MIDDLEBY Corp - Quarter Report: 2022 April (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the quarterly period ended April 2, 2022
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 | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically 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 x No o
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 the definitions 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 | MIDD | Nasdaq Global Select Market | ||||||
As of May 6, 2022, there were 54,389,831 shares of the registrant's common stock outstanding.
THE MIDDLEBY CORPORATION
QUARTER ENDED APRIL 2, 2022
INDEX
| DESCRIPTION | PAGE | |||||||
| PART I. FINANCIAL INFORMATION | ||||||||
| Item 1. | ||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS as of APRIL 2, 2022 and JANUARY 1, 2022 | ||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME for the three months ended APRIL 2, 2022 and APRIL 3, 2021 | ||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY for the three months ended APRIL 2, 2022 and APRIL 3, 2021 | ||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the three months ended APRIL 2, 2022 and APRIL 3, 2021 | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. OTHER INFORMATION | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
| ASSETS | Apr 2, 2022 | Jan 1, 2022 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 146,676 | $ | 180,362 | |||||||
Accounts receivable, net of reserve for doubtful accounts of $17,436 and $18,770 | 629,855 | 577,142 | |||||||||
| Inventories, net | 924,763 | 837,418 | |||||||||
| Prepaid expenses and other | 108,721 | 92,269 | |||||||||
| Prepaid taxes | 13,805 | 19,894 | |||||||||
| Total current assets | 1,823,820 | 1,707,085 | |||||||||
Property, plant and equipment, net of accumulated depreciation of $272,725 and $266,203 | 382,574 | 380,980 | |||||||||
| Goodwill | 2,236,441 | 2,243,469 | |||||||||
Other intangibles, net of amortization of $475,930 and $442,208 | 1,835,157 | 1,875,377 | |||||||||
| Long-term deferred tax assets | 30,621 | 33,194 | |||||||||
| Other assets | 165,552 | 143,493 | |||||||||
| Total assets | $ | 6,474,165 | $ | 6,383,598 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current maturities of long-term debt | $ | 27,693 | $ | 27,293 | |||||||
| Accounts payable | 305,344 | 304,740 | |||||||||
| Accrued expenses | 585,364 | 582,855 | |||||||||
| Total current liabilities | 918,401 | 914,888 | |||||||||
| Long-term debt | 2,570,132 | 2,387,001 | |||||||||
| Long-term deferred tax liability | 200,500 | 186,935 | |||||||||
| Accrued pension benefits | 202,945 | 219,680 | |||||||||
| Other non-current liabilities | 154,220 | 180,818 | |||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none issued | — | — | |||||||||
Common stock, $0.01 par value; 63,509,015 and 63,666,020 shares issued in 2022 and 2021, respectively | 147 | 147 | |||||||||
| Paid-in capital | 363,741 | 357,309 | |||||||||
Treasury stock, at cost; 9,117,274 and 8,170,276 shares in 2022 and 2021 | (736,412) | (566,399) | |||||||||
| Retained earnings | 3,148,058 | 3,062,303 | |||||||||
| Accumulated other comprehensive loss | (347,567) | (359,084) | |||||||||
| Total stockholders' equity | 2,427,967 | 2,494,276 | |||||||||
| Total liabilities and stockholders' equity | $ | 6,474,165 | $ | 6,383,598 | |||||||
See accompanying notes
1
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
| Three Months Ended | |||||||||||
| Apr 2, 2022 | Apr 3, 2021 | ||||||||||
| Net sales | $ | 994,676 | $ | 758,058 | |||||||
| Cost of sales | 664,166 | 482,184 | |||||||||
| Gross profit | 330,510 | 275,874 | |||||||||
| Selling, general and administrative expenses | 206,071 | 154,957 | |||||||||
| Restructuring expenses | 1,875 | 794 | |||||||||
| Gain on sale of plant | — | (1,050) | |||||||||
| Income from operations | 122,564 | 121,173 | |||||||||
| Interest expense and deferred financing amortization, net | 17,654 | 16,067 | |||||||||
| Net periodic pension benefit (other than service costs) | (11,516) | (11,373) | |||||||||
| Other expense (income), net | 4,061 | (1,691) | |||||||||
| Earnings before income taxes | 112,365 | 118,170 | |||||||||
| Provision for income taxes | 26,610 | 28,907 | |||||||||
| Net earnings | $ | 85,755 | $ | 89,263 | |||||||
| Net earnings per share: | |||||||||||
| Basic | $ | 1.57 | $ | 1.62 | |||||||
| Diluted | $ | 1.52 | $ | 1.59 | |||||||
| Weighted average number of shares | |||||||||||
| Basic | 54,669 | 55,213 | |||||||||
| Dilutive common stock equivalents | 1,694 | 753 | |||||||||
| Diluted | 56,363 | 55,966 | |||||||||
| Comprehensive income | $ | 97,272 | $ | 87,091 | |||||||
See accompanying notes
2
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(amounts in thousands)
(Unaudited)
| Common Stock | Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income/(loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | $ | 147 | $ | 357,309 | $ | (566,399) | $ | 3,062,303 | $ | (359,084) | $ | 2,494,276 | |||||||||||||||||||||||
| Net earnings | — | — | — | 85,755 | — | 85,755 | |||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | (27,191) | (27,191) | |||||||||||||||||||||||||||||
Change in unrecognized pension benefit costs, net of tax of $987 | — | — | — | — | 6,244 | 6,244 | |||||||||||||||||||||||||||||
Unrealized gain on interest rate swap, net of tax of $10,892 | — | — | — | — | 31,116 | 31,116 | |||||||||||||||||||||||||||||
Unrealized gain on certain investments, net of tax of $449 | — | — | — | — | 1,348 | 1,348 | |||||||||||||||||||||||||||||
| Stock compensation | — | 13,723 | — | — | — | 13,723 | |||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | (170,013) | — | — | (170,013) | |||||||||||||||||||||||||||||
Purchase of capped calls, net of tax of $(2,364) | — | (7,291) | — | — | — | (7,291) | |||||||||||||||||||||||||||||
| Balance, April 2, 2022 | $ | 147 | $ | 363,741 | $ | (736,412) | $ | 3,148,058 | $ | (347,567) | $ | 2,427,967 | |||||||||||||||||||||||
| Common Stock | Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income/(loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Balance, January 2, 2021 | $ | 147 | $ | 433,308 | $ | (537,134) | $ | 2,568,756 | $ | (488,428) | $ | 1,976,649 | |||||||||||||||||||||||
| Net earnings | — | — | — | 89,263 | — | 89,263 | |||||||||||||||||||||||||||||
Adoption of 2020-06 (1) | — | (79,430) | — | 5,055 | — | (74,375) | |||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | (10,614) | (10,614) | |||||||||||||||||||||||||||||
Change in unrecognized pension benefit costs, net of tax of $(877) | — | — | — | — | (3,970) | (3,970) | |||||||||||||||||||||||||||||
Unrealized gain on interest rate swap, net of tax of $4,327 | — | — | — | — | 12,412 | 12,412 | |||||||||||||||||||||||||||||
| Stock compensation | — | 7,609 | — | — | — | 7,609 | |||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | (1,762) | — | — | (1,762) | |||||||||||||||||||||||||||||
| Balance, April 3, 2021 | $ | 147 | $ | 361,487 | $ | (538,896) | $ | 2,663,074 | $ | (490,600) | $ | 1,995,212 | |||||||||||||||||||||||
(1) As of January 3, 2021 the company adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity using the modified retrospective method. The adoption of this guidance resulted in a $79.4 million reduction to paid-in capital, net of tax of $25.5 million, and the recognition of $5.1 million as an adjustment to the opening balance of retained earnings, net of tax of $1.6 million.
See accompanying notes
3
THE MIDDLEBY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| Apr 2, 2022 | Apr 3, 2021 | ||||||||||
| Cash flows from operating activities-- | |||||||||||
| Net earnings | $ | 85,755 | $ | 89,263 | |||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities-- | |||||||||||
| Depreciation and amortization | 46,742 | 30,432 | |||||||||
| Non-cash share-based compensation | 13,723 | 7,609 | |||||||||
| Deferred income taxes | 8,586 | 1,913 | |||||||||
| Net periodic pension benefit (other than service costs) | (11,516) | (11,373) | |||||||||
| Gain on sale of plant | — | (1,050) | |||||||||
| Other non-cash items | (6,173) | — | |||||||||
| Changes in assets and liabilities, net of acquisitions | |||||||||||
| Accounts receivable, net | (55,305) | (66,666) | |||||||||
| Inventories, net | (88,474) | (33,266) | |||||||||
| Prepaid expenses and other assets | (3,926) | 27,407 | |||||||||
| Accounts payable | 1,235 | 31,662 | |||||||||
| Accrued expenses and other liabilities | (5,991) | (16,236) | |||||||||
| Net cash (used in) provided by operating activities | (15,344) | 59,695 | |||||||||
| Cash flows from investing activities-- | |||||||||||
| Net additions to property, plant and equipment | (14,497) | (8,725) | |||||||||
| Proceeds on sale of property, plant and equipment | — | 3,354 | |||||||||
| Purchase of intangible assets | (240) | — | |||||||||
| Acquisitions, net of cash acquired | (9,389) | (1,667) | |||||||||
| Net cash used in investing activities | (24,126) | (7,038) | |||||||||
| Cash flows from financing activities-- | |||||||||||
| Proceeds under Credit Facility | 365,000 | 18,995 | |||||||||
| Repayments under Credit Facility | (177,250) | (23,683) | |||||||||
| Premiums paid for capped call | (9,655) | — | |||||||||
| Net proceeds (repayments) under international credit facilities | 756 | (1,757) | |||||||||
| Repurchase of treasury stock | (170,013) | (1,762) | |||||||||
| Other, net | (117) | (78) | |||||||||
| Net cash provided by (used in) financing activities | 8,721 | (8,285) | |||||||||
| Effect of exchange rates on cash and cash equivalents | (2,937) | (3,144) | |||||||||
| Changes in cash and cash equivalents-- | |||||||||||
| Net (decrease) increase in cash and cash equivalents | (33,686) | 41,228 | |||||||||
| Cash and cash equivalents at beginning of year | 180,362 | 268,103 | |||||||||
| Cash and cash equivalents at end of period | $ | 146,676 | $ | 309,331 | |||||||
See accompanying notes
4
THE MIDDLEBY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 2, 2022
(Unaudited)
1)Summary of Significant Accounting Policies
a)Basis of Presentation
The condensed consolidated financial statements have been prepared by The Middleby Corporation (the "company" or “Middleby”), pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements are unaudited and certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information not misleading. These financial statements should be read in conjunction with the financial statements and related notes contained in the company's 2021 Form 10-K. The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2022.
In the opinion of management, the financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position of the company as of April 2, 2022 and January 1, 2022, the results of operations for the three months ended April 2, 2022 and April 3, 2021, cash flows for the three months ended April 2, 2022 and April 3, 2021 and statement of stockholders' equity for the three months ended April 2, 2022 and April 3, 2021.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long-lived and intangible assets, warranty reserves, insurance reserves, income tax reserves, non-cash share-based compensation and post-retirement obligations. Actual results could differ from the company's estimates.
b)Non-Cash Share-Based Compensation
The company estimates the fair value of market-based stock awards and stock options at the time of grant and recognizes compensation cost over the vesting period of the awards and options. Non-cash share-based compensation expense was $13.7 million and $7.6 million for the three months period ended April 2, 2022 and April 3, 2021, respectively.
c)Income Taxes
A tax provision of $26.6 million, at an effective rate of 23.7%, was recorded during the three months period ended April 2, 2022, as compared to a $28.9 million tax provision at a 24.5% effective rate in the prior year period. The effective tax rate for the three months period ended April 2, 2022 is lower than the comparable year rate primarily due to excess tax benefits from share-based compensation award vesting.
5
d)Fair Value Measures
Accounting Standards Codification ("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 the company's own assumptions.
The company’s financial assets and liabilities that are measured at fair value and are categorized using the fair value hierarchy are as follows (in thousands):
| Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | Total | ||||||||||||||||||||
| As of April 2, 2022 | |||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | 26,124 | $ | — | $ | 26,124 | |||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | 2,106 | $ | — | $ | 2,106 | |||||||||||||||
| Contingent consideration | $ | — | $ | — | $ | 35,108 | $ | 35,108 | |||||||||||||||
| Foreign exchange derivative contracts | $ | — | $ | 3,033 | $ | — | $ | 3,033 | |||||||||||||||
| As of January 1, 2022 | |||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | 3,645 | $ | — | $ | 3,645 | |||||||||||||||
| Foreign exchange derivative contracts | $ | — | $ | 1,095 | $ | — | $ | 1,095 | |||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | 21,635 | $ | — | $ | 21,635 | |||||||||||||||
| Contingent consideration | $ | — | $ | — | $ | 34,983 | $ | 34,983 | |||||||||||||||
The contingent consideration as of April 2, 2022 and January 1, 2022, 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 agreement. On a quarterly basis, the company assesses the projected results for each acquired business in comparison to the earnout targets and adjusts the liability accordingly.
e) Consolidated Statements of Cash Flows
Cash paid for interest was $18.1 million and $16.6 million for the three months ended April 2, 2022 and April 3, 2021, respectively. Cash payments totaling $7.9 million and $12.8 million were made for income taxes for the three months ended April 2, 2022 and April 3, 2021, respectively.
6
f) 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 vesting of restricted stock grants computed using the treasury method and amounted to 5,653 and 8,269 for the three months ended April 2, 2022, and April 3, 2021, respectively. For the three months ended April 2, 2022 and April 3, 2021, the average market price of the company's common stock exceeded the exercise price of the Convertible Notes (as defined below) resulting in 1,688,402 and 744,334 diluted common stock equivalents to be included in the diluted net earnings per share, respectively. There have been no conversions to date. See Note 12, Financing Arrangements for further details on the Convertible Notes. There were no anti-dilutive restricted stock grants excluded from common stock equivalents in any period presented.
7
2) Acquisitions and Purchase Accounting
The company accounts for all business combinations using the acquisition method to record a new cost basis for the assets acquired and liabilities assumed. The difference between the purchase price and the fair value of the assets acquired and liabilities assumed has been recorded as goodwill in the financial statements. The company recognizes identifiable intangible assets, primarily trade names and customer relationships, at their fair value using a discounted cash flow model. The significant assumptions used to estimate the value of the intangible assets include revenue growth rates, projected profit margins, discount rates, royalty rates, and customer attrition rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions. The results of operations are reflected in the consolidated financial statements of the company from the dates of acquisition.
The company completed no material acquisitions during the three months ended April 2, 2022.
Novy Invest NV
On July 12, 2021, the company completed its acquisition of all of the capital stock of Novy Invest NV ("Novy"), a leading manufacturer of premium residential ventilation hoods and cook tops located in Belgium, for a purchase price of approximately $250.9 million, net of cash acquired.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair values of assets acquired and liabilities assumed (in thousands):
| Preliminary Opening Balance Sheet | Preliminary Measurement Period Adjustments | Adjusted Opening Balance Sheet | |||||||||||||||
| Cash | $ | 16,152 | $ | — | $ | 16,152 | |||||||||||
| Current assets | 23,762 | 328 | 24,090 | ||||||||||||||
| Property, plant and equipment | 17,058 | (969) | 16,089 | ||||||||||||||
| Goodwill | 142,741 | (17,414) | 125,327 | ||||||||||||||
| Other intangibles | 126,557 | 22,966 | 149,523 | ||||||||||||||
| Other assets | 26 | 173 | 199 | ||||||||||||||
| Current liabilities | (23,440) | 591 | (22,849) | ||||||||||||||
| Long-term deferred tax liability | (33,918) | (5,482) | (39,400) | ||||||||||||||
| Other non-current liabilities | (1,930) | (193) | (2,123) | ||||||||||||||
| Net assets acquired and liabilities assumed | $ | 267,008 | $ | — | $ | 267,008 | |||||||||||
The long-term deferred tax liability amounted to $39.4 million. The deferred tax liability is comprised of $37.4 million related to the difference between the book and tax basis of identifiable intangible assets and $2.0 million related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $105.7 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $40.0 million allocated to customer relationships, $2.7 million allocated to developed technology and $1.1 million allocated to backlog, which are being amortized over periods of 7 years, 7 years, and 3 months, respectively. Goodwill of $125.3 million and other intangibles of $149.5 million from this acquisition are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Goodwill and other intangibles are not expected to be deductible for tax purposes.
The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the company is waiting for additional information necessary to finalize those fair values for all acquisitions completed during 2021. The intangible assets are pending external valuation and are preliminarily valued using historical information from the Residential Kitchen Equipment Group and qualitative assessment of the business at acquisition date. Specifically, the company estimated the fair values of the intangible assets based on the percentage of purchase price assigned to similar intangible assets in previous acquisitions. Thus, the provisional measurements of fair values 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.
8
Kamado Joe and Masterbuilt
On December 27, 2021, the company completed its acquisition of Masterbuilt Holdings, LLC, including its residential outdoor brands ("Kamado Joe and Masterbuilt"), a leader in outdoor residential cooking located in the Atlanta, Georgia area, for a purchase price of approximately $400.8 million, net of cash acquired. The purchase price was comprised of $403.6 million in cash and 12,921 shares of Middleby common stock valued at $2.5 million. The purchase price is subject to adjustment as provided in the purchase agreement. The company expects to finalize this adjustment in the second quarter of 2022.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair values of assets acquired and liabilities assumed (in thousands):
| Preliminary Opening Balance Sheet | Preliminary Measurement Period Adjustments | Adjusted Opening Balance Sheet | |||||||||||||||
| Cash | $ | 5,381 | $ | (70) | $ | 5,311 | |||||||||||
| Current assets | 137,826 | (1,964) | 135,862 | ||||||||||||||
| Property, plant and equipment | 7,773 | — | 7,773 | ||||||||||||||
| Goodwill | 110,052 | 4,746 | 114,798 | ||||||||||||||
| Other intangibles | 215,577 | — | 215,577 | ||||||||||||||
| Other assets | 2,143 | — | 2,143 | ||||||||||||||
| Current liabilities | (54,865) | (2,747) | (57,612) | ||||||||||||||
| Long-term deferred tax liability | (15,907) | — | (15,907) | ||||||||||||||
| Other non-current liabilities | (1,914) | 35 | (1,879) | ||||||||||||||
| Net assets acquired and liabilities assumed | $ | 406,066 | $ | — | $ | 406,066 | |||||||||||
The long-term deferred tax liability amounted to $15.9 million. The net deferred tax liability is comprised of $2.3 million of deferred tax asset related to tax loss carryforwards and $18.2 million of deferred tax liability related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $158.8 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $50.3 million allocated to customer relationships and $6.5 million allocated to backlog, which are being amortized over periods of 7 years and 3 months, respectively. Goodwill of $114.8 million and other intangibles of $215.6 million of the company are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Of these assets, goodwill of $71.7 million and intangibles of $164.3 million are expected to be deductible for tax purposes.
The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the company is waiting for additional information necessary to finalize those fair values for all acquisitions completed during 2021. The intangible assets are pending external valuation and are preliminarily valued using historical information from the Residential Kitchen Equipment Group and qualitative assessment of the business at acquisition date. Specifically, the company estimated the fair values of the intangible assets based on the percentage of purchase price assigned to similar intangible assets in previous acquisitions. Thus, the provisional measurements of fair values 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.
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Other 2021 Acquisitions
During the year ended January 1, 2022, the company 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 other 2021 acquisitions and are summarized as follows (in thousands):
| Preliminary Opening Balance Sheet | Preliminary Measurement Period Adjustments | Adjusted Opening Balance Sheet | |||||||||||||||
| Cash | $ | 6,414 | $ | — | $ | 6,414 | |||||||||||
| Current assets | 76,077 | 726 | 76,803 | ||||||||||||||
| Property, plant and equipment | 19,561 | (187) | 19,374 | ||||||||||||||
| Goodwill | 85,270 | 9,514 | 94,784 | ||||||||||||||
| Other intangibles | 158,725 | (9,193) | 149,532 | ||||||||||||||
| Other assets | 2,101 | 31 | 2,132 | ||||||||||||||
| Current liabilities | (33,910) | 144 | (33,766) | ||||||||||||||
| Long-term deferred tax asset (liability) | (3,010) | 3,381 | 371 | ||||||||||||||
| Other non-current liabilities | (7,092) | (3,397) | (10,489) | ||||||||||||||
| Consideration paid at closing | $ | 304,136 | $ | 1,019 | $ | 305,155 | |||||||||||
| Contingent consideration | 9,404 | — | 9,404 | ||||||||||||||
| Net assets acquired and liabilities assumed | $ | 313,540 | $ | 1,019 | $ | 314,559 | |||||||||||
The long-term deferred tax asset amounted to $0.4 million. The net deferred tax asset is comprised of $0.7 million of deferred tax asset related to tax loss carryforwards and $0.3 million of deferred tax liability related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.
The goodwill and $97.1 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $41.1 million allocated to customer relationships, $3.4 million allocated to developed technology, and $7.9 million allocated to backlog, which are being amortized over periods of 7 years, 7 years, and 3 months, respectively. Goodwill of $30.0 million and other intangibles of $89.0 million are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Goodwill of $64.8 million and other intangibles of $60.6 million are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. Of these assets, goodwill of $92.8 million and intangibles of $148.4 million are expected to be deductible for tax purposes.
One purchase agreement includes earnout provisions providing for contingent payments due to the sellers to the extent certain financial targets are exceeded and upon the achievement of product rollout targets. One earnout is payable upon the achievement of product rollout targets. The second earnout is payable during 2026 if the company exceeds certain earnings targets. The contractual obligation associated with the contingent earnout provisions recognized on the acquisition date amount to $9.4 million.
The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the company is waiting for additional information necessary to finalize those fair values for all acquisitions completed during 2021. Certain intangible assets are pending external valuation and are preliminarily valued using historical information from the Residential Kitchen Equipment Group and Commercial Foodservice Equipment Group and qualitative assessments of the individual businesses at acquisition date. Specifically, the company estimated the fair values of the intangible assets based on the percentage of purchase price assigned to similar intangible assets in previous acquisitions. Thus, the provisional measurements of fair values 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.
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Pro Forma Financial Information
The following unaudited pro forma results of operations for the three months ended April 2, 2022 and April 3, 2021, assumes the 2021 and 2022 acquisitions described above were completed on January 3, 2021 (first day of fiscal year 2021). The 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):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Net sales | $ | 994,676 | $ | 887,876 | |||||||
| Net earnings | 112,840 | 66,300 | |||||||||
| Net earnings per share: | |||||||||||
| Basic | $ | 2.06 | $ | 1.20 | |||||||
| Diluted | $ | 2.00 | $ | 1.18 | |||||||
The historical consolidated financial information of the company and the acquisitions have been adjusted in the pro forma information to give effect to 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) Litigation Matters
From time to time, the company is subject to proceedings, lawsuits and other claims related to products, suppliers, employees, customers and competitors. The company maintains insurance to partially cover product liability, workers compensation, property and casualty, and general liability matters. The company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after assessment of each matter and the related insurance coverage. The required accrual may change in the future due to new developments or changes in approach such as a change in settlement strategy in dealing with these matters. The company does not believe that any pending litigation will have a material effect on its financial condition, results of operations or cash flows.
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4) Recently Issued Accounting Standards
Accounting Pronouncements - Recently Adopted
On May 3, 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The company adopted this standard in the first quarter of 2022 and it did not have a material impact on its Consolidated Financial Statements and disclosures.
Accounting Pronouncements - To be adopted
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The new standard is effective for the company on January 2, 2022 and only impacts annual financial statement footnote disclosures. The company is currently evaluating the impacts the adoption of this guidance will have on its Consolidated Financial Statements and disclosures.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance for troubled debt restructurings by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current-period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The standard should be applied prospectively, and it allows for a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The company is currently evaluating the impacts the adoption of this guidance will have on its Consolidated Financial Statements and disclosures.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. The new standard expands and clarifies the use of the portfolio layer method for fair value hedges of interest rate risk. The new standard allows non-prepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The new guidance on hedging multiple layers in a closed portfolio should be applied prospectively and the guidance on the accounting for fair value basis adjustments should be applied on a modified retrospective basis. The company is currently evaluating the impacts the adoption of this guidance will have on its Consolidated Financial Statements and disclosures.
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5) Revenue Recognition
Disaggregation of Revenue
The company disaggregates its net sales by reportable operating segment and geographical location as the company believes it best depicts how the nature, timing and uncertainty of its 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 the company's long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. The following table summarizes the company's net sales by reportable operating segment and geographical location (in thousands):
| Commercial Foodservice | Food Processing | Residential Kitchen | Total | ||||||||||||||||||||
| Three Months Ended April 2, 2022 | |||||||||||||||||||||||
| United States and Canada | $ | 374,909 | $ | 94,797 | $ | 229,599 | $ | 699,305 | |||||||||||||||
| Asia | 52,016 | 3,743 | 6,005 | 61,764 | |||||||||||||||||||
| Europe and Middle East | 100,291 | 14,200 | 93,583 | 208,074 | |||||||||||||||||||
| Latin America | 16,437 | 7,203 | 1,893 | 25,533 | |||||||||||||||||||
| Total | $ | 543,653 | $ | 119,943 | $ | 331,080 | $ | 994,676 | |||||||||||||||
| Three Months Ended April 3, 2021 | |||||||||||||||||||||||
| United States and Canada | $ | 338,837 | $ | 79,650 | $ | 108,574 | $ | 527,061 | |||||||||||||||
| Asia | 49,719 | 4,003 | 3,032 | 56,754 | |||||||||||||||||||
| Europe and Middle East | 82,017 | 20,425 | 51,844 | 154,286 | |||||||||||||||||||
| Latin America | 10,582 | 8,416 | 959 | 19,957 | |||||||||||||||||||
| Total | $ | 481,155 | $ | 112,494 | $ | 164,409 | $ | 758,058 | |||||||||||||||
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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 Condensed Consolidated Balance Sheet. Contract assets are transferred to receivables when the right to consideration becomes unconditional. Accounts receivable are not considered contract assets under the revenue standard as contract assets are conditioned upon the company's future satisfaction of a performance obligation. Accounts receivable, in contracts, are unconditional rights to consideration.
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 Condensed Consolidated Balance Sheet. Non-current contract liabilities are recorded in other non-current liabilities in the Condensed 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):
| Apr 2, 2022 | Jan 1, 2022 | ||||||||||
| Contract assets | $ | 34,012 | $ | 21,592 | |||||||
| Contract liabilities | $ | 160,204 | $ | 133,315 | |||||||
| Non-current contract liabilities | $ | 11,089 | $ | 11,602 | |||||||
During the three months period ended April 2, 2022, the company reclassified $4.8 million to receivables, which was included in the contract asset balance at the beginning of the period. During the three months period ended April 2, 2022, the company recognized revenue of $79.6 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 $119.9 million during the three months period ended April 2, 2022. Substantially, all of the company's outstanding performance obligations will be satisfied within 12 to 36 months. There were no contract asset impairments during the three months period ended April 2, 2022.
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6) Other Comprehensive Income
The company reports changes in equity during a period, except those resulting from investments by owners and distributions to owners, in accordance with ASC 220, "Comprehensive Income".
Changes in accumulated other comprehensive income(1) were as follows (in thousands):
| Currency Translation Adjustment | Pension Benefit Costs | Unrealized Gain/(Loss) Interest Rate Swap | Unrealized Gain Certain Investments | Total | |||||||||||||||||||||||||
| Balance as of January 1, 2022 | $ | (97,654) | $ | (249,696) | $ | (13,064) | $ | 1,330 | $ | (359,084) | |||||||||||||||||||
| Other comprehensive income before reclassification | (27,191) | 6,244 | 27,155 | 1,348 | 7,556 | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | — | 3,961 | — | 3,961 | ||||||||||||||||||||||||
| Net current-period other comprehensive income | $ | (27,191) | $ | 6,244 | $ | 31,116 | 1,348 | $ | 11,517 | ||||||||||||||||||||
| Balance as of April 2, 2022 | $ | (124,845) | $ | (243,452) | $ | 18,052 | 2,678 | $ | (347,567) | ||||||||||||||||||||
| Balance as of January 2, 2021 | $ | (49,961) | $ | (400,919) | $ | (37,548) | $ | — | $ | (488,428) | |||||||||||||||||||
| Other comprehensive income before reclassification | (10,614) | (3,970) | 7,389 | — | (7,195) | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | — | 5,023 | — | 5,023 | ||||||||||||||||||||||||
| Net current-period other comprehensive income | $ | (10,614) | $ | (3,970) | $ | 12,412 | $ | — | $ | (2,172) | |||||||||||||||||||
| Balance as of April 3, 2021 | $ | (60,575) | $ | (404,889) | $ | (25,136) | $ | — | $ | (490,600) | |||||||||||||||||||
(1) As of April 2, 2022, pension, interest rate swap, and gain on investment amounts are net of tax of $(38.5) million, $6.4 million, and $0.9 million, respectively. During the three months ended April 2, 2022, the adjustments to pension, interest rate swap, and gain on investments were net of tax of $1.0 million, $10.9 million, and $0.5 million, respectively. As of April 3, 2021 pension and interest rate swap amounts are net of tax of $(90.0) million and $(8.8) million, respectively. During the three months ended April 3, 2021, the adjustments to pension benefit costs and unrealized gain/(loss) interest rate swap were net of tax of $(0.9) million and $4.3 million, respectively.
Components of other comprehensive income were as follows (in thousands):
| Three Months Ended | |||||||||||
| Apr 2, 2022 | Apr 3, 2021 | ||||||||||
| Net earnings | $ | 85,755 | $ | 89,263 | |||||||
| Currency translation adjustment | (27,191) | (10,614) | |||||||||
| Pension liability adjustment, net of tax | 6,244 | (3,970) | |||||||||
| Unrealized gain on interest rate swaps, net of tax | 31,116 | 12,412 | |||||||||
| Unrealized gain on certain investments, net of tax | 1,348 | — | |||||||||
| Comprehensive income | $ | 97,272 | $ | 87,091 | |||||||
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7) 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 April 2, 2022 and January 1, 2022 are as follows (in thousands):
| Apr 2, 2022 | Jan 1, 2022 | ||||||||||
| Raw materials and parts | $ | 491,213 | $ | 421,361 | |||||||
| Work-in-process | 74,325 | 65,581 | |||||||||
| Finished goods | 359,225 | 350,476 | |||||||||
| $ | 924,763 | $ | 837,418 | ||||||||
8) Goodwill
Changes in the carrying amount of goodwill for the three months ended April 2, 2022 are as follows (in thousands):
| Commercial Foodservice | Food Processing | Residential Kitchen | Total | ||||||||||||||||||||
| Balance as of January 1, 2022 | $ | 1,285,087 | $ | 250,715 | $ | 707,667 | $ | 2,243,469 | |||||||||||||||
| Goodwill acquired during the year | 1,764 | — | — | 1,764 | |||||||||||||||||||
| Measurement period adjustments to goodwill acquired in prior year | 980 | — | 3,909 | 4,889 | |||||||||||||||||||
| Exchange effect | (3,014) | (1,045) | (9,622) | (13,681) | |||||||||||||||||||
| Balance as of April 2, 2022 | $ | 1,284,817 | $ | 249,670 | $ | 701,954 | $ | 2,236,441 | |||||||||||||||
The annual impairment assessment for goodwill and indefinite-lived intangible assets is performed as of the first day of the fourth quarter and since that assessment the company does not believe there are any indicators of impairment requiring subsequent analysis. This is supported by the review of order rates, backlog levels and financial performance across business segments.
9) Intangibles
Intangible assets consist of the following (in thousands):
| April 2, 2022 | January 1, 2022 | ||||||||||||||||||||||||||||||||||
| Estimated Weighted Avg Remaining Life | Gross Carrying Amount | Accumulated Amortization | Estimated Weighted Avg Remaining Life | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||||||||||||
| Amortized intangible assets: | |||||||||||||||||||||||||||||||||||
| Customer lists | 7.4 | $ | 863,339 | $ | (430,729) | 7.6 | $ | 863,339 | $ | (411,327) | |||||||||||||||||||||||||
| Backlog | 0.0 | 13,646 | (13,646) | 0.2 | 13,684 | (929) | |||||||||||||||||||||||||||||
| Developed technology | 8.7 | 73,701 | (31,555) | 8.9 | 73,461 | (29,952) | |||||||||||||||||||||||||||||
| $ | 950,686 | $ | (475,930) | $ | 950,484 | $ | (442,208) | ||||||||||||||||||||||||||||
| Indefinite-lived assets: | |||||||||||||||||||||||||||||||||||
| Trademarks and tradenames | $ | 1,360,401 | $ | 1,367,101 | |||||||||||||||||||||||||||||||
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The aggregate intangible amortization expense was $33.6 million and $18.8 million for the three months period ended April 2, 2022 and April 3, 2021, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands):
| Twelve Month Period coinciding with the end of the company's Fiscal First Quarter | Amortization Expense | |||||||
| 2023 | $ | 80,942 | ||||||
| 2024 | 74,658 | |||||||
| 2025 | 62,315 | |||||||
| 2026 | 57,876 | |||||||
| 2027 | 53,343 | |||||||
| Thereafter | 145,622 | |||||||
| $ | 474,756 | |||||||
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10) Accrued Expenses
Accrued expenses consist of the following (in thousands):
| Apr 2, 2022 | Jan 1, 2022 | ||||||||||
| Contract liabilities | $ | 160,204 | $ | 133,315 | |||||||
| Accrued payroll and related expenses | 111,943 | 115,762 | |||||||||
| Accrued warranty | 79,660 | 80,215 | |||||||||
| Accrued customer rebates | 40,250 | 72,451 | |||||||||
| Accrued short-term leases | 22,007 | 22,753 | |||||||||
| Accrued contingent consideration | 21,391 | 18,728 | |||||||||
| Accrued professional fees | 20,647 | 19,292 | |||||||||
| Accrued sales and other tax | 20,256 | 22,684 | |||||||||
| Accrued agent commission | 15,520 | 13,670 | |||||||||
| Accrued product liability and workers compensation | 11,722 | 10,952 | |||||||||
| Other accrued expenses | 81,764 | 73,033 | |||||||||
| $ | 585,364 | $ | 582,855 | ||||||||
11) Warranty Costs
In the normal course of business, the company issues product warranties for specific product lines and provides for the estimated future warranty cost in the period in which the sale is recorded. The estimate of warranty cost is based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Because warranty estimates are forecasts that are based on the best available information, actual claims costs may differ from amounts provided. Adjustments to initial obligations for warranties are made as changes in the obligations become reasonably estimable.
A rollforward of the warranty reserve is as follows (in thousands):
| Three Months Ended | |||||
| Apr 2, 2022 | |||||
| Balance as of January 1, 2022 | $ | 80,215 | |||
| Warranty reserve related to acquisitions | 436 | ||||
| Warranty expense | 16,620 | ||||
| Warranty claims | (17,611) | ||||
| Balance as of April 2, 2022 | $ | 79,660 | |||
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12) Financing Arrangements
| Apr 2, 2022 | Jan 1, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Senior secured revolving credit line | $ | 871,001 | $ | 683,175 | |||||||
| Term loan facility | 987,251 | 993,340 | |||||||||
| Convertible senior notes | 735,234 | 734,417 | |||||||||
| Foreign loans | 3,271 | 2,224 | |||||||||
| Other debt arrangement | 1,068 | 1,138 | |||||||||
| Total debt | 2,597,825 | 2,414,294 | |||||||||
| Less: Current maturities of long-term debt | 27,693 | 27,293 | |||||||||
| Long-term debt | $ | 2,570,132 | $ | 2,387,001 | |||||||
Credit Facility
As of April 2, 2022, the company had $1.9 billion of borrowings outstanding under the Credit Facility, including $1.0 billion outstanding under the term loan ($987 million, net of unamortized issuance fees). The company also had $2.2 million in outstanding letters of credit as of April 2, 2022, which reduces the borrowing availability under the Credit Facility. Remaining borrowing capacity under this facility was $2.6 billion at April 2, 2022.
At April 2, 2022, borrowings under the Credit Facility accrued interest at a rate of 1.625% above LIBOR per annum or 0.625% 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. Borrowings under the Credit Facility will accrue interest at a minimum of 1.625% above LIBOR and the variable unused commitment fee will be at a minimum of 0.25%. The average interest rate per annum, inclusive of hedging instruments, on the debt under the Credit Facility was equal to 2.85% at the end of the period and the variable commitment fee was equal to 0.25% per annum as of April 2, 2022.
The term loan facility had an average interest rate per annum, inclusive of hedging instruments, of 3.35% as of April 2, 2022.
In addition, the company has international credit facilities to fund working capital needs outside the United States. At April 2, 2022, these foreign credit facilities amounted to $3.3 million in U.S. Dollars with a weighted average per annum interest rate of approximately 10.05%.
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):
| Apr 2, 2022 | Jan 1, 2022 | ||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||
| Total debt excluding convertible senior notes | $ | 1,862,591 | $ | 1,869,089 | $ | 1,679,877 | $ | 1,686,537 | |||||||||||||||
The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. In February 2022, the company entered into an additional floating-to-fixed interest rate swap agreements totaling $375.0 million notional amount carrying an average interest rate of 1.50%. At April 2, 2022, the company had outstanding floating-to-fixed interest rate swaps totaling $129.0 million notional amount carrying an average interest rate of 1.71% maturing in less than 12 months and $1,048.0 million notional amount carrying an average interest rate of 1.79% that mature in more than 12 months but less than 70 months.
At April 2, 2022, the company was in compliance with all covenants pursuant to its borrowing agreements.
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Convertible Notes
The following table summarizes the outstanding principal amount and carrying value of the Convertible Notes:
Apr 2, 2022 | Jan 1, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Principal amounts: | |||||||||||
| Principal | $ | 747,500 | $ | 747,500 | |||||||
| Unamortized issuance costs | (12,266) | (13,083) | |||||||||
| Net carrying amount | $ | 735,234 | $ | 734,417 | |||||||
The following table summarizes total interest expense recognized related to the Convertible Notes:
| Three Months Ended | |||||||||||
Apr 2, 2022 | Apr 3, 2021 | ||||||||||
| Contractual interest expense | $ | 1,890 | $ | 1,890 | |||||||
| Interest cost related to amortization of issuance costs | 902 | 883 | |||||||||
| Total interest expense | $ | 2,792 | $ | 2,773 | |||||||
The estimated fair value of the Convertible Notes was $1.0 billion as of April 2, 2022 and was determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 1(d), Fair Value Measurements, in these Notes to the Condensed Consolidated Financial Statement. The if-converted value of the Convertible Notes exceeded their respective principal value by $191.0 million as of April 2, 2022.
Capped Call Transactions
In connection with the pricing of the Convertible Notes, the company entered into privately negotiated Capped Call Transactions (the "2020 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 company entered into two tranches of privately negotiated Capped Call Transactions in December 2021 (the "2021 Capped Call Transactions") in the aggregate amount of $54.6 million. On March 15, 2022 , the company entered into an additional tranche of privately negotiated Capped Call Transactions (the "2022 Capped Call Transactions") in the amount of $9.7 million.
The 2020, 2021, and 2022 Capped Call Transactions (collectively, 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 2020 Capped Call Transactions have an initial cap price of $207.93 per share of the company's common stock. The 2021 Capped Call Transactions have initial cap prices of $216.50 and $225.00 per share of the company's common stock. The 2022 Capped Call Transactions have an initial cap price of $229.00 per share. 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.
20
13) Financial Instruments
Foreign Exchange: The company uses foreign currency forward, foreign exchange swaps and option purchase and sales contracts to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The notional amount of foreign currency contracts outstanding was $350.2 million and $350.5 million as of April 2, 2022 and January 1, 2022, respectively. The fair value of the forward and option contracts was a loss of $3.0 million at the end of the first quarter of 2022.
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. In February 2022, the company entered into an additional floating-to-fixed interest rate swap agreement that uses a daily Secured Overnight Financing Rate ("SOFR") in lieu of LIBOR. The company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income. As of April 2, 2022, the fair value of these instruments was a asset of $24.0 million. The change in fair value of these swap agreements in the first three months of 2022 was a gain of $31.1 million, net of taxes.
The following table summarizes the company’s fair value of interest rate swaps (in thousands):
| Condensed Consolidated Balance Sheet Presentation | Apr 2, 2022 | Jan 1, 2022 | |||||||||||||||
| Fair value | Prepaid expense and other | $ | 623 | — | |||||||||||||
| Fair value | Other assets | $ | 25,501 | $ | 3,645 | ||||||||||||
| Fair value | Accrued expenses | $ | 67 | $ | 1,171 | ||||||||||||
| Fair value | Other non-current liabilities | $ | 2,039 | $ | 20,464 | ||||||||||||
The impact on earnings from interest rate swaps was as follows (in thousands):
| Three Months Ended | |||||||||||||||||
| Presentation of Gain/(loss) | Apr 2, 2022 | Apr 3, 2021 | |||||||||||||||
| Gain/(loss) recognized in accumulated other comprehensive income | Other comprehensive income | $ | 38,047 | $ | 11,716 | ||||||||||||
| Gain/(loss) reclassified from accumulated other comprehensive income (effective portion) | Interest expense | $ | (3,961) | $ | (5,023) | ||||||||||||
Interest rate swaps are subject to default risk to the extent the counterparties are unable to satisfy their settlement obligations under the interest rate swap agreements. The company reviews the credit profile of the financial institutions 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 agreements.
21
14) Segment Information
The company operates in three reportable operating segments defined by management reporting structure and operating activities.
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 tumblers, massagers, 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, beer dispensers, ventilation equipment, mixers, rotisseries and outdoor cooking equipment.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief operating decision maker evaluates individual segment performance based on operating income.
Net Sales Summary
(dollars in thousands)
| Three Months Ended | |||||||||||||||||||||||
| Apr 2, 2022 | Apr 3, 2021 | ||||||||||||||||||||||
| Sales | Percent | Sales | Percent | ||||||||||||||||||||
| Business Segments: | |||||||||||||||||||||||
| Commercial Foodservice | $ | 543,653 | 54.7 | % | $ | 481,155 | 63.5 | % | |||||||||||||||
| Food Processing | 119,943 | 12.0 | 112,494 | 14.8 | |||||||||||||||||||
| Residential Kitchen | 331,080 | 33.3 | 164,409 | 21.7 | |||||||||||||||||||
| Total | $ | 994,676 | 100.0 | % | $ | 758,058 | 100.0 | % | |||||||||||||||
22
The following table summarizes the results of operations for the company's business segments (in thousands):
| Commercial Foodservice | Food Processing | Residential Kitchen | Corporate and Other (1) | Total | |||||||||||||||||||||||||
| Three Months Ended April 2, 2022 | |||||||||||||||||||||||||||||
| Net sales | $ | 543,653 | $ | 119,943 | $ | 331,080 | $ | — | $ | 994,676 | |||||||||||||||||||
Income (loss) from operations (2, 3) | 109,718 | 20,112 | 24,946 | (32,212) | 122,564 | ||||||||||||||||||||||||
| Depreciation expense | 5,872 | 1,325 | 3,985 | 190 | 11,372 | ||||||||||||||||||||||||
Amortization expense (5) | 13,649 | 1,787 | 18,129 | 1,805 | 35,370 | ||||||||||||||||||||||||
| Net capital expenditures | 5,564 | 3,087 | 5,541 | 305 | 14,497 | ||||||||||||||||||||||||
| Total assets | $ | 3,596,857 | $ | 654,766 | $ | 2,127,119 | $ | 95,423 | $ | 6,474,165 | |||||||||||||||||||
| Three Months Ended April 3, 2021 | |||||||||||||||||||||||||||||
| Net sales | $ | 481,155 | $ | 112,494 | $ | 164,409 | $ | — | $ | 758,058 | |||||||||||||||||||
Income (loss) from operations (2, 3, 4) | 96,316 | 19,662 | 29,856 | (24,661) | 121,173 | ||||||||||||||||||||||||
| Depreciation expense | 5,793 | 1,315 | 2,774 | 255 | 10,137 | ||||||||||||||||||||||||
Amortization expense (5) | 15,204 | 1,843 | 1,772 | 1,476 | 20,295 | ||||||||||||||||||||||||
| Net capital expenditures | 5,195 | 928 | 2,256 | 346 | 8,725 | ||||||||||||||||||||||||
| Total assets | $ | 3,283,354 | $ | 632,746 | $ | 1,213,045 | $ | 160,768 | $ | 5,289,913 | |||||||||||||||||||
(1)Includes corporate and other general company assets and operations.
(2)Non-operating expenses are not allocated to the operating segments. Non-operating expenses consist of interest expense and deferred financing amortization, foreign exchange gains and losses and other income and expense items outside of income from operations.
(3)Restructuring expenses are allocated in operating income by segment.
(4)Gain on sale of plants are included in Commercial Foodservice.
(5)Includes amortization of deferred financing costs and Convertible Notes issuance costs.
Geographic Information
Long-lived assets, not including goodwill and other intangibles (in thousands):
| Apr 2, 2022 | Apr 3, 2021 | ||||||||||
| United States and Canada | $ | 401,182 | $ | 332,387 | |||||||
| Asia | 19,626 | 18,747 | |||||||||
| Europe and Middle East | 147,005 | 182,577 | |||||||||
| Latin America | 10,934 | 6,155 | |||||||||
| Total international | $ | 177,565 | $ | 209,785 | |||||||
| $ | 578,747 | $ | 539,865 | ||||||||
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15) Employee Retirement Plans
The following table summarizes the company's net periodic pension benefit related to the AGA Group pension plans (in thousands):
| Three Months Ended | ||||||||||||||
| Apr 2, 2022 | Apr 3, 2021 | |||||||||||||
| Net Periodic Pension Benefit: | ||||||||||||||
| Service cost | $ | — | $ | 194 | ||||||||||
| Interest cost | 6,705 | 4,290 | ||||||||||||
| Expected return on assets | (19,956) | (19,531) | ||||||||||||
| Amortization of net loss (gain) | 965 | 3,152 | ||||||||||||
| Amortization of prior service cost (credit) | 696 | 716 | ||||||||||||
| $ | (11,590) | $ | (11,179) | |||||||||||
The pension costs for all other plans of the company were not material during the period. The service cost component is recognized within Selling, general and administrative expenses and the non-operating components of pension benefit are included within Net periodic pension benefit (other than service cost) in the Condensed Consolidated Statements of Comprehensive Income.
16) Share Repurchases
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 three months period ended April 2, 2022, the company repurchased 862,912 shares of its common stock under the program for $155.2 million, including applicable commissions, which represented an average price of $179.89. As of April 2, 2022, 2,027,577 shares had been purchased under the 2017 stock repurchase program and 472,423 shares remained 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 the three months period ended April 2, 2022, the company repurchased 84,086 shares of its common stock that were surrendered to the company for withholding taxes related to restricted stock vestings for $14.8 million. During the three months period ended April 3, 2021, the company repurchased 10,473 shares of its common stock that were surrendered to the company for withholding taxes related to restricted stock vestings for $1.8 million.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Notes Regarding Forward-Looking Statements
This report contains forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The company cautions readers that these projections are based upon future results or events and are highly dependent upon a variety of important factors which could cause such results or events to differ materially from any forward-looking statements which may be deemed to have been made in this report, or which are otherwise made by or on behalf of the company. Such factors include, but are not limited to, the impact of COVID-19 pandemic and the response of governments, businesses and other third parties; volatility in earnings resulting from goodwill impairment losses which may occur irregularly and in varying amounts; variability in financing costs; quarterly variations in operating results; dependence on key customers; international exposure; foreign exchange and political risks affecting international sales; ability to protect trademarks, copyrights and other intellectual property; changing market conditions; the impact of competitive products and pricing; the timely development and market acceptance of the company’s products; the availability and cost of raw materials; and other risks detailed herein and from time-to-time in the company’s SEC filings, including the company’s 2021 Annual Report on Form 10-K. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this report are made only as of the date hereof and, except as required by federal securities laws and rules and regulations of the SEC, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The ongoing conflict between Russia and Ukraine has resulted in significant economic disruption globally and may adversely affect our business and results of operations. In response to the Russia-Ukraine conflict, governments have imposed sanctions and other restrictive actions against Russia and accordingly, the company has suspended all sales into and purchases from Russia. The Russia-Ukraine conflict has resulted in increased transportation costs and supply chain challenges, and further escalation of such conflict may result in additional supply chain disruptions, among other things, which may adversely affect our business and results of operations. As the Company does not have material operations in Ukraine or Russia, the impact of this conflict did not have a material impact on our results of operations during the three months ended April 2, 2022. However, the extent of the adverse impacts of the ongoing conflict on the broader global economy cannot be predicted and could negatively impact our business and results of operations in the future.
Net Sales Summary
(dollars in thousands)
| Three Months Ended | |||||||||||||||||||||||
| Apr 2, 2022 | Apr 3, 2021 | ||||||||||||||||||||||
| Sales | Percent | Sales | Percent | ||||||||||||||||||||
| Business Segments: | |||||||||||||||||||||||
| Commercial Foodservice | $ | 543,653 | 54.7 | % | $ | 481,155 | 63.5 | % | |||||||||||||||
| Food Processing | 119,943 | 12.0 | 112,494 | 14.8 | |||||||||||||||||||
| Residential Kitchen | 331,080 | 33.3 | 164,409 | 21.7 | |||||||||||||||||||
| Total | $ | 994,676 | 100.0 | % | $ | 758,058 | 100.0 | % | |||||||||||||||
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Results of Operations
The following table sets forth certain consolidated statements of earnings items as a percentage of net sales for the periods:
| Three Months Ended | |||||||||||
| Apr 2, 2022 | Apr 3, 2021 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||
| Cost of sales | 66.8 | 63.6 | |||||||||
| Gross profit | 33.2 | 36.4 | |||||||||
| Selling, general and administrative expenses | 20.7 | 20.4 | |||||||||
| Restructuring | 0.2 | 0.1 | |||||||||
| Income from operations | 12.3 | 16.0 | |||||||||
| Interest expense and deferred financing amortization, net | 1.8 | 2.1 | |||||||||
| Net periodic pension benefit (other than service costs) | (1.2) | (1.5) | |||||||||
| Other expense (income), net | 0.4 | (0.2) | |||||||||
| Earnings before income taxes | 11.3 | 15.6 | |||||||||
| Provision for income taxes | 2.7 | 3.8 | |||||||||
| Net earnings | 8.6 | % | 11.8 | % | |||||||
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Three Months Ended April 2, 2022 as compared to Three Months Ended April 3, 2021
NET SALES. Net sales for the three months period ended April 2, 2022 increased by $236.6 million or 31.2% to $994.7 million as compared to $758.1 million in the three months period ended April 3, 2021. Net sales increased by $157.0 million, or 20.7%, from the fiscal 2021 acquisitions of Novy, Imperial, Newton CFV, Char-Griller, and Kamado Joe and Masterbuilt. Excluding acquisitions, net sales increased $79.6 million, or 10.5%, from the prior year period. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the three months period ended April 2, 2022 decreased net sales by approximately $8.8 million or 1.2%. Excluding the impact of foreign exchange and acquisitions sales increased 11.7% for the three months period ended April 2, 2022 as compared to the prior year period, including a net sales increase of 10.9% at the Commercial Foodservice Equipment Group, a net sales increase of 8.4% at the Food Processing Equipment Group and a net sales increase of 16.1% at the Residential Kitchen Equipment Group.
•Net sales of the Commercial Foodservice Equipment Group increased by $62.5 million, or 13.0%, to $543.7 million in the three months period ended April 2, 2022, as compared to $481.2 million in the prior year period. Net sales from the acquisitions of Imperial and Newton CFV, which were acquired on September 24, 2021 and November 16, 2021, respectively, accounted for an increase of $14.6 million during the three months period ended April 2, 2022. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group increased $47.9 million, or 10.0%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales increased $52.6 million, or 10.9%, at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $36.0 million, or 10.6%, to $374.9 million, as compared to $338.9 million in the prior year period. This includes an increase of $13.4 million from the recent acquisitions. Excluding the acquisitions, the net increase in domestic sales was $22.6 million, or 6.7%. The increase in domestic sales is related to improvements in market conditions and consumer demand. International sales increased $26.5 million, or 18.6%, to $168.8 million, as compared to $142.3 million in the prior year period. This includes an increase of $1.2 million from the recent acquisitions and a decrease of $4.7 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales increase in international sales was $30.0 million, or 21.1%. The increase in international sales is related to improvements in market conditions, primarily in the European markets.
•Net sales of the Food Processing Equipment Group increased by $7.4 million, or 6.6%, to $119.9 million in the three months period ended April 2, 2022, as compared to $112.5 million in the prior year period. Excluding the impact of foreign exchange, net sales increased $9.4 million, or 8.4%, at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $15.1 million, or 18.9%, to $94.8 million, as compared to $79.7 million in the prior year period. The increase in domestic sales reflects growth primarily driven by protein products. International sales decreased $7.7 million, or 23.5%, to $25.1 million, as compared to $32.8 million in the prior year period. This includes a decrease of $2.0 million related to the unfavorable impact of exchange rates. Excluding foreign exchange, the net sales decrease in international sales was $5.7 million, or 17.4%. The decrease in international sales is impacted by the timing of certain larger projects in the European markets.
•Net sales of the Residential Kitchen Equipment Group increased by $166.7 million, or 101.4%, to $331.1 million in the three months period ended April 2, 2022, as compared to $164.4 million in the prior year period. Net sales from the acquisitions of Novy, Char-Griller, and Kamado Joe and Masterbuilt, which were acquired on July 12, 2021, December 27, 2021 and December 27, 2021, respectively, accounted for an increase of $142.4 million during the three months period ended April 2, 2022. Excluding the impact of the acquisitions, net sales of the Residential Kitchen Equipment Group increased $24.3 million, or 14.8%, as compared to the prior year period. Excluding the impact of foreign exchange and the acquisitions, net sales increased $26.4 million, or 16.1% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales increase of $121.0 million, or 111.4%, to $229.6 million, as compared to $108.6 million in the prior year period. International sales increased $45.7 million, or 81.9%, to $101.5 million, as compared to $55.8 million in the prior year period. This includes an decrease of $2.1 million related to the unfavorable impact of exchange rates. Excluding foreign exchange and the acquisitions, the net sales increase in international sales was $3.6 million, or 6.5%. The increase in domestic and international sales reflects the strong demand for our premium appliance brands and strength in the European market.
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GROSS PROFIT. Gross profit increased to $330.5 million in the three months period ended April 2, 2022 from $275.9 million in the prior year period, primarily reflecting higher sales volumes related to improvements in market conditions and consumer demand. The impact of foreign exchange rates decreased gross profit by approximately $3.3 million. The gross margin rate was 36.4% in the three months period ended April 3, 2021 as compared to 33.2% in the current year period. Gross profit margins have been negatively impacted by acquisitions, including $14.3 million of acquisition related inventory step-up charges, along with rising costs of many raw materials and inputs, labor rates and logistics costs.
•Gross profit at the Commercial Foodservice Equipment Group increased by $24.0 million, or 13.7%, to $199.2 million in the three months period ended April 2, 2022, as compared to $175.2 million in the prior year period. Gross profit from the acquisitions of Imperial and Newton CFV increased gross profit by $5.0 million. Excluding acquisitions, gross profit increased by $19.0 million related to higher sales volumes. The impact of foreign exchange rates decreased gross profit by approximately $1.7 million. The gross margin rate increased to 36.6%, as compared to 36.4% in the prior year period. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 36.7%.
•Gross profit at the Food Processing Equipment Group increased by $1.5 million, or 3.8%, to $40.7 million in the three months period ended April 2, 2022, as compared to $39.2 million in the prior year period. The impact of foreign exchange rates decreased gross profit by approximately $0.7 million. The gross profit margin rate decreased to 33.9%, as compared to 34.8% in the prior year period primarily related to higher sales volumes and product mix. The gross margin rate, excluding the impact of foreign exchange, was 34.0%.
•Gross profit at the Residential Kitchen Equipment Group increased by $30.2 million, or 49.7%, to $91.0 million in the three months period ended April 2, 2022, as compared to $60.8 million in the prior year period. Gross profit from the acquisitions of Novy, Char-Griller, and Kamado Joe and Masterbuilt increased gross profit by $20.9 million. The impact of foreign exchange rates decreased gross profit by approximately $0.9 million. The gross margin rate decreased to 27.5%, as compared to 37.0% in the prior year period related to higher sales volumes. Gross profit margins have been negatively impacted by acquisitions, including $14.3 million of acquisition related inventory step-up charges. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 37.2%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses increased from $155.0 million in the three months period ended April 3, 2021 to $206.1 million in the three months period ended April 2, 2022. As a percentage of net sales, selling, general, and administrative expenses were 20.4% in the three months period ended April 3, 2021, as compared to 20.7% in the three months period ended April 2, 2022.
Selling, general and administrative expenses reflect increased costs of $36.1 million associated with acquisitions, including $17.7 million of intangible amortization expense. Selling, general and administrative expenses increased $6.1 million related to compensation costs. Higher sales volumes also resulted in increased commission expense. Foreign exchange rates had an favorable impact of $1.7 million.
RESTRUCTURING EXPENSES. Restructuring expenses were $0.8 million for the three months period ended April 3, 2021 and $1.9 million for the three months period ended April 2, 2022. Restructuring expenses in both periods related primarily to headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were $17.7 million in the three months period ended April 2, 2022, as compared to $16.1 million in the prior year period. Net periodic pension benefit (other than service costs) increased $0.1 million to $11.5 million in the three months period ended April 2, 2022 from $11.4 million in the prior year period. Other expense was $4.1 million in the three months period ended April 2, 2022, as compared to other income of $1.7 million in the prior year period and consists mainly of foreign exchange gains and losses.
INCOME TAXES. A tax provision of $26.6 million, at an effective rate of 23.7%, was recorded during the three months period ended April 2, 2022, as compared to $28.9 million at an effective rate of 24.5%, in the prior year period. The effective tax rate for the three months period ended April 2, 2022 is lower than the comparable year rate primarily due to excess tax benefits from share-based compensation award vesting.
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Financial Condition and Liquidity
During the three months ended April 2, 2022, cash and cash equivalents decreased by $33.7 million to $146.7 million from $180.4 million at January 1, 2022. Total debt increased to $2.6 billion at April 2, 2022 from $2.4 billion at January 1, 2022.
OPERATING ACTIVITIES. Net cash used for operating activities was $15.3 million for the three months ended April 2, 2022, compared to net cash provided by operating activities of $59.7 million for the three months ended April 3, 2021.
During the three months period ended April 2, 2022, working capital changes meaningfully impacted operating cash flows. These included an increase in accounts receivable of $55.3 million due to increased sales from improved market conditions. Additionally, inventory increased $88.5 million due to the seasonality of acquired businesses, efforts to mitigate supply chain risks and the inflationary impacts on inventory.
INVESTING ACTIVITIES. During the three months ended April 2, 2022, net cash used for investing activities amounted to $24.1 million. Cash used to fund acquisitions and investments amounted to $6.4 million. Additionally, $14.5 million was expended, primarily for additions and upgrades of production equipment and manufacturing facilities.
FINANCING ACTIVITIES. Net cash flows provided by financing activities were $8.7 million during the three months ended April 2, 2022. The company’s borrowing activities during the three months ended April 2, 2022 included $187.8 million of net proceeds under its Credit Facility. Additionally, the company repurchased $170.0 million of Middleby common shares during the three months ended April 2, 2022. This was comprised of $14.8 million to repurchase 84,086 shares of Middleby common stock that were surrendered to the company by employees in lieu of cash payment for withholding taxes related to restricted stock vesting and $155.2 million used to repurchase 862,912 shares of its common stock under a repurchase program.
At April 2, 2022, the company believes that its current capital resources, including cash and cash equivalents, cash expected to be generated from operations, funds available from its current lenders and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and expenditures for the foreseeable future.
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Recently Issued Accounting Standards
See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 4 - Recent Issued Accounting Standards, of this Quarterly Report on Form 10-Q.
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 the company's consolidated financial statements. There have been no changes in the company's critical accounting policies, which include revenue recognition, inventories, goodwill and indefinite-life intangibles, convertible debt, pensions benefits, and income taxes, as discussed in the company's Annual Report on Form 10-K for the year ended January 1, 2022 (the “2021 Annual Report on Form 10-K”).
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The company is exposed to market risk related to changes in interest rates. The following table summarizes the maturity of the company’s debt obligations:
Twelve Month Period coinciding with the end of the company's Fiscal First Quarter | Variable Rate Debt | |||||||
| 2023 | $ | 27,693 | ||||||
| 2024 | 23,644 | |||||||
| 2025 | 23,639 | |||||||
| 2026 | 758,789 | |||||||
| 2027 and thereafter | 1,764,060 | |||||||
| $ | 2,597,825 | |||||||
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 April 2, 2022, the fair value of these instruments was an asset of $24.0 million. The change in fair value of these swap agreements in the first three months of 2022 was a gain of $31.1 million, net of taxes. The potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted interest rates would not have a material impact on the company's financial position, results of operations and cash flows.
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 foreign currency forward, foreign exchange swaps and option purchase and sales contracts to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted foreign exchange rates would not have a material impact on the company's financial position, results of operations and cash flows. The fair value of the forward and option contracts was a loss of $3.0 million at the end of the first quarter of 2022.
The company accounts for its derivative financial instruments in accordance with ASC 815, "Derivatives and Hedging". In accordance with ASC 815, these instruments are recognized on the balance sheet as either an asset or a liability measured at fair value. Changes in the market value and the related foreign exchange gains and losses are recorded in the statement of earnings.
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Item 4. Controls and Procedures
The company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of April 2, 2022, the company carried out an evaluation, under the supervision and with the participation of the company's management, including the company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the company's disclosure controls and procedures. Based on the foregoing, the company's Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of this period.
During the quarter ended April 2, 2022, there has been no change in the company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
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PART II. OTHER INFORMATION
The company was not required to report the information pursuant to Items 1 through 6 of Part II of Form 10-Q for the three months ended April 2, 2022, except as follows:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
c) Issuer Purchases of Equity Securities
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | Maximum Number of Shares that May Yet be Purchased Under the Plan or Program (1) | ||||||||||||||||||||
| January 2, 2022 to January 29, 2022 | 188,397 | $ | 187.77 | 188,397 | 1,146,938 | ||||||||||||||||||
| January 30, 2022 to February 26, 2022 | 314,740 | 184.10 | 314,740 | 832,198 | |||||||||||||||||||
| February 27, 2022 to April 2, 2022 | 359,775 | 172.08 | 359,775 | 472,423 | |||||||||||||||||||
| Quarter ended April 2, 2022 | 862,912 | $ | 179.89 | 862,912 | 472,423 | ||||||||||||||||||
(1) On November 7, 2017, the company's Board of Directors resolved to terminate the company's existing share repurchase program, effective as of such date, which was originally adopted in 1998, and approved a new stock repurchase program. This program authorizes the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock. As of April 2, 2022, the total number of shares authorized for repurchase under the program is 2,500,000. As of April 2, 2022, 2,027,577 shares had been purchased under the 2017 stock repurchase program.
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. Exhibits
| Exhibits: | |||||
| Exhibit 31.1 – | |||||
| Exhibit 31.2 – | |||||
| Exhibit 32.1 – | |||||
| Exhibit 32.2 – | |||||
| Exhibit 101 – | Financial statements on Form 10-Q for the quarter ended April 2, 2022, filed on May 12, 2022, formatted in Inline Extensive Business Reporting Language (iXBRL); (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of earnings, (iii) condensed statements of cash flows, (iv) notes to the condensed consolidated financial statements. | ||||
| Exhibit 104 – | Cover Page Interactive Data File (formatted as Inline Extensive Business Reporting Language (iXBRL) and contained in Exhibit 101). | ||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE MIDDLEBY CORPORATION | ||||||||||||||
| (Registrant) | ||||||||||||||
| Date: | May 12, 2022 | By: | /s/ Bryan E. Mittelman | |||||||||||
| Bryan E. Mittelman | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
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