MIDDLEBY CORP - FORM 10-Q - November 12, 2010

Attached files

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EX-32.1 - EXHIBIT 32.1 - MIDDLEBY CORP	v201122_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - MIDDLEBY CORP	v201122_ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - MIDDLEBY CORP	Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - MIDDLEBY CORP	v201122_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - MIDDLEBY CORP	v201122_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 2, 2010

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 1-9973

THE MIDDLEBY CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware		36-3352497
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)

1400 Toastmaster Drive, Elgin, Illinois		60120
(Address of Principal Executive Offices)		(Zip Code)

Registrant's Telephone No., including Area Code

(847) 741-3300

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o

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

As of November 5, 2010, there were 18,454,934 shares of the registrant's common stock outstanding.

THE MIDDLEBY CORPORATION AND SUBSIDIARIES

QUARTER ENDED OCTOBER 2, 2010

INDEX

DESCRIPTION			PAGE

PART I. FINANCIAL INFORMATION

	Item 1.	Condensed Consolidated Financial Statements (unaudited)

		CONDENSED CONSOLIDATED BALANCE SHEETS October 2, 2010 and January 2, 2010	1

		CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS October 2, 2010 and October 3, 2009	2

		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS October 2, 2010 and October 3, 2009	3

		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

	Item 4.	Controls and Procedures	38

PART II. OTHER INFORMATION

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

	Item 6.	Exhibits	40

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

THE MIDDLEBY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(Unaudited)

	October 2, 2010			January 2, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	5,986		$	8,363
Accounts receivable, net of reserve for doubtful accounts of $7,195 and $6,596		102,710			78,897
Inventories, net		106,053			90,640
Prepaid expenses and other		9,139			9,914
Prepaid taxes		4,176			5,873
Current deferred taxes		25,229			23,339
Total current assets		253,293			217,026
Property, plant and equipment, net of accumulated depreciation of $48,750 and $44,988		44,791			47,340
Goodwill		372,049			358,506
Other intangibles		191,000			189,572
Other assets		5,505			3,902
Total assets	$	866,638		$	816,346
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt		5,349		$	7,517
Accounts payable		51,650			38,580
Accrued expenses		113,185			100,259
Total current liabilities		170,184			146,356
Long-term debt		238,259			268,124
Long-term deferred tax liability		14,379			14,187
Other non-current liabilities		44,116			45,024
Stockholders' equity:
Preferred stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value; 47,500,000 shares authorized; 22,685,913 and 22,622,650 shares issued in 2010 and 2009, respectively		137			136
Paid-in capital		175,712			162,001
Treasury stock at cost; 4,230,979 and 4,069,913 shares in 2010 and 2009, respectively		(110,780	)		(102,000	)
Retained earnings		339,260			287,387
Accumulated other comprehensive income		(4,629	)		(4,869	)
Total stockholders' equity		399,700			342,655
Total liabilities and stockholders' equity	$	866,638		$	816,346

See accompanying notes

THE MIDDLEBY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	Oct 2, 2010			Oct 3, 2009			Oct 2, 2010		Oct 3, 2009

Net sales	$	177,793		$	153,989		$	511,888	$	494,136
Cost of sales		107,106			91,952			308,304		301,989
Gross profit		70,687			62,037			203,584		192,147
Selling expenses		17,776			16,361			54,437		49,335
General and administrative expenses		20,900			17,602			60,972		59,702
Income from operations		32,011			28,074			88,175		83,110
Net interest expense and deferred financing amortization		2,177			2,797			6,898		8,800
Other expense, net		(121	)		(137	)		443		607
Earnings before income taxes		29,955			25,414			80,834		73,703
Provision for income taxes		9,353			9,913			28,961		30,421
Net earnings	$	20,602		$	15,501		$	51,873	$	43,282

Net earnings per share:
Basic	$	1.16		$	0.88		$	2.91	$	2.46

Diluted	$	1.13		$	0.83		$	2.84	$	2.34

Weighted average number of shares
Basic		17,815			17,600			17,811		17,589
Dilutive stock options1		459			1,154			460		931
Diluted		18,274			18,754			18,271		18,520

There were no anti-dilutive stock options excluded from common stock equivalents for any period presented.

See accompanying notes

THE MIDDLEBY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	Nine Months Ended
	Oct 2, 2010			Oct 3, 2009

Cash flows from operating activities-
Net earnings	$	51,873		$	43,282

Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		11,656			11,873
Deferred taxes		(1,698	)		(2,850	)
Non-cash share-based compensation		11,058			8,184
Unrealized loss on derivative financial instruments		4			14
Changes in assets and liabilities, net of acquisitions
Accounts receivable, net		(19,344	)		22,065
Inventories, net		(5,563	)		11,718
Prepaid expenses and other assets		2,003			(850	)
Accounts payable		9,279			(2,636	)
Accrued expenses and other liabilities		6,888			(13,638	)

Net cash provided by operating activities		66,156			77,162

Cash flows from investing activities-
Net additions to property and equipment		(3,008	)		(4,941	)
Acquisition of Giga		(1,621	)		—
Acquisition of TurboChef, net of cash acquired		—			(116,129	)
Acquisition of CookTek		(1,000	)		(8,000	)
Acquisition of Anets		(500	)		(3,359	)
Acquisition of Doyon		(577	)		—
Acquisition of PerfectFry, net of cash acquired		(4,607	)		—
Acquisition of Cozzini, net of cash acquired		(17,443	)		—

Net cash (used in) investing activities		(28,756	)		(132,429	)

Cash flows from financing activities-
Net (repayments) proceeds under revolving credit facilities		(30,050	)		59,650
Net repayments under foreign bank loan		(1,508	)		221
Repurchase of treasury stock		(8,780	)		—
Net proceeds from stock issuances		565			384

Net cash (used in) provided by financing activities		(39,773	)		60,255

Effect of exchange rates on cash
and cash equivalents		(4	)		(141	)

Changes in cash and cash equivalents-
Net (decrease) increase in cash and cash equivalents		(2,377	)		4,847

Cash and cash equivalents at beginning of year		8,363			6,144

Cash and cash equivalents at end of the nine-month period	$	5,986		$	10,991

Supplemental disclosure of cash flow information:
Interest paid	$	6,352		$	8,170
Income tax payments	$	24,283		$	24,509

Non-cash financing and investing activities:
Stock issuance related to the acquisition of TurboChef	$	—		$	44,048
Stock issuance related to the acquisition of Cozzini	$	2,090		$	—
Contingent consideration related to the acquisition of CookTek	$	—		$	7,360
Contingent consideration related to the acquisition of Cozzini	$	2,000		$	—

See accompanying notes

THE MIDDLEBY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 2, 2010

(Unaudited)

1)	Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared by The Middleby Corporation (the "company"), pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements are unaudited and certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information not misleading. These financial statements should be read in conjunction with the financial statements and related notes contained in the company's 2009 Form 10-K.

In the opinion of management, the financial statements contain all adjustments necessary to present fairly the financial position of the company as of October 2, 2010 and January 2, 2010, and the results of operations for the three and nine months ended October 2, 2010 and October 3, 2009 and cash flows for the nine months ended October 2, 2010 and October 3, 2009.

Non-Cash Share-Based Compensation

The company estimates the fair value of market-based stock awards and stock options at the time of grant and recognizes compensation cost over the vesting period of the awards and options. Non-cash share-based compensation expense was $3.7 million and $2.7 million for the third quarter of 2010 and 2009, respectively. Non-cash share-based compensation expense was $11.1 million and $8.2 million for the nine month periods ended October 2, 2010 and October 3, 2009, respectively.

Income Tax Contingencies

On December 31, 2006, the company adopted the provisions of Accounting Standards Codification (“ASC”) 740 “Income Taxes”. This interpretation prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740 states that a tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information.

As of January 2, 2010, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $20.3 million (of which $12.9 would impact the effective tax rate if recognized) plus approximately $2.0 million of accrued interest and $2.2 million of penalties. As of October 2, 2010, there were no significant changes in the total amount of liability for unrecognized tax benefits. During the second quarter, the IRS completed its audit of the company's 2007 federal tax return resulting in a $1.3 million benefit to the provision. The results of this audit were reflected in the company's second quarter financial statements.

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

The company operates in multiple taxing jurisdictions, both within the United States and outside of the United States, and faces audits from various tax authorities. The company remains subject to examination until the statute of limitations expires for the respective tax jurisdiction. Federal tax years 2006 and 2007 were examined by competent IRS agents. Therefore the company believes the tax years to be effectively settled and closed for ASC 740 purposes. Within specific countries, the company and its operating subsidiaries may be subject to audit by various tax authorities and may be subject to different statute of limitations expiration dates. A summary of the tax years that remain subject to examination in the company’s major tax jurisdictions are:

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

D) Fair Value Measures

On December 30, 2007 (first day of fiscal year 2008), the company adopted the provisions of ASC 820 “Fair Value Measurements and Disclosures”. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements.

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

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.

Level 3 – Unobservable inputs based on our own assumptions.

The company’s financial assets and liabilities that are measured at fair value and are categorized using the fair value hierarchy at October 2, 2010 are as follows (in thousands):

	Fair Value		Fair Value		Fair Value
	Level 1		Level 2		Level 3		Total
As of October 2, 2010
Financial Assets:
None		—		—		—	$	—

Financial Liabilities:
Interest rate swaps		—	$	2,921		—	$	2,921
Contingent consideration		—		—	$	5,706	$	5,706

As of January 2, 2010
Financial Assets:
None		—		—		—	$	—

Financial Liabilities:
Interest rate swaps		—	$	2,966		—	$	2,966
Contingent consideration		—		—	$	4,134	$	4,134

The contingent consideration relates to earnout provisions recorded in conjunction with the acquisitions of CookTek LLC and the food processing equipment division of Cozzini, Inc. See Note 2 for more information.

2)	Acquisitions and Purchase Accounting

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

The company has accounted for all business combinations using the purchase method to record a new cost basis for the assets acquired and liabilities assumed. The difference between the purchase price and the fair value of the assets acquired and liabilities assumed has been recorded as goodwill in the financial statements. The results of operations are reflected in the consolidated financial statements of the company from the date of acquisition.

CookTek

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

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

	(as initially reported)			Measurement Period			(as adjusted)
	Apr 26, 2009			Adjustments			Apr 26, 2009

Current assets	$	2,595		$	(12	)	$	2,583
Property, plant and equipment		152			—			152
Goodwill		11,544			(5,649	)		5,895
Other intangibles		3,622			3,000			6,622
Current liabilities		(3,428	)		165			(3,263	)
Other non-current liabilities		(6,485	)		2,496			(3,989	)

Total cash paid at closing	$	8,000		$	—		$	8,000

Deferred cash payment		1,000			—			1,000
Contingent consideration		7,360			(2,660	)		4,700

Net assets acquired and liabilities assumed	$	16,360		$	(2,660	)	$	13,700

The CookTek purchase agreement included an earnout provision providing for contingent payments due to the sellers to the extent certain financial targets are exceeded. The earnout amounts are payable in the four consecutive years subsequent to the acquisition date if CookTek exceeds certain sales targets for each of those years. The earnout payment will amount to 10% of the sales in excess of the target for each of the respective years. There is no cap on the potential earnout payment, however, the company’s estimated probable range of the contingent consideration is between $0 and $8 million. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date was $4.7 million. This amount was determined based on an income approach.

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

During the second quarter of 2009, the company recorded a preliminary estimate of the intangible assets acquired in conjunction with the CookTek acquisition. The company also recorded intangible amortization expense related to those assets in its results of operations for the second quarter of 2009. The final valuation of intangible assets acquired was completed during the fourth quarter of 2009. Therefore, the company adjusted the intangible amortization expense in its full year results of operations for 2009. This adjustment did not have a material impact on the company’s results of operations.

Anets

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

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

	(as initially reported)			Measurement Period			(as adjusted)
	Apr 30, 2009			Adjustments			Apr 30, 2009

Current assets	$	2,210		$	—		$	2,210
Goodwill		3,320			22			3,342
Other intangibles		1,085			—			1,085
Current liabilities		(3,107	)		(22	)		(3,129	)
Other non-current liabilities		(150	)		—			(150	)

Total cash paid at closing	$	3,358		$	—		$	3,358
Deferred cash payment		500			—			500

Net assets acquired and liabilities assumed	$	3,858		$	—		$	3,858

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

Doyon

On December 14, 2009, the company completed its acquisition of Doyon Equipment, Inc. (“Doyon”), a leading Canadian manufacturer of baking ovens for the commercial foodservice industry, for a purchase price of approximately $5.8 million. During the three month period ended October 2, 2010, the company finalized the working capital provision resulting in an additional payment of $577,000.

The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the acquisition date (in thousands):

	(as initially reported)			Measurement Period			(as adjusted)
	Dec 14, 2009			Adjustments			Dec 14, 2009

Current assets	$	5,034		$	—		$	5,034
Property, Plant and Equipment		1,876			—			1,876
Goodwill		191			1,550			1,741
Other intangibles		2,355			(82	)		2,273
Current maturities of long-term debt		(285	)		—			(285	)
Current liabilities		(2,105	)		(891	)		(2,996	)
Long-term debt		(1,081	)		—			(1,081	)
Other non-current liabilities		(166	)		—			(166	)

Net assets and liabilities assumed	$	5,819		$	577		$	6,396

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

The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. In the company’s financial statements for the fiscal year 2009, the company recorded a preliminary estimate of the intangible assets acquired in conjunction with the Doyon acquisition. The company also recorded intangible amortization expense related to these assets in its results of operations for the first quarter of 2010. The final valuation of intangible assets acquired was completed during the second quarter of 2010. Therefore, the company adjusted the intangible amortization expense in its results of operations for the second quarter of 2010 on a year to date basis. This adjustment did not have a material impact on the company’s results of operations.

PerfectFry

On July 13, 2010, the company completed its acquisition of substantially all of the assets and operations of PerfectFry Company LTD (“PerfectFry”), a leading manufacturer of ventless countertop frying units for the commercial foodservice industry for a purchase price of approximately $4.6 million. The purchase price is subject to adjustment based upon a working capital provision within the purchase agreement.

	Jul 13, 2010

Cash	$	247
Current assets		1,949
Goodwill		2,502
Other intangibles		1,653
Current liabilities		(1,497	)

Net assets and liabilities assumed	$	4,854

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

Cozzini

On September 21, 2010, the company completed its acquisition of the food processing equipment business of Cozzini, Inc. (“Cozzini”), a leading manufacturer of equipment solutions for the food processing industry, for an aggregate purchase price of approximately $19.5 million, including $17.4 million in cash and 34,263 shares of Middleby common stock valued at $2.1 million. An additional contingent payment is also payable upon the achievement of certain sales targets. The purchase price is subject to adjustment based upon a working capital provision within the purchase agreement.

	Sep 21, 2010

Cash	$	557
Current assets		13,601
Property, Plant and Equipment		863
Goodwill		9,601
Other intangibles		6,691
Other assets		636
Current liabilities		(11,859	)

Consideration paid at closing	$	20,090

Contingent consideration		2,000

Net assets acquired and liabilities assumed	$	22,090

The goodwill and $3.2 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $0.6 million allocated to developed technology, $2.4 million allocated to customer relationships and $0.4 million allocated to backlog which are to be amortized over the periods of 5 years, 7 years and 3 months respectively. Goodwill and other intangibles of Cozzini are allocated to the Food Processing Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.

The Cozzini purchase agreement included an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout payment is payable within the first quarter of 2011 if Cozzini exceeds certain sales targets for fiscal 2010. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date was $2.0 million.

3)	Litigation Matters

From time to time, the company is subject to proceedings, lawsuits and other claims related to products, suppliers, employees, customers and competitors. The company maintains insurance to partially cover product liability, workers compensation, property and casualty, and general liability matters. The company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after assessment of each matter and the related insurance coverage. The reserve requirement may change in the future due to new developments or changes in approach such as a change in settlement strategy in dealing with these matters. The company does not believe that any pending litigation will have a material adverse effect on its financial condition, results of operations or cash flows.

4)	Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820), “Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”). ASU No. 2010-06 requires new disclosures about significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for such transfers and to disclose separately information about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements. The company adopted the provisions of ASU No. 2010-06 on January 3, 2010, except for disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements. These disclosures will be effective for financial statements issued for fiscal years beginning after December 15, 2010. The company does not expect that the adoption of ASU No. 2010-06 will have a material impact on the company’s financial position, results of operations or cash flows.

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605), “Multiple-Deliverable Revenue Arrangements” (“ASU No. 2009-13”). ASU No. 2009-13 establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. The amendments in ASU No. 2009-13 are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. The company will adopt the provisions of ASU No. 2009-13 as required. The company does not expect that the adoption of ASU No. 2009-13 will have a material impact on the company’s financial position, results of operations or cash flows.

5)	Other Comprehensive Income

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

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

	Three Months Ended					Nine Months Ended
	Oct 2, 2010			Oct 3, 2009		Oct 2, 2010			Oct 3, 2009

Net earnings	$	20,602		$	15,501	$	51,873		$	43,282
Currency translation adjustment		2,557			365		251			1,333
Unrealized gain on interest rate swaps, net of tax		(79	)		466		(11	)		1,041
Comprehensive income	$	23,080		$	16,332	$	52,113		$	45,656

Accumulated other comprehensive income is comprised of unrecognized pension benefit costs of $2.3 million, net of taxes of $0.6 million as of October 2, 2010 and January 2, 2010, foreign currency translation adjustments of $0.9 million as of October 2, 2010 and $1.1 million as of January 2, 2010 and an unrealized loss on interest rate swaps of $1.5 million, net of taxes of $1.0 million as of October 2, 2010 and January 2, 2010.

6)	Inventories

Inventories are composed of material, labor and overhead and are stated at the lower of cost or market. Costs for inventory at two of the company's manufacturing facilities have been determined using the last-in, first-out ("LIFO") method. These inventories under the LIFO method amounted to $16.0 million at October 2, 2010 and $15.6 million at January 2, 2010 and represented approximately 15% and 17% of the total inventory in each respective period. Costs for all other inventory have been determined using the first-in, first-out ("FIFO") method. The company estimates reserves for inventory obsolescence and shrinkage based on its judgment of future realization. Inventories at October 2, 2010 and January 2, 2010 are as follows:

	Oct 2, 2010			Jan 2, 2010
	(in thousands)
Raw materials and parts	$	60,708		$	51,071
Work-in-process		18,440			13,629
Finished goods		27,696			26,731
		106,844			91,431
LIFO reserve		(791	)		(791	)

	$	106,053		$	90,640

Goodwill

Changes in the carrying amount of goodwill for the nine months ended October 2, 2010 are as follows (in thousands):

	Commercial			Food
	Foodservice			Processing		Total

Balance as of January 2, 2010	$	326,980		$	31,526	$	358,506

Goodwill acquired during the year		2,502			9,601		12,103
Adjustments to prior year acquisitions		1,567			—		1,567
Foreign exchange rate effect		(127	)		—		(127	)

Balance as of October 2, 2010	$	330,922		$	41,127	$	372,049

8)	Accrued Expenses

Accrued expenses consist of the following:

	Oct 2, 2010		Jan 2, 2010
	(in thousands)

Accrued payroll and related expenses	$	28,372	$	19,988
Advance customer deposits		17,630		14,066
Accrued warranty		14,213		14,265
Accrued customer rebates		13,161		12,980
Accrued product liability and workers comp		9,443		9,877
Accrued agent commission		6,701		4,825
Accrued professional services		5,559		4,931
Other accrued expenses		18,106		19,327

	$	113,185	$	100,259

9)	Warranty Costs

In the normal course of business the company issues product warranties for specific product lines and provides for the estimated future warranty cost in the period in which the sale is recorded. The estimate of warranty cost is based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Because warranty estimates are forecasts that are based on the best available information, actual claims costs may differ from amounts provided. Adjustments to initial obligations for warranties are made as changes in the obligations become reasonably estimable.

A rollforward of the warranty reserve is as follows:

	Nine Months Ended
	Oct 2, 2010
	(in thousands)

Beginning balance	$	14,265
Warranty reserve related to acquisitions		481
Warranty expense		16,416
Warranty claims		(16,949	)
Ending balance	$	14,213

10)	Financing Arrangements

	Oct 2, 2010		Jan 2, 2010
	(in thousands)

Senior secured revolving credit line	$	235,850	$	265,900
Foreign loan		7,758		9,741
Total debt	$	243,608	$	275,641

Less: Current maturities of long-term debt		5,349		7,517

Long-term debt	$	238,259	$	268,124

Terms of the company’s senior credit agreement provide for $497.8 million of availability under a revolving credit line. As of October 2, 2010, the company had $235.9 outstanding under this facility. The company also has $6.9 million in outstanding letters of credit as of October 2, 2010, 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 $247.2 million at October 2, 2010.

At October 2, 2010, borrowings under the senior secured credit facility are assessed at an interest rate of 1.25% above LIBOR for long-term borrowings or at the higher of the Prime rate and the Federal Funds Rate. At October 2, 2010 the average interest rate on the senior debt amounted to 1.55%. The interest rates on borrowings under the senior secured credit facility may be adjusted quarterly based on the company’s indebtedness ratio on a rolling four-quarter basis. Additionally, a commitment fee based upon the indebtedness ratio is charged on the unused portion of the revolving credit line. This variable commitment fee amounted to 0.25% as of October 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 October 2, 2010 these facilities amounted to $2.7 million in U.S. dollars, including $0.9 million outstanding under a revolving credit facility and $1.8 million of a term loan. The interest rate on the revolving credit facility is assessed at 1.25% above Euro LIBOR, which amounted to 3.85% on October 2, 2010. The term loan matures in 2013 and the interest rate is assessed at 5.146%.

In April 2008, the company completed its acquisition of Giga Grandi Cucine S.r.l (“Giga”) in Italy. This acquisition was funded in part with locally established debt facilities with borrowings denominated in Euro. On October 2, 2010 these facilities amounted to $4.1 million in U.S. dollars. The interest rate on the credit facilities is tied to six-month Euro LIBOR. At October 2, 2010, the average interest rate on these facilities was approximately 3.5%. 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 October 2, 2010, these facilities amounted to $0.9 million 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 October 2, 2010, the average interest rate on these facilities amounted to 3.0%. These facilities mature in 2017.

The company’s debt is reflected on the balance sheet at cost. Based on current market conditions, the company believes its interest rate margins on its existing debt are below the rate available in the market, which causes the fair value of debt to fall below the carrying value. The company believes the current interest rate margin is approximately 1.0% below current market rates. However, as the interest rate margin is based upon numerous factors, including but not limited to the credit rating of the borrower, the duration of the loan, the structure and restrictions under the debt agreement, current lending policies of the counterparty, and the company’s relationships with its lenders, there is no readily available market data to ascertain the current market rate for an equivalent debt instrument. As a result, the current interest rate margin is based upon the company’s best estimate based upon discussions with its lenders.

The company estimated the fair value of its loans by calculating the upfront cash payment a market participant would require to assume the company’s obligations. The upfront cash payment is the amount that a market participant would be able to lend at October 2, 2010 to achieve sufficient cash inflows to cover the cash outflows under the company’s senior revolving credit facility assuming the facility was outstanding in its entirety until maturity. Since the company maintains its borrowings under a revolving credit facility and there is no predetermined borrowing or repayment schedule, for purposes of this calculation the company calculated the fair value of its obligations assuming the current amount of debt at the end of the period was outstanding until the maturity of the company’s senior revolving credit facility in December 2012. Although borrowings could be materially greater or less than the current amount of borrowings outstanding at the end of the period, it is not practical to estimate the amounts that may be outstanding during future periods. The fair value of the company’s senior debt obligations as estimated by the company based upon its assumptions is approximately $238.2 million at October 2, 2010, as compared to the carrying value of $243.6 million.

The carrying value and estimated aggregate fair value, based primarily on market prices, of debt is as follows (in thousands):

	October 2, 2010				January 2, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
Total debt	$	243,608	$	238,227	$	275,641	$	267,632

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

The company has historically entered into interest rate swap agreements to effectively fix the interest rate on its outstanding debt. The agreements swap one-month LIBOR for fixed rates. As of October 2, 2010 the company had the following interest rate swaps in effect:

	Fixed
Notional	Interest		Effective	Maturity
Amount	Rate		Date	Date

10,000,000	3.032	%	02/06/08	02/06/11
10,000,000	3.590	%	06/10/08	06/10/11
10,000,000	3.460	%	09/08/08	09/06/11
25,000,000	3.670	%	09/23/08	09/23/11
15,000,000	1.220	%	11/23/09	11/23/11
10,000,000	1.120	%	03/11/10	03/11/12
20,000,000	1.800	%	11/23/09	11/23/12
20,000,000	1.560	%	03/11/10	12/11/12
15,000,000	0.950	%	09/07/10	12/06/12

The terms of the senior secured credit facility limit the paying of dividends, capital expenditures and leases, and require, among other things, 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 October 2, 2010, the company was in compliance with all covenants pursuant to its borrowing agreements.

11)	Financial Instruments

ASC 815 “Derivatives and Hedging” requires an entity to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Derivatives that do not qualify as a hedge must be adjusted to fair value in earnings. If the derivative does qualify as a hedge under ASC 815, changes in the fair value will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments or recognized in other accumulated comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a hedge's change in fair value will be immediately recognized in earnings.

Foreign Exchange: The company has entered into derivative instruments, principally forward contracts to reduce exposures pertaining to fluctuations in foreign exchange rates. As of October 2, 2010, the company had no forward contracts outstanding.

Interest Rate: The company has entered into interest rate swaps to fix the interest rate applicable to certain of its variable-rate debt. The agreements swap one-month LIBOR for fixed rates. The company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income. As of October 2, 2010, the fair value of these instruments was a loss of $2.9 million. The change in fair value of these swap agreements in the first nine months of 2010 was a gain of less than $0.1 million, net of taxes.

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

	Condensed Consolidated
	Balance Sheet Presentation	Oct 2, 2010			Jan 2, 2010

Fair value	Other non-current liabilities	$	(2,921	)	$	(2,966	)

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

		Three Months Ended						Nine Months Ended
	Presentation of Gain/(loss)	Oct 2, 2010			Oct 3, 2009			Oct 2, 2010			Oct 3, 2009

Gain/(loss) recognized in other comprehensive income	Other comprehensive income	$	(860	)	$	(500	)	$	(2,621	)	$	(2,045	)

Gain/(loss) reclassified from accumulated other comprehensive income (effective portion)	Interest expense	$	(759	)	$	(1,279	)	$	(2,670	)	$	(3,767	)

Gain recognized in income (ineffective portion)	Other expense	$	7		$	1		$	(4	)	$	(14	)

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

12)	Segment Information

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

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

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

During the second quarter of 2010, the company made a determination that the International Distribution Division, previously reported as a separate business segment, no longer met the criteria requiring it to be reported as separate operating segment. Accordingly, the associated financial information has been incorporated within the Commercial Foodservice Group for the current and prior year periods.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief decision maker evaluates individual segment performance based on operating income. Management believes that intersegment sales are made at established arms-length transfer prices.

Net Sales Summary

(dollars in thousands)

	Three Months Ended										Nine Months Ended
	Oct 2, 2010					Oct 3, 2009					Oct 2, 2010					Oct 3, 2009
	Sales		Percent			Sales		Percent			Sales		Percent			Sales		Percent

Business Divisions:
Commercial Foodservice	$	156,081		87.8		$	136,643		88.7		$	450,036		87.9		$	448,252		90.7
Food Processing		21,712		12.2			17,346		11.3			61,852		12.1			45,884		9.3

Total	$	177,793		100.0	%	$	153,989		100.0	%	$	511,888		100.0	%	$	494,136		100.0	%

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

	Commercial		Food		Corporate
	Foodservice		Processing		and Other(2)			Total

Three months ended October 2, 2010
Net sales	$	156,081	$	21,712	$	—		$	177,793
Income from operations		38,002		4,040		(10,031	)		32,011
Depreciation and amortization expense		3,257		438		154			3,849
Net capital expenditures		400		65		138			603

Nine months ended October 2, 2010
Net sales	$	450,036	$	61,852	$	—		$	511,888
Income from operations		107,042		12,076		(30,943	)		88,175
Depreciation and amortization expense		10,040		1,150		466			11,656
Net capital expenditures		2,492		167		349			3,008

Total assets		709,733		104,377		52,528			866,638
Long-lived assets		524,905		58,271		30,169			613,345

Three months ended October 3, 2009
Net sales	$	136,643	$	17,346	$	—		$	153,989
Income from operations		30,655		3,815		(6,396	)		28,074
Depreciation and amortization expense		3,288		319		191			3,798
Net capital expenditures		879		50		42			971

Nine months ended October 3, 2009
Net sales	$	448,252	$	45,884	$	—		$	494,136
Income from operations		100,072		7,658		(24,620	)		83,110
Depreciation and amortization expense		10,381		980		512			11,873
Net capital expenditures		4,467		74		400			4,941

Total assets		715,737		68,177		39,267			823,181
Long-lived assets		542,634		43,347		11,916			597,897

(1)

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

(2)

Includes corporate and other general company assets and operations.

Long-lived assets by major geographic region are as follows (in thousands):

	Oct 2, 2010		Oct 3, 2009
United States and Canada	$	586,151	$	568,891
Asia		1,826		1,917
Europe and Middle East		24,412		26,895
Latin America		956		194
Total international	$	27,194	$	29,006
	$	613,345	$	597,897

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

	Three Months Ended				Nine Months Ended
	Oct 2, 2010		Oct 3, 2009		Oct 2, 2010		Oct 3, 2009
United States and Canada	$	141,179	$	125,071	$	410,444	$	417,703
Asia		12,503		8,111		29,724		18,757
Europe and Middle East		17,675		17,039		56,915		46,392
Latin America		6,436		3,768		14,805		11,284
Total international	$	36,614	$	28,918	$	101,444	$	76,433
	$	177,793	$	153,989	$	511,888	$	494,136

13)	Employee Retirement Plans

(a) Pension Plans

The company maintains a non-contributory defined benefit plan for its employees at the Smithville, Tennessee facility, which was acquired as part of the New Star International Holdings, Inc. (“Star”) acquisition. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 1, 2008 and no further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 1, 2008 upon reaching retirement age.

The company maintains a non-contributory defined benefit plan for its union employees at the Elgin, Illinois facility. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2002 and no further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 30, 2002 upon reaching retirement age. The employees participating in the defined benefit plan were enrolled in a newly established 401K savings plan on July 1, 2002, further described below.

The company also maintains a retirement benefit agreement with its Chairman. The retirement benefits are based upon a percentage of the Chairman’s final base salary. Additionally, the company maintains a retirement plan for non-employee directors who served on the Board of Directors prior to 2004. This plan is not available to any new non-employee directors. The plan provides for an annual benefit upon a change in control of the company or retirement from the Board of Directors at age 70 equal to 100% of the director’s last annual retainer, payable for a number of years equal to the director’s years of service up to a maximum of 10 years.

In March 2010, the Patient Protection and Affordable Care Act and a reconciliation measure, the Health Care and Education Reconciliation Act of 2010, (collectively, the “Act”) were signed into law. The company is currently evaluating provisions of the Act to determine its potential impact, if any, on health care benefit costs.

(b) 401K Savings Plans

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

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

Informational Notes

This report contains forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The company cautions readers that these projections are based upon future results or events and are highly dependent upon a variety of important factors which could cause such results or events to differ materially from any forward-looking statements which may be deemed to have been made in this report, or which are otherwise made by or on behalf of the company. Such factors include, but are not limited to, volatility in earnings resulting from goodwill impairment losses which may occur irregularly and in varying amounts; variability in financing costs; quarterly variations in operating results; dependence on key customers; international exposure; foreign exchange and political risks affecting international sales; ability to protect trademarks, copyrights and other intellectual property; changing market conditions; the impact of competitive products and pricing; the timely development and market acceptance of the company’s products; the availability and cost of raw materials; and other risks detailed herein and from time-to-time in the company’s Securities and Exchange Commission (“SEC”) filings, including the company’s 2009 Annual Report on Form 10-K.

The economic outlook for 2010 continues to be uncertain at this time. As a global business, the company’s operating results are impacted by the health of the North American, European, Asian and Latin American economies. While the response by governments and central banks around the world may reduce volatility in the markets, the depth and duration of economic impact and the timing and strength of the recovery remain unpredictable.

Net Sales Summary

(dollars in thousands)

	Three Months Ended										Nine Months Ended
	Oct 2, 2010					Oct 3, 2009					Oct 2, 2010					Oct 3, 2009
	Sales		Percent			Sales		Percent			Sales		Percent			Sales		Percent

Business Divisions:
Commercial Foodservice	$	156,081		87.8		$	136,643		88.7		$	450,036		87.9		$	448,252		90.7
Food Processing		21,712		12.2			17,346		11.3			61,852		12.1			45,884		9.3

Total	$	177,793		100.0	%	$	153,989		100.0	%	$	511,888		100.0	%	$	494,136		100.0	%