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EX-21 - MIDDLEBY CORP | v176031_ex21.htm |
EX-32.2 - MIDDLEBY CORP | v176031_ex32-2.htm |
EX-31.2 - MIDDLEBY CORP | v176031_ex31-2.htm |
EX-32.1 - MIDDLEBY CORP | v176031_ex32-1.htm |
EX-23.1 - MIDDLEBY CORP | v176031_ex23-1.htm |
EX-31.1 - MIDDLEBY CORP | v176031_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
For
the Fiscal Year Ended January 2, 2010
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
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60120
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: 847-741-3300
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
|
Name of each exchange on which
registered
|
|
Common
stock, par value $0.01 per share
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|
The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
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Yes
x
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No
¨
|
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act.
|
Yes
¨
|
No
x
|
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-K during the preceding
12
months.
|
Yes
¨
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No
¨
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See definition of “accelerated filer, large accelerated filer and smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
|
x
|
|
Accelerated
filer
|
|
¨
|
|
Non-accelerated
filer
|
|
¨
|
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
|
Yes
¨
|
No
x
|
The
aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of June 30, 2009 was approximately $765,694,347.
The
number of shares outstanding of the Registrant’s class of common stock, as of
February 26, 2010, was 18,552,737shares.
Documents Incorporated by
Reference
Part III
of Form 10-K incorporates by reference the Registrant’s definitive proxy
statement to be filed pursuant to Regulation 14A in connection with the 2010
annual meeting of stockholders.
THE MIDDLEBY CORPORATION AND
SUBSIDIARIES
JANUARY 2,
2010
FORM 10-K ANNUAL
REPORT
TABLE OF
CONTENTS
Page
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|||||
PART I
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|||||
Item
1.
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Business
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1 | |||
Item
1A.
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Risk
Factors
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11 | |||
Item
1B.
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Unresolved
Staff Comments
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18 | |||
Item
2.
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Properties
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19 | |||
Item
3.
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Legal
Proceedings
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20 | |||
Item
4.
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Reserved
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20 | |||
PART II
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|||||
Item
5.
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Market
for Registrant’s Common Equity,
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||||
Related
Stockholder Matters and
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|||||
Issuer
Purchases of Equity Securities
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21 | ||||
Item
6.
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Selected
Financial Data
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23 | |||
Item
7.
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Management’s
Discussion and Analysis of Financial
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||||
Condition
and Results of Operations
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24 | ||||
Item
7A.
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Quantitative
and Qualitative Disclosure about
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||||
Market
Risk
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33 | ||||
Item
8.
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Financial
Statements and Supplementary Data
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36 | |||
Item
9.
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Changes
in and Disagreements with Accountants on
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||||
Accounting
and Financial Disclosure
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80 | ||||
Item
9A.
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Controls
and Procedures
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80 | |||
Item
9B.
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Other
Information
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82 | |||
PART III
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|||||
Item
10.
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Directors
and Executive Officers of the Registrant
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83 | |||
Item
11.
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Executive
Compensation
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83 | |||
Item
12.
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Security
Ownership of Certain Beneficial Owners
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||||
and
Management and Related Stockholder Matters
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83 | ||||
Item
13.
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Certain
Relationships and Related Transactions
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83 | |||
Item
14.
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Principal
Accountant Fees and Services
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83 | |||
PART IV
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|||||
Item
15.
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Exhibits
and Financial Statement Schedule
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84 |
PART I
Item 1.
Business
General
The
Middleby Corporation (“Middleby” or the “company”), through its operating
subsidiary Middleby Marshall Inc. (“Middleby Marshall”) and its subsidiaries, is
a leader in the design, manufacture, marketing, distribution, and service of a
broad line of (i) cooking and warming equipment used in all types of commercial
restaurants and institutional kitchens and (ii) food preparation, cooking and
packaging equipment for food processing operations.
Founded
in 1888 as a manufacturer of baking ovens, Middleby Marshall Oven Company was
acquired in 1983 by TMC Industries Ltd., a publicly traded company that changed
its name in 1985 to The Middleby Corporation. The company has established
itself as a leading provider of (i) commercial restaurant equipment and (ii)
food processing equipment as a result of its acquisition of industry leading
brands and through the introduction of innovative products within both of these
segments.
Over the
past three years the company has completed eleven acquisitions in the commercial
foodservice equipment and food processing equipment industries. These
acquisitions have added fourteen brands to the Middleby portfolio and positioned
the company as a leading supplier of equipment in both industries.
In April
2007, the company acquired the assets of Jade Products Company (“Jade”) for $7.8
million in cash. Jade is a leading manufacturer of premium commercial and
residential ranges and ovens used by many of the top chefs and upscale
restaurant chains. Jade is also known for its ability to provide unique
customized cooking suites designed to suit the needs of the most demanding
restaurant operators. This acquisition allowed Middleby to expand its
product offerings in the commercial foodservice segment with a leading industry
brand.
In June
2007, the company acquired the assets of Carter-Hoffmann for $16.4 million in
cash. Carter-Hoffmann is a leading brand and supplier of heated cabinets
and food holding equipment for the commercial restaurant industry. This
acquisition was complementary to Middleby’s existing cooking products and
allowed the company to provide a more complete offering on the “hot-side” of the
kitchen.
In July
2007, the company acquired the assets of MP Equipment (“MP Equipment”) for $15.3
million in cash and $3.0 million in deferred payments made to the sellers.
MP Equipment further strengthened Middleby’s position in the food
processing equipment industry by adding a portfolio of complementary products to
the Alkar and Rapidpak brands. The products of MP Equipment include
breading machines, battering machines, mixers, forming equipment, and slicing
machines. These products are used by numerous suppliers of food product to
the major restaurant chains.
In August
2007, the company acquired the assets of Wells Bloomfield for $29.2 million in
cash. Wells is a leading brand of cooking and warming equipment for the
commercial restaurant industry, complimenting Middleby’s other products in this
category. Wells also offers a unique ventless hood system, which is
increasing in demand as more and more food operations are opening in
unconventional locations where it is difficult to install ventilation systems,
such as shopping malls, airports and stadiums. Bloomfield is a leading
provider of coffee brewers, tea brewers and beverage dispensing equipment.
The addition of Bloomfield to Middleby’s portfolio of brands allows Middleby to
benefit in the fast growing beverage segment as the company’s restaurant chain
customers increase their offerings of coffee and specialty drinks.
In
December 2007, subsequent to the company’s fiscal 2007 year end, the company
acquired New Star International Holdings, Inc. (“Star”) for $189.5 million in
cash. This acquisition added three leading brands to Middleby’s portfolio
of brands in the commercial restaurant industry, including Star, a leader in
light duty cooking and concession equipment, Holman, a leader in conveyor and
pop-up toasters, and Lang, a leading oven and range line. The transaction
positions Middleby as a leading supplier to convenience chains and fast casual
restaurant chains.
1
In April
2008, the company acquired the net assets and related business operations
of Frifri aro SA (“Frifri”) for $3.5 million in cash. Frifri is a leading
European supplier of advanced frying systems.
In April
2008, the company acquired the assets of Giga Grandi Cucine S.r.l. (“Giga”) for
$9.9 million in cash and assumed debt. Giga is a leading European
manufacturer of ranges, ovens and steam cooking equipment.
In
January 2009, subsequent to the company’s fiscal 2008 year end, the company
acquired TurboChef Technologies, Inc. (“TurboChef”) for cash and shares of
Middleby common stock. The total aggregate purchase price of the
transaction amounted to $160.3 million including $116.3 million in cash and
1,539,668 shares of Middleby common stock valued at $44.0 million.
TurboChef is a leader in speed-cook technology, one of the fastest growing
segments of the commercial foodservice equipment market. TurboChef’s
user-friendly speed cook ovens employ proprietary combinations of heating
technologies to cook a variety of food products at speeds up to 12 times faster
than that of conventional heating methods.
In April
2009, the company acquired the assets of CookTek LLC (“CookTek”) for $8 million
in cash and $1.0 million in a deferred payment due the seller. CookTek is
a leader in the manufacture of induction cooking and warming systems for the
commercial foodservice industry. CookTek’s line of induction cooking equipment
utilizes magnetic waves to heat product in a highly energy efficient manner at
speeds fast than conventional cooking equipment.
In April
2009, the company acquired substantially all of the assets of Anetsberger
Brothers, Inc. (“Anets”), a leading manufacturer of griddles, fryers, and dough
rollers for the commercial foodservice industry for $3.4 million in cash and
$0.5 million in deferred payments. The acquisition of Anets allows
Middleby to continue to expand its portfolio of leading brands in cooking and
warming and increase its leading position in the griddle and fryer
segment.
In
December 2009, the company acquired all of the shares of Doyon
Equipment Inc. (“Doyon”), a leading manufacturer of baking ovens for the
commercial foodservice industry for approximately $5.8 million. The
acquisition of Doyon enhances Middleby’s position as a leader in the baking
segment and better positions the company to address the growing needs of the
retail and supermarket foodservice segment
The
company's annual reports on Form 10-K, including this Form 10-K, as well as the
company's quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to such reports are available, free of charge, on the company's
internet website, www.middleby.com.
These reports are available as soon as reasonably practicable after they are
electronically filed with or furnished to the Securities and Exchange
Commission.
Business Divisions and
Products
The company conducts its business
through three principal business divisions: the Commercial Foodservice Equipment
Group; the Food Processing Equipment Group; and the International Distribution
Division. See Note 11 to the Consolidated Financial Statements for further
information on the company's business segments.
Commercial Foodservice
Equipment Group
The
Commercial Foodservice Equipment Group has a broad portfolio of leading brands
of cooking and warming equipment, which enable it to serve virtually any cooking
or warming application within a commercial restaurant or institutional
kitchen. This cooking and warming 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 company offers a broad line of cooking equipment
marketed under a portfolio of twenty brands, including, Anets®,
Blodgett®, Blodgett Combi®, Blodgett Range®, Bloomfield®, CTX®,
Carter-Hoffmann®, CookTek®, Doyon®, Frifri®, Giga®, Holman®, Houno®, Jade®,
Lang®, MagiKitch'n®, Middleby Marshall®, NuVu®, Pitco®, Southbend®, Star®,
Toastmaster®, TurboChef® and Wells®. These products are manufactured at
the company's U.S. facilities in California, Illinois, Michigan, New Hampshire,
North Carolina, Tennessee, Texas and Vermont. The company also has
international manufacturing facilities located in Canada, China, Denmark, Italy
and the Philippines.
2
The
products offered by this group include ranges, convection ovens, conveyor ovens,
baking ovens, proofers, broilers, fryers, combi-ovens, charbroilers, steam
equipment, pop-up and conveyor toasters, steam cooking equipment, food warming
equipment, induction cooking systems, griddles, ventless cooking systems, coffee
brewers, tea brewers and beverage dispensing equipment.
This
group is represented by the following product brands:
|
·
|
For
over 80 years, Anets® has been an innovator in the commercial foodservice
industry with a full range of fryers, griddles, dough rollers, pasta
cookers and bakery products.
|
|
·
|
Blodgett®,
known for its durability and craftsmanship, is the leading brand of
convection and combi-ovens. In demand since the late 1800's, the
Blodgett oven has stood the test of time and set the industry
standard.
|
|
·
|
Bloomfield®
is one of the leading brands providing coffee brewers, tea brewers, and
beverage dispensing equipment. Bloomfield has a reputation of
durability and dependability.
|
|
·
|
Carter-Hoffmann®
has been a leading provider of heated cabinets, rethermalizing equipment
and food serving equipment for over 60 years. Carter-Hoffmann is
known for providing innovative and energy saving equipment that allow a
foodservice operation to save on food costs by holding food in its heated
cabinets and holding stations for an extended period of time, while
maintaining the quality of the
product.
|
|
·
|
CookTek®
is the leading innovator, developer and manufacturer of induction powered
equipment for the foodservice industry, with a focus on cooking, buffet
holding and hot food delivery. Designed to be simple to operate,
rugged and durable, all products are supremely energy efficient - “green
by nature.”
|
|
·
|
Doyon®
has been a manufacturer of bakery ovens for more than 50 years. Doyon is
recognized for its quality and service. Doyon’s products include
bakery ovens, proofers and mixers.
|
|
·
|
Frifri
is a leading manufacturer of fryers and frying systems in Europe.
They lead the market due to their innovation, including advanced controls
and filtration functions. Since 1947 they have been known for their
quality products and durability.
|
|
·
|
Founded
in 1967, GIGA Grandi Cucine S.r.l. is a leading manufacturer well known in
Italy as a manufacturer of a broad line of professional cooking equipment
and catering equipment. Giga’s products include ranges, steam
cooking equipment and ovens.
|
|
·
|
For
over 50 years, Holman® is a leading brand in toasting equipment including
high speed, conveyorized and pop-up. Holman equipment can be found
in many convenience stores, restaurant chains, and hotels. With the
recent trend of toasted sandwiches, Holman toasters can be found in
several of the leading sandwich
chains.
|
|
·
|
For
more than 30 years, Houno® has manufactured quality combi-ovens and baking
ovens. Houno ovens are recognized for their superior design, energy
and water saving features and
reliability.
|
|
·
|
Jade®
designs and manufactures premium and customized cooking suites which can
be found in the restaurants of many leading chefs. Jade is renowned
for its offering of specialty cooking equipment and its ability to
customize products to meet the specialized requests of a restaurant
operator.
|
|
·
|
For
more than a century, Lang® has been a world-class supplier of cooking
equipment, offering a complete line of high-performing, innovative gas and
electric cooking solutions for commercial and marine
applications.
|
|
·
|
For
more than 60 years, MagiKitch’n® has focused on manufacturing charbroiling
products that deliver quality construction, high performance and flexible
operation.
|
3
|
·
|
Conveyor
oven equipment products are marketed under the Middleby Marshall®,
Blodgett® and CTX® brands. Conveyor oven equipment allows for
simplification of the food preparation process, which in turn provides for
labor savings opportunities and a greater consistency of the final
product. Conveyor oven customers include many of the leading pizza
restaurant chains and sandwich
chains.
|
|
·
|
Nu-Vu®,
the leader in on-premise baking, manufacturers a wide variety of
commercial baking equipment for use in restaurants and institutions.
Nu-Vu ovens and proofers are used by many of the leading sandwich chains
for daily baking of fresh bread.
|
|
·
|
Pitco
Frialator® offers a broad line of gas and electric equipment combining
reliability with efficiency in simple-to-operate professional frying
equipment. Since 1918, Pitco fryers have captured a major market
share by offering simple, reliable equipment for cooking menu items such
as french fries, onion rings, chicken, donuts and
seafood.
|
|
·
|
For
over 100 years, Southbend® has produced a broad array of heavy-duty,
gas-fired equipment, including ranges, convection ovens, broilers, and
steam cooking equipment. Southbend has dedicated significant
resources to developing and introducing innovative product features
resulting in a premier cooking
line.
|
|
·
|
Star®
has been making durable, reliable, quality products since 1921. Star
products are used in a broad range of applications that include fast food,
leisure, concessions and traditional restaurant
operations.
|
|
·
|
Toastmaster®
manufactures light and medium-duty electric equipment, including pop-up
and conveyor toasters, hot food servers, foodwarmers and griddles to
commercial restaurants and institutional
kitchens.
|
|
·
|
Since
its inception in 1991, TurboChef ® has pioneered the world of rapid
cooking. The result of top-grade engineering and testing, TurboChef ovens
feature proprietary technology, which combines superior air impingement
with other rapid-cook methods to create high heat transfer rates and
outstanding food quality.
|
|
·
|
Wells®
is a leader in countertop and drop in warmers. It is also one of
only a few companies to offer ventless cooking systems. Its patented
technology allows a food service operator to utilize cooking equipment in
locations where external ventilation may not be possible, such as shopping
malls, airports and sports arenas.
|
Food Processing Equipment
Group
The Food
Processing Equipment Group provides a broad array of innovative products
designed for the food processing industry. These products
include:
|
·
|
Cooking
equipment, including batch ovens, belt ovens and conveyorized cooking
systems marketed under the Alkar®
brand.
|
|
·
|
Food
preparation equipment, such as breading, battering, mixing, forming and
slicing machines, marketed under the MP Equipment®
brand.
|
|
·
|
Packaging
and food safety equipment marketed under the Rapidpak®
brand.
|
Customers
include large international food processing companies throughout the
world. The company is recognized as a market leader in the manufacturing
of equipment for producing pre-cooked meat products, such as hot dogs, dinner
sausages, poultry and lunchmeats. 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
Food Processing Equipment Group has manufacturing facilities in
Wisconsin.
4
International Distribution
Division
The
company has identified the international markets as an area of growth.
Middleby’s International Distribution Division provides integrated export
management and distribution services, enabling the company to offer equipment to
be delivered and supported virtually anywhere in the world. The company
believes that its global network provides it with a competitive advantage that
positions the company as a preferred foodservice equipment supplier to major
restaurant chains expanding globally. The company offers customers a
complete package of kitchen equipment, delivered and installed in over 100
countries. For a local country distributor or dealer, the division
provides centralized sourcing of a broad line of equipment with complete export
management services, including export documentation, freight forwarding,
equipment warehousing and consolidation, installation, warranty service and
parts support. The International Distribution Division has regional export
management companies in Asia, Europe and Latin America complemented by sales and
distribution offices located in Australia, Belgium, China, France, India, Italy,
Germany, Lebanon, Mexico, the Philippines, Russia, Saudi Arabia, Singapore,
South Korea, Spain, Sweden, Taiwan, United Arab Emirates and the United
Kingdom.
The Customers and
Market
Commercial Foodservice
Equipment Industry
The
company's end-user customers include: (i) fast food or quick-service
restaurants, (ii) full-service restaurants, including casual-theme restaurants,
(iii) retail outlets, such as convenience stores, supermarkets and department
stores and (iv) public and private institutions, such as hotels, resorts,
schools, hospitals, long-term care facilities, correctional facilities,
stadiums, airports, corporate cafeterias, military facilities and government
agencies. The company's domestic sales are primarily through independent
dealers and distributors and are marketed by the company's sales personnel and
network of independent manufacturers' representatives. Many of the dealers
in the U.S. belong to buying groups that negotiate sales terms with the
company. Certain large multi-national restaurant and hotel chain customers
have purchasing organizations that manage product procurement for their
systems. Included in these customers are several large restaurant chains,
which account for a meaningful portion of the company's business. The
company’s international sales are through a combined network of independent and
company-owned distributors. The company maintains sales and distribution
offices in Australia, Belgium, China, France, India, Italy, Germany, Lebanon,
Mexico, the Philippines, Russia, Saudi Arabia, Singapore, South Korea, Spain,
Sweden, Taiwan, United Arab Emirates and the United Kingdom.
Over the
past several decades, the foodservice equipment industry has enjoyed steady
growth in the United States due to the development of new quick-service and
casual-theme restaurant chain concepts, the expansion into nontraditional
locations by quick-service restaurants and store equipment modernization.
In the international markets, foodservice equipment manufacturers have been
experiencing stronger growth than the U.S. market due to rapidly expanding
international economies and increased opportunity for expansion by U.S. chains
into developing regions.
The
company believes that the worldwide commercial foodservice equipment market has
sales in excess of $20 billion. The cooking and warming equipment segment
of this market is estimated by management to exceed $1.5 billion in North
America and $3.0 billion worldwide. The company believes that continuing
growth in demand for foodservice equipment will result from the development of
new restaurant concepts in the U.S. and the expansion of U.S. and foreign chains
into international markets, the replacement and upgrade of existing equipment
and new equipment requirements resulting from menu changes.
5
Food Processing Equipment
Industry
The
company's customers include a diversified base of leading food processors.
A large portion of the company's revenues have been generated from producers of
pre-cooked meat products such as hot dogs, dinner sausages, poultry, and
lunchmeats; however, the company believes that it can leverage its expertise and
product development capabilities in thermal processing to organically grow into
new end markets.
Food
processing has quickly become a highly competitive landscape dominated by a few
large conglomerates that possess a variety of food brands. The
consolidation of food processing plants associated with industry consolidation
drives a need for more flexible and efficient equipment that is capable of
processing large volumes in quicker cycle times. In recent years, food
processors have had to conform to the demands of “big-box” retailers, including,
most importantly, greater product consistency and exact package weights.
Food processors are beginning to realize that their old equipment is no longer
capable of efficiently producing adequate uniformity in the large product
volumes required, and they are turning to equipment manufacturers that offer
product consistency, innovative packaging designs and other solutions. To
protect their own brands and reputations, big-box retailers are also dictating
food safety standards that are actually stricter than government
regulations.
A number
of factors, including rising raw material prices, labor and health care costs,
are driving food processors to focus on ways to improve their generally thin
profitability margins. In order to increase the profitability and
efficiency in processing plants, food processors pay increasingly more attention
to the performance of their machinery and the flexibility in the functionality
of the equipment. Meat processors are continuously looking for ways to
make their plants safer and reduce labor-intensive activities. Food processors
have begun to recognize the value of new technology as an important vehicle to
drive productivity and profitability in their plants. Due to pressure from
big-box retailers, food processors are expected to continue to demand new and
innovative equipment that addresses food safety, food quality, automation and
flexibility.
Improving
living standards in developing countries is spurring increased worldwide demand
for pre-cooked and convenience food products. As industrializing countries
create more jobs, consumers in these countries will have the means to buy
pre-cooked food products. In industrialized regions, such as Western Europe and
the U.S., consumers are demanding more pre-cooked and convenience food products,
such as deli tray variety packs, frozen food products and ready-to-eat varieties
of ethnic foods.
The
global food processing equipment industry is highly fragmented, large and
growing. The company estimates demand for food equipment is approximately $3
billion in the U.S and $20 billion worldwide. The company’s product
offerings are estimated to compete in a subsegment of total industry, and the
relevant market size for its products are estimated by management to exceed $0.5
billion in the U.S. and $1.5 billion worldwide.
Backlog
The
company's backlog of orders was $51.7 million at January 2, 2010, all of which
is expected to be filled during 2010. The acquired TurboChef, CookTek,
Anets and Doyon businesses accounted for $4.5 million of the backlog. The
company's backlog was $47.3 million at January 3, 2009. The backlog is not
necessarily indicative of the level of business expected for the year, as there
is generally a short time between order receipt and shipment for the majority of
the company’s products.
6
Marketing and
Distribution
Commercial Foodservice
Equipment Group
Middleby's
products and services are marketed in the U.S. and in over 100 countries through
a combination of the company's sales personnel and international marketing
divisions and subsidiaries, together with an extensive network of independent
dealers, distributors, consultants, sales representatives and agents. The
company's relationships with major restaurant chains are primarily handled
through an integrated effort of top-level executive and sales management at the
corporate and business division levels to best serve each customer's
needs.
In the
United States, the company distributes its products to independent end-users
primarily through a network of non-exclusive dealers nationwide, who are
supported by manufacturers' marketing representatives. Sales are made
direct to certain large restaurant chains that have established their own
procurement and distribution organization for their franchise
system.
International
sales are primarily made through the International Distribution Division network
to independent local country stocking and servicing distributors and dealers
and, at times, directly to major chains, hotels and other large
end-users.
Food Processing Equipment
Group
The
company maintains a direct sales force to market the Alkar, Rapidpak and MP
Equipment brands and maintains direct relationships with each of its
customers. The company also involves division management in the
relationships with large global accounts. In North America, the company
employs regional sales managers, each with responsibility for a group of
customers and a particular region. Internationally, the company maintains global
sales managers supported by a network of independent sales
representatives.
The
company’s sale process is highly consultative due to the highly technical nature
of the equipment. During a typical sales process, a salesperson makes
several visits to the customer’s facility to conceptually discuss the production
requirements, footprint and configuration of the proposed equipment. The
company employs a technically proficient sales force, many of whom have previous
technical experience with the company as well as education backgrounds in food
science.
Services and Product
Warranty
The
company is an industry leader in equipment installation programs and after-sales
support and service. The company provides a warranty on its products
typically for a one year period and in certain instances greater periods.
The emphasis on global service increases the likelihood of repeat business and
enhances Middleby's image as a partner and provider of quality products and
services.
Commercial Foodservice
Equipment Group
The
company's domestic service network consists of over 100 authorized service parts
distributors and 3,000 independent certified technicians who have been formally
trained and certified by the company through its factory training school and
on-site installation training programs. Technicians work through service
parts distributors, which are required to provide around-the-clock service via a
toll-free paging number. The company provides substantial technical
support to the technicians in the field through factory-based technical service
engineers. The company has stringent parts stocking requirements for these
agencies, leading to a high first-call completion rate for service and warranty
repairs.
It is
critical to major foodservice chains that equipment providers be capable of
supporting equipment on a worldwide basis. The company's international
service network covers over 100 countries with more than 1,000 service
technicians trained in the installation and service of the company's products
and supported by internationally-based service managers along with the
factory-based technical service engineers. As with its domestic service
network, the company maintains stringent parts stocking requirements for its
international distributors.
7
Food Processing Equipment
Group
The
company maintains a technical service group of employees that oversees and
performs installation and startup of equipment and completes warranty and repair
work. This technical service group provides services for customers both
domestically and internationally. Service technicians are trained
regularly on new equipment to ensure the customer receives a high level of
customer service. From time to time the company utilizes trained third
party technicians supervised by company employees to supplement company
employees on large projects.
Competition
The
commercial foodservice and food processing equipment industries are highly
competitive and fragmented. Within a given product line the company may
compete with a variety of companies, including companies that manufacture a
broad line of products and those that specialize in a particular product
category. Competition is based upon many factors, including brand
recognition, product features, reliability, quality, price, delivery lead times,
serviceability and after-sale service. The company believes that its
ability to compete depends on strong brand equity, exceptional product
performance, short lead-times and timely delivery, competitive pricing and
superior customer service support. In the international markets, the
company competes with U.S. manufacturers and numerous global and local
competitors.
The
company believes that it is one of the largest multiple-line manufacturers of
food production equipment in the U.S. and worldwide although some of its
competitors are units of operations that are larger than the company and possess
greater financial and personnel resources. Among the company's major
competitors to the Commercial Foodservice Equipment Group are: Manitowoc
Company, Inc.; Vulcan-Hart and Hobart Corporation, subsidiaries of Illinois Tool
Works Inc.; Electrolux AB; Groen, a subsidiary of Dover Corporation; Rational
AG; and the Ali Group. Major competitors to the Food Processing Equipment
Group include Convenience Food Systems, FMC Technologies, Multivac, Marel,
Formax, and Heat and Control.
Manufacturing and Quality
Control
The
company manufactures product in eleven domestic and five international
production facilities. In Brea, California, the company manufactures
cooking ranges. In Chicago, Illinois, the company manufacturers induction
cooking and warming systems. In Elgin, Illinois, the company manufactures
conveyor ovens. In Mundelein, Illinois, the company manufactures warming
equipment and heated food cabinets. In Menominee, Michigan, the company
manufactures baking ovens and proofers. In Bow, New Hampshire, the company
manufactures fryers, charbroilers and catering equipment products. In
Fuquay-Varina, North Carolina, the company manufactures ranges, steamers,
combi-ovens, convection ovens and broiling equipment. In Smithville,
Tennessee, the company manufacturers counterline cooking equipment and warming
systems, fryers, convection ovens, counterline cooking equipment and ventless
cooking systems. In Dallas, Texas, the company manufacturers high-speed
cooking ovens. In Burlington, Vermont, the company manufactures
combi-ovens, convection ovens and deck oven product lines. In Lodi, Wisconsin,
the company manufactures cooking systems, breading, battering, mixing, forming,
and slicing equipment and packaging equipment that serves customers in the food
processing industry. In Randers, Denmark, the company manufactures
combi-ovens and baking ovens. In Scandicci, Italy, the company manufacturers a
wide array of food service equipment including ranges, fryers and ovens.
In Quebec City, Quebec, Canada, the company manufacturers baking ovens,
proofers, pizza ovens and mixers. In Shanghai, China, the company manufactures
frying systems. In Laguna, the Philippines, the company manufactures fryers,
counterline equipment and component parts for the U.S. manufacturing
facilities.
Metal
fabrication, finishing, sub-assembly and assembly operations are conducted at
each manufacturing facility. Equipment installed at individual
manufacturing facilities includes numerically controlled turret presses and
machine centers, shears, press brakes, welding equipment, polishing equipment,
CAD/CAM systems and product testing and quality assurance measurement
devices. The company's CAD/CAM systems enable virtual electronic
prototypes to be created, reviewed and refined before the first physical
prototype is built.
8
Detailed
manufacturing drawings are quickly and accurately derived from the model and
passed electronically to manufacturing for programming and optimal parts nesting
on various numerically controlled punching cells. The company believes
that this integrated product development and manufacturing process is critical
to assuring product performance, customer service and competitive
pricing.
The
company has established comprehensive programs to ensure the quality of
products, to analyze potential product failures and to certify vendors for
continuous improvement. Products manufactured by the company are tested
prior to shipment to ensure compliance with company standards.
Sources of
Supply
The
company purchases its raw materials and component parts from a number of
suppliers. The majority of the company’s material purchases are standard
commodity-type materials, such as stainless steel, electrical components and
hardware. These materials and parts generally are available in adequate
quantities from numerous suppliers. Some component parts are obtained from
sole sources of supply. In such instances, management believes it can
substitute other suppliers as required. The majority of fabrication is
done internally through the use of automated equipment. Certain equipment
and accessories are manufactured by other suppliers for sale by the
company. The company believes it enjoys good relationships with its
suppliers and considers the present sources of supply to be adequate for its
present and anticipated future requirements.
Research and
Development
The
company believes its future success will depend in part on its ability to
develop new products and to improve existing products. Much of the
company's research and development efforts are directed to the development and
improvement of products designed to reduce cooking time, increase cooking
capacity or throughput, reduce energy consumption, minimize labor costs, improve
product yield and improve safety while maintaining consistency and quality of
cooking production and food preparation. The company has identified these
issues as key concerns for most of its customers. The company often
identifies product improvement opportunities by working closely with customers
on specific applications. Most research and development activities
are performed by the company's technical service and engineering staff located
at each manufacturing location. On occasion, the company will contract
outside engineering firms to assist with the development of certain technical
concepts and applications. See Note 4(n) to the Consolidated Financial
Statements for further information on the company's research and development
activities.
Licenses, Patents, and
Trademarks
The
company owns numerous trademarks and trade names; among them, Alkarâ, Anets®, Blodgettâ, Blodgett Combiâ, Blodgett Rangeâ, Bloomfieldâ, CTXâ, Carter-Hoffmannâ, CookTekâ, Doyonâ, Frifriâ, Gigaâ, Holmanâ, Hounoâ, Jadeâ , L
angâ, MP Equipmentâ, MagiKitch’nâ, Middleby Marshallâ, Nu-Vuâ, Pitco Frialatorâ, RapidPakâ, Southbendâ, Starâ, Toastmasterâ TurboChefâ and Wellsâ are registered with the
U.S. Patent and Trademark Office and in various foreign countries.
The
company holds a broad portfolio of patents covering technology and applications
related to various products, equipment and systems. Management believes
the expiration of any one of these patents would not have a material adverse
effect on the overall operations or profitability of the company.
9
Employees
As of
January 2, 2010, the company employed 1,902 persons. Of this amount, 865
were management, administrative, sales, engineering and supervisory personnel;
835 were hourly production non-union workers; and 202 were hourly production
union members. Included in these totals were 464 individuals employed
outside of the United States, of which 286 were management, sales,
administrative and engineering personnel, 104 were hourly production non-union
workers and 74 were hourly production workers, who participate in an employee
cooperative. At its Lodi, Wisconsin facility, the company has a contract
with the International Association of Bridge, Structural, Ornamental and
Reinforcing Ironworkers that expires on December 31, 2010. At its Elgin,
Illinois facility, the company has a union contract with the International
Brotherhood of Teamsters that expires on April 30, 2012. The company also
has a union workforce at its manufacturing facility in the Philippines, under a
contract that extends through June 2011. Management believes that the
relationships between employees, union and management are good.
Seasonality
The
company’s revenues historically have been stronger in the second and third
quarters due to increased purchases from customers involved with the catering
business and institutional customers, particularly schools, during the summer
months.
10
Item 1A. Risk
Factors
The
company’s business, results of operations, cash flows and financial condition
are subject to various risks, including, but not limited to those set forth
below. If any of the following risks actually occurs, the company's
business, results of operations, cash flows and financial condition could be
materially adversely affected These risk factors should be carefully
considered together with the other information in this Annual Report on Form
10-K, including the risks and uncertainties described under the heading "Special
Note Regarding Forward-Looking Statements."
Economic
conditions may cause a decline in business and consumer spending which could
adversely affect the company’s business and financial performance.
The
company’s operating results are impacted by the health of the North American,
European, Asian and Latin American economies. The company’s business and
financial performance, including collection of its accounts receivable, may be
adversely affected by the current and future economic conditions that caused a
decline in business and consumer spending, a reduction in the availability of
credit and decreased growth by our existing customers, resulting in customers
electing to delay the replacement of aging equipment. Higher energy costs,
rising interest rates, financial market volatility, recession and acts of
terrorism may also adversely affect the company’s business and financial
performance. Additionally, the company may experience difficulties in scaling
its operations due to economic pressures in the U.S. and International
markets.
The
company's level of indebtedness could adversely affect its business, results of
operations and growth strategy.
The
company now has and may continue to have a significant amount of
indebtedness. At January 2, 2010, the company had $275.6 million of
borrowings and $7.8 million in letters of credit outstanding. As of
January 2, 2010, the company could incur an additional $214.4 million under its
credit agreement. To the extent the company requires additional capital
resources, there can be no assurance that such funds will be available on
favorable terms, or at all. The unavailability of funds could have a
material adverse effect on the company's financial condition, results of
operations and ability to expand the company's operations.
The
company's level of indebtedness could adversely affect it in a number of ways,
including the following:
|
•
|
the
company may be unable to obtain additional financing for working capital,
capital expenditures, acquisitions and other general corporate
purposes;
|
|
•
|
a
significant portion of the company's cash flow from operations must be
dedicated to debt service, which reduces the amount of cash the company
has available for other purposes;
|
|
•
|
the
company may be more vulnerable in the event of a downturn in the
company’s business or general economic and industry
conditions;
|
|
•
|
the
company may be disadvantaged competitively by its potential inability to
adjust to changing market conditions, as a result of its significant level
of indebtedness; and
|
|
•
|
the
company may be restricted in its ability to make strategic acquisitions
and to pursue new business
opportunities.
|
11
The
company has a significant amount of goodwill and could suffer losses due to
asset impairment charges.
The
company’s balance sheet includes a significant amount of goodwill, which
represents approximately 44% of its total assets as of January 2, 2010.
The excess of the purchase price over the fair value of assets acquired and
liabilities assumed in conjunction with acquisitions is recorded as other
identifiable intangible assets and goodwill. In accordance with Accounting
Standards Code (“ASC”) 350 “Intangibles-Goodwill and Other”, the company’s
long-lived assets (including goodwill and other intangibles) are reviewed for
impairment annually and whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In assessing the
recoverability of long-lived assets, the company considers changes in economic
conditions and makes assumptions regarding estimated future cash flows and other
factors. A significant decline in stock prices, such as occurred during
2008, could indicate that an impairment has occurred. Estimates of future cash
flows are judgments based on the company’s experience and knowledge of
operations. These estimates can be significantly impacted by many factors,
including changes in global and local business and economic conditions,
operating costs, inflation, competition, and consumer and demographic
trends. If the company’s estimates or the underlying assumptions change in
the future, the company may be required to record impairment charges. Any such
charge could have a material adverse effect on the company’s reported net
earnings.
The
company's current credit agreement limits its ability to conduct business, which
could negatively affect the company's ability to finance future capital needs
and engage in other business activities.
The
covenants in the company's existing credit agreement contain a number of
significant limitations on its ability to, among other things:
|
·
|
pay
dividends;
|
|
·
|
incur
additional indebtedness;
|
|
·
|
create
liens on the company's assets;
|
|
·
|
engage
in new lines of business;
|
|
·
|
make
investments;
|
|
·
|
make
capital expenditures and enter into leases;
and
|
|
·
|
acquire
or dispose of assets.
|
These
restrictive covenants, among others, could negatively affect the company's
ability to finance its future capital needs, engage in other business activities
or withstand a future downturn in the company's business or the
economy.
Under the
company's current credit agreement, the company is required to maintain certain
specified financial ratios and meet financial tests, including certain ratios of
leverage and fixed charge coverage. The company's ability to comply with
these requirements may be affected by matters beyond its control, and, as a
result, there can be no assurance that the company will be able to meet
these ratios and tests. A breach of any of these covenants would prevent
the company from being able to draw under the company revolver and would result
in a default under the company's credit agreement. In the event of a default
under the company's current credit agreement, the lenders could terminate their
commitments and declare all amounts borrowed, together with accrued interest and
other fees, to be due and payable. Borrowings under other debt instruments
that contain cross-acceleration or cross-default provisions may also be
accelerated and become due and payable. The company may be unable to pay
these debts in these circumstances.
12
Competition
in the foodservice equipment industry is intense and could impact the company’s
results of operations and cash flows.
The
company operates in a highly competitive industry. In the company's
business, competition is based on product features and design, brand
recognition, reliability, durability, technology, energy efficiency, breadth of
product offerings, price, customer relationships, delivery lead times,
serviceability and after-sale service. The company has a number of
competitors in each product line that it offers. Many of the company's
competitors are substantially larger and enjoy substantially greater financial,
marketing, technological and personnel resources. These factors may enable them
to develop similar or superior products, to provide lower cost products and to
carry out their business strategies more quickly and efficiently than the
company can. In addition, some competitors focus on particular product lines or
geographic regions or emphasize their local manufacturing presence or local
market knowledge. Some competitors have different pricing structures and may be
able to deliver their products at lower prices. Although the company believes
that the performance and price characteristics of its products will provide
competitive solutions for its customers' needs, there can be no assurance that
the company's customers will continue to choose the company’s products over
products offered by its competitors.
Further,
the market for the company's products is characterized by changing technology
and evolving industry standards. The company's ability to compete in the
past has depended in part on the company's ability to develop innovative new
products and bring them to market more quickly than the company's
competitors. The company's ability to compete successfully will depend, in
large part, on its ability to enhance and improve its existing products, to
continue to bring innovative products to market in a timely fashion, to adapt
the company's products to the needs and standards of its current and potential
customers and to continue to improve operating efficiencies and lower
manufacturing costs. Moreover, competitors may develop technologies or
products that render the company's products obsolete or less marketable. If the
company's products, markets and services are not competitive, the company's
business, financial condition and operating results will be materially
harmed.
The
company is subject to risks associated with developing products and
technologies, which could delay product introductions and result in significant
expenditures.
The
company continually seeks to refine and improve upon the performance, utility
and physical attributes of its existing products and to develop new
products. As a result, the company's business is subject to risks
associated with new product and technological development, including
unanticipated technical or other problems. The occurrence of any of these
risks could cause a substantial change in the design, delay in the development,
or abandonment of new technologies and products. Consequently, there can
be no assurance that the company will develop new technologies superior to the
company's current technologies or successfully bring new products to
market.
Additionally,
there can be no assurance that new technologies or products, if developed, will
meet the company's current price or performance objectives, be developed on a
timely basis or prove to be as effective as products based on other
technologies. The inability to successfully complete the development of a
product, or a determination by the company, for financial, technical or other
reasons, not to complete development of a product, particularly in instances in
which the company has made significant expenditures, could have a material
adverse effect on the company's financial condition and operating
results.
The
company's revenues and profits will be adversely affected if it is unable to
expand its product offerings, retain its current customers, or attract new
customers.
The
success of the company's business depends, in part, on its ability to maintain
and expand the company's product offerings and the company's customer
base. The company's success also depends on its ability to offer
competitive prices and services in a price sensitive business. Many of the
company's larger restaurant chain customers have multiple sources of supply for
their equipment purchases and periodically approve new competitive equipment as
an alternative to the company's products for use within their restaurants.
There can be no assurance that the company will be able to continue to expand
its product lines or that it will be able to retain its current customers or
attract new customers. The company also cannot assure you that it will not
lose customers to low-cost competitors with comparable or superior products and
services. If the company fails to expand its product offerings, or loses a
substantial number of the company's current customers or substantial business
from current customers, or is unable to attract new customers, the company's
business, financial condition and results of operations will be adversely
affected.
13
The
company has depended, and will continue to depend, on key customers for a
material portion of its revenues. As a result, changes in the purchasing
patterns of such key customers could adversely impact the company's operating
results.
Many of
the company's key customers are large restaurant chains. The number of new
store openings by these chains can vary from quarter to quarter depending on
internal growth plans, construction, seasonality and other factors. If
these chains were to conclude that the market for their type of restaurant has
become saturated, they could open fewer restaurants. In addition, during an
economic downturn, key customers could both open fewer restaurants and defer
purchases of new equipment for existing restaurants. Either of these
conditions could have a material adverse effect on the company's financial
condition and results of operations.
Price
changes in some materials and sources of supply could affect the company's
profitability.
The
company uses large amounts of stainless steel, aluminized steel and other
commodities in the manufacture of its products. The price of steel has
increased significantly over the past several years. The significant
increase in the price of steel or any other commodity that the company is not
able to pass on to its customers would adversely affect the company's operating
results. In addition, an interruption in or the cessation of an important
supply by any third party and the company's inability to make alternative
arrangements in a timely manner, or at all, could have a material adverse effect
on the company's business, financial condition and operating
results.
The
company's acquisition, investment and alliance strategy involves risks. If the
company is unable to effectively manage these risks, its business will be
materially harmed.
To
achieve the company's strategic objectives, the company has pursued and may
continue to pursue strategic acquisitions and investments or invest in other
companies, businesses or technologies. Acquisitions entail numerous risks,
including the following:
•
difficulties in the assimilation of acquired businesses or
technologies;
•
diversion of management's attention from other business
concerns;
•
potential assumption of unknown material liabilities;
•
failure to achieve financial or operating objectives;
and
•
loss of customers or key employees.
The
company may not be able to successfully integrate any operations, personnel,
services or products that it has acquired or may acquire in the
future.
The
company may seek to expand or enhance some of its operations by forming joint
ventures or alliances with various strategic partners throughout the
world. Entering into joint ventures and alliances also entails
risks, including difficulties in developing and expanding the businesses of
newly formed joint ventures, exercising influence over the activities of joint
ventures in which the company does not have a controlling interest and potential
conflicts with the company's joint venture or alliance partners.
Expansion
of the company's operations internationally involves special challenges that it
may not be able to meet. The company's failure to meet these challenges could
adversely affect its business, financial condition and operating
results.
The
company plans to continue to expand its operations internationally. The
company faces certain risks inherent in doing business in international markets.
These risks include:
•
extensive
regulations and oversight, tariffs and other trade barriers;
•
reduced protection for intellectual property rights;
•
difficulties in staffing and managing foreign operations;
and
•
potentially adverse tax consequences.
14
In
addition, the company is and will be required to comply with the laws and
regulations of foreign governmental and regulatory authorities of each country
in which the company conducts business.
There can
be no assurance that the company will be able to succeed in marketing its
products and services in international markets. The company may also experience
difficulty in managing its international operations because of, among other
things, competitive conditions overseas, management of foreign exchange risk,
established domestic markets, language and cultural differences and economic or
political instability. Any of these factors could have a material adverse effect
on the success of the company's international operations and, consequently, on
the company's business, financial condition and operating results.
The
company may not be able to adequately protect its intellectual property rights,
and this inability may materially harm its business.
The
company relies primarily on trade secret, copyright, service mark, trademark and
patent law and contractual protections to protect the company’s proprietary
technology and other proprietary rights. The company has filed numerous
patent applications covering the company’s technology. Notwithstanding the
precautions the company takes to protect its intellectual property rights, it is
possible that third parties may copy or otherwise obtain and use the company's
proprietary technology without authorization or may otherwise infringe on the
company's rights. In some cases, including a number of the company's most
important products, there may be no effective legal recourse against duplication
by competitors. In the future, the company may have to rely on litigation
to enforce its intellectual property rights, protect its trade secrets,
determine the validity and scope of the proprietary rights of others or defend
against claims of infringement or invalidity. Any such litigation, whether
successful or unsuccessful, could result in substantial costs to the company and
diversions of the company's resources, either of which could adversely affect
the company's business.
Any
infringement by the company on patent rights of others could result in
litigation and adversely affect its ability to continue to provide, or could
increase the cost of providing, the company's products and
services.
Patents
of third parties may have an important bearing on the company's ability to offer
some of its products and services. The company's competitors, as well as
other companies and individuals, may obtain, and may be expected to obtain in
the future, patents related to the types of products and services the company
offers or plans to offer. There can be no assurance that the company is or
will be aware of all patents containing claims that may pose a risk of
infringement by its products and services. In addition, some patent
applications in the United States are confidential until a patent is issued and,
therefore, the company cannot evaluate the extent to which its products and
services may be covered or asserted to be covered by claims contained in pending
patent applications. In general, if one or more of the company's products
or services were to infringe patents held by others, the company may be required
to stop developing or marketing the products or services, to obtain licenses
from the holders of the patents to develop and market the services, or to
redesign the products or services in such a way as to avoid infringing on the
patent claims. The company cannot assess the extent to which it may be
required in the future to obtain licenses with respect to patents held by
others, whether such licenses would be available or, if available, whether it
would be able to obtain such licenses on commercially reasonable terms. If the
company were unable to obtain such licenses, it also may not be able to redesign
the company's products or services to avoid infringement, which could materially
adversely affect the company's business, financial condition and operating
results.
15
The
company may be the subject of product liability claims or product recalls, and
it may be unable to obtain or maintain insurance adequate to cover potential
liabilities.
Product
liability is a significant commercial risk to the company. The company's
business exposes it to potential liability risks that arise from the
manufacture, marketing and sale of the company's products. In addition to
direct expenditures for damages, settlement and defense costs, there is a
possibility of adverse publicity as a result of product liability claims. Some
plaintiffs in some jurisdictions have received substantial damage awards against
companies based upon claims for injuries allegedly caused by the use of their
products. In addition, it may be necessary for the company to recall products
that do not meet approved specifications, which could result in adverse
publicity as well as costs connected to the recall and loss of
revenue.
The
company cannot be certain that a product liability claim or series of claims
brought against it would not have an adverse effect on the company's business,
financial condition or results of operations. If any claim is brought
against the company, regardless of the success or failure of the claim, the
company cannot assure you that it will be able to obtain or maintain product
liability insurance in the future on acceptable terms or with adequate coverage
against potential liabilities or the cost of a recall.
An
increase in warranty expenses could adversely affect the company's financial
performance.
The
company offers purchasers of its products warranties covering workmanship and
materials typically for one year and, in certain circumstances, for periods of
up to ten years, during which period the company or an authorized service
representative will make repairs and replace parts that have become defective in
the course of normal use. The company estimates and records its future
warranty costs based upon past experience. These warranty expenses may
increase in the future and may exceed the company's warranty reserves, which, in
turn, could adversely affect the company's financial performance.
The
company is subject to currency fluctuations and other risks from its operations
outside the United States.
The
company has manufacturing operations located in Asia and Europe and distribution
operations in Asia, Europe and Latin America. The company's operations are
subject to the impact of economic downturns, political instability and foreign
trade restrictions, which may adversely affect the company's business, financial
condition and operating results. The company anticipates that international
sales will continue to account for a significant portion of consolidated net
sales in the foreseeable future. Some sales by the company's foreign
operations are in local currency, and an increase in the relative value of the
U.S. dollar against such currencies would lead to a reduction in consolidated
sales and earnings. Additionally, foreign currency exposures are not fully
hedged, and there can be no assurances that the company's future results of
operations will not be adversely affected by currency fluctuations.
The
company is subject to potential liability under environmental laws.
The
company's operations are regulated under a number of federal, state and local
environmental laws and regulations that govern, among other things, the
discharge of hazardous materials into the air and water as well as the handling,
storage and disposal of these materials. Compliance with these
environmental laws and regulations is a significant consideration for the
company because it uses hazardous materials in its manufacturing
processes. In addition, because the company is a generator of hazardous
wastes, even if it fully complies with applicable environmental laws, it may be
subject to financial exposure for costs associated with an investigation and
remediation of sites at which it has arranged for the disposal of hazardous
wastes if these sites become contaminated. In the event of a violation of
environmental laws, the company could be held liable for damages and for the
costs of remedial actions. Environmental laws could also become more
stringent over time, imposing greater compliance costs and increasing risks and
penalties associated with any violation, which could negatively affect the
company's operating results.
16
The
company's financial performance is subject to significant
fluctuations.
The
company's financial performance is subject to quarterly and annual fluctuations
due to a number of factors, including:
•
general economic conditions;
•
the
lengthy, unpredictable sales cycle for commercial foodservice equipment and food
processing equipment;
•
the gain or loss of significant customers;
•
unexpected delays in new product introductions;
•
the level
of market acceptance of new or enhanced versions of the company's
products;
•
unexpected changes in the levels of the company's operating
expenses; and
•
competitive product offerings and pricing actions.
Each of
these factors could result in a material and adverse change in the company's
business, financial condition and results of operations.
The
company may be unable to manage its growth.
The
company has recently experienced rapid growth in business. Continued growth
could place a strain on the company's management, operations and financial
resources. There also will be additional demands on the company's sales,
marketing and information systems and on the company's administrative
infrastructure as it develops and offers additional products and enters new
markets. The company cannot be certain that the company's operating
and financial control systems, administrative infrastructure, outsourced and
internal production capacity, facilities and personnel will be adequate to
support the company's future operations or to effectively adapt to future
growth. If the company cannot manage the company's growth effectively, the
company's business may be harmed.
The
company's business could suffer in the event of a work stoppage by its unionized
labor force.
Because
the company has a significant number of workers whose employment is subject to
collective bargaining agreements and labor union representation, the company is
vulnerable to possible organized work stoppages and similar actions.
Unionized employees accounted for approximately 11% of the company's workforce
as of January 2, 2010 The company has union contracts with employees
at its facilities in Lodi, Wisconsin and Elgin, Illinois that extend through
December 2011 and April 2012, respectively. The company also has a union
workforce at its manufacturing facility in the Philippines under a contract that
extends through June 2011. Any future strikes, employee slowdowns or
similar actions by one or more unions, in connection with labor contract
negotiations or otherwise, could have a material adverse effect on the company's
ability to operate the company's business.
The
company depends significantly on its key personnel.
The
company depends significantly on certain of the company's executive officers and
certain other key personnel, many of whom could be difficult to replace.
While the company has employment agreements with certain key executives, the
company cannot be certain that it will succeed in retaining this personnel or
their services under existing agreements. The incapacity, inability or
unwillingness of certain of these people to perform their services may have a
material adverse effect on the company. There is intense competition for
qualified personnel within the company's industry, and there can be no assurance
that it will be able to continue to attract, motivate and retain personnel with
the skills and experience needed to successfully manage the company business and
operations.
17
The
impact of future transactions on the company's common stock is
uncertain.
The
company periodically reviews potential transactions related to products or
product rights and businesses complementary to the company's business.
Such transactions could include mergers, acquisitions, joint ventures, alliances
or licensing agreements. In the future, the company may choose to enter
into such transactions at any time. The impact of transactions on the
market price of a company's stock is often uncertain, but it may cause
substantial fluctuations to the market price. Consequently, any
announcement of any such transaction could have a material adverse effect upon
the market price of the company's common stock. Moreover, depending upon
the nature of any transaction, the company may experience a charge to earnings,
which could be material and could possibly have an adverse impact upon the
market price of the company's common stock.
Future
sales or issuances of equity or convertible securities could depress the market
price of the company's common stock and be dilutive and affect the company's
ability to raise funds through equity issuances.
If the
company's stockholders sell substantial amounts of the company's common stock or
the company issues substantial additional amounts of the company's equity
securities, or there is a belief that such sales or issuances could occur, the
market price of the company's common stock could fall. These factors could also
make it more difficult for the company to raise funds through future offerings
of equity securities.
The
market price of the company's common stock may be subject to significant
volatility.
The
market price of the company's common stock may be highly volatile because of a
number of factors, including the following:
•
actual or anticipated fluctuations in the company's operating
results;
|
•
|
changes
in expectations as to the company's future financial performance,
including financial estimates by securities analysts and
investors;
|
|
•
|
the
operating performance and stock price of other companies in the company's
industry;
|
|
•
|
announcements
by the company or the company's competitors of new products or significant
contracts, acquisitions, joint ventures or capital
commitments;
|
•
changes in interest rates;
•
additions or departures of key personnel; and
•
future sales or issuances of the company's common
stock.
In
addition, the stock markets from time to time experience price and volume
fluctuations that may be unrelated or disproportionate to the operating
performance of particular companies. These broad fluctuations may
adversely affect the trading price of the company's common stock, regardless of
the company's operating performance.
Item 1B.
Unresolved Staff Comments
Not
applicable.
18
Item 2.
Properties
The
company's principal executive offices are located in Elgin, Illinois. The
company operates thirteen manufacturing facilities in the U.S and manufacturing
facilities in Canada, China, Denmark, Italy and the Phillipines.
The
principal properties of the company utilized to conduct business operations are
listed below:
Location
|
Principal
Function
|
Square
Footage
|
Owned/
Leased
|
Lease
Expiration
|
||||||
Brea,
CA
|
Manufacturing,
Warehousing and Offices
|
72,000 |
Leased
|
June
2015
|
||||||
Buford,
GA
|
Warehousing
and Offices
|
17,350 |
Leased
|
February
2013/
|
||||||
30,000 |
Leased
|
December 2014
|
||||||||
Chicago,
IL
|
Manufacturing,
Warehousing and Offices
|
30,800 |
Leased
|
March
2010/
|
||||||
|
November
2012
|
|||||||||
Elgin,
IL
|
Manufacturing,
Warehousing and Offices
|
207,000 |
Owned
|
N/A
|
||||||
Mundelein,
IL
|
Manufacturing,
Warehousing and Offices
|
55,000 |
Owned
|
N/A
|
||||||
|
|
33,000 |
Owned
|
N/A
|
||||||
Menominee,
MI
|
Manufacturing,
Warehousing and Offices
|
46,000 |
Owned
|
N/A
|
||||||
St.
Louis, MO
|
Offices
|
47,250 |
Leased
|
August
2010
|
||||||
Bow,
NH
|
Manufacturing,
Warehousing and Offices
|
102,000 |
Owned
|
N/A
|
||||||
|
34,000 |
Leased
|
March
2010
|
|||||||
Fuquay-Varina,
NC
|
Manufacturing,
Warehousing and Offices
|
131,000 |
Owned
|
N/A
|
||||||
Smithville,
TN
|
Manufacturing,
Warehousing and Offices
|
190,000 |
Owned
|
N/A
|
||||||
Carrollton,
TX
|
Manufacturing,
Warehousing and Offices
|
110,100 |
Leased
|
September
2012/
|
||||||
November
2012
|
||||||||||
Burlington,
VT
|
Manufacturing,
Warehousing and Offices
|
140,000 |
Owned
|
N/A
|
||||||
Lodi,
WI
|
Manufacturing,
Warehousing and Offices
|
112,000 |
Owned
|
N/A
|
||||||
Quebec
City, Canada
|
Manufacturing,
Warehousing and Offices
|
36,000 |
Owned
|
N/A
|
||||||
Shanghai,
China
|
Manufacturing,
Warehousing and Offices
|
37,500 |
Leased
|
July
2012
|
||||||
Randers,
Denmark
|
Manufacturing,
Warehousing and Offices
|
50,100 |
Owned
|
N/A
|
||||||
Scandicco,
Italy
|
Manufacturing,
Warehousing and Offices
|
106,350 |
Leased
|
March
2014
|
||||||
Laguna,
the Philippines
|
Manufacturing,
Warehousing and Offices
|
54,000 |
Owned
|
N/A
|
At
various other locations the company leases small amounts of office space for
administrative and sales functions, and in certain instances limited short-term
inventory storage. These locations are in China, Mexico, Spain, Sweden,
Taiwan and the United Kingdom.
Management
believes that these facilities are adequate for the operation of the company's
business as presently conducted.
The
company also has a leased manufacturing facility in Quakertown, Pennsylvania,
which was exited as part of the company's manufacturing consolidation
efforts. This lease extends through June 2015. Additionally, the
company has a leased manufacturing facility in Verdi, Nevada, which was exited
as part of the company’s consolidation efforts. This lease extends through June
2012.
19
Item 3.
Legal Proceedings
The
company is routinely involved in litigation incidental to its business,
including product liability claims, which are partially covered by insurance or
in certain cases by indemnification provisions under purchase agreements for
recently acquired companies. Such routine claims are vigorously contested
and management does not believe that the outcome of any such pending litigation
will have a material adverse effect upon the financial condition, results of
operations or cash flows of the company.
Item 4.
Reserved
20
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Principal
Market
The
company's Common Stock trades on the Nasdaq Global Market under the symbol
"MIDD". The following table sets forth, for the periods indicated, the
high and low closing sale prices per share of Common Stock, as reported by the
Nasdaq Global Market.
Closing Share Price
|
||||||||
High
|
Low
|
|||||||
Fiscal 2009
|
||||||||
First
quarter
|
35.65 | 20.76 | ||||||
Second
quarter
|
49.76 | 33.75 | ||||||
Third
quarter
|
56.51 | 39.34 | ||||||
Fourth
quarter
|
53.00 | 43.67 | ||||||
Fiscal 2008
|
||||||||
First
quarter
|
76.62 | 53.76 | ||||||
Second
quarter
|
67.23 | 44.52 | ||||||
Third
quarter
|
63.96 | 39.90 | ||||||
Fourth
quarter
|
54.31 | 24.80 |
Shareholders
The
company estimates there were approximately 34,005 record holders of the
company's common stock as of February 26, 2010.
Dividends
The
company does not currently pay cash dividends on its common stock. Any
future payment of cash dividends on the company’s common stock will be at the
discretion of the company’s Board of Directors and will depend upon the
company’s results of operations, earnings, capital requirements, contractual
restrictions and other factors deemed relevant by the Board of Directors.
The company’s Board of Directors currently intends to retain any future earnings
to support its operations and to finance the growth and development of the
company’s business and does not intend to declare or pay cash dividends on its
common stock for the foreseeable future. In addition, the company’s
revolving credit facility limits its ability to declare or pay dividends on its
common stock.
21
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
|
|||||||||||||
October
4, 2009 to October 31, 2009
|
— | — | — | 627,332 | ||||||||||||
November
1, 2009 to November 28, 2009
|
— | — | — | 627,332 | ||||||||||||
November
29, 2009 to January 2, 2010
|
— | — | — | 627,332 | ||||||||||||
Quarter
ended January 2, 2010
|
— | — | — | 627,332 |
In July
1998, the company's Board of Directors adopted a stock repurchase program and
subsequently authorized the purchase of up to 1,800,000 common shares in open
market purchases. As of January 2, 2010, 1,172,668 shares had been
purchased under the 1998 stock repurchase program.
In May
2007, the company’s Board of Directors approved a two-for-one stock split of the
company’s common stock in the form of a stock dividend. The stock split
was paid to shareholders of record as of June 1, 2007. The company’s stock
began trading on a stock-adjusted basis on June 18, 2007. The stock split
effectively doubled the number of shares outstanding at June 15,
2007.
At
January 2, 2010, the company had a total of 4,069,913 shares in treasury
amounting to $102.0 million.
22
Item 6. Selected
Financial Data
(amounts in thousands,
except per share data)
Fiscal Year
Ended(1)(2)
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Income
Statement Data:
|
||||||||||||||||||||
Net
sales
|
$ | 646,629 | $ | 651,888 | $ | 500,472 | $ | 403,131 | $ | 316,668 | ||||||||||
Cost
of sales
|
396,001 | 403,746 | 308,107 | 246,254 | 195,015 | |||||||||||||||
Gross
profit
|
250,628 | 248,142 | 192,365 | 156,877 | 121,653 | |||||||||||||||
Selling
and distribution expenses
|
64,239 | 63,593 | 50,769 | 40,371 | 33,772 | |||||||||||||||
General
and administrative expenses
|
74,948 | 64,931 | 48,663 | 39,605 | 29,909 | |||||||||||||||
Income
from operations
|
111,441
|
119,618
|
92,933
|
76,901
|
57,972
|
|||||||||||||||
Interest
expense and deferred financing amortization, net
|
11,594
|
12,982
|
5,855 | 6,932 | 6,437 | |||||||||||||||
Debt
extinguishment expenses
|
— | — | 481 | — | — | |||||||||||||||
Loss
(gain) on financing derivatives
|
— | — | 314 | — | — | |||||||||||||||
Other
expense (income), net
|
121 | 2,414 | (1,696 | ) | 161 | 137 | ||||||||||||||
Earnings
before income taxes
|
99,726 | 104,222 | 87,979 | 69,808 | 51,398 | |||||||||||||||
Provision
for income taxes
|
38,570 | 40,321 | 35,365 | 27,431 | 19,220 | |||||||||||||||
Net
earnings
|
$ | 61,156 | $ | 63,901 | $ | 52,614 | $ | 42,377 | $ | 32,178 | ||||||||||
Net
earnings per share:
|
||||||||||||||||||||
Basic
|
$ | 3.47 | $ | 4.00 | $ | 3.35 | $ | 2.77 | $ | 2.14 | ||||||||||
Diluted
|
$ | 3.29 | $ | 3.75 | $ | 3.11 | $ | 2.57 | $ | 1.99 | ||||||||||
Weighted
average number of shares outstanding:
|
||||||||||||||||||||
Basic
|
17,605 | 15,978 | 15,694 | 15,286 | 15,028 | |||||||||||||||
Diluted
|
18,575 | 17,030 | 16,938 | 16,518 | 16,186 | |||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Working
capital
|
$ | 70,670 | $ | 68,198 | $ | 61,573 | $ | 11,512 | $ | 7,590 | ||||||||||
Total
assets
|
816,346 | 654,498 | 413,647 | 288,323 | 267,219 | |||||||||||||||
Total
debt
|
275,641 | 234,700 | 96,197 | 82,802 | 121,595 | |||||||||||||||
Stockholders'
equity
|
342,655 | 227,960 | 182,912 | 100,573 | 48,500 |
(1)
|
The
company's fiscal year ends on the Saturday nearest to
December 31.
|
(2)
|
The
prior years’ net earnings per share, the number of shares and cash
dividends declared have been adjusted to reflect the company’s stock split
that occurred on June 15, 2007.
|
23
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Special Note Regarding
Forward-Looking Statements
This
report contains "forward-looking statements" subject to the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve
known and unknown risks, uncertainties and other factors, which could cause the
company's actual results, performance or outcomes to differ materially from
those expressed or implied in the forward-looking statements. The following are
some of the important factors that could cause the company's actual results,
performance or outcomes to differ materially from those discussed in the
forward-looking statements:
|
·
|
changing
market conditions;
|
|
·
|
volatility
in earnings resulting from goodwill impairment losses, which may occur
irregularly and in varying amounts;
|
|
·
|
variability
in financing costs;
|
|
·
|
quarterly
variations in operating results;
|
|
·
|
dependence
on key customers;
|
|
·
|
risks
associated with the company's foreign operations, including market
acceptance and demand for the company's products and the company's ability
to manage the risk associated with the exposure to foreign currency
exchange rate fluctuations;
|
|
·
|
the
company's ability to protect its trademarks, copyrights and other
intellectual property;
|
|
·
|
the
impact of competitive products and
pricing;
|
|
·
|
the
timely development and market acceptance of the company's products;
and
|
|
·
|
the
availability and cost of raw
materials.
|
The
company cautions readers to carefully consider the statements set forth in the
section entitled "Item 1A Risk Factors" of this filing and discussion of risks
included in the company's Securities and Exchange Commission
filings.
24
NET SALES
SUMMARY
(dollars
in thousands)
Fiscal Year Ended(1)
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
Sales
|
Percent
|
Sales
|
Percent
|
Sales
|
Percent
|
|||||||||||||||||||
Business Divisions:
|
||||||||||||||||||||||||
Commercial
Foodservice
|
$ | 558,677 | 86.4 | % | $ | 547,351 | 84.0 | % | $ | 403,735 | 80.7 | % | ||||||||||||
Food
Processing
|
65,925 | 10.2 | 78,510 | 12.0 | 70,467 | 14.1 | ||||||||||||||||||
International
Distribution Division (2)
|
52,772 | 8.2 | 62,427 | 9.6 | 62,476 | 12.5 | ||||||||||||||||||
Intercompany
sales (3)
|
(30,745 | ) | (4.8 | ) | (36,400 | ) | (5.6 | ) | (36,206 | ) | (7.3 | ) | ||||||||||||
Total
|
$ | 646,629 | 100.0 | % | $ | 651,888 | 100.0 | % | $ | 500,472 | 100.0 | % | ||||||||||||
(1)
|
The
company's fiscal year ends on the Saturday nearest to December
31.
|
(2)
|
Consists
of sales of products manufactured by Middleby and products manufactured by
third parties.
|
(3)
|
Represents
the elimination of sales from the Commercial Foodservice Equipment Group
to the International Distribution
Division.
|
Results of
Operations
The following table sets forth certain
items in the consolidated statements of earnings as a percentage of net sales
for the periods presented:
Fiscal Year Ended(1)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost
of sales
|
61.2 | 61.9 | 61.6 | |||||||||
Gross
profit
|
38.8 | 38.1 | 38.4 | |||||||||
Selling,
general and administrative expenses
|
21.6 | 19.8 | 19.8 | |||||||||
Income
from operations
|
17.2 | 18.3 | 18.6 | |||||||||
Interest
expense and deferred financing amortization,
net
|
1.8 | 2.0 | 1.2 | |||||||||
Debt
extinguishment expenses
|
— | — | 0.1 | |||||||||
Loss
on financing derivatives
|
— | — | — | |||||||||
Other
expense (income), net
|
— | 0.4 | (0.3 | ) | ||||||||
Earnings
before income taxes
|
15.4 | 15.9 | 17.6 | |||||||||
Provision
for income taxes
|
5.9 | 6.1 | 7.1 | |||||||||
Net
earnings
|
9.5 | % | 9.8 | % | 10.5 | % |
(1)
|
The
company's fiscal year ends on the Saturday nearest to December
31.
|
25
Fiscal Year Ended January 2,
2010 as Compared to January 3, 2009
Net
sales. Net sales in fiscal 2009 decreased by $5.3 million or 0.8%
to $646.6 million as compared to $651.9 million in fiscal 2008. The
decline in net sales was net of an increase of $89.7 million or 13.8%
attributable to acquisition growth, resulting from the fiscal 2008 acquisitions
of Giga and Frifri and the fiscal 2009 acquisitions of TurboChef, CookTek, Anets
and Doyon. Excluding acquisitions, net sales decreased $95.0 million or
14.6% from the prior year. Sales of both the Commercial Foodservice Equipment
Group and the Food Processing Equipment Group were affected by the economic
slowdown which has affected the commercial foodservice and food processing
equipment customer purchases.
Net sales
of the Commercial Foodservice Equipment Group increased by $11.3 million or 2.1%
to $558.7 million in 2009 as compared to $547.4 million in fiscal 2008. Net
sales from the acquisitions of Giga, Frifri, TurboChef, CookTek, Anets and Doyon
which were acquired on April 22, 2008, April 23, 2008, April 27, 2009, April 30,
2009 and December 14, 2009 respectively, accounted for an increase of $89.8
million during the fiscal year 2009. Excluding the impact of acquisitions,
net sales of commercial foodservice equipment decreased $95.0 million or 14.6%
as compared to the prior year, primarily as a result of economic
slowdown.
Net sales
for the Food Processing Equipment Group were $65.9 million as compared to $78.5
million in fiscal 2008. Food processing equipment purchases are generally
cyclical and are impacted by global economic conditions. Food processors
reduced capital expenditures and deferred purchasing decisions in 2009, due in
large part to global economic conditions.
Net sales
for the International Distribution Division decreased by $9.6 million to $52.8
million, as compared to $62.4 million in the prior year. International
sales declined as a result of the global recession. Difficult economic
conditions in Europe resulted in lower equipment purchases from foodservice
operators. New restaurant growth in emerging markets such as China, India
and Latin America were affected as the global restaurant chains reduced store
openings in the short-term in response to the economic conditions.
The company records an
elimination of its sales from the Commercial Foodservice Group to the
International Distribution Division. This sales elimination decreased by
$5.7 million to $30.7 million reflecting the decrease in purchases of equipment
by the International Distribution Division from the Commercial Foodservice
Equipment Group.
Gross
profit. Gross profit increased by $2.5 million to $250.6 million in
fiscal 2009 from $248.1 million in 2008. The gross margin rate increased from
38.1% in 2008 to 38.8% in 2009. The net increase in the gross margin rate
reflects:
|
·
|
Improved
margins at certain of the newly acquired operating companies which have
improved due to acquisition integration initiatives including costs
savings from plant consolidations
|
|
·
|
Reduced
material costs associated with steel prices and other supply chain
initiatives
|
|
·
|
The
adverse impact of lower sales
volumes
|
Selling,
general and administrative expenses. Combined selling, general, and
administrative expenses increased by $10.7 million to $139.2 million in 2009
from $128.5 million in 2008. As a percentage of net sales, operating
expenses amounted to 21.6% in 2009 as compared to 19.8% in 2008.
Selling
expenses increased $0.6 million to $64.2 million from $63.6 million, reflecting
an increase of $8.6 million associated with the newly acquired Giga, Frifri,
TurboChef, CookTek, Anets and Doyon operations offset by $6.8 million in reduced
commissions resulting from the slowdown in sales.
General
and administrative expenses increased $10.0 million to $74.9 million from $64.9
million, reflecting an increase of $10.4 million associated with the newly
acquired Giga, Frifri, TurboChef, CookTek, Anets and Doyon operations offset by
reduced incentive compensation expense. General and administrative
expenses also included non-recurring expense of $5.1 million associated with the
closure and consolidation of a production facility in Verdi, Nevada which had
produced products under the Wells and Bloomfield brands.
26
Income
from operations. Income from operations decreased $3.6 million to
$111.4 million in fiscal 2009 from $119.6 million in fiscal 2008. The
decrease in operating income resulted from the higher operating expenses related
to the newly acquired companies and non-recurring charges associated with the
facility consolidation. Operating income as a percentage of net sales
declined from 18.3% in 2008 to 17.2% in 2009.
Non-operating
expenses. Non-operating expenses decreased $3.7 million to $11.7
million in 2009 from $15.4 million in 2008. Net interest expense decreased
$1.4 million from $13.0 million in 2008 to $11.6 million in 2009 as a result of
lower borrowing costs resulting from the decline in interest rates in
2009. Other expense decreased $2.3 million from $2.4 million in 2008 to
$0.1 million in 2009 and consisted primarily of foreign exchange gains and
losses.
Income
taxes. A tax provision of $38.6 million, at an effective rate of
38.7%, was recorded for 2009 as compared to $40.3 million at a 38.7% effective
rate in 2008.
Fiscal Year Ended January 3,
2009 as Compared to December 29, 2007
Net
sales. Net sales in fiscal 2008 increased by $151.4 million or
30.3% to $651.9 million as compared to $500.5 million in fiscal 2007.
The net sales increase included $174.4 million or 21.8% attributable to
acquisition growth, resulting from the fiscal 2007 acquisitions of Jade,
Carter-Hoffmann, MP Equipment and Wells Bloomfield, the fiscal 2008 acquisitions
of Star, Giga and Frifri. Excluding acquisitions, net sales decreased
$23.0 million or 4.6% from the prior year, as a result of the economic slowdown
that occurred late in the third quarter of 2008. Sales of both the
Commercial Foodservice Equipment Group and the Food Processing Equipment Group
were affected by the economic slowdown which began in early 2008 and worsened in
the third quarter of 2008. The difficult economic conditions are expected
to continue in 2009 as food processors and restaurant operators have reduced
spending on capital equipment.
Net sales
of the Commercial Foodservice Equipment Group increased by $143.6 million or
35.6% to $547.4 million in 2008 as compared to $403.7 million in fiscal 2007.
Net sales from the acquisitions of Jade, Carter-Hoffmann, Wells Bloomfield,
Star, Giga and Frifri which were acquired on April 1, 2007, June 28, 2007,
August 3, 2007, December 31, 2007, April 22, 2008 and April 23, 2008,
respectively, accounted for an increase of $154.5 million during the fiscal year
2008. Excluding the impact of acquisitions, net sales of commercial
foodservice equipment decreased $10.0 million or 1.8% as compared to the prior
year, primarily as a result of the economic slowdown.
Net sales
for the Food Processing Equipment Group were $78.5 million as compared to $70.5
million in fiscal 2007. Net sales of MP Equipment, which was acquired on
July 2, 2007, accounted for an increase of $19.9 million. Excluding the
impact of acquisitions, net sales of food processing equipment decreased $11.9
million or 16.9% as compared to the prior year, due to a slowdown in purchase
orders from food processing customers who reduced their capital expenditures
during the year. Food processing equipment purchases are generally
cyclical and are impacted by global economic conditions.
Net sales
for the International Distribution Division decreased slightly by $0.1 million
to $62.4 million, as compared to $62.5 million in the prior year. The net
sales decrease reflects a $3.9 million decrease in Europe offset by a $1.2
million increase in Asia and a $2.5 million increase in Latin America resulting
from expansion of the U.S. chains and increased business with local restaurant
chains in the region.
The company records an
elimination of its sales from the Commercial Foodservice Group to the
International Distribution Division. This sales elimination increased by
$0.2 million to $36.4 million reflecting the increase in purchases of equipment
by the International Distribution Division from the Commercial Foodservice
Equipment Group due to increased products distributed from recently acquired
companies.
27
Gross
profit. Gross profit increased by $55.8 million to $248.1 million
in fiscal 2008 from $192.4 million in 2007, reflecting the impact of higher
sales volumes. The gross margin rate decreased from 38.4% in 2007 to 38.1% in
2008. The net decrease in the gross margin rate reflects:
|
·
|
The
adverse impact of steel costs which have risen significantly from the
prior year.
|
|
·
|
Improved
margins at certain of the newly acquired operating companies which have
improved due to acquisition integration
initiatives.
|
|
·
|
Higher
margins associated with new product
sales.
|
Selling,
general and administrative expenses. Combined selling, general, and
administrative expenses increased by $29.1 million to $128.5 million in 2008
from $99.4 million in 2007. As a percentage of net sales, operating
expenses amounted to 19.8% in both 2008 and 2007.
Selling
expenses increased $12.8 million to $63.6 million from $50.8 million, reflecting
an increase of $16.4 million associated with the newly acquired Jade,
Carter-Hoffmann, MP Equipment, Wells Bloomfield, Star, Giga and Frifri
operations offset by $2.5 million in reduced commissions resulting from the
slowdown in sales.
General
and administrative expenses increased $16.2 million to $64.9 million from $48.7
million, reflecting an increase of $13.1 million associated with the newly
acquired Jade, Carter-Hoffmann, MP Equipment, Wells Bloomfield, Star, Giga and
Frifri operations. General and administrative expenses also includes $3.6
million in increased expense associated with non-cash share-based
compensation.
Income
from operations. Income from operations increased $26.7 million to
$119.6 million in fiscal 2008 from $92.9 million in fiscal 2007. The
increase in operating income resulted from the increase in net sales and gross
profit resulting from the acquisitions. Operating income as a percentage
of net sales declined from 18.6% in 2007 to 18.3% in 2008. The reduction
in operating income percentage reflects lower gross margins, which were impacted
by higher steel costs.
Non-operating
expenses. Non-operating expenses increased $10.4 million to $15.4
million in 2008 from $5.0 million in 2007. Net interest expense increased
$6.6 million from $6.4 million in 2007 to $13.0 million in 2008 as a result of
increased borrowings to finance acquisitions. The company recorded $2.4
million of other expense in 2008, which included foreign exchange losses of $1.9
million that resulted from the strengthening of the U.S. Dollar against
currencies at most of the company’s foreign operations.
Income
taxes. A tax provision of $40.3 million, at an effective rate of
38.7%, was recorded for 2008 as compared to $35.4 million at a 40.2% effective
rate in 2007. The reduced effective rate reflects lower state income taxes
at certain of the newly acquired companies due to their location in a more
favorable tax jurisdiction. The company also received increased U.S.
federal tax deductions related to domestic manufacturing
activities.
Financial
Condition and Liquidity
Total cash and cash equivalents
increased by $2.2 million to $8.4 million at January 2, 2010 from $6.2 million
at January 3, 2009. Net borrowings increased to $275.6 million at January
2, 2010 from $234.7 million at January 3, 2009.
Operating
activities. Net cash provided by operating activities after
changes in assets and liabilities amounted to $100.8 million as compared to
$85.3 million in the prior year.
Adjustments
to reconcile 2009 net earnings to operating cash flows included $6.3 million of
depreciation and $9.6 million of amortization, $10.7 million of non-cash stock
compensation expense and $11.1 million of deferred tax
provision.
28
The
changes in working capital included: a $23.1 million decrease in accounts
receivable as a result of reduced sales volumes; a $17.3 million decrease in
inventories, resulting from lower sales volumes, reductions in inventory
resulting from plant consolidations and the depletion of inventory associated
with a large order for a major chain customer in the first quarter of 2009; and
a $4.6 million decrease in accounts payable as a result of reduced purchasing
volumes. Prepaid and other assets increased $8.7 million. Accrued expenses
and other liabilities increased by $25.2 million as a result of increased
liabilities associated with plant consolidation initiatives and deferred
payments relating to acquisitions completed in 2009.
Investing
activities. During 2009, net cash used for investing
activities amounted to $139.0 million. This included $133.3 million of
acquisition related investments, which included $116.1 million paid in
connection with the acquisition of TurboChef, $8.0 million paid in connection
with the acquisition of CookTek, $3.4 million paid in connection with the
acquisition of Anets, $5.8 million paid in connection with the acquisition of
Doyon. Additional investing activities included $5.7 million of additions
and upgrades of production equipment, manufacturing facilities and training
equipment.
Financing
activities. Net cash flows from financing activities amounted to
$39.2 million in 2009. The company’s borrowing activities under debt
agreements included $39.6 million of borrowings under its senior secured
revolving credit facility and $0.3 million in repayments of foreign loans.
The net borrowings, along with cash generated from operating activities, were
utilized to fund acquisition activities and capital expenditures.
The
company’s financing activities are primarily funded from borrowings under its
senior secured revolving credit facility that matures in December 2012.
This facility was amended in August 2008 to provide for the acquisition of
TurboChef Technologies, Inc. and increase the total amount of borrowing
availability to $497.5 million. Total outstanding borrowings under this facility
amounted to $265.9 million at January 2, 2010. The company also has
borrowing facilities in Denmark and Italy to fund local operating activities.
Borrowings under these foreign facilities are denominated in local currency and
amounted to $9.7 million at January 2, 2010.
At
January 2, 2010, the company was in compliance with all covenants pursuant to
its borrowing agreements. Management believes that future cash flows from
operating activities and borrowing availability under the revolving credit
facility will provide the company with sufficient financial resources to meet
its anticipated requirements for working capital, capital expenditures and debt
amortization for the foreseeable future.
Contractual
Obligations
The company's contractual cash payment
obligations are set forth below (dollars in thousands):
Amounts
|
Total
|
|||||||||||||||||||
Due Sellers
|
Idle
|
Contractual
|
||||||||||||||||||
From
|
Long-term
|
Operating
|
Facility
|
Cash
|
||||||||||||||||
Acquisition
|
Debt
|
Leases
|
Lease
|
Obligations
|
||||||||||||||||
Less
than 1 year
|
$ | 3,278 | $ | 7,517 | $ | 4,068 | $ | 746 | $ | 15,609 | ||||||||||
1-3
years
|
3,955 | 266,560 | 6,788 | 1,341 | 278,644 | |||||||||||||||
4-5
years
|
1,751 | 1,564 | 2,477 | 768 | 6,560 | |||||||||||||||
After
5 years
|
— | — | 266 | 244 | 510 | |||||||||||||||
$ | 8,984 | $ | 275,641 | $ | 13,599 | $ | 3,099 | $ | 301,323 |
Idle facility lease consists of
obligations for two manufacturing locations that were exited in conjunction with
the company's manufacturing consolidation efforts. These lease obligations
continues through June 2015. These obligations presented above do not
reflect anticipated sublease income from the facilities.
29
As
indicated in Note 11 to the consolidated financial statements, the company’s
projected benefit obligation under its defined benefit plans exceeded the plans’
assets by $10.4 million at the end of 2009 as compared to $9.5 million at the
end of 2008. The unfunded benefit obligations were comprised of a $3.3
million underfunding of the company’s Smithville plan, which was acquired as
part of the Star acquisition, $1.0 million underfunding of the company's union
plan and $6.1 million underfunding of the company's director plans. The
company does not expect to contribute to the director plans in 2010. The
company made minimum contributions required by the Employee Retirement Income
Security Act of 1974 (“ERISA”) of $0.3 million in 2009 and 2008 to the company’s
Smithville plan and $0.1 million in 2008 and 2007 to the company's union
plan. The company expects to continue to make minimum contributions to the
Smithville plan as required by ERISA, which are expected to be $0.3 million in
2010.
The
company places purchase orders with its suppliers in the ordinary course of
business. These purchase orders are generally to fulfill short-term
manufacturing requirements of less than 90 days and most are cancelable with a
restocking penalty. The company has no long-term purchase contracts or
minimum purchase obligations with any supplier.
The company has contractual obligations
under its various debt agreements to make interest payments. These amounts
are subject to the level of borrowings in future periods and the interest rate
for the applicable periods, and therefore the amounts of these payments are not
determinable.
The company has no activities,
obligations or exposures associated with off-balance sheet
arrangements.
Related Party
Transactions
From
January 4, 2009 through the date hereof, there were no transactions between the
company, its directors and executive officers that are required to be disclosed
pursuant to Item 404 of Regulation S-K, promulgated under the Securities and
Exchange Act of 1934, as amended.
Critical Accounting Policies
and Estimates
Management's
discussion and analysis of financial condition and results of operations are
based upon the company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses as well as related disclosures. On an
ongoing basis, the company evaluates its estimates and judgments based on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue
Recognition. The
company recognizes revenue on the sale of its products when risk of loss has
passed to the customer, which occurs at the time of shipment, and collectibility
is reasonably assured. The sale prices of the products sold are fixed and
determinable at the time of shipment. Sales are reported net of sales
returns, sales incentives and cash discounts based on prior experience and other
quantitative and qualitative factors.
At the Food Processing Equipment Group,
the company enters into long-term sales contracts for certain products.
Revenue under these long-term sales contracts is recognized using the percentage
of completion method prescribed by American Institute of Certified Public
Accountants Statement of Position No. 81-1 due to the length of time to fully
manufacture and assemble the equipment. The company measures revenue
recognized based on the ratio of actual labor hours incurred in relation to the
total estimated labor hours to be incurred related to the contract.
Because estimated labor hours to complete a project are based upon forecasts
using the best available information, the actual hours may differ from original
estimates. The percentage of completion method of accounting for these
contracts most accurately reflects the status of these uncompleted contracts in
the company's financial statements and most accurately measures the matching of
revenues with expenses. At the time a loss on a contract becomes known,
the amount of the estimated loss is recognized in the consolidated financial
statements.
30
Property
and equipment.
Property and equipment are depreciated or amortized on a straight-line basis
over their useful lives based on management's estimates of the period over which
the assets will be utilized to benefit the operations of the company. The useful
lives are estimated based on historical experience with similar assets, taking
into account anticipated technological or other changes. The company
periodically reviews these lives relative to physical factors, economic factors
and industry trends. If there are changes in the planned use of property and
equipment or if technological changes were to occur more rapidly than
anticipated, the useful lives assigned to these assets may need to be shortened,
resulting in the recognition of increased depreciation and amortization expense
in future periods.
Long-lived
assets. Long-lived assets (including goodwill and other
intangibles) are reviewed for impairment annually and whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In assessing the recoverability of the company's long-lived assets,
the company considers changes in economic conditions and makes assumptions
regarding estimated future cash flows and other factors. Estimates of
future cash flows are judgments based on the company's experience and knowledge
of operations. These estimates can be significantly impacted by many
factors including changes in global and local business and economic conditions,
operating costs, inflation, competition, and consumer and demographic
trends. If the company's estimates or the underlying assumptions change in
the future, the company may be required to record impairment
charges.
Warranty.
In the normal course of business the company issues product warranties for
specific product lines and provides for the estimated future warranty cost in
the period in which the sale is recorded. The estimate of warranty cost is
based on contract terms and historical warranty loss experience that is
periodically adjusted for recent actual experience. Because warranty estimates
are forecasts that are based on the best available information, claims costs may
differ from amounts provided. Adjustments to initial obligations for warranties
are made as changes in the obligations become reasonably estimable.
Litigation.
From time to time, the company is subject to proceedings, lawsuits and other
claims related to products, suppliers, employees, customers and competitors. The
company maintains insurance to partially cover product liability, workers
compensation, property and casualty, and general liability matters. The
company is required to assess the likelihood of any adverse judgments or
outcomes to these matters as well as potential ranges of probable losses.
A determination of the amount of accrual required, if any, for these
contingencies is made after assessment of each matter and the related insurance
coverage. The reserve requirements may change in the future due to new
developments or changes in approach such as a change in settlement strategy in
dealing with these matters. The company does not believe that any pending
litigation will have a material adverse effect on its financial condition or
results of operations.
Income
taxes. The company operates in numerous foreign and domestic taxing
jurisdictions where it is subject to various types of tax, including sales tax
and income tax. The company's tax filings are subject to audits and
adjustments. Because of the nature of the company’s operations, the nature of
the audit items can be complex and the objectives of the government auditors can
result in a tax on the same transaction or income in more than one state or
country. As part of the company's calculation of the provision for taxes,
the company establishes reserves for the amount that it expects to incur as a
result of audits. The reserves may change in the future due to new developments
related to the various tax matters.
31
New Accounting
Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued ASC 805,
“Business Combinations”. This statement provides companies with principles
and requirements on how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree as well as the recognition and
measurement of goodwill acquired in a business combination. This statement also
requires certain disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
Acquisition costs associated with the business combination will generally be
expensed as incurred. This statement is effective for business combinations
occurring in fiscal years beginning after December 15, 2008. Early
adoption of ASC 805 was not permitted. The company adopted this statement
on January 5, 2009, including the acquisition of TurboChef. Accordingly,
the company has applied the principles of ASC 805 in valuing this acquisition.
Middleby shares of common stock which were issued in conjunction with this
transaction were valued using the share price at the time of closing to
determine the value of the purchase price. Additionally, the company
incurred approximately $4.6 million in transaction related expenses which were
recorded as a deferred acquisition cost reported as an asset on the balance
sheet on January 3, 2009. Upon adoption of the new standard guidance, the
company recorded a charge to retained earnings of $4.6 million.
In
December 2007, the FASB issued ASC 810-10, “Consolidation”. This statement
establishes accounting and reporting standards for the noncontrolling interest
(minority interest) in a subsidiary and for the deconsolidation of a subsidiary.
Upon its adoption, effective as of the beginning of the company’s 2009 fiscal
year, noncontrolling interests will be classified as equity in the company’s
financial statements and income and comprehensive income attributed to the
noncontrolling interest will be included in the company’s income and
comprehensive income. The provisions of this standard must be applied
retrospectively upon adoption. The adoption of ASC 810-10 “Consolidation”
did not have a material impact on the company’s financial position, results of
operations or cash flows.
In
December 2008, the FASB issued ASC 715-20 “Compensation-Retirement
Benefits.” This statement requires disclosures about assets held in an
employer’s defined benefit pension or other postretirement plan. This statement
requires the disclosure of the percentage of the fair value of total plan assets
for each major category of plan assets, such as equity securities, debt
securities, real estate and all other assets, with the fair value of each major
asset category as of each annual reporting date for which a financial statement
is presented. It also requires disclosure of the level within the fair value
hierarchy in which each major category of plan assets falls, using the guidance
in ASC 820, “Fair Value Measurements and Disclosures.” This statement is
applicable to employers that are subject to the disclosure requirements and is
generally effective for fiscal years ending after December 15, 2009. The
adoption of ASC 715-20 “Compensation-Retirement Benefits” did not have a
material impact on the company’s financial position, results of operations or
cash flows.
Certain Risk Factors That
May Affect Future Results
An
investment in shares of the company's common stock involves risks. The
company believes the risks and uncertainties described in "Item 1A Risk Factors"
and in "Special Note Regarding Forward-Looking Statements" are the material
risks it faces. Additional risks and uncertainties not currently known to
the company or that it currently deems immaterial may impair its business
operations. If any of the risks identified in "Item 1A. Risk Factors"
actually occurs, the company's business, results of operations and financial
condition could be materially adversely affected, and the trading price of the
company's common stock could decline.
32
Item 7A.
Quantitative and Qualitative
Disclosure about Market Risk
Interest Rate
Risk
The company is exposed to market risk
related to changes in interest rates. The following table summarizes the
maturity of the company's debt obligations:
Fixed Rate Debt
|
Variable Rate Debt
|
|||||||
(dollars in thousands)
|
||||||||
2010
|
$ | — | $ | 7,517 | ||||
2011
|
— | 355 | ||||||
2012
|
— | 266,205 | ||||||
2013
|
— | 290 | ||||||
2014
and thereafter
|
— | 1,274 | ||||||
$ | — | $ | 275,641 |
Terms of
the company’s senior credit agreement provide for $497.8 million of availability
under a revolving credit line. As of January 2, 2010, the company had
$265.9 million of borrowings outstanding under this facility. The company
also has $7.8 million in outstanding letters of credit, which reduces the
borrowing availability under the revolving credit line. Remaining
borrowing availability under this facility, which is also reduced by the
company’s foreign borrowings, was $214.4 million at January 2,
2010.
At
January 2, 2010, borrowings under the senior secured credit facility were
assessed at an interest rate at 1.25% above LIBOR for long-term borrowings or at
the higher of the Prime rate and the Federal Funds Rate. At January 2,
2010 the average interest rate on the senior debt amounted to 1.56%. The
interest rates on borrowings under the senior bank facility may be adjusted
quarterly based on the company’s defined indebtedness ratio on a rolling
four-quarter basis. Additionally, a commitment fee, based upon the
indebtedness ratio is charged on the unused portion of the revolving credit
line. This variable commitment fee amounted to 0.20% as of January 2,
2010.
In August
2006, the company completed its acquisition of Houno A/S in Denmark. This
acquisition was funded in part with locally established debt facilities with
borrowings in Danish Krone. On January 2, 2010 these facilities amounted
to $3.2 million in U.S. dollars, including $1.2 million outstanding under a
revolving credit facility and $2.0 million of a term loan. The interest
rate on the revolving credit facility is assessed at 1.25% above Euro LIBOR,
which amounted to 4.15% on January 2, 2010. The term loan matures in 2013 and
the interest rate is assessed at 5.46%.
In April
2008, the company completed its acquisition of Giga Grandi Cucine S.r.l. in
Italy. This acquisition was funded in part with locally established debt
facilities with borrowings denominated in Euro. On January 2, 2010, these
facilities amounted to $5.1 million in U.S. dollars. The interest rate on
the credit facilities is tied to six-month Euro LIBOR. The facilities mature in
April of 2015.
In
December 2009, the company completed its acquisition of Doyon in Canada. This
acquisition was funded in part with locally established debt facilities with
borrowings denominated in Canadian Dollars. On January 2, 2010 these
facilities amounted to $1.4 million in U.S. dollars. The borrowings under
these facilities are collateralized by the assets of the company. The
interest rate on these credit facilities is assessed at 0.75% above the prime
rate. At January 2, 2010, the average interest rate on these facilities
amounted to 3.0% and 3.7%. These facilities mature in
2010.
33
The company has historically entered
into interest rate swap agreements to effectively fix the interest rate on its
outstanding debt. The agreements swap one-month LIBOR for fixed rates. As
of January 2, 2010, the company had the following interest rate swaps in
effect.
Fixed
|
|||||||
Notional
|
Interest
|
Effective
|
Maturity
|
||||
Amount
|
Rate
|
Date
|
Date
|
||||
15,000,000
|
1.220 | % |
11/23/09
|
11/23/11
|
|||
20,000,000
|
1.800 | % |
11/23/09
|
11/23/12
|
|||
25,000,000
|
3.670 | % |
09/26/08
|
09/23/11
|
|||
10,000,000
|
2.920 | % |
02/01/08
|
02/01/10
|
|||
10,000,000
|
3.460 | % |
09/08/08
|
09/06/11
|
|||
15,000,000
|
3.130 | % |
09/08/08
|
09/06/10
|
|||
10,000,000
|
3.032 | % |
02/06/08
|
02/06/11
|
|||
10,000,000
|
2.785 | % |
02/06/08
|
02/06/10
|
|||
10,000,000
|
3.590 | % |
06/10/08
|
06/10/11
|
|||
20,000,000
|
3.350 | % |
06/10/08
|
06/10/10
|
|||
25,000,000
|
3.350 | % |
01/14/08
|
01/14/10
|
The terms
of the senior secured credit facility limit the paying of dividends, capital
expenditures and leases and require, among other things, certain ratios of
indebtedness of 3.5 debt to earnings before interest, taxes, depreciation and
amortization (“EBITDA”) and fixed charge coverage of 1.25 EBITDA to fixed
charges. The credit agreement also provides that if a material adverse
change in the company’s business operations or conditions occurs, the lender
could declare an event of default. Under terms of the agreement a material
adverse effect is defined as (a) a material adverse change in, or a material
adverse effect upon, the operations, business properties, condition (financial
and otherwise) or prospects of the company and its subsidiaries taken as a
whole; (b) a material impairment of the ability of the company to perform under
the loan agreements and to avoid any event of default; or (c) a material adverse
effect upon the legality, validity, binding effect or enforceability against the
company of any loan document. A material adverse effect is determined on a
subjective basis by the company's creditors. The credit facility is
secured by the capital stock of the company’s domestic subsidiaries, 65% of the
capital stock of the company’s foreign subsidiaries and substantially all other
assets of the company. At January 2, 2010, the company was in compliance
with all covenants pursuant to its borrowing agreements.
34
Financing Derivative
Instruments
The
company has entered into interest rate swaps to fix the interest rate applicable
to certain of its variable-rate debt. The agreements swap one-month LIBOR for
fixed rates. The company has designated these swaps as cash flow hedges and all
changes in fair value of the swaps are recognized in accumulated other
comprehensive income. As of January 2, 2010, the fair value of these
instruments was a loss of $3.0 million. The change in fair value of these
swap agreements in fiscal 2009 was a loss of $1.8 million, net of
taxes.
A summary
of the company’s interest rate swaps is as follows:
Fixed
|
Changes
|
|||||||||||||||
Notional
|
Interest
|
Effective
|
Maturity
|
Fair Value
|
In Fair Value
|
|||||||||||
Amount
|
Rate
|
Date
|
Date
|
Jan 2, 2010
|
(net of taxes)
|
|||||||||||
$
|
15,000,000
|
1.220 | % |
11/23/09
|
11/23/11
|
$ | 4,000 | $ | 3,000 | |||||||
20,000,000
|
1.800 | % |
11/23/09
|
11/23/12
|
50,000 | 30,000 | ||||||||||
25,000,000
|
3.670 | % |
09/26/08
|
09/23/11
|
(1,124,000 | ) | (675,000 | ) | ||||||||
10,000,000
|
2.920 | % |
02/01/08
|
02/01/10
|
(46,000 | ) | (28,000 | ) | ||||||||
10,000,000
|
3.460 | % |
09/08/08
|
09/06/11
|
(423,000 | ) | (254,000 | ) | ||||||||
15,000,000
|
3.130 | % |
09/08/08
|
09/06/10
|
(313,000 | ) | (188,000 | ) | ||||||||
10,000,000
|
3.032 | % |
02/06/08
|
02/06/11
|
(282,000 | ) | (169,000 | ) | ||||||||
10,000,000
|
2.785 | % |
02/06/08
|
02/06/10
|
(45,000 | ) | (27,000 | ) | ||||||||
10,000,000
|
3.590 | % |
06/10/08
|
06/10/11
|
(410,000 | ) | (246,000 | ) | ||||||||
20,000,000
|
3.350 | % |
06/10/08
|
06/10/10
|
(310,000 | ) | (186,000 | ) | ||||||||
25,000,000
|
3.350 | % |
01/14/08
|
01/14/10
|
(67,000 | ) | (40,000 | ) | ||||||||
$
|
170,000,000
|
$ | (2,966,000 | ) | $ | (1,780,000 | ) |
Foreign Exchange Derivative
Financial Instruments
The company uses derivative financial
instruments, principally foreign currency forward purchase and sale contracts
with terms of less than one year, to hedge its exposure to changes in foreign
currency exchange rates. The company’s primary hedging activities are to
mitigate its exposure to changes in exchange rates on intercompany and third
party trade receivables and payables. The company does not currently enter
into derivative financial instruments for speculative purposes. In
managing its foreign currency exposures, the company identifies and aggregates
naturally occurring offsetting positions and then hedges residual balance sheet
exposures.
The
company accounts for its derivative financial instruments in accordance with ASC
815, "Derivative and Hedging." In accordance with ASC 815, as
amended, 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.
35
Item 8.
Financial Statements and Supplementary Data
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
37
|
|
Consolidated
Balance Sheets
|
39
|
|
Consolidated
Statements of Earnings
|
40
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
41
|
|
Consolidated
Statements of Cash Flows
|
42
|
|
Notes
to Consolidated Financial Statements
|
43
|
|
The
following consolidated financial statement schedule is included in
response to Item 15
|
||
Schedule
II - Valuation and Qualifying Accounts and Reserves
|
79
|
All other
schedules for which provision is made to applicable regulation of the Securities
and Exchange Commission are not required under the related instruction or are
inapplicable and, therefore, have been omitted.
36
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
The
Middleby Corporation:
We have
audited the accompanying consolidated balance sheets of The Middleby Corporation
and subsidiaries (the "Company") as of January 2, 2010 and January 3, 2009, and
the related consolidated statements of earnings, changes in stockholders'
equity, and cash flows for each of the three years in the period ended January
2, 2010. Our audits also included the financial statement schedule listed
in the Index at Item 8. We also have audited the Company's internal control over
financial reporting as of January 2, 2010, based on criteria established in
Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for these financial
statements and financial statement schedule, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule and an opinion on the Company's internal control
over financial reporting based on our audits.
As
described in Management’s Report on Internal Control Over Financial Reporting,
management excluded from its assessment the internal control over financial
reporting at TurboChef Technologies, Inc., CookTek Induction Systems LLC,
Anetsberger LLC, and Doyon Equipment Inc., which were acquired on Janaury 5,
2009, April 27, 2009, April 30, 2009 and December 14, 2009, respectively.
These acquisitions constitute 24.6% of total assets, 25.9% of net assets,13.2%
of net sales, and 15.9% of net income of the consolidated financial statements
of the Company as of, and for the year ended, January 2, 2010.
Accordingly, our audit did not include the internal control over financial
reporting at TurboChef Technologies Inc., CookTek Induction Systems LLC,
Anetsberger LLC and Doyon Equipment Inc.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
37
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of The Middleby Corporation and
subsidiaries as of January 2, 2010 and January 3, 2009, and the results of their
operations and their cash flows for each of the three years in the period ended
January 2, 2010, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 2, 2010, based on the criteria established in
Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
As discussed in Note 3, on January 4, 2009, the
Company adopted ASC 805 Business
Combinations.
/s/ DELOITTE & TOUCHE
LLP
Chicago,
Illinois
March 3,
2010
38
THE MIDDLEBY CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
JANUARY 2, 2010 AND JANUARY
3, 2009
(amounts
in thousands, except share data)
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 8,363 | $ | 6,144 | ||||
Accounts
receivable, net
|
78,897 | 85,969 | ||||||
Inventories,
net
|
90,640 | 91,551 | ||||||
Prepaid
expenses and other
|
9,914 | 7,646 | ||||||
Prepaid
taxes
|
5,873 | — | ||||||
Current
deferred taxes
|
23,339 | 18,387 | ||||||
Total
current assets
|
217,026 | 209,697 | ||||||
Property,
plant and equipment, net
|
47,340 | 44,757 | ||||||
Goodwill
|
358,506 | 266,663 | ||||||
Other
intangibles
|
189,572 | 125,501 | ||||||
Other
assets
|
3,902 | 7,880 | ||||||
Total
assets
|
$ | 816,346 | 654,498 | |||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Current
maturities of long-term debt
|
$ | 7,517 | $ | 6,377 | ||||
Accounts
payable
|
38,580 | 32,543 | ||||||
Accrued
expenses
|
100,259 | 102,579 | ||||||
Total
current liabilities
|
146,356 | 141,499 | ||||||
Long-term
debt
|
268,124 | 228,323 | ||||||
Long-term
deferred tax liability
|
14,187 | 33,687 | ||||||
Other
non-current liabilities
|
45,024 | 23,029 | ||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, $0.01 par value; none issued
|
— | — | ||||||
Common
stock, $0.01 par value, 22,622,650 and 21,068,556 shares issued in 2009
and 2008, respectively
|
136 | 120 | ||||||
Paid-in
capital
|
162,001 | 107,305 | ||||||
Treasury
stock at cost; 4,069,913 shares in 2009 and 2008,
respectively
|
(102,000 | ) | (102,000 | ) | ||||
Retained
earnings
|
287,387 | 230,797 | ||||||
Accumulated
other comprehensive (loss) income
|
(4,869 | ) | (8,262 | ) | ||||
Total
stockholders' equity
|
342,655 | 227,960 | ||||||
Total
liabilities and stockholders' equity
|
$ | 816,346 | $ | 654,498 |
The
accompanying Notes to Consolidated Financial Statements
are an
integral part of these consolidated financial statements.
39
THE MIDDLEBY CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
EARNINGS
FOR THE FISCAL YEARS ENDED
JANUARY 2, 2010, JANUARY 3, 2009
AND DECEMBER 29,
2007
(amounts
in thousands, except per share data)
2009
|
2008
|
2007
|
||||||||||
Net
sales
|
$ | 646,629 | $ | 651,888 | $ | 500,472 | ||||||
Cost
of sales
|
396,001 | 403,746 | 308,107 | |||||||||
Gross
profit
|
250,628 | 248,142 | 192,365 | |||||||||
Selling
and distribution expenses
|
64,239 | 63,593 | 50,769 | |||||||||
General
and administrative expenses
|
74,948 | 64,931 | 48,663 | |||||||||
Income
from operations
|
111,441 | 119,618 | 92,933 | |||||||||
Interest
expense and deferred financing amortization, net
|
11,594 | 12,982 | 5,855 | |||||||||
Write-off
of unamortized deferred financing costs
|
— | — | 481 | |||||||||
Loss
on financing derivatives
|
— | — | 314 | |||||||||
Other
expense (income), net
|
121 | 2,414 | (1,696 | ) | ||||||||
Earnings
before income taxes
|
99,726 | 104,222 | 87,979 | |||||||||
Provision
for income taxes
|
38,570 | 40,321 | 35,365 | |||||||||
Net
earnings
|
$ | 61,156 | $ | 63,901 | $ | 52,614 | ||||||
Net
earnings per share:
|
||||||||||||
Basic
|
$ | 3.47 | $ | 4.00 | $ | 3.35 | ||||||
Diluted
|
$ | 3.29 | $ | 3.75 | $ | 3.11 | ||||||
Weighted
average number of shares
|
||||||||||||
Basic
|
17,605 | 15,978 | 15,694 | |||||||||
Dilutive
common stock equivalents
|
970 | 1,052 | 1,244 | |||||||||
Diluted
|
18,575 | 17,030 | 16,938 |
The
accompanying Notes to Consolidated Financial Statements
are an
integral part of these consolidated financial statements.
40
THE MIDDLEBY CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
JANUARY 2, 2010 JANUARY 3, 2009
AND DECEMBER 29,
2007
(amounts
in thousands)
Accumulated
|
||||||||||||||||||||||||
Other
|
Total
|
|||||||||||||||||||||||
Common
|
Paid-in
|
Treasury
|
Retained
|
Comprehensive
|
Stockholders'
|
|||||||||||||||||||
Stock
|
Capital
|
Stock
|
Earnings
|
Income
|
Equity
|
|||||||||||||||||||
Balance,
January 1, 2007
|
$ | 117 | $ | 73,743 | $ | (89,641 | ) | $ | 115,917 | $ | 437 | $ | 100,573 | |||||||||||
Comprehensive
income:
|