions amounted to a loss of $2.9 million, gain of $0.9 million and a loss of $2.6 million in 2020, 2019 and 2018, respectively, and are included in other expense on the statements of earnings.
(l)Shipping and Handling Costs
Fees billed to the customer for shipping and handling are classified as a component of net revenues. Shipping and handling costs are included in cost of products sold.
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(m)Warranty Costs
In the normal course of business, the company issues product warranties for specific product lines and provides for the estimated future warranty cost in the period in which the sale is recorded. The estimate of warranty cost is based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Because warranty estimates are forecasts that are based on the best available information, claims costs may differ from amounts provided. Adjustments to initial obligations for warranties are made as changes in the obligations become reasonably estimable.
A rollforward of the warranty reserve for the fiscal years 2020 and 2019 are as follows (in thousands):
| 2020 | 2019 | ||||||||||
| Beginning balance | $ | 66,374 | $ | 59,451 | |||||||
| Warranty reserve related to acquisitions | 1,485 | 7,353 | |||||||||
| Warranty expense | 58,047 | 68,842 | |||||||||
| Warranty claims paid | (56,239) | (69,272) | |||||||||
| Ending balance | $ | 69,667 | $ | 66,374 | |||||||
(n)Research and Development Costs
Research and development costs, included in cost of sales in the consolidated statements of earnings, are charged to expense when incurred. These costs were $35.3 million, $41.2 million and $35.3 million in fiscal 2020, 2019 and 2018, respectively.
(o)Non-Cash Share-Based Compensation
The company estimates the fair value of restricted share grants and stock options at the time of grant and recognizes compensation costs over the vesting period of the awards and options. Non-cash share-based compensation expense of $19.6 million, $8.1 million and $2.5 million was recognized for fiscal 2020, 2019 and 2018, respectively, associated with restricted share grants. The company recorded a related tax benefit of $2.7 million, $0.5 million and less than $0.1 million in fiscal 2020, 2019 and 2018, respectively.
As of January 2, 2021, there was $44.3 million of total unrecognized compensation cost related to nonvested restricted share grant compensation arrangements, if all performance conditions are fully achieved. The remaining weighted average life is 1.24 years.
Share grant awards not subject to market conditions for vesting are valued at the closing share price of the company’s stock as of the date of the grant. The company issued 389,993 and 537,059 restricted share grant awards in 2020 and 2019, respectively, with a fair value of $22.5 million and $60.8 million, respectively. Share grant awards issued in 2020 and 2019 are generally performance based and were not subject to market conditions. The weighted average fair value of $57.74 and $113.26 per share for the awards for 2020 and 2019, respectively, represent the closing share price of the company’s stock as of the date of grant.
On December 31, 2020, the company issued restricted stock units, which entitle the holder to shares of common stock subject to time vesting and the achievement of certain market and performance goals. Compensation expense is recognized over the performance measurement period of the units in accordance with ASC 718 Stock Compensation for awards with market and performance vesting conditions. The fair value of restricted stock units granted during 2020 was $135.31 and no restricted stock units have vested.
As of January 2, 2021, there was $10.7 million of total unrecognized compensation cost related to nonvested restricted stock unit compensation arrangements, if all performance conditions are fully achieved. The remaining weighted average life is 2.18 years.
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(p)Earnings Per Share
“Basic earnings per share” is calculated based upon the weighted average number of common shares actually outstanding, and “diluted earnings per share” is calculated based upon the weighted average number of common shares outstanding and other dilutive securities.
The company’s potentially dilutive securities consist of shares issuable on exercise of outstanding options and vesting of restricted stock grants computed using the treasury method and amounted to 43,000, 9,000, and 28,000 for fiscal 2020, 2019 and 2018, respectively. During fiscal 2020, the average market price of the company's common stock has not exceeded the exercise price of the Convertible Notes and there have been no conversions to date, and as a result there is no impact to the diluted earnings per share. See Note 5, Financing Arrangements, in these Notes to the Consolidated Financial Statements for further details on the Convertible Notes. There were no anti-dilutive equity awards excluded from common stock equivalents for 2020, 2019 or 2018.
(q)Consolidated Statements of Cash Flows
Cash paid for interest was $65.6 million, $80.9 million and $55.3 million in fiscal 2020, 2019 and 2018, respectively. Cash payments totaling $41.2 million, $91.5 million, and $79.0 million were made for income taxes during fiscal 2020, 2019 and 2018, respectively.
(r)New Accounting Pronouncements
Accounting Pronouncements - Recently Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, and has since modified the standard with several ASUs (collectively, the “new credit loss standard”). The new credit loss standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The company adopted the new standard as of December 29, 2019 (first day of fiscal year 2020) using the modified retrospective approach. As a result of the company's assessment process on its receivables and contract assets portfolio, which is the only financial instrument in scope of this standard, the adoption of this guidance did not have a material impact on the company's Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in ASU-04 simplify the subsequent measurement of goodwill, by removing the second step of the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The company adopted this guidance on December 29, 2019 on a prospective basis. The adoption of this guidance did not have an impact on the company's Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement". The amendments in ASU-13 remove, modify and add various disclosure requirements around fair value measurement in order to clarify and improve the cost-benefit nature of disclosures. The company adopted this guidance on December 29, 2019 on a prospective basis. The adoption of this guidance did not have an impact on the company's Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)". The amendments in ASU-14 remove, modify and add various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. The company adopted this guidance on December 29, 2019 on a retrospective basis for all periods presented. The adoption of this guidance did not have an impact on the company's Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)". The amendments in ASU-15 align the requirements for capitalizing implementation costs in a service contract hosting arrangement with those of developing or obtaining internal-use software. The company adopted this guidance on December 29, 2019 on a prospective basis. The adoption of this guidance did not have an impact on the company's Consolidated Financial Statements.
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Accounting Pronouncements - To be adopted
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)", which removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This guidance is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2020 with early adoption permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings in the period of adoption. The company intends to adopt this guidance on January 3, 2021, and does not expect a material impact on the company's Consolidated Financial Statements upon adoption.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting". Subject to meeting certain criteria, ASU 2020-04 provides optional expedients and exceptions to applying contract modification accounting under existing generally accepted accounting principles, for contracts that are modified to address the expected phase out of the London Inter-bank Offered Rate (“LIBOR”) by the end of 2021. Some of the Company’s contracts with respect to its borrowings and interest rate swap contracts already contain comparable alternative reference rates that would automatically take effect upon the phasing out of LIBOR, while for others, the company anticipates negotiating comparable replacement rates with its counterparties. In January 2021, the FASB issued ASU 2021-01 to provide supplemental guidance and to further clarify the scope. This guidance is effective for all entities from the beginning of an interim period that includes the issuance date of the ASU. An entity may elect to apply the amendments prospectively through December 31, 2022. The company is currently evaluating the impacts the adoption of this guidance will have on its Consolidated Financial Statements.
In August 2020, the FASB issued ASU No. 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be reported as a single liability instrument with no separate accounting for embedded conversion features. This new standard also removes certain settlement conditions that are required for contracts to qualify for equity classification and simplifies the diluted earnings per share calculations by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in diluted earnings per share calculations. This guidance is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2021 with early adoption permitted. The amendments are required to be adopted on either a modified retrospective method or a fully retrospective method. Upon adoption, the Company expects a decrease to additional paid in capital, an increase in the carrying value of the Convertible Notes and an increase to retained earnings. After adoption, the Company expects a reduction in its reported interest expense. The company is anticipating early adoption and will continue to evaluate the impact this guidance will have on its Consolidated Financial Statements.
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(4) REVENUE RECOGNITION
Revenue is recognized when the control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and represents the unit of account. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The company’s contracts can have multiple performance obligations or just a single performance obligation. The company treats shipping and handling activities performed after the customer obtains control of the good as a contract fulfillment activity. The company generally expenses sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expenses.
For contracts with multiple performance obligations, the contracts transaction price is allocated to each performance obligation using the company’s best estimate of the standalone selling price of each distinct good or service in the contract. As the company’s standard payment terms are less than one year, the company does not assess whether a contract has a significant financing component. Sales, use and value added taxes assessed by governmental authorities are excluded from the measurement of the transaction price within the company’s contracts with its customers. The company generally expenses sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expenses.
Within the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups, the estimated standalone selling price of equipment is based on observable prices. Within the Food Processing Equipment Group, the company estimates the standalone selling price based on expected cost to manufacture the good or complete the service plus an appropriate profit margin.
Control may pass to the customer over time or at a point in time. In general, the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups recognize revenue at the point in time control transfers to their customers based on contractual shipping terms. Revenue from equipment sold under our long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. Installation services provided in connection with the delivery of the equipment are also generally recognized as those services are rendered. Over time transfer of control is measured using an appropriate input measure (e.g., costs incurred or direct labor hours incurred in relation to total estimate). These measures include forecasts based on the best information available and therefore reflect the company's judgment to faithfully depict the transfer of the goods.
Contract Estimates
Accounting for long-term contracts within the Food Processing Equipment group involves the use of various techniques to estimate total contract revenue and costs. For the company’s long-term contracts, estimated profit for the equipment performance obligations is recognized as the equipment is manufactured and assembled. Profit on the equipment performance obligations is estimated as the difference between the total estimated revenue and expected costs to complete a contract. Contract cost estimates are based on labor productivity and availability, the complexity of the work to be performed; the cost and availability of materials and labor, and the performance of subcontractors. The company does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Contracts within the Commercial Foodservice and Residential Foodservice Equipment groups may contain variable consideration in the form of volume rebate programs. The company’s estimate of variable consideration is based on its experience with similarly situated customers using the portfolio approach.
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Disaggregation of Revenue
We disaggregate our net sales by reportable operating segment and geographical location as we believe it best depicts how the nature, timing and uncertainty of our net sales and cash flows are affected by economic factors. In general, the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups recognize revenue at the point in time control transfers to their customers based on contractual shipping terms. Revenue from equipment sold under our long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. The following table summarizes our net sales by reportable operating segment and geographical location (in thousands):
| Commercial Foodservice | Food Processing | Residential Kitchen | Total | ||||||||||||||||||||
| Twelve Months Ended January 2, 2021 | |||||||||||||||||||||||
| United States and Canada | $ | 1,067,872 | $ | 311,042 | $ | 373,864 | $ | 1,752,778 | |||||||||||||||
| Asia | 155,742 | 26,778 | 6,711 | 189,231 | |||||||||||||||||||
| Europe and Middle East | 246,845 | 78,690 | 182,919 | 508,454 | |||||||||||||||||||
| Latin America | 39,820 | 20,762 | 2,212 | 62,794 | |||||||||||||||||||
| Total | $ | 1,510,279 | $ | 437,272 | $ | 565,706 | $ | 2,513,257 | |||||||||||||||
| Twelve Months Ended December 28, 2019 | |||||||||||||||||||||||
| United States and Canada | $ | 1,334,776 | $ | 246,572 | $ | 362,753 | $ | 1,944,101 | |||||||||||||||
| Asia | 221,422 | 31,250 | 5,760 | 258,432 | |||||||||||||||||||
| Europe and Middle East | 349,613 | 98,814 | 198,672 | 647,099 | |||||||||||||||||||
| Latin America | 78,534 | 24,315 | 6,965 | 109,814 | |||||||||||||||||||
| Total | $ | 1,984,345 | $ | 400,951 | $ | 574,150 | $ | 2,959,446 | |||||||||||||||
| Twelve Months Ended December 29, 2018 | |||||||||||||||||||||||
| United States and Canada | $ | 1,176,006 | $ | 263,743 | $ | 366,679 | $ | 1,806,428 | |||||||||||||||
| Asia | 180,409 | 36,578 | 7,155 | 224,142 | |||||||||||||||||||
| Europe and Middle East | 315,935 | 64,666 | 221,126 | 601,727 | |||||||||||||||||||
| Latin America | 57,464 | 24,607 | 8,563 | 90,634 | |||||||||||||||||||
| Total | $ | 1,729,814 | $ | 389,594 | $ | 603,523 | $ | 2,722,931 | |||||||||||||||
Contract Balances
Contract assets primarily relate to the company's right to consideration for work completed but not billed at the reporting date and are recorded in prepaid expenses and other in the Consolidated Balance Sheet. Contract assets are transferred to receivables when the right to consideration becomes unconditional.
Contract liabilities relate to advance consideration received from customers for which revenue has not been recognized. Current contract liabilities are recorded in accrued expenses in the Consolidated Balance Sheet. Non-current contract liabilities are recorded in other non-current liabilities in the Consolidated Balance Sheet. Contract liabilities are reduced when the associated revenue from the contract is recognized.
The following table provides information about contract assets and contract liabilities from contracts with customers (in thousands):
| January 2, 2021 | December 28, 2019 | ||||||||||
| Contract assets | $ | 20,328 | $ | 22,675 | |||||||
| Contract liabilities | $ | 93,871 | $ | 74,511 | |||||||
| Non-current contract liabilities | $ | 13,523 | $ | 12,870 | |||||||
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During the twelve months period ended January 2, 2021, the company reclassified $15.7 million to accounts receivable which was included in the contract asset balance at the beginning of the period. During the twelve months period ended January 2, 2021, the company recognized revenue of $67.4 million which was included in the contract liability balance at the beginning of the period. Additions to contract liabilities representing amounts billed to clients in excess of revenue recognized to date were $87.2 million during the twelve months period ended January 2, 2021. Substantially all of the company's outstanding performance obligations will be satisfied within 12 to 36 months. There were no contract asset impairments during twelve months period ended January 2, 2021.
(5) FINANCING ARRANGEMENTS
| 2020 | 2019 | ||||||||||
| (in thousands) | |||||||||||
| Senior secured revolving credit line | $ | 755,000 | $ | 1,869,402 | |||||||
| Term loan facility | 335,938 | — | |||||||||
| Convertible senior notes | 632,847 | — | |||||||||
| Foreign loans | 4,421 | 3,622 | |||||||||
| Other debt arrangement | 1,390 | 116 | |||||||||
| Total debt | 1,729,596 | 1,873,140 | |||||||||
| Less: Current maturities of long-term debt | 22,944 | 2,894 | |||||||||
| Long-term debt | $ | 1,706,652 | $ | 1,870,246 | |||||||
On January 31, 2020, the company entered into an amended and restated five-year, $3.5 billion multi-currency senior secured credit agreement (as amended as described below, the "Credit Facility"). The Credit Facility amended the company's pre-existing $3.0 billion credit facility, which had an original maturity of July 2021, to provide for (i) a $750.0 million term loan facility and (ii) a $2.75 billion multi-currency revolving credit facility, with the potential under certain circumstances, to increase the amount of the credit facility to up to a total of $4.0 billion (plus additional amounts, subject to compliance with a senior secured net leverage ratio). The Credit Facility matures on January 31, 2025. The term loan facility will amortize in equal quarterly installments due on the last day of each fiscal quarter, commencing with the first full fiscal quarter after January 31, 2020, in an aggregate annual amount equal to 2.50% of the original aggregate principal amount of the term loan facility, with the balance, plus any accrued interest, due and payable on January 31, 2025.
On August 21, 2020, the company issued $747.5 million aggregate principal amount of 1.00% Convertible Senior Notes due 2025 in a private offering pursuant to an indenture, dated August 21, 2020 (the "Indenture"), between the company and U.S. Bank National Association, as trustee. The net proceeds from the sale of the Convertible Notes were approximately $729.9 million after deducting the initial purchasers' discounts and the offering expenses payable by the company. In connection with the pricing of the Convertible Notes, the company entered into privately negotiated Capped Call Transactions and the company used the net proceeds of the offering of the Convertible Notes to pay the aggregate amount of $104.7 million for them. The Capped Call Transactions initially cover, subject to customary anti-dilution adjustments, the number of shares of the company's common stock that underlie the Convertible Notes.
The company used a portion of the net proceeds from the offering of the Convertible Notes to prepay $400.0 million aggregate principal amount of its term loan obligations owed under its Credit Facility, which was amended concurrently with the issuance of the Convertible Notes. The Credit Facility, as amended, is in an aggregate principal amount of $3.1 billion, consisting of (i) a $350 million term loan facility and (ii) a $2.75 billion multi-currency revolving credit facility. The maturity date remains unchanged at January 31, 2025. The company is using the remaining net proceeds for general corporate purposes, including the financing of its operations, the potential repayment of additional indebtedness and potential acquisitions and other strategic transactions.
Credit Facility
As of January 2, 2021, the company had $1.1 billion of borrowings outstanding under the Credit Facility, including $335.9 million outstanding under the term loan. The company also had $10.9 million in outstanding letters of credit as of January 2, 2021, which reduces the borrowing availability under the Credit Facility. Remaining borrowing capacity under this facility was $2.0 billion at January 2, 2021.
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At January 2, 2021, borrowings under the Credit Facility accrued interest at a rate of 2.00% above LIBOR per annum or 1.00% above the highest of the prime rate, the federal funds rate plus 0.50% and one month LIBOR plus 1.00%. The interest rates on borrowings under the Credit Facility may be adjusted quarterly based on the company’s Funded Debt less Unrestricted Cash to Pro Forma EBITDA (the “Leverage Ratio”) on a rolling four-quarter basis. Additionally, a commitment fee based upon the Leverage Ratio is charged on the unused portion of the commitments under the Credit Facility. As a result of the amendment, for the quarterly periods extending through the second fiscal quarter of 2021, borrowings under the Credit Facility will accrue interest at a minimum of 2.00% above LIBOR and the variable unused commitment fee will be at a minimum of 0.35%. The average interest rate per annum, inclusive of hedging instruments, on the debt under the Credit Facility was equal to 3.97% at the end of the period and the variable commitment fee was equal to 0.35% per annum as of January 2, 2021.
The term loan facility had an average interest rate per annum, inclusive of hedging instruments, of 3.25% as of January 2, 2021.
In addition, the company has international credit facilities to fund working capital needs outside the United States. At January 2, 2021, these foreign credit facilities amounted to $4.4 million in U.S. Dollars with a weighted average per annum interest rate of approximately 5.91%.
The company’s debt is reflected on the balance sheet at cost. The fair values of the Credit Facility, term debt and foreign and other debt is based on the amount of future cash flows associated with each instrument discounted using the company's incremental borrowing rate. 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. The interest rate margin is based on the company's Leverage Ratio. The carrying value and estimated aggregate fair value, a level 2 measurement, based primarily on market prices, of debt excluding the Convertible Notes is as follows (in thousands):
| Jan 2, 2021 | Dec 28, 2019 | ||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||
| Total debt excluding convertible senior notes | $ | 1,096,749 | $ | 1,096,749 | $ | 1,873,140 | $ | 1,873,140 | |||||||||||||||
The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At January 2, 2021, the company had outstanding floating-to-fixed interest rate swaps totaling $260.0 million notional amount carrying an average interest rate of 2.36% maturing in less than 12 months and $802.0 million notional amount carrying an average interest rate of 1.92% that mature in more than 12 months but less than 74 months.
The terms of the Credit Facility, as amended, 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 requires, among other things, the company to satisfy certain financial covenants: (i) a minimum Interest Coverage Ratio (as defined in the Credit Facility) of 3.00 to 1.00, (ii) a maximum Total Leverage Ratio of Funded Debt less Unrestricted Cash to Pro Forma EBITDA (each as defined in the Credit Facility) of 5.50 to 1.00, and (iii) a maximum Secured Leverage Ratio of Funded Debt less Unrestricted Cash to Pro Forma EBITDA (each as defined in the Credit Facility) of 3.50 to 1.00; which may be adjusted to 4.00 to 1.00 for a four consecutive fiscal quarter period in connection with certain qualified acquisitions, subject to the terms and conditions contained in the Credit Facility. However; the maximum secured leverage ratio is permitted to be at higher amounts for periods extending through the second fiscal quarter of 2021, after which time covenants will revert to their original levels. The 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 foreign and domestic subsidiaries. The 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. At January 2, 2021, the company was in compliance with all covenants pursuant to its borrowing agreements.
The company has run various scenarios to estimate the impact of the COVID-19 pandemic and continues to believe that its future cash generated from operations, together with its capacity under its Credit Facility and its cash on hand, will provide adequate resources to meet its working capital needs and cash requirements and maintain compliance with financial covenants in its Credit Facility for at least the next 12 months.
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Convertible Notes
The following table summarizes the outstanding principal amount and carrying value of the Convertible Notes:
Jan 2, 2021 | |||||
| (in thousands) | |||||
| Principal amounts: | |||||
| Principal | $ | 747,500 | |||
| Unamortized debt discount | (114,653) | ||||
| Net carrying amount | $ | 632,847 | |||
The following table summarizes total interest expense recognized related to the Convertible Notes:
| Twelve Months Ended | |||||
Jan 2, 2021 | |||||
| Contractual interest expense | $ | 2,720 | |||
| Interest cost related to amortization of the debt discount and issuance costs | 7,971 | ||||
| Total interest expense | $ | 10,691 | |||
The estimated fair value of the Convertible Notes was $910.1 million as of January 2, 2021 and was determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 3 (j), Fair Value Measurements, in these Notes to the Consolidated Financial Statements included in this Part II, Item 8 of this Annual Report on Form 10-K. The if-converted value of the Convertible Notes exceeded their respective principal value by $1.7 million as of January 2, 2021.
The Convertible Notes are general unsecured obligations of the company. The Convertible Notes rank senior in right of payment to any of the company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; rank equal in right of payment to the company’s existing and future unsecured indebtedness that is not so subordinated; are effectively subordinated in right of payment to any of the company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and are structurally subordinated to all existing and future indebtedness and liabilities of the company’s subsidiaries.
In accounting for the issuance of the Convertible Notes, the company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the company's own stock, was determined by deducting the fair value of the liability component from the par value of the Convertible Notes. The difference between the principal amount of the Convertible Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheets and amortized to interest expense using the effective interest method over the term of the Convertible Notes. The effective interest rate of the Convertible Notes is 4.7%. The equity component of the Convertible Notes of approximately $105.0 million is included in the additional paid-in capital in the Consolidated Balance Sheets and is not remeasured as long as it continues to meet the conditions for equity classification. The company allocated transaction costs related to the Convertible Notes using the same proportions as the proceeds from the Convertible Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheets and amortized to interest expense over the term of the Convertible Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders' equity.
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The Convertible Notes were issued pursuant to the Indenture and bear interest semi-annually in arrears at a rate of 1.00% per annum on March 1 and September 1 of each year. The Convertible Notes are convertible based upon an initial conversion rate of 7.7746 shares of the company's common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $128.62 per share of the company's common stock. The conversion rate will be subject to adjustment upon occurrence of certain specified events in accordance with the Indenture, but will not be adjusted for accrued and unpaid interest. Additionally, in the event of a Fundamental Change (as defined in the Indenture), holders of the Convertible Notes may require the company to repurchase all or a portion of their Convertible Notes at a price equal to 100.0% of the principal amount of Convertible Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date. Upon conversion, the company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the company's election, in respect of the remainder, if any, of the company's conversion obligation in excess of the aggregate principal amount of the notes being converted.
The Convertible Notes will mature on September 1, 2025 unless they are redeemed, repurchased or converted prior to such date in accordance with their terms. Prior to the close of business on the business day immediately preceding June 1, 2025, the notes will be convertible at the option of the holders only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 2, 2021 (and only during such fiscal quarter), if the last reported sale price of the company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130.0% of the conversion price for the Convertible Notes on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of that ten consecutive trading day period was less than 98.0% of the product of the last reported sale price of the company's common stock and the conversion rate of the Convertible Notes on each such trading day; (3) if the company calls such Convertible Notes for redemption; or (4) upon the occurrence of specified corporate events. On or after June 1, 2025, the notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Holders of the Convertible Notes who convert in connection with a Make-Whole Fundamental Change or during a Redemption Period (each as defined in the Indenture) will be, under certain circumstances, entitled to an increase in the conversion rate.
The company may settle the conversions of the Convertible Notes in cash, shares of the company's common stock or any combination thereof at its election. The number of shares of the company's common stock issuable at the conversion price of $128.62 per share is expected to be 5.8 million shares. However, the Capped Call Transactions are expected generally to reduce the potential dilution of the company's common stock upon any conversion of Convertible Notes and/or offset the cash payments the company is required to make in excess of the principal amount of the Notes. Under the Capped Call Transactions, the number of shares of common stock issuable at the conversion price of $207.93 is expected to be 3.6 million shares.
The Convertible Notes were not convertible during the twelve months period ended January 2, 2021 and none have been converted to date. Also given the average market price of the company's common stock has not exceeded the exercise price since inception, there is no impact to the diluted earnings per share.
The company may redeem all or any portion of the Convertible Notes, at its option, on or after September 5, 2023 and prior to the 41st scheduled trading day immediately preceding the maturity date, at a redemption price equal to 100.0% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest thereon, if the last reported sales price of the company's common stock has been at least 130.0% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the company provides written notice of redemption.
The Indenture includes customary terms and covenants, including certain events of default after which the Convertible Notes may become due and payable immediately.
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Capped Call Transactions
The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset the cash payments the company is required to make in excess of the principal amount of the Convertible Notes upon conversion of the Convertible Notes in the event that the market price per share of the company's common stock is greater than the strike price of the Capped Call Transactions (which initially corresponds to the initial conversion price of the Convertible Notes and is subject to certain adjustments under the terms of the Capped Call Transactions), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Transactions. The Capped Call Transactions have an initial cap price of $207.93 per share of the company's common stock. The Capped Call Transactions cover, initially, the number of shares of the company's common stock underlying the Convertible Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes.
The Capped Call Transactions are separate transactions entered into by the company with the capped call counterparties, and are not part of the terms of the Convertible Notes and will not affect any holder's right under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Capped Call Transactions. The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the company's stock. The premiums paid of the Capped Call Transactions have been included as a net reduction to additional paid-in capital with stockholders' equity.
The aggregate amount of debt payable during each of the next five years is as follows (in thousands):
| 2021 | $ | 22,944 | |||
| 2022 | 19,261 | ||||
| 2023 | 19,056 | ||||
| 2024 | 19,069 | ||||
| 2025 and thereafter | 1,649,266 | ||||
| $ | 1,729,596 | ||||
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(6) COMMON AND PREFERRED STOCK
(a) Shares Authorized
At January 2, 2021 and December 28, 2019, the company had 95,000,000 authorized shares of common stock and 2,000,000 authorized shares of non-voting preferred stock.
(b) Treasury Stock
In November 2017, the company's Board of Directors approved a stock repurchase program authorizing the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock. During 2020, the company repurchased 896,965 shares of its common stock under the program for $69.7 million, including applicable commissions, which represented an average price of $77.70. As of January 2, 2021, 1,023,165 shares had been purchased under the 2017 stock repurchase program and 1,476,835 remain authorized for repurchase.
The company also treats shares withheld for tax purposes on behalf of employees in connection with the vesting of restricted share grants as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. During 2020, the company repurchased 176,242 shares of its common stock that were surrendered to the company for withholding taxes related to restricted stock vestings for $16.2 million.
(c) Share-Based Awards
The company maintains several stock incentive plans under which the company's Board of Directors issues restricted share grants to key employees. Restricted share grants issued to employees are transferable upon certain vesting requirements being met. The 2011 Stock Incentive Plan (the "2011 Plan") was adopted on April 1, 2011, under which the company's Board of Directors issues stock grants to key employees. On July 11, 2017 the company increased the maximum amount of shares reserved for issuance under the 2011 Plan by 1,000,000. A maximum amount of 2,650,000 shares can be issued under the 2011 Plan. Stock grants issued to employees are transferable upon certain vesting requirements. As of January 2, 2021, a total of 2,137,168 share-based awards have been issued under the 2011 Plan. This includes 2,042,168 restricted share grants, of which 433,065 remain outstanding and unvested. For fiscal year ended January 2, 2021, the approximate fair value of restricted shares vested were $44.8 million. This also includes 95,000 restricted stock units, of which 95,000 remain unvested. For fiscal year ended January 2, 2021, no restricted stock units have vested.
A summary of the company’s nonvested restricted share grant activity and their corresponding fair value on the date of grant for fiscal years ended January 2, 2021 and December 28, 2019 is as follows:
| Shares | Weighted Average Grant-Date Fair Value | ||||||||||
| Nonvested shares at December 29, 2018 | 125,842 | $ | 103.29 | ||||||||
| Granted | 537,059 | 113.26 | |||||||||
| Vested | (135,816) | 105.81 | |||||||||
| Forfeited | — | — | |||||||||
| Nonvested shares at December 28, 2019 | 527,085 | $ | 112.60 | ||||||||
| Granted | 389,993 | 57.74 | |||||||||
| Vested | (476,261) | 68.54 | |||||||||
| Forfeited | (7,752) | 66.01 | |||||||||
| Nonvested shares at January 2, 2021 | 433,065 | $ | 112.54 | ||||||||
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A summary of the company’s nonvested restricted stock unit activity and their corresponding fair value (based upon the Monte Carlo Methodology) on the date of grant for fiscal years ended January 2, 2021 is as follows:
| Units | Weighted Average Grant-Date Fair Value | ||||||||||
| Nonvested shares at December 28, 2019 | — | $ | — | ||||||||
| Granted | 95,000 | 135.31 | |||||||||
| Vested | — | — | |||||||||
| Forfeited | — | — | |||||||||
| Nonvested shares at January 2, 2021 | 95,000 | $ | 135.31 | ||||||||
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(7) INCOME TAXES
Earnings before taxes is summarized as follows (in thousands):
| 2020 | 2019 | 2018 | |||||||||||||||
| Domestic | $ | 178,813 | $ | 336,688 | $ | 328,870 | |||||||||||
| Foreign | 89,244 | 125,931 | 94,643 | ||||||||||||||
| Total | $ | 268,057 | $ | 462,619 | $ | 423,513 | |||||||||||
The provision for income taxes is summarized as follows (in thousands):
| 2020 | 2019 | 2018 | |||||||||||||||
| Federal | $ | 36,908 | $ | 69,074 | $ | 66,359 | |||||||||||
| State and local | 8,815 | 16,203 | 16,035 | ||||||||||||||
| Foreign | 15,040 | 25,102 | 23,967 | ||||||||||||||
| Total | $ | 60,763 | $ | 110,379 | $ | 106,361 | |||||||||||
| Current | $ | 44,342 | $ | 88,167 | $ | 85,872 | |||||||||||
| Deferred | 16,421 | 22,212 | 20,489 | ||||||||||||||
| Total | $ | 60,763 | $ | 110,379 | $ | 106,361 | |||||||||||
Reconciliation of the differences between income taxes computed at the federal statutory rate to the effective rate are as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| U.S. federal statutory tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| State taxes, net of federal benefit | 3.2 | 3.2 | 3.0 | ||||||||||||||
| Permanent differences | (0.4) | 0.6 | 0.2 | ||||||||||||||
| Foreign income tax rate at rates other than U.S. statutory | 0.5 | 0.2 | 1.3 | ||||||||||||||
| Deferred tax changes | (0.7) | — | 0.2 | ||||||||||||||
| Tax Cuts and Jobs Act of 2017 transition tax | — | — | (0.1) | ||||||||||||||
Change in valuation allowances (1) | (0.1) | 0.1 | (0.5) | ||||||||||||||
| Tax on unremitted earnings | 1.2 | 0.3 | — | ||||||||||||||
| Other | (2.0) | (1.5) | — | ||||||||||||||
| Consolidated effective tax | 22.7 | % | 23.9 | % | 25.1 | % | |||||||||||
(1) Net of changes in related tax attributes.
The company’s effective tax rate for 2020 was 22.7% as compared to 23.9% in 2019. The effective tax rate for 2020 reflects favorable tax adjustments for deferred tax rate changes and adjustments for the finalization of 2019 tax returns. The effective tax rate is higher than the federal tax rate of 21.0% primarily due to state taxes and foreign tax rate differentials.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted in response to the coronavirus ("COVID-19") pandemic. The CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferment of the employer portion of social security payments, net operating loss carryback periods, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not have a material impact on the company’s Consolidated Financial Statements for the year ended January 2, 2021. On December 27, 2020, the Consolidated Appropriations Act (“CAA”) was enacted in further response to the COVID-19 pandemic, in combination with omnibus spending for the 2021 federal fiscal year. The CAA extended many of the provisions enacted by the CARES Act, the extension of which likewise did not have a material impact on the company’s Consolidated Financial Statements for the year ended January 2, 2021.
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At January 2, 2021 and December 28, 2019, the company had recorded the following deferred tax assets and liabilities (in thousands):
| 2020 | 2019 | ||||||||||
| Deferred tax assets: | |||||||||||
| Compensation related | $ | 12,328 | $ | 4,744 | |||||||
| Pension and post-retirement benefits | 88,709 | 48,716 | |||||||||
| Inventory reserves | 14,732 | 15,166 | |||||||||
| Accrued liabilities and reserves | 22,049 | 17,321 | |||||||||
| Warranty reserves | 17,890 | 16,550 | |||||||||
| Operating lease liability | 16,180 | 17,521 | |||||||||
| Interest rate swaps | 12,997 | 6,075 | |||||||||
| Net operating loss carryforwards | 20,747 | 17,873 | |||||||||
| Other | 17,187 | 16,504 | |||||||||
| Gross deferred tax assets | 222,819 | 160,470 | |||||||||
| Valuation allowance | (11,731) | (7,754) | |||||||||
| Deferred tax assets | $ | 211,088 | $ | 152,716 | |||||||
| Deferred tax liabilities: | |||||||||||
| Intangible assets | $ | (226,598) | $ | (203,721) | |||||||
| Depreciable assets | (26,916) | (18,020) | |||||||||
| Operating lease right-of-use assets | (15,921) | (17,542) | |||||||||
| Other | (12,825) | (10,001) | |||||||||
| Deferred tax liabilities | $ | (282,260) | $ | (249,284) | |||||||
| Net deferred tax assets (liabilities) | $ | (71,172) | $ | (96,568) | |||||||
| Long-term deferred asset | 76,052 | 36,932 | |||||||||
| Long-term deferred liability | (147,224) | (133,500) | |||||||||
| Net deferred tax assets (liabilities) | $ | (71,172) | $ | (96,568) | |||||||
The company has recorded tax reserves on undistributed foreign earnings not permanently reinvested of $7.5 million and $5.6 million at January 2, 2021 and December 28, 2019, respectively. No further provisions were made for income taxes that may result from future remittances of undistributed earnings of foreign subsidiaries that are determined to be permanently reinvested, which were $433.0 million on January 2, 2021. Determination of the total amount of unrecognized deferred income taxes on undistributed earnings net of foreign subsidiaries is not practicable.
The company has a deferred tax asset on net operating loss carryforwards totaling $20.7 million as of January 2, 2021. These net operating losses are available to reduce future taxable earnings of certain domestic and foreign subsidiaries. United States federal loss carryforwards total $15.7 million of which $10.0 million will expire through 2036 and $5.7 million have no expiration date. State loss carryforwards total $102.4 million and expire through 2040 and international loss carryforwards total $56.5 million and expire through 2038; however, some have no expiration date. Of these carryforwards, $11.4 million are subject to full valuation allowance.
As of January 2, 2021, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $30.3 million (of which $30.2 million would impact the effective tax rate if recognized) plus approximately $6.3 million of accrued interest and $7.0 million of penalties. The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. Interest recognized in fiscal years 2020, 2019 and 2018 was $0.8 million, $0.4 million and $0.6 million, respectively. Penalties recognized in fiscal years 2020, 2019 and 2018 was $(0.2) million, $(0.9) million and $0.6 million, respectively.
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Although the company believes its tax returns are correct, the final determination of tax examinations may be different than what was reported on the tax returns. In the opinion of management, adequate tax provisions have been made for the years subject to examination.
The following table summarizes the activity related to the unrecognized tax benefits for the fiscal years ended December 29, 2018, December 28, 2019 and January 2, 2021 (in thousands):
| Balance at December 29, 2018 | $ | 31,912 | |||
| Increases to current year tax positions | 4,216 | ||||
| Increase to prior year tax positions | 254 | ||||
| Lapse of statute of limitations | (4,823) | ||||
| Balance at December 28, 2019 | $ | 31,559 | |||
| Increases to current year tax positions | 3,657 | ||||
| Increase to prior year tax positions | 183 | ||||
| Settlements and other adjustments | (586) | ||||
| Lapse of statute of limitations | (4,484) | ||||
| Balance at January 2, 2021 | $ | 30,329 | |||
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 $4.4 million of its remaining unrecognized tax benefits may be recognized by the end of 2021 as a result of settlements with taxing authorities or lapses of statutes of limitations.
In the normal course of business, income tax authorities in various income tax jurisdictions both in the United States and internationally conduct routine audits of our income tax returns filed in prior years. These audits are generally designed to determine if individual income tax authorities are in agreement with our interpretations of complex tax regulations regarding the allocation of income to the various income tax jurisdictions. Income tax years are open from 2017 through the current year for the United States federal jurisdiction. Income tax years open for our other major jurisdictions range from 2014 through the current year.
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(8) FINANCIAL INSTRUMENTS
Derivatives are measured at fair value and recognized as either assets or liabilities. Derivatives that do not qualify as a hedge must be adjusted to fair value in earnings. If a derivative does qualify, 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.
(a)Foreign Exchange
The company periodically enters into derivative instruments, principally forward contracts to reduce exposures pertaining to fluctuations in foreign exchange rates. The fair value of these forward contracts was an unrealized loss of $2.2 million at the end of the year.
(b)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. The fair value of these instruments was a liability of $51.1 million and a liability of $23.3 million as of January 2, 2021 and December 28, 2019, respectively. The change in fair value of these swap agreements in 2020 was a loss of $20.7 million, net of taxes.
A summary of the company’s interest rate swaps is as follows (in thousands):
| Twelve Months Ended | |||||||||||||||||
| Location | Jan 2, 2021 | Dec 28, 2019 | |||||||||||||||
| Fair value | Other assets | $ | — | $ | 1,830 | ||||||||||||
| Fair value | Accrued expenses | $ | 14,075 | $ | — | ||||||||||||
| Fair value | Other non-current liabilities | $ | 37,018 | $ | 25,120 | ||||||||||||
| Amount of gain/(loss) recognized in other comprehensive income | Other comprehensive income | $ | (43,317) | $ | (31,396) | ||||||||||||
| Gain/(loss) reclassified from accumulated other comprehensive income (effective portion) | Interest expense | $ | (15,514) | $ | 1,256 | ||||||||||||
Interest rate swaps are subject to default risk to the extent the counterparty is unable to satisfy its settlement obligations under the interest rate swap agreements. The company reviews the credit profile of the financial institutions that are counterparties to such swap agreements and assesses their creditworthiness prior to entering into the interest rate swap agreements and throughout the term. 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 agreement.
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(9) LEASE COMMITMENTS
Accounting Policy
At the commencement date of a lease, the company recognizes a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. The lease liability is measured at the present value of lease payments over the lease term, including variable fees that are known or subject to a minimum floor. The lease liability includes lease component fees, while non-lease component fees are expensed as incurred for all asset classes. The company's lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. When a contract excludes an implicit rate, the company utilizes an incremental borrowing rate based on information available at the lease commencement date including lease term and geographic region. The initial valuation of the right-of-use (“ROU”) asset includes the initial measurement of the lease liability, lease payments made in advance of the lease commencement date and initial direct costs incurred by the Company and excludes lease incentives. Operating lease ROU assets are included in other assets and operating lease liabilities are included accrued expenses and other non-current liabilities.
Leases with an initial term of 12 months or less are classified as short-term leases and are not recorded on the Consolidated Balance Sheets. The lease expense for short-term leases is recognized on a straight-line basis over the lease term.
Leases
The company leases warehouse space, office facilities and equipment under operating leases. The company has operating lease costs of $31.2 million, $31.0 million and $30.2 million in fiscal 2020, 2019 and 2018 respectively, including short-term lease expense and variable lease costs, which were immaterial in the year.
| Leases (in thousands) | January 2, 2021 | December 28, 2019 | |||||||||
| Operating lease right-of-use assets | $ | 97,193 | $ | 96,655 | |||||||
| Operating Lease Liability: | |||||||||||
| Current | 22,493 | 21,827 | |||||||||
| Non-current | 76,529 | 75,018 | |||||||||
| Total Liability | $ | 99,022 | $ | 96,845 | |||||||
| Total Lease Commitments (in thousands) | Operating Leases | ||||
| 2021 | $ | 24,675 | |||
| 2022 | 21,230 | ||||
| 2023 | 16,650 | ||||
| 2024 | 13,214 | ||||
| 2025 | 9,315 | ||||
| 2026 and thereafter | 23,446 | ||||
| Total future lease commitments | 108,530 | ||||
| Less imputed interest | 9,508 | ||||
| Total | $ | 99,022 | |||
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| Other Lease Information (in thousands, except lease term and discount rate) | Twelve Months Ended January 2, 2021 | Twelve Months Ended December 28, 2019 | |||||||||
| Supplemental cash flow information | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows for operating leases | $ | 26,024 | $ | 24,794 | |||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | 25,433 | 25,306 | |||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Weighted-average remaining lease terms leases - Operating | 6.0 years | 6.3 years | |||||||||
| Weighted-average discount rate - Operating | 3.0 | % | 3.4 | % | |||||||
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(10) 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 foodservice equipment for the restaurant and institutional kitchen industry. This business segment has manufacturing facilities in Arkansas, California, Colorado, Florida, Illinois, Michigan, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Vermont, Washington, Australia, Canada, China, Denmark, Estonia, Italy, Mexico, the Philippines, Poland, Spain, Sweden and the United Kingdom. Principal product lines of this group include conveyor ovens, combi-ovens, convection ovens, baking ovens, proofing ovens, deck ovens, speed cooking ovens, hydrovection ovens, ranges, fryers, rethermalizers, steam cooking equipment, food warming equipment, catering equipment, heated cabinets, charbroilers, ventless cooking systems, kitchen ventilation, induction cooking equipment, countertop cooking equipment, toasters, griddles, charcoal grills, professional mixers, stainless steel fabrication, custom millwork, professional refrigerators, blast chillers, coldrooms, ice machines, freezers, soft serve ice cream equipment, coffee and beverage dispensing equipment, home and professional craft brewing equipment, fry dispensers, bottle filling and canning equipment, and IoT solutions. These products are sold and marketed under the brand names: Anets, APW Wyott, Bakers Pride, Beech, BKI, Blodgett, Blodgett Combi, Bloomfield, Britannia, Carter-Hoffmann, Celfrost, Concordia, CookTek, Crown, CTX, Desmon, Deutsche Beverage, Doyon, Eswood, EVO, Firex, Follett, Frifri, Giga, Globe, Goldstein, Holman, Houno, IMC, Induc, Ink Kegs, Inline Filling Systems, Jade, JoeTap, Josper, L2F, Lang, Lincat, MagiKitch’n, Market Forge, Marsal, Meheen, Middleby Marshall, MPC, Nieco, Nu-Vu, PerfectFry, Pitco, QualServ, RAM, Southbend, Ss Brewtech, Star, Starline, Sveba Dahlen, Synesso, Tank, Taylor, Thor, Toastmaster, TurboChef, Ultrafryer, Varimixer, Wells, Wild Goose 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, Oklahoma, Pennsylvania, Texas, Virginia, Washington, Wisconsin, Denmark, France, Germany, India, Italy, and the United Kingdom. Principal product lines of this group include batch ovens, baking ovens, proofing ovens, conveyor belt ovens, continuous processing ovens, frying systems and automated thermal processing systems, grinders, slicers, reduction and emulsion systems, mixers, blenders, formers, battering equipment, breading equipment, seeding equipment, water cutting systems, food presses, food suspension equipment, filling and depositing solutions, forming equipment, automated loading and unloading systems, food safety, food handling, freezing, defrosting and packaging equipment. These products are sold and marketed under the brand names: Alkar, Armor Inox, Auto-Bake, Baker Thermal Solutions, Burford, Cozzini, CV-Tek, Danfotech, Deutsche Process, Drake, Glimek, Hinds-Bock, Maurer-Atmos, MP Equipment, Pacproinc, RapidPak, Scanico, Spooner Vicars, Stewart Systems, Thurne and Ve.Ma.C.
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 and the United Kingdom. Principal product lines of this group are ranges, cookers, stoves, cooktops, microwaves, ovens, refrigerators, dishwashers, undercounter refrigeration, wine cellars, ice machines, ventilation equipment and outdoor equipment. These products are sold and marketed under the brand names: AGA, AGA Cookshop, Brava, EVO, 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. Management believes that intersegment sales are made at established arm's length transfer prices.
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The following table summarizes the results of operations for the company’s business segments(1) (dollars in thousands):
| Commercial Foodservice | Food Processing | Residential Kitchen | Corporate and Other(2) | Total | |||||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||||||||
| Net sales | $ | 1,510,279 | $ | 437,272 | $ | 565,706 | $ | — | $ | 2,513,257 | |||||||||||||||||||
Operating income (3,4) | 239,625 | 78,008 | 67,046 | (60,248) | 324,431 | ||||||||||||||||||||||||
| Depreciation expense | 21,768 | 5,507 | 11,691 | 120 | 39,086 | ||||||||||||||||||||||||
Amortization expense (5) | 51,985 | 7,319 | 9,657 | 2,485 | 71,446 | ||||||||||||||||||||||||
| Net capital expenditures | 25,463 | 3,427 | 4,801 | 1,158 | 34,849 | ||||||||||||||||||||||||
| Total assets | 3,249,441 | 617,171 | 1,221,229 | 114,633 | 5,202,474 | ||||||||||||||||||||||||
Long-lived assets (6) | 279,481 | 55,069 | 192,940 | 19,849 | 547,339 | ||||||||||||||||||||||||
| 2019 | |||||||||||||||||||||||||||||
| Net sales | $ | 1,984,345 | $ | 400,951 | $ | 574,150 | $ | — | $ | 2,959,446 | |||||||||||||||||||
Operating income (3,4) | 429,946 | 68,935 | 89,312 | (74,150) | 514,043 | ||||||||||||||||||||||||
| Depreciation expense | 21,054 | 4,944 | 11,742 | 112 | 37,852 | ||||||||||||||||||||||||
Amortization expense (5) | 45,906 | 8,162 | 9,896 | 1,612 | 65,576 | ||||||||||||||||||||||||
| Net capital expenditures | 29,353 | 6,683 | 9,168 | 1,405 | 46,609 | ||||||||||||||||||||||||
| Total assets | 3,188,304 | 621,619 | 1,157,211 | 35,009 | 5,002,143 | ||||||||||||||||||||||||
Long-lived assets (6) | 261,466 | 57,403 | 176,834 | 4,116 | 499,819 | ||||||||||||||||||||||||
| 2018 | |||||||||||||||||||||||||||||
| Net sales | $ | 1,729,814 | $ | 389,594 | $ | 603,523 | $ | — | $ | 2,722,931 | |||||||||||||||||||
Operating income (3) | 393,380 | 62,435 | 53,959 | (63,808) | 445,966 | ||||||||||||||||||||||||
| Depreciation expense | 17,374 | 5,207 | 12,838 | 363 | 35,782 | ||||||||||||||||||||||||
Amortization expense (5) | 35,224 | 7,527 | 17,226 | 1,479 | 61,456 | ||||||||||||||||||||||||
| Net capital expenditures | 17,444 | 7,373 | 11,721 | (498) | 36,040 | ||||||||||||||||||||||||
| Total assets | 2,906,373 | 513,189 | 1,089,103 | 41,116 | 4,549,781 | ||||||||||||||||||||||||
Long-lived assets (6) | 181,636 | 33,127 | 146,897 | 22,328 | 383,988 | ||||||||||||||||||||||||
(1)Non-operating expenses are not allocated to the reportable 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.
(3)Restructuring expenses and impairments are included in operating income of the segment to which they pertain. See note 3(f) and 13 for further details.
(4)Gain on litigation settlement is included in Residential Kitchen and gain on sale of plant is included in Commercial Foodservice.
(5)Includes amortization of deferred financing costs .
(6)Long-lived assets consist of property, plant and equipment, long-term deferred tax assets and other assets.
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Geographic Information
Long-lived assets, not including goodwill and other intangibles (in thousands):
| 2020 | 2019 | 2018 | |||||||||||||||
| United States and Canada | $ | 331,688 | $ | 305,207 | $ | 262,482 | |||||||||||
| Asia | 28,018 | 22,312 | 12,136 | ||||||||||||||
| Europe and Middle East | 181,242 | 165,781 | 108,001 | ||||||||||||||
| Latin America | 6,391 | 6,519 | 1,369 | ||||||||||||||
| Total International | 215,651 | 194,612 | 121,506 | ||||||||||||||
| $ | 547,339 | $ | 499,819 | $ | 383,988 | ||||||||||||
(11) 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. 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 former Chairman ("Chairman Plan"). The retirement benefits are based upon a percentage of the former 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. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2010 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, 2010 upon reaching retirement age.
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 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. In December 2020, it was agreed that the Group Pension Scheme will be closed to future pension accruals effective April 5, 2021 and as a result, a curtailment loss has been recognized in fiscal 2020.
The other, much smaller, defined benefit pension plans operating within the AGA Group cover employees in France 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.
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A summary of the plans’ net periodic pension cost, benefit obligations, funded status, and net balance sheet position is as follows (dollars in thousands)
| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||
| U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||
| Net Periodic Pension Cost (Benefit): | |||||||||||||||||||||||
| Service cost | $ | — | $ | 2,581 | $ | — | $ | 2,457 | |||||||||||||||
| Interest cost | 1,043 | 25,966 | 1,253 | 33,490 | |||||||||||||||||||
| Expected return on assets | (999) | (72,795) | (868) | (67,542) | |||||||||||||||||||
| Amortization of net loss | 763 | 3,449 | 664 | 721 | |||||||||||||||||||
| Amortization of prior service cost | — | 2,577 | — | 2,560 | |||||||||||||||||||
| Curtailment loss | — | 14,682 | — | 865 | |||||||||||||||||||
| $ | 807 | $ | (23,540) | $ | 1,049 | $ | (27,449) | ||||||||||||||||
| Change in Benefit Obligation: | |||||||||||||||||||||||
| Benefit obligation – beginning of year | $ | 35,395 | $ | 1,501,616 | $ | 31,559 | $ | 1,377,575 | |||||||||||||||
| Service cost | — | 2,581 | — | 2,457 | |||||||||||||||||||
| Prior service cost | — | 2,309 | — | — | |||||||||||||||||||
| Interest on benefit obligations | 1,043 | 25,966 | 1,253 | 33,490 | |||||||||||||||||||
| Member contributions | — | 312 | — | 313 | |||||||||||||||||||
| Actuarial loss | 4,146 | 186,945 | 4,173 | 102,377 | |||||||||||||||||||
| Net benefit payments | (1,687) | (62,878) | (1,590) | (62,355) | |||||||||||||||||||
| Curtailment loss | — | 14,682 | — | 865 | |||||||||||||||||||
| Exchange effect | — | 73,041 | — | 46,894 | |||||||||||||||||||
| Benefit obligation – end of year | $ | 38,897 | $ | 1,744,574 | $ | 35,395 | $ | 1,501,616 | |||||||||||||||
| Change in Plan Assets: | |||||||||||||||||||||||
| Plan assets at fair value – beginning of year | $ | 16,744 | $ | 1,231,181 | $ | 14,634 | $ | 1,141,381 | |||||||||||||||
| Company contributions | 1,587 | 5,745 | 1,191 | 5,934 | |||||||||||||||||||
| Investment gain | 811 | 69,824 | 2,509 | 107,368 | |||||||||||||||||||
| Member contributions | — | 312 | — | 313 | |||||||||||||||||||
| Benefit payments and plan expenses | (1,687) | (62,878) | (1,590) | (62,355) | |||||||||||||||||||
| Exchange effect | — | 52,332 | — | 38,540 | |||||||||||||||||||
| Plan assets at fair value – end of year | $ | 17,455 | $ | 1,296,516 | $ | 16,744 | $ | 1,231,181 | |||||||||||||||
| Funded Status: | |||||||||||||||||||||||
| Unfunded benefit obligation | $ | (21,442) | $ | (448,058) | $ | (18,651) | $ | (270,435) | |||||||||||||||
| Amounts recognized in balance sheet at year end: | |||||||||||||||||||||||
| Accrued pension benefits | $ | (21,442) | $ | (448,058) | $ | (18,651) | $ | (270,435) | |||||||||||||||
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| Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||
| U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||
| Pre-tax components in accumulated other comprehensive income at period end: | |||||||||||||||||||||||
| Net actuarial loss | $ | 10,424 | $ | 479,554 | $ | 6,853 | $ | 270,116 | |||||||||||||||
| Pre-tax components recognized in other comprehensive income for the period: | |||||||||||||||||||||||
| Current year actuarial loss | $ | 4,334 | $ | 211,494 | $ | 2,532 | $ | 69,228 | |||||||||||||||
| Actuarial loss recognized | (763) | (3,841) | (664) | (798) | |||||||||||||||||||
| Prior service cost | — | 3,335 | — | — | |||||||||||||||||||
| Prior service cost recognized | — | (1,550) | — | (986) | |||||||||||||||||||
| Total amount recognized | $ | 3,571 | $ | 209,438 | $ | 1,868 | $ | 67,444 | |||||||||||||||
| Accumulated Benefit Obligation | $ | 38,897 | $ | 1,744,536 | $ | 35,395 | $ | 1,501,589 | |||||||||||||||
| Salary growth rate | n/a | 0.8 | % | n/a | 0.8 | % | |||||||||||||||||
| Assumed discount rate | 2.2 | % | 1.2 | % | 3.0 | % | 2.0 | % | |||||||||||||||
| Expected return on assets | 6.0 | % | 6.2 | % | 6.0 | % | 6.2 | % | |||||||||||||||
The company has engaged non-affiliated third party professional investment advisors to assist the company in developing its investment policy and establishing asset allocations. The company's overall investment objective is to provide a return, that along with company contributions, is expected to meet future benefit payments. Investment policy is established in consideration of anticipated future timing of benefit payments under the plans. The anticipated duration of the investment and the potential for investment losses during that period are carefully weighed against the potential for appreciation when making investment decisions. The company routinely monitors the performance of investments made under the plans and reviews investment policy in consideration of changes made to the plans or expected changes in the timing of future benefit payments.
The assets of the plans were invested in the following classes of securities (none of which were securities of the company):
U.S. Plans:
| Target Allocation | Percentage of Plan Assets | ||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Equity | 48 | % | 48 | % | 51 | % | |||||||||||
| Fixed income | 40 | 39 | 37 | ||||||||||||||
| Money market | 4 | 3 | 2 | ||||||||||||||
| Other (real estate investment trusts & commodities contracts) | 8 | 10 | 10 | ||||||||||||||
| 100 | % | 100 | % | 100 | % | ||||||||||||
Non-U.S. Plans:
| Target Allocation | Percentage of Plan Assets | ||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Equity | 17 | % | 12 | % | 22 | % | |||||||||||
| Fixed income | 38 | 57 | 39 | ||||||||||||||
| Alternatives/Other | 32 | 15 | 22 | ||||||||||||||
| Real Estate | 13 | 13 | 13 | ||||||||||||||
| Cash and cash equivalents | — | 3 | 4 | ||||||||||||||
| 100 | % | 100 | % | 100 | % | ||||||||||||
87
In accordance with ASC 820 Fair Value Measurements and Disclosures, the company has measured its defined benefit pension plans at fair value. In accordance with ASU 2015-04, "Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets", the company has elected to measure the pension plan assets and obligations as of the calendar month end closest to the fiscal year end. The following tables summarize the basis used to measure the pension plans’ assets at fair value as of January 2, 2021and December 28, 2019 (in thousands):
U.S. Plans:
| Fiscal 2020 | Fiscal 2019 | |||||||||||||||||||||||||||||||||||||
| Asset Category | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Net Asset Value | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Net Asset Value | ||||||||||||||||||||||||||||||||
| Short Term Investment Fund (a) | $ | 533 | $ | — | $ | 533 | $ | 347 | $ | — | $ | 347 | ||||||||||||||||||||||||||
| Equity Securities: | ||||||||||||||||||||||||||||||||||||||
| Large Cap | 3,443 | 3,443 | — | 3,957 | 3,957 | — | ||||||||||||||||||||||||||||||||
| Mid Cap | 407 | 407 | — | 417 | 417 | — | ||||||||||||||||||||||||||||||||
| Small Cap | 489 | 489 | — | 418 | 418 | — | ||||||||||||||||||||||||||||||||
| International | 4,198 | 4,198 | — | 3,657 | 3,657 | — | ||||||||||||||||||||||||||||||||
| Fixed Income: | ||||||||||||||||||||||||||||||||||||||
| Government/Corporate | 5,517 | 5,517 | — | 4,992 | 4,992 | — | ||||||||||||||||||||||||||||||||
| High Yield | 1,211 | 1,211 | — | 1,260 | 1,260 | — | ||||||||||||||||||||||||||||||||
| Alternative: | ||||||||||||||||||||||||||||||||||||||
| Global Real Estate Investment Trust | 1,063 | 1,063 | — | 1,358 | 1,358 | — | ||||||||||||||||||||||||||||||||
| Commodities Contracts | 594 | 594 | — | 338 | 338 | — | ||||||||||||||||||||||||||||||||
| Total | $ | 17,455 | $ | 16,922 | $ | 533 | $ | 16,744 | $ | 16,397 | $ | 347 | ||||||||||||||||||||||||||
(a)Represents collective short term investment fund, composed of high-grade money market instruments with short maturities.
88
Non-U.S. Plans:
| Fiscal 2020 | ||||||||||||||||||||||||||||||||
| Asset Category | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Net Asset Value | |||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 36,537 | $ | 9,653 | $ | 832 | $ | — | $ | 26,052 | ||||||||||||||||||||||
| Equity Securities: | ||||||||||||||||||||||||||||||||
| UK | 8,615 | 1,747 | — | — | 6,868 | |||||||||||||||||||||||||||
| International: | ||||||||||||||||||||||||||||||||
| Developed | 110,718 | 3,076 | — | — | 107,642 | |||||||||||||||||||||||||||
| Emerging | 34,417 | 418 | — | — | 33,999 | |||||||||||||||||||||||||||
| Unquoted/Private Equity | 1,792 | 1 | — | — | 1,791 | |||||||||||||||||||||||||||
| Fixed Income: | ||||||||||||||||||||||||||||||||
| Government/Corporate: | ||||||||||||||||||||||||||||||||
| UK | 264,703 | 16,330 | — | — | 248,373 | |||||||||||||||||||||||||||
| International | 141,030 | — | — | — | 141,030 | |||||||||||||||||||||||||||
| Index Linked | 330,360 | 2,945 | — | — | 327,415 | |||||||||||||||||||||||||||
| Other | 8,296 | — | — | — | 8,296 | |||||||||||||||||||||||||||
| Convertible Bonds | 214 | — | — | — | 214 | |||||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||||||||||
| Direct | 156,588 | — | 156,588 | — | — | |||||||||||||||||||||||||||
| Indirect | 9,283 | 52 | 4,485 | — | 4,746 | |||||||||||||||||||||||||||
| Hedge Fund Strategy: | ||||||||||||||||||||||||||||||||
| Equity Long/Short | 44,097 | — | — | — | 44,097 | |||||||||||||||||||||||||||
| Arbitrage & Event | 16,594 | — | — | — | 16,594 | |||||||||||||||||||||||||||
| Directional Trading & Fixed Income | 9,721 | — | — | — | 9,721 | |||||||||||||||||||||||||||
| Cash & Other | 196,952 | — | — | — | 196,952 | |||||||||||||||||||||||||||
| Direct Sourcing | 2,397 | — | — | — | 2,397 | |||||||||||||||||||||||||||
| Leveraged Loans | 28,720 | — | — | — | 28,720 | |||||||||||||||||||||||||||
| Alternative/Other | (104,518) | 5 | — | — | (104,523) | |||||||||||||||||||||||||||
| Total | $ | 1,296,516 | $ | 34,227 | $ | 161,905 | $ | — | $ | 1,100,384 | ||||||||||||||||||||||
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| Fiscal 2019 | ||||||||||||||||||||||||||||||||
| Asset Category | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Net Asset Value | |||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 44,748 | $ | 18,142 | $ | 2,874 | $ | — | $ | 23,732 | ||||||||||||||||||||||
| Equity Securities: | ||||||||||||||||||||||||||||||||
| UK | 101,922 | 88,830 | — | — | 13,092 | |||||||||||||||||||||||||||
| International: | ||||||||||||||||||||||||||||||||
| Developed | 165,709 | 13,170 | — | — | 152,539 | |||||||||||||||||||||||||||
| Emerging | 11,653 | 650 | — | — | 11,003 | |||||||||||||||||||||||||||
| Unquoted/Private Equity | 123 | — | — | — | 123 | |||||||||||||||||||||||||||
| Fixed Income: | ||||||||||||||||||||||||||||||||
| Government/Corporate: | ||||||||||||||||||||||||||||||||
| UK | 189,513 | 14,245 | 2,867 | — | 172,401 | |||||||||||||||||||||||||||
| International | 86,208 | — | — | — | 86,208 | |||||||||||||||||||||||||||
| Index Linked | 189,463 | 2,085 | — | — | 187,378 | |||||||||||||||||||||||||||
| Other | 6,367 | — | — | — | 6,367 | |||||||||||||||||||||||||||
| Convertible Bonds | 177 | — | — | — | 177 | |||||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||||||||||
| Direct | 154,494 | — | 154,494 | — | — | |||||||||||||||||||||||||||
| Indirect | 8,155 | 137 | 7,603 | — | 415 | |||||||||||||||||||||||||||
| Hedge Fund Strategy: | ||||||||||||||||||||||||||||||||
| Equity Long/Short | 21,683 | — | — | — | 21,683 | |||||||||||||||||||||||||||
| Arbitrage & Event | 29,284 | — | — | — | 29,284 | |||||||||||||||||||||||||||
| Directional Trading & Fixed Income | 9,361 | — | — | — | 9,361 | |||||||||||||||||||||||||||
| Cash & Other | 163,058 | — | — | — | 163,058 | |||||||||||||||||||||||||||
| Direct Sourcing | 2,269 | — | — | — | 2,269 | |||||||||||||||||||||||||||
| Leveraged Loans | 21,635 | — | — | — | 21,635 | |||||||||||||||||||||||||||
| Alternative/Other | 25,359 | 1 | — | — | 25,358 | |||||||||||||||||||||||||||
| Total | $ | 1,231,181 | $ | 137,260 | $ | 167,838 | $ | — | $ | 926,083 | ||||||||||||||||||||||
The fair value of the Level 1 assets is based on observable, quoted market prices of the identical underlying security in an active market. The fair value of the Level 2 assets is primarily based on market observable inputs to quoted market prices, benchmark yields and broker/dealer quotes. Level 3 inputs, as applicable, represent unobservable inputs that reflect assumptions developed by management to measure assets at fair value.
The expected return on assets is developed in consideration of the anticipated duration of investment period for assets held by the plan, the allocation of assets in the plan, and the historical returns for plan assets.
90
Estimated future benefit payments under the plans are as follows (dollars in thousands):
| U.S. Plans | Non-U.S. Plans | ||||||||||
| 2021 | $ | 1,794 | $ | 64,476 | |||||||
| 2022 | 1,789 | 64,905 | |||||||||
| 2023 | 1,792 | 65,805 | |||||||||
| 2024 | 1,807 | 65,551 | |||||||||
| 2025 through 2030 | 11,446 | 402,537 | |||||||||
Expected contributions to the U.S. Plans and Non-U.S. Plans to be made in 2021 are $0.6 million and $4.7 million, respectively.
(b)Defined Contribution Plans
As of January 2, 2021, the company maintained two separate defined contribution 401(k) 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 maintained defined contribution plans for its UK based employees.
(12) QUARTERLY DATA (UNAUDITED)
1st | 2nd | 3rd | 4th | Total Year | ||||||||||||||||||||||||||||
| (dollars in thousands, except per share data) | ||||||||||||||||||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||||||
| Net sales | $ | 677,459 | $ | 471,977 | $ | 634,525 | $ | 729,296 | $ | 2,513,257 | ||||||||||||||||||||||
| Gross profit | 250,190 | 153,126 | 222,749 | 255,983 | 882,048 | |||||||||||||||||||||||||||
| Income from operations | 105,414 | 39,118 | 86,672 | 93,227 | 324,431 | |||||||||||||||||||||||||||
| Net earnings | $ | 73,779 | $ | 21,162 | $ | 60,516 | $ | 51,837 | $ | 207,294 | ||||||||||||||||||||||
| Basic earnings per share (1) | $ | 1.33 | $ | 0.39 | $ | 1.10 | $ | 0.94 | $ | 3.76 | ||||||||||||||||||||||
| Diluted earnings per share (1) | $ | 1.33 | $ | 0.39 | $ | 1.10 | $ | 0.94 | $ | 3.76 | ||||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||||||||||
| Net sales | $ | 686,802 | $ | 761,004 | $ | 724,014 | $ | 787,626 | $ | 2,959,446 | ||||||||||||||||||||||
| Gross profit | 257,312 | 286,479 | 270,028 | 289,678 | 1,103,497 | |||||||||||||||||||||||||||
| Income from operations | 101,061 | 139,607 | 121,345 | 152,030 | 514,043 | |||||||||||||||||||||||||||
| Net earnings | $ | 69,013 | $ | 92,210 | $ | 82,020 | $ | 108,997 | $ | 352,240 | ||||||||||||||||||||||
| Basic earnings per share (1) | $ | 1.24 | $ | 1.66 | $ | 1.47 | $ | 1.96 | $ | 6.33 | ||||||||||||||||||||||
| Diluted earnings per share (1) | $ | 1.24 | $ | 1.66 | $ | 1.47 | $ | 1.96 | $ | 6.33 | ||||||||||||||||||||||
(1)Sum of quarters may not equal the total for the year due to changes in the number of shares outstanding during the year.
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(13) RESTRUCTURING AND ACQUISITION INTEGRATION INITIATIVES
Commercial Foodservice Equipment Group:
During the fiscal years 2020, 2019 and 2018, the company undertook cost reduction initiatives related to the Commercial Foodservice Equipment Group including headcount reductions and facility consolidations. These actions resulted in expenses of $10.1 million, $6.4 million and $3.5 million in the twelve months ended January 2, 2021, December 28, 2019 and December 29, 2018 respectively, primarily for severance related to headcount reductions and facility consolidations. These expenses are reflected in restructuring expenses in the Consolidated Statements of Earnings. The realization of cost savings from the restructuring initiatives began in 2020 with an expected annual savings of approximately $20.0 million. At January 2, 2021, the restructuring obligations accrued for these initiatives are immaterial and will be substantially complete by the end of fiscal year year 2021.
Residential Kitchen Equipment Group:
During the fiscal years 2020, 2019 and 2018, the company has completed various restructuring initiatives for the AGA Group, including headcount reductions and consolidation and disposition of certain facilities and business operations. During 2018, the company undertook restructuring efforts related to Grange, a non-core business within the AGA Group, and elected to cease its operations. During fiscal 2019 and 2020, the initiatives within the AGA Group were primarily related to headcount reductions. The company recorded expense of $1.6 million, $2.3 million and $15.1 million, respectively in the years ended January 2, 2021, December 28, 2019 and December 29, 2018, respectively.
Additionally within the Residential Kitchen Equipment Group, the company incurred restructuring costs, primarily for severance related to headcount reductions and facility consolidations. The company recorded expense of $0.2 million and $1.7 million, respectively in the years ended January 2, 2021 and December 28, 2019, respectively.
These expenses are reflected in restructuring expenses in the Consolidated Statements of Earnings and no material future expenses associated with these actions are anticipated. The restructuring obligations accrued for these initiatives are immaterial and will be substantially complete by the end of fiscal year 2021.
The costs and corresponding reserve balances for restructuring within the Residential Kitchen Equipment Group are summarized as follows (in thousands):
| Severance/Benefits | Facilities/Operations | Other | Total | |||||||||||||||||||||||
| Balance as of December 30, 2017 | $ | 3,698 | $ | 1,467 | $ | 157 | $ | 5,322 | ||||||||||||||||||
| Expenses | 6,367 | 3,771 | 5,001 | 15,139 | ||||||||||||||||||||||
| Exchange Effect | (49) | (11) | 23 | (37) | ||||||||||||||||||||||
| Payments | (9,150) | (5,171) | (4,394) | (18,715) | ||||||||||||||||||||||
| Balance as of December 29, 2018 | $ | 866 | $ | 56 | $ | 787 | $ | 1,709 | ||||||||||||||||||
| Expenses | 3,766 | 684 | (476) | 3,974 | ||||||||||||||||||||||
| Exchange Effect | 24 | (7) | (55) | (38) | ||||||||||||||||||||||
| Payments/Utilization | (3,990) | (632) | (256) | (4,878) | ||||||||||||||||||||||
| Balance as of December 28, 2019 | $ | 666 | $ | 101 | $ | — | $ | 767 | ||||||||||||||||||
| Expenses | 899 | 907 | — | 1,806 | ||||||||||||||||||||||
| Exchange Effect | — | 26 | — | 26 | ||||||||||||||||||||||
| Payments/Utilization | (1,368) | (922) | — | (2,290) | ||||||||||||||||||||||
| Balance as of January 2, 2021 | $ | 197 | $ | 112 | $ | — | $ | 309 | ||||||||||||||||||
The restructuring expenses for the other segment of the company were not material during fiscal years 2020, 2019 and 2018.
In December 2020, the company recorded an impairment of approximately $2.9 million associated to reflect the fair market value of assets held for sale of a non-core business within the Residential Kitchen Equipment Group. This charge was reflected in impairments in the Consolidated Statements of Earnings. As a result approximately $17.4 million of current assets have been classified as held for sale, within prepaid expenses and other current assets and approximately $22.3 million of liabilities have been classified as held for sale within accrued expenses on the Consolidated Balance Sheets.
92
THE MIDDLEBY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED JANUARY 2, 2021, DECEMBER 28, 2019
AND December 29, 2018
(amounts in thousands)
| Balance Beginning Of Period | Additions/ (Recoveries) Charged to Expense | Other Adjustments (1) | Write-Offs During the Period | Balance At End Of Period | |||||||||||||||||||||||||
| Allowance for doubtful accounts; deducted from accounts receivable on the balance sheets- | |||||||||||||||||||||||||||||
| 2020 | $ | 14,886 | $ | 6,868 | $ | 1,239 | $ | (3,768) | $ | 19,225 | |||||||||||||||||||
| 2019 | $ | 13,608 | $ | 1,941 | $ | 2,009 | $ | (2,672) | $ | 14,886 | |||||||||||||||||||
| 2018 | $ | 13,182 | $ | 3,160 | $ | 1,121 | $ | (3,855) | $ | 13,608 | |||||||||||||||||||
(1) Amounts consist primarily of valuation allowances assumed from acquired companies.
| Balance Beginning Of Period | Additions/ (Recoveries) Charged to Expense | Write-Offs During the Period | Balance At End Of Period | ||||||||||||||||||||
| Valuation allowance - Deferred tax assets | |||||||||||||||||||||||
| 2020 | $ | 7,754 | $ | 3,977 | $ | — | $ | 11,731 | |||||||||||||||
| 2019 | $ | 26,023 | $ | 129 | $ | (18,398) | $ | 7,754 | |||||||||||||||
| 2018 | $ | 23,190 | $ | 2,833 | $ | — | $ | 26,023 | |||||||||||||||
93
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report 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.
The company carried out an evaluation, under the supervision and with the participation of the company's management, including the company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures as of January 2, 2021. 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.
Changes in Internal Control Over Financial Reporting
During the quarter ended January 2, 2021, there have been no changes in the company's internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting.
94
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i)pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and
(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Our assessment of the internal control structure excluded RAM (acquired January 13, 2020), Deutsche (acquired March 2, 2020), Wild Goose (acquired December 8, 2020) and United Foodservice Equipment Zhuhai (acquired December 21, 2020).
These acquisitions constitute 0.0% and 2.7% of net and total assets, respectively, 0.6% of net sales and (3.1)% of net income of the consolidated financial statements of the Company as of and for the year ended January 2, 2021. These acquisitions are included in the consolidated financial statements of the company as of and for the year ended January 2, 2021. Under guidelines established by the Securities Exchange Commission, companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired companies.
Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 2, 2021.
Ernst & Young LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of the company included in this report, has issued an attestation report on the effectiveness of the company's internal control over financial reporting as of January 2, 2021.
The Middleby Corporation
March 3, 2021
95
Item 9B. Other Information
On February 26, 2021, the company’s Board of Directors approved the Fourth Amended and Restated Bylaws (“ Bylaws”), which remove the requirements to elect a President and that the Chairman of the Board of Directors and Chief Executive Officer positions be held by the same individual.
The foregoing description of these amendments is qualified in its entirety by reference to the full text of the Bylaws, a copy of which is attached hereto as Exhibit 3.2 and incorporated herein by reference.
PART III
Pursuant to General Instruction G (3), of Form 10-K, the information called for by Part III Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence) and Item 14 (Principal Accountant Fees and Services), is incorporated herein by reference from the registrant’s definitive proxy statement filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.
96
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
The financial statements listed on Page 49 are filed as part of this Form 10-K.
3. Exhibits
3.2 Forth Amended and Restated Bylaws of The Middleby Corporation (effective as of February 26, 2021).
4.1 Certificate of Designations dated October 30, 1987, and specimen stock certificate relating to the company Preferred Stock, incorporated by reference from the company’s Form 10-K, Exhibit (4), for the fiscal year ended December 31, 1988, filed on March 15, 1989.
4.4 Description of the Company's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.
10.1 Seventh Amended and Restated Credit Agreement, dated as of January 31, 2020, among Middleby Marshall Inc., The Middleby Corporation, the Subsidiary Borrowers named therein, the lenders named therein and Bank of America, N.A., as administrative agent for the lenders, incorporated by reference to the company's Form 8-K, Exhibit 10.1, filed on February 3, 2020.
97
10.16* Form of Restricted Stock Unit Award Agreement for The Middleby Corporation 2011 Long-Term Incentive Plan, incorporated by reference to the company's Form 8-K Exhibit 10.1, dated December 31, 2020, filed on January 5, 2021.
101 Financial statements on Form 10-K for the year ended January 2, 2021, filed on March 3, 2021, formatted in Extensive Business Reporting Language (XBRL); (i) consolidated balance sheets, (ii) consolidated statements of earnings, (iii) consolidated statements of cash flows, (iv) notes to the consolidated financial statements.
104 Cover Page Interactive Data File (formatted as Inline Extensive Business Reporting Language (iXBRL) and contained in Exhibit 101).
* Designates management contract or compensation plan.
(c)See the financial statement schedule included under Item 8.
98
Item 16. Form 10-K Summary
None
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on the 3rd day of March 2021.
THE MIDDLEBY CORPORATION
| BY: | /s/ Bryan E. Mittelman | |||||||
| Bryan E. Mittelman | ||||||||
| Chief Financial Officer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 3, 2021.
| Signatures | Title | |||||||
| PRINCIPAL EXECUTIVE OFFICER | ||||||||
| /s/ Timothy J. FitzGerald | Chief Executive Officer and Director | |||||||
| Timothy J. FitzGerald | ||||||||
| PRINCIPAL FINANCIAL AND | ||||||||
| ACCOUNTING OFFICER | ||||||||
| /s/ Bryan E. Mittelman | Chief Financial Officer, | |||||||
| Bryan E. Mittelman | Principal Financial Officer and | |||||||
| Principal Accounting Officer | ||||||||
| DIRECTORS | ||||||||
| /s/ Gordon O'Brien | Chairman of the Board, Director | |||||||
| Gordon O'Brien | ||||||||
| /s/ Sarah Palisi Chapin | Director | |||||||
| Sarah Palisi Chapin | ||||||||
| /s/ Cathy L. McCarthy | Director | |||||||
| Cathy L. McCarthy | ||||||||
| /s/ John R. Miller, III | Director | |||||||
| John R. Miller, III | ||||||||
| /s/ Robert Nerbonne | Director | |||||||
| Robert Nerbonne | ||||||||
| /s/ Nassem Ziyad | Director | |||||||
| Nassem Ziyad | ||||||||
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