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EX-32.2 - EXHIBIT 32.2 - MIDDLEBY CORP | midd-ex322x2016070216x10q.htm |
EX-32.1 - EXHIBIT 32.1 - MIDDLEBY CORP | midd-ex321x2016070216x10q.htm |
EX-31.2 - EXHIBIT 31.2 - MIDDLEBY CORP | midd-ex312x2016070216x10q.htm |
EX-31.1 - EXHIBIT 31.1 - MIDDLEBY CORP | midd-ex311x2016070216x10q.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 July 2, 2016
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File No. 1-9973
THE MIDDLEBY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 36-3352497 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
1400 Toastmaster Drive, Elgin, Illinois | 60120 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: | (847) 741-3300 |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 5, 2016, there were 57,539,766 shares of the registrant's common stock outstanding.
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
QUARTER ENDED JULY 2, 2016
INDEX
DESCRIPTION | PAGE | |
PART I. FINANCIAL INFORMATION | ||
Item 1. | ||
CONDENSED CONSOLIDATED BALANCE SHEETS JULY 2, 2016 and JANUARY 2, 2016 | ||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME JULY 2, 2016 and JULY 4, 2015 | ||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS JULY 2, 2016 and JULY 4, 2015 | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. OTHER INFORMATION | ||
Item 2. | ||
Item 6. |
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
ASSETS | Jul 2, 2016 | Jan 2, 2016 | |||||
Current assets: | |||||||
Cash and cash equivalents | $ | 74,031 | $ | 55,528 | |||
Accounts receivable, net of reserve for doubtful accounts of $9,350 and $8,839 | 316,797 | 282,534 | |||||
Inventories, net | 389,878 | 354,150 | |||||
Prepaid expenses and other | 46,009 | 39,801 | |||||
Prepaid taxes | 8,270 | 11,426 | |||||
Current deferred taxes | — | 51,723 | |||||
Total current assets | 834,985 | 795,162 | |||||
Property, plant and equipment, net of accumulated depreciation of $102,138 and $100,345 | 216,097 | 199,750 | |||||
Goodwill | 1,051,954 | 983,339 | |||||
Other intangibles, net of amortization of $157,306 and $139,279 | 792,945 | 749,430 | |||||
Long-term deferred tax assets | 11,341 | 11,438 | |||||
Other assets | 24,348 | 22,032 | |||||
Total assets | $ | 2,931,670 | $ | 2,761,151 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Current maturities of long-term debt | $ | 53,755 | $ | 32,059 | |||
Accounts payable | 158,115 | 157,758 | |||||
Accrued expenses | 305,522 | 320,154 | |||||
Total current liabilities | 517,392 | 509,971 | |||||
Long-term debt | 862,571 | 734,002 | |||||
Long-term deferred tax liability | 67,433 | 113,010 | |||||
Accrued pension benefits | 166,864 | 207,564 | |||||
Other non-current liabilities | 32,483 | 29,774 | |||||
Stockholders' equity: | |||||||
Preferred stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none issued | — | — | |||||
Common stock, $0.01 par value; 95,000,000 shares authorized; 62,445,315 and 62,168,346 shares issued in 2016 and 2015, respectively | 144 | 144 | |||||
Paid-in capital | 339,014 | 328,686 | |||||
Treasury stock, at cost; 4,905,549 and 4,862,264 shares in 2016 and 2015, respectively | (205,280 | ) | (200,862 | ) | |||
Retained earnings | 1,242,703 | 1,115,274 | |||||
Accumulated other comprehensive loss | (91,654 | ) | (76,412 | ) | |||
Total stockholders' equity | 1,284,927 | 1,166,830 | |||||
Total liabilities and stockholders' equity | $ | 2,931,670 | $ | 2,761,151 |
See accompanying notes
1
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended | Six Months Ended | ||||||||||||||
Jul 2, 2016 | Jul 4, 2015 | Jul 2, 2016 | Jul 4, 2015 | ||||||||||||
Net sales | $ | 580,456 | $ | 436,291 | $ | 1,096,811 | $ | 842,887 | |||||||
Cost of sales | 346,954 | 263,402 | 666,536 | 512,436 | |||||||||||
Gross profit | 233,502 | 172,889 | 430,275 | 330,451 | |||||||||||
Selling and distribution expenses | 58,025 | 45,332 | 111,714 | 92,441 | |||||||||||
General and administrative expenses | 57,174 | 42,719 | 113,277 | 81,993 | |||||||||||
Restructuring expenses | 6,390 | 1,478 | 6,996 | 6,077 | |||||||||||
Income from operations | 111,913 | 83,360 | 198,288 | 149,940 | |||||||||||
Interest expense and deferred financing amortization, net | 6,059 | 4,048 | 11,335 | 7,797 | |||||||||||
Other (income) expense, net | (3,838 | ) | (366 | ) | (4,638 | ) | 4,195 | ||||||||
Earnings before income taxes | 109,692 | 79,678 | 191,591 | 137,948 | |||||||||||
Provision for income taxes | 36,801 | 25,411 | 64,162 | 45,450 | |||||||||||
Net earnings | $ | 72,891 | $ | 54,267 | $ | 127,429 | $ | 92,498 | |||||||
Net earnings per share: | |||||||||||||||
Basic | $ | 1.28 | $ | 0.95 | $ | 2.23 | $ | 1.62 | |||||||
Diluted | $ | 1.28 | $ | 0.95 | $ | 2.23 | $ | 1.62 | |||||||
Weighted average number of shares | |||||||||||||||
Basic | 57,022 | 56,963 | 57,037 | 56,940 | |||||||||||
Dilutive common stock equivalents1 | — | 2 | — | 1 | |||||||||||
Diluted | 57,022 | 56,965 | 57,037 | 56,941 | |||||||||||
Comprehensive income | $ | 54,388 | $ | 61,149 | $ | 112,187 | $ | 83,231 |
1There were no anti-dilutive equity awards excluded from common stock equivalents for any period presented.
See accompanying notes
2
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended | |||||||
Jul 2, 2016 | Jul 4, 2015 | ||||||
Cash flows from operating activities-- | |||||||
Net earnings | $ | 127,429 | $ | 92,498 | |||
Adjustments to reconcile net earnings to net cash provided by operating activities-- | |||||||
Depreciation and amortization | 31,240 | 22,160 | |||||
Non-cash share-based compensation | 11,160 | 7,399 | |||||
Deferred income taxes | 8,593 | (1,644 | ) | ||||
Changes in assets and liabilities, net of acquisitions | |||||||
Accounts receivable, net | (16,745 | ) | (1,271 | ) | |||
Inventories, net | (23,358 | ) | (26,702 | ) | |||
Prepaid expenses and other assets | (8,575 | ) | 14,947 | ||||
Accounts payable | 36 | 5,236 | |||||
Accrued expenses and other liabilities | (34,098 | ) | (3,863 | ) | |||
Net cash provided by operating activities | 95,682 | 108,760 | |||||
Cash flows from investing activities-- | |||||||
Additions to property and equipment | (13,108 | ) | (11,684 | ) | |||
Acquisitions, net of cash acquired | (212,024 | ) | (76,192 | ) | |||
Net cash used in investing activities | (225,132 | ) | (87,876 | ) | |||
Cash flows from financing activities-- | |||||||
Net proceeds (repayments) under current revolving credit facilities | 128,500 | (24,500 | ) | ||||
Net proceeds under foreign bank loan | 26,165 | 1,525 | |||||
Net repayments under other debt arrangement | (17 | ) | (18 | ) | |||
Repurchase of treasury stock | (4,418 | ) | (4,836 | ) | |||
Excess tax (detriment) benefit related to share-based compensation | (833 | ) | 2,400 | ||||
Net cash provided by (used in) financing activities | 149,397 | (25,429 | ) | ||||
Effect of exchange rates on cash and cash equivalents | (1,444 | ) | (814 | ) | |||
Changes in cash and cash equivalents-- | |||||||
Net increase in cash and cash equivalents | 18,503 | (5,359 | ) | ||||
Cash and cash equivalents at beginning of year | 55,528 | 43,945 | |||||
Cash and cash equivalents at end of period | $ | 74,031 | $ | 38,586 |
See accompanying notes
3
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 2, 2016
(Unaudited)
1) | Summary of Significant Accounting Policies |
A) | Basis of Presentation |
The condensed consolidated financial statements have been prepared by The Middleby Corporation (the "company" or “Middleby”), pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements are unaudited and certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information not misleading. These financial statements should be read in conjunction with the financial statements and related notes contained in the company's 2015 Form 10-K. The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2016.
In the opinion of management, the financial statements contain all adjustments necessary to present fairly the financial position of the company as of July 2, 2016 and January 2, 2016, the results of operations for the three and six months ended July 2, 2016 and July 4, 2015 and cash flows for the six months ended July 2, 2016 and July 4, 2015.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long lived and intangible assets, warranty reserves, insurance reserves, income tax reserves and post-retirement obligations. Actual results could differ from the company's estimates.
B) | Non-Cash Share-Based Compensation |
The company estimates the fair value of market-based stock awards and stock options at the time of grant and recognizes compensation cost over the vesting period of the awards and options. Non-cash share-based compensation expense was $6.2 million and $5.4 million for the second quarter periods ended July 2, 2016 and July 4, 2015, respectively. Non-cash share-based compensation expense was $11.2 million and $7.4 million for the six months ended July 2, 2016 and July 4, 2015, respectively.
During the first quarter ended April 4, 2015, the company issued restricted shares under its 2011 Stock Incentive Plan. These amounts are contingent on the attainment of certain performance objectives. The aggregate grant-date fair value of these awards was $31.0 million, based on the closing share price of the company's stock at the date of the grant.
C) | Income Taxes |
As of January 2, 2016, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $14.4 million (of which $14.1 million would impact the effective tax rate if recognized) plus approximately $1.9 million of accrued interest and $3.8 million of penalties. The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. As of July 2, 2016, the company recognized a tax expense of $1.8 million for unrecognized tax benefits related to current year tax exposures.
It is reasonably possible that the amounts of unrecognized tax benefits associated with state, federal and foreign tax positions may decrease over the next twelve months due to expiration of a statute or completion of an audit. The company believes that it is reasonably possible that approximately $1.6 million of its remaining unrecognized tax benefits may be recognized over the next twelve months as a result of lapses of statutes of limitations.
4
A summary of the tax years that remain subject to examination in the company’s major tax jurisdictions are:
United States - federal | 2012 – 2015 |
United States - states | 2006 – 2015 |
Australia | 2011 – 2015 |
Brazil | 2011 – 2015 |
Canada | 2009 – 2015 |
China | 2006 – 2015 |
Czech Republic | 2013 – 2015 |
Denmark | 2013 – 2015 |
France | 2013 – 2015 |
Germany | 2013 – 2015 |
India | 2013 – 2015 |
Ireland | 2009 – 2015 |
Italy | 2011 – 2015 |
Luxembourg | 2011 – 2015 |
Mexico | 2011 – 2015 |
Netherlands | 2004 – 2015 |
Philippines | 2013 – 2015 |
Poland | 2010 – 2015 |
Romania | 2006 – 2015 |
Scotland | 2015 |
South Korea | 2011 |
Spain | 2011 – 2015 |
Sweden | 2009 – 2015 |
Switzerland | 2008 – 2015 |
Taiwan | 2011 – 2012 |
United Kingdom | 2014 – 2015 |
5
D) | Fair Value Measures |
ASC 820 "Fair Value Measurements and Disclosures" defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into the following levels:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3 – Unobservable inputs based on our own assumptions.
The company’s financial liabilities that are measured at fair value and are categorized using the fair value hierarchy are as follows (in thousands):
Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | Total | ||||||||||||
As of July 2, 2016 | |||||||||||||||
Financial Liabilities: | |||||||||||||||
Interest rate swaps | $ | — | $ | 610 | $ | — | $ | 610 | |||||||
Contingent consideration | $ | — | $ | — | $ | 8,446 | $ | 8,446 | |||||||
As of January 2, 2016 | |||||||||||||||
Financial Liabilities: | |||||||||||||||
Interest rate swaps | $ | — | $ | 412 | $ | — | $ | 412 | |||||||
Contingent consideration | $ | — | $ | — | $ | 11,065 | $ | 11,065 |
The contingent consideration as of July 2, 2016 relates to the earnout provisions recorded in conjunction with the acquisitions of PES, Concordia, Desmon, Goldstein Eswood and Induc.
The contingent consideration as of January 2, 2016 relates to the earnout provisions recorded in conjunction with the acquisitions of Spooner Vicars, PES, Concordia, Desmon, Goldstein Eswood and Induc.
The earnout provisions associated with these acquisitions are based upon performance measurements related to sales and earnings, as defined in the respective purchase agreements. On a quarterly basis the company assesses the projected results for each of the acquired businesses in comparison to the earnout targets and adjusts the liability accordingly.
E) Consolidated Statements of Cash Flows
Cash paid for interest was $10.3 million and $6.9 million for the six months ended July 2, 2016 and July 4, 2015, respectively. Cash payments totaling $53.6 million and $36.2 million were made for income taxes for the six months ended July 2, 2016 and July 4, 2015, respectively.
6
2) | Acquisitions and Purchase Accounting |
The company operates in a highly fragmented industry and has completed numerous acquisitions over the past several years as a component of its growth strategy. The company has acquired industry leading brands and technologies to position itself as a leader in the commercial foodservice equipment, food processing equipment and residential kitchen equipment industries.
The company has accounted for all business combinations using the acquisition method to record a new cost basis for the assets acquired and liabilities assumed. The difference between the purchase price and the fair value of the assets acquired and liabilities assumed has been recorded as goodwill in the financial statements. The results of operations are reflected in the consolidated financial statements of the company from the dates of acquisition.
Market Forge
On January 7, 2014, the company completed its acquisition of certain assets of Market Forge Industries, Inc. (“Market Forge”), a leading manufacturer of steam cooking equipment for the commercial foodservice industry, for a purchase price of approximately $7.0 million. During the first quarter of 2014, the company finalized the working capital provision provided for by the purchase agreement resulting in an additional payment to the seller of $0.2 million. Additional deferred payments of $3.0 million in aggregate were paid to the seller during the second and third quarters of 2014. An additional contingent payment of $1.5 million was paid to the seller during the first quarter of 2015 upon the achievement of certain financial targets for the fiscal year 2014.
The final allocation of cash paid for the Market Forge acquisition is summarized as follows (in thousands):
(as initially reported) Jan 7, 2014 | Measurement Period Adjustments | (as adjusted) Jan 7, 2014 | |||||||||
Current assets | $ | 2,051 | $ | (100 | ) | $ | 1,951 | ||||
Property, plant and equipment | 120 | — | 120 | ||||||||
Goodwill | 5,252 | 654 | 5,906 | ||||||||
Other intangibles | 4,191 | — | 4,191 | ||||||||
Current liabilities | (4,374 | ) | (554 | ) | (4,928 | ) | |||||
Consideration paid at closing | $ | 7,240 | $ | — | $ | 7,240 | |||||
Deferred payments | 3,000 | — | 3,000 | ||||||||
Contingent consideration | 1,374 | 126 | 1,500 | ||||||||
Net assets acquired and liabilities assumed | $ | 11,614 | $ | 126 | $ | 11,740 |
The goodwill and $2.9 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350 "Intangibles - Goodwill and Other." Other intangibles also includes $1.1 million allocated to customer relationships, $0.2 million allocated to developed technology and less than $0.1 million allocated to backlog, which are to be amortized over periods of 4 years, 5 years and 3 months, respectively. Goodwill and other intangibles of Market Forge are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
7
Viking Distributors 2014
The company, through Viking, purchased certain assets of two of Viking's former distributors ("Viking Distributors 2014"). The aggregate purchase price of these transactions as of January 31, 2014 was approximately $44.5 million. This included $6.0 million in forgiveness of liabilities owed to Viking resulting from pre-existing relationships with Viking.
The final allocation of cash paid for the Viking Distributors 2014 acquisition is summarized as follows (in thousands):
(as initially reported) Jan 31, 2014 | Measurement Period Adjustments | (as adjusted) Jan 31, 2014 | |||||||||
Current assets | $ | 35,909 | $ | (8,101 | ) | $ | 27,808 | ||||
Property, plant and equipment | 2,000 | (291 | ) | 1,709 | |||||||
Goodwill | 7,552 | 8,647 | 16,199 | ||||||||
Current liabilities | (1,005 | ) | (255 | ) | (1,260 | ) | |||||
Net assets acquired and liabilities assumed | $ | 44,456 | $ | — | $ | 44,456 | |||||
Forgiveness of liabilities owed to Viking | (5,971 | ) | — | (5,971 | ) | ||||||
Consideration paid at closing | $ | 38,485 | $ | — | $ | 38,485 |
The goodwill is subject to the non-amortization provisions of ASC 350 and is allocated to the Residential Kitchen Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
8
Process Equipment Solutions
On March 31, 2014, the company completed its acquisition of substantially all of the assets of Processing Equipment Solutions, Inc. ("PES"), a leading manufacturer of water jet cutting equipment for the food processing industry, for a purchase price of approximately $15.0 million. An additional payment is also due upon the achievement of certain financial targets. During the third quarter of 2014, the company finalized the working capital provision provided by the purchase agreement resulting in no adjustment to the original purchase price.
The final allocation of cash paid for the PES acquisition is summarized as follows (in thousands):
(as initially reported) Mar 31, 2014 | Measurement Period Adjustments | (as adjusted) Mar 31, 2014 | |||||||||
Current assets | $ | 2,211 | $ | (153 | ) | $ | 2,058 | ||||
Property, plant and equipment | 3,493 | — | 3,493 | ||||||||
Goodwill | 10,792 | 332 | 11,124 | ||||||||
Other intangibles | 1,600 | 18 | 1,618 | ||||||||
Other assets | 21 | (21 | ) | — | |||||||
Current liabilities | (816 | ) | — | (816 | ) | ||||||
Other non-current liabilities | (2,301 | ) | (176 | ) | (2,477 | ) | |||||
Consideration paid at closing | $ | 15,000 | $ | — | $ | 15,000 | |||||
Contingent consideration | 2,301 | 176 | 2,477 | ||||||||
Net assets acquired and liabilities assumed | $ | 17,301 | $ | 176 | $ | 17,477 |
The goodwill is subject to the non-amortization provisions of ASC 350. Other intangibles includes $1.0 million allocated to customer relationships, $0.6 million allocated to developed technology and less than $0.1 million allocated to backlog, which are being amortized over periods of 5 years, 5 years and 3 months, respectively. Goodwill and other intangibles of PES are allocated to the Food Processing Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
The PES purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable within the first quarter of 2017, if PES exceeds certain sales targets for fiscal 2014, 2015 and 2016. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $2.5 million.
9
Concordia
On September 8, 2014, the company completed its acquisition of all of the capital stock of Concordia Coffee Company, Inc. ("Concordia"), a leading manufacturer of automated and self-service coffee and espresso machines for the commercial foodservice industry, for a purchase price of approximately $12.5 million, net of cash acquired. An additional payment is also due upon the achievement of certain financial targets. During the first quarter of 2015, the company finalized the working capital provision provided by the purchase agreement resulting in a return from the seller of $0.1 million.
The final allocation of cash paid for the Concordia acquisition is summarized as follows (in thousands):
(as initially reported) Sep 8, 2014 | Measurement Period Adjustments | (as adjusted) Sep 8, 2014 | |||||||||
Cash | $ | 345 | $ | — | $ | 345 | |||||
Current deferred tax asset | — | 726 | 726 | ||||||||
Current assets | 3,767 | (497 | ) | 3,270 | |||||||
Goodwill | 11,255 | (5,720 | ) | 5,535 | |||||||
Other intangibles | 4,500 | (1,200 | ) | 3,300 | |||||||
Long-term deferred tax asset | — | 3,264 | 3,264 | ||||||||
Current liabilities | (2,296 | ) | (842 | ) | (3,138 | ) | |||||
Other non-current liabilities | (4,710 | ) | 4,189 | (521 | ) | ||||||
Consideration paid at closing | $ | 12,861 | $ | (80 | ) | $ | 12,781 | ||||
Contingent consideration | 4,710 | (4,189 | ) | 521 | |||||||
Net assets acquired and liabilities assumed | $ | 17,571 | $ | (4,269 | ) | $ | 13,302 |
The current and long term deferred tax assets amounted to $0.7 million and $3.3 million, respectively. These net assets are comprised of $4.1 million related to federal net operating loss carry forwards, $1.1 million of assets arising from the difference between the book and tax basis of tangible asset and liability accounts, net of $1.2 million of deferred tax liabilities related to the difference between the book and tax basis of identifiable intangible assets. Federal net operating loss carry forwards are subject to carry forward limitations for income tax purposes.
The goodwill and $1.1 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles include $2.2 million allocated to customer relationships, which is being amortized over a period of 10 years. Goodwill and other intangibles of Concordia are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
The Concordia purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable within the first quarter of 2017 if Concordia exceeds certain sales targets for fiscal years 2015 and 2016. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $0.5 million.
10
U-Line
On November 5, 2014, the company completed its acquisition of all of the capital stock of U-Line Corporation ("U-Line"), a leading manufacturer of premium residential built-in modular ice making, refrigeration and wine preservation products for the residential industry, for a purchase price of approximately $142.0 million, net of cash acquired. During the first quarter of 2015, the company finalized the working capital provision provided by the purchase agreement resulting in a return from the seller of $0.3 million.
The final allocation of cash paid for the U-Line acquisition is summarized as follows (in thousands):
(as initially reported) Nov 5, 2014 | Measurement Period Adjustments | (as adjusted) Nov 5, 2014 | |||||||||
Cash | $ | 12,764 | $ | — | $ | 12,764 | |||||
Current deferred tax asset | 657 | 114 | 771 | ||||||||
Current assets | 12,237 | — | 12,237 | ||||||||
Property, plant and equipment | 3,376 | — | 3,376 | ||||||||
Goodwill | 89,501 | (8,000 | ) | 81,501 | |||||||
Other intangibles | 57,500 | 17,700 | 75,200 | ||||||||
Current liabilities | (6,032 | ) | (1,973 | ) | (8,005 | ) | |||||
Long-term deferred tax liability | (13,095 | ) | (4,657 | ) | (17,752 | ) | |||||
Other non-current liabilities | (2,111 | ) | (3,459 | ) | (5,570 | ) | |||||
Net assets acquired and liabilities assumed | $ | 154,797 | $ | (275 | ) | $ | 154,522 |
The current deferred tax assets and long term deferred tax liabilities amounted to $0.8 million and $17.8 million, respectively. These net assets are comprised of $5.7 million related to federal and state net operating loss carry forwards, $1.5 million of assets arising from the difference between the book and tax basis of tangible asset and liability accounts, net of $24.2 million of deferred tax liabilities related to the difference between the book and tax basis of identifiable intangible assets. Federal and state net operating loss carry forwards are subject to carry forward limitations for income tax purposes.
The goodwill and $52.7 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles includes $20.7 million allocated to customer relationships and $1.8 million allocated to backlog, which are being amortized over a period of 6 years and 5 months, respectively. Goodwill and other intangibles of U-Line are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
11
Desmon
On January 7, 2015, the company completed its acquisition of all of the capital stock of Desmon Food Service Equipment Company ("Desmon"), a leading manufacturer of blast chillers and refrigeration for the commercial foodservice industry located in Nusco, Italy, for a purchase price of approximately $13.5 million, net of cash acquired. An additional payment is also due upon the achievement of certain financial targets. During the fourth quarter of 2015, the company finalized the working capital provision provided by the purchase agreement resulting in a return from the seller of $0.4 million.
The final allocation of cash paid for the Desmon acquisition is summarized as follows (in thousands):
(as initially reported) Jan 7, 2015 | Measurement Period Adjustments | (as adjusted) Jan 7, 2015 | |||||||||
Cash | $ | 441 | $ | (12 | ) | $ | 429 | ||||
Current deferred tax asset | 535 | — | 535 | ||||||||
Current assets | 8,639 | (1,105 | ) | 7,534 | |||||||
Property, plant and equipment | 7,989 | — | 7,989 | ||||||||
Goodwill | 7,175 | 53 | 7,228 | ||||||||
Other intangibles | 3,129 | (899 | ) | 2,230 | |||||||
Current liabilities | (8,668 | ) | 998 | (7,670 | ) | ||||||
Long-term deferred tax liability | (2,389 | ) | 282 | (2,107 | ) | ||||||
Other non-current liabilities | (2,463 | ) | 269 | (2,194 | ) | ||||||
Consideration paid at closing | $ | 14,388 | $ | (414 | ) | $ | 13,974 | ||||
Contingent consideration | 2,416 | (269 | ) | 2,147 | |||||||
Net assets acquired and liabilities assumed | $ | 16,804 | $ | (683 | ) | $ | 16,121 |
The current deferred tax assets and long term deferred tax liabilities amounted to $0.5 million and $2.1 million, respectively. These net liabilities are comprised of $0.7 million of deferred tax liabilities related to the difference between the book and tax basis of identifiable intangible assets, $1.1 million of liabilities arising from the difference between the book and tax basis of tangible asset and liability accounts, net of $0.2 million of assets related to foreign net operating loss carry forwards.
The goodwill and $1.3 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $0.6 million allocated to customer relationships and $0.3 million allocated to developed technology, which are to be amortized over periods of 9 years and 7 years, respectively. Goodwill and other intangibles of Desmon are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
The Desmon purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable within the second quarter of each of the fiscal years 2016, 2017 and 2018, respectively, if Desmon exceeds certain sales targets for fiscal 2015, 2016 and 2017, respectively. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $2.1 million.
12
Goldstein Eswood
On January 30, 2015, the company completed its acquisition of substantially all of the assets of J. Goldstein & Co. Pty. Ltd. ("Goldstein") and Eswood Australia Pty. Ltd. ("Eswood" and together with Goldstein, "Goldstein Eswood") for a purchase price of approximately $27.4 million. Goldstein is a leading manufacturer of cooking equipment including ranges, ovens, griddles, fryers and warming equipment and Eswood is a leading manufacturer of dishwashing equipment, both for the commercial foodservice industry and located in Smithfield, Australia. An additional payment is also due upon the achievement of certain financial targets. During the third quarter of 2015, the company finalized the working capital provision provided by the purchase agreement resulting in no adjustment to the original purchase price.
The final allocation of cash paid for the Goldstein acquisition is summarized as follows (in thousands):
(as initially reported) Jan 30, 2015 | Measurement Period Adjustments | (as adjusted) Jan 30, 2015 | |||||||||
Current assets | $ | 8,036 | $ | — | $ | 8,036 | |||||
Property, plant and equipment | 8,690 | — | 8,690 | ||||||||
Goodwill | 8,493 | (2,727 | ) | 5,766 | |||||||
Other intangibles | 5,648 | 3,113 | 8,761 | ||||||||
Current liabilities | (1,806 | ) | (202 | ) | (2,008 | ) | |||||
Other non-current liabilities | (1,655 | ) | (184 | ) | (1,839 | ) | |||||
Consideration paid at closing | $ | 27,406 | $ | — | $ | 27,406 | |||||
Contingent consideration | 1,655 | 183 | 1,838 | ||||||||
Net assets acquired and liabilities assumed | $ | 29,061 | $ | 183 | $ | 29,244 |
The goodwill and $2.8 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $5.9 million allocated to customer relationships and less than $0.1 million allocated to backlog, which are to be amortized over periods of 7 years and 3 months, respectively. Goodwill and other intangibles of Goldstein Eswood are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
The Goldstein Eswood purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable within the second quarter of each of the fiscal years 2016 and 2017, respectively, if Goldstein Eswood exceeds certain sales targets for fiscal 2015 and 2016, respectively. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $1.8 million.
13
Marsal
On February 10, 2015, the company completed its acquisition of certain assets of Marsal & Sons, Inc. ("Marsal"), a leading manufacturer of deck ovens for the commercial foodservice industry, for a purchase price of approximately $5.5 million. During the second quarter of 2015, the company finalized the working capital provision provided by the purchase agreement resulting in no adjustment to the purchase price.
The final allocation of cash paid for the Marsal acquisition is summarized as follows (in thousands):
(as initially reported) Feb 10, 2015 | Measurement Period Adjustments | (as adjusted) Feb 10, 2015 | |||||||||
Current assets | $ | 455 | $ | — | $ | 455 | |||||
Property, plant and equipment | 201 | (6 | ) | 195 | |||||||
Goodwill | 3,012 | 6 | 3,018 | ||||||||
Other intangibles | 2,027 | — | 2,027 | ||||||||
Current liabilities | (195 | ) | — | (195 | ) | ||||||
Net assets acquired and liabilities assumed | $ | 5,500 | $ | — | $ | 5,500 |
The goodwill and $1.3 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $0.5 million allocated to customer relationships, $0.1 million allocated to developed technology and less than $0.1 million allocated to backlog, which are to be amortized over periods of 4 years, 5 years and 3 months, respectively. Goodwill and other intangibles of Marsal are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
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Thurne
On April 7, 2015, the company completed its acquisition of certain assets of the High Speed Slicing business unit of Marel ("Thurne"), a leading manufacturer of slicing equipment for the food processing industry located in Norwich, United Kingdom, for a purchase price of approximately $12.6 million. During the second quarter of 2015, the company finalized the working capital provision provided for by the purchase agreement resulting in a refund from the seller of $2.7 million.
The final allocation of cash paid for the Thurne acquisition is summarized as follows (in thousands):
(as initially reported) Apr 7, 2015 | Measurement Period Adjustments | (as adjusted) Apr 7, 2015 | |||||||||
Current assets | $ | 3,419 | $ | (275 | ) | $ | 3,144 | ||||
Property, plant and equipment | 3,334 | — | 3,334 | ||||||||
Goodwill | 609 | 2,378 | 2,987 | ||||||||
Other intangibles | 3,625 | (2,024 | ) | 1,601 | |||||||
Current liabilities | (1,115 | ) | — | (1,115 | ) | ||||||
Net assets acquired and liabilities assumed | $ | 9,872 | $ | 79 | $ | 9,951 |
The goodwill and $0.4 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $0.6 million allocated to customer relationships, $0.6 million allocated to developed technology and $0.1 million allocated to backlog, which are to be amortized over periods of 9 years, 7 years, and 3 months, respectively. Goodwill and other intangibles of Thurne are allocated to the Food Processing Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
15
Induc
On May 30, 2015, the company completed its acquisition of certain assets of the Induc Commercial Electronics Co. Ltd. ("Induc"), a leading manufacturer of induction cooking equipment for the commercial foodservice industry located in Qingdao, China, for a purchase price of approximately $10.6 million. An additional deferred payment of approximately $1.5 million is also due to the seller on the second anniversary of the acquisition. An additional payment is also due upon the achievement of certain financial targets. During the second quarter of 2016, the company finalized the working capital provision provided for by the purchase agreement resulting in an additional payment to the seller of $0.2 million.
The final allocation of cash paid for the Induc acquisition is summarized as follows (in thousands):
(as initially reported) May 30, 2015 | Measurement Period Adjustments | (as adjusted) May 30, 2015 | |||||||||
Current assets | $ | 1,705 | $ | (325 | ) | $ | 1,380 | ||||
Property, plant and equipment | 536 | 353 | 889 | ||||||||
Goodwill | 13,496 | (979 | ) | 12,517 | |||||||
Other intangibles | 1,500 | (300 | ) | 1,200 | |||||||
Other assets | 32 | (32 | ) | — | |||||||
Current liabilities | (854 | ) | 854 | — | |||||||
Other non-current liabilities | (5,793 | ) | 586 | (5,207 | ) | ||||||
Consideration paid at closing | $ | 10,622 | $ | 157 | $ | 10,779 | |||||
Deferred payment | 1,516 | (44 | ) | 1,472 | |||||||
Contingent consideration | 4,276 | (541 | ) | 3,735 | |||||||
Net assets acquired and liabilities assumed | $ | 16,414 | $ | (428 | ) | $ | 15,986 |
The goodwill and $0.5 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $0.7 million allocated to customer relationships, which is to be amortized over a period of 9 years. Goodwill and other intangibles of Induc are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.
The Induc purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable within the first quarter of each of the fiscal years 2018, 2019 and 2020, respectively, if Induc exceeds certain sales and earnings targets for fiscal 2017, 2018 and 2019, respectively. The contractual obligation associated with the contingent earnout provision recognized on the acquisition date is $3.7 million.
16
AGA
On September 23, 2015, the company completed its acquisition of all of the capital stock of AGA Rangemaster Group plc ("AGA") a leading manufacturer of residential kitchen equipment including ranges, ovens and refrigeration for a purchase price of approximately $184.7 million, net of cash acquired. AGA is headquartered in Leamington Spa, United Kingdom. During the fourth quarter of 2015, the company completed the purchase of the minority interest of an AGA subsidiary for approximately $4.3 million.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):
(as initially reported) Sep 23, 2015 | Preliminary Measurement Period Adjustments | (as adjusted) Sep 23, 2015 | |||||||||
Cash | $ | 15,316 | $ | 984 | $ | 16,300 | |||||
Current assets | 163,216 | (9,105 | ) | 154,111 | |||||||
Property, plant and equipment | 61,423 | (210 | ) | 61,213 | |||||||
Goodwill | 144,645 | (21,957 | ) | 122,688 | |||||||
Other intangibles | 190,000 | 30,000 | 220,000 | ||||||||
Deferred tax asset | 5,306 | (5,306 | ) | — | |||||||
Other assets | 1,573 | 289 | 1,862 | ||||||||
Current portion long-term debt | (30,703 | ) | — | (30,703 | ) | ||||||
Current liabilities | (147,279 | ) | (7,237 | ) | (154,516 | ) | |||||
Long term debt | (138 | ) | — | (138 | ) | ||||||
Long-term deferred tax liability | — | (143 | ) | (143 | ) | ||||||
Other non-current liabilities | (202,312 | ) | 12,685 | (189,627 | ) | ||||||
Net assets acquired and liabilities assumed | $ | 201,047 | $ | — | $ | 201,047 |
The long-term deferred tax asset amounted to $0.1 million. These net assets are comprised of $33.6 million of assets related to pension liabilities, $0.9 million of assets related to foreign net operating loss, $1.7 million of assets related to federal net operating loss carry forwards and $5.2 million of assets related to the difference between the book and tax basis of tangible assets and liability accounts, net of $41.5 million of deferred tax liabilities related to the difference between the book and tax basis of identifiable intangible assets. Net operating loss carryforwards are subject to carryforward limitations.
The goodwill and $145.0 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $75.0 million allocated to customer relationships, which is to be amortized over a period of 8 years. Goodwill and other intangibles of AGA are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
The company estimated the fair value of the assets and liabilities of AGA on a preliminary basis at the time of acquisition based on third-party estimates used to assist in determining the fair market value for acquired tangible and intangible assets. Changes to these allocations will occur as additional information becomes available. The company is in the process of obtaining third-party valuations related to the fair value of tangible and intangible assets, in addition to determining and recording the tax effects of the transaction to include all assets/liabilities as those are recorded at fair value. Acquired goodwill represents the premium paid over the fair value of assets acquired and liabilities assumed.
The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.
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Lynx
On December 15, 2015, the company completed its acquisition of all of the capital stock of Lynx Grills, Inc. ("Lynx"), a leading manufacturer of premium residential outdoor equipment located in Downey, California, for a purchase price of approximately $83.8 million, net of cash acquired. The purchase price is subject to adjustment based upon a working capital provision provided by the purchase agreement. The company expects to finalize this in the third quarter of 2016.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):
(as initially reported) Dec 15, 2015 | Preliminary Measurement Period Adjustments | (as adjusted) Dec 15, 2015 | |||||||||
Cash | $ | 276 | $ | — | $ | 276 | |||||
Current deferred tax asset | 467 | — | 467 | ||||||||
Current assets | 18,630 | (296 | ) | 18,334 | |||||||
Property, plant and equipment | 1,690 | — | 1,690 | ||||||||
Goodwill | 42,502 | 1,526 | 44,028 | ||||||||
Other intangibles | 39,800 | — | 39,800 | ||||||||
Other assets | 130 | — | 130 | ||||||||
Current liabilities | (6,208 | ) | — | (6,208 | ) | ||||||
Long term deferred tax liability | (12,589 | ) | — | (12,589 | ) | ||||||
Other non-current liabilities | (666 | ) | (1,230 | ) | (1,896 | ) | |||||
Net assets acquired and liabilities assumed | $ | 84,032 | $ | — | $ | 84,032 |
The current deferred tax assets and long term deferred tax liabilities amounted to $0.5 million and $12.6 million, respectively. These net liabilities are comprised of $14.0 million of deferred tax liabilities related to the difference between book and tax basis of identifiable intangible assets, net of $1.6 million related to federal and state net operating loss carryforwards and $0.3 million of assets arising from the difference between the book and tax basis of tangible assets and liability accounts. Federal and state net operating loss carryforwards are subject to carryforward limitations.
The goodwill and $30.0 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $9.0 million allocated to customer relationships and $0.8 million allocated to backlog, which is to be amortized over a period of 5 years and 3 months respectively. Goodwill and other intangibles of Lynx are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes.
The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.
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Emico
On May 20, 2016, the company completed its acquisition of certain assets of Emico Automated Bakery Equipment Solutions ("Emico"), manufacturer of high speed dough make-up bakery equipment located in Sante Fe Springs, California, for a purchase price of approximately $1.0 million. Additional deferred payments of approximately $1.6 million in aggregate are also due to the seller during the two year period subsequent to the acquisition.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):
(as initially reported) May 20, 2016 | |||
Current assets | $ | 746 | |
Goodwill | 1,816 | ||
Current liabilities | (934 | ) | |
Other non-current liabilities | (628 | ) | |
Consideration paid at closing | $ | 1,000 | |
Deferred payments | 1,559 | ||
Net assets acquired and liabilities assumed | $ | 2,559 |
The goodwill is subject to the non-amortization provisions of ASC 350 and is expected to be deductible for tax purposes.
The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.
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Follett
On May 31, 2016, the company completed its acquisition of substantially all of the assets of of Follett Corporation ("Follett"), a leading manufacturer of ice machines, ice and water dispensing equipment, ice storage and transport products and medical grade refrigeration products for the foodservice and healthcare industries headquartered in Easton, Pennsylvania, for a purchase price of approximately $209.1 million, net of cash acquired. The purchase price is subject to adjustment based upon a working capital provision provided by the purchase agreement. The company expects to finalize this in the fourth quarter of 2016.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):
(as initially reported) May 31, 2016 | |||
Cash | $ | 22,620 | |
Current assets | 41,602 | ||
Property, plant and equipment | 19,868 | ||
Goodwill | 76,220 | ||
Other intangibles | 82,450 | ||
Other assets | 1,358 | ||
Current liabilities | (11,779 | ) | |
Other non-current liabilities | (616 | ) | |
Net assets acquired and liabilities assumed | $ | 231,723 |
The goodwill and $55.0 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also includes $22.5 million allocated to customer relationships, $4.5 million allocated to developed technology and $0.5 million allocated to backlog, which are to be amortized over periods of 6 years, 6 years, and 3 months, respectively. These assets are expected to be deductible for tax purposes.
The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.
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Pro Forma Financial Information
In accordance with ASC 805 “Business Combinations”, the following unaudited pro forma results of operations for the six months ended July 2, 2016 and July 4, 2015, assumes the 2015 acquisitions of Desmon, Goldstein Eswood, Marsal, Thurne, Induc, AGA and Lynx and the 2016 acquisition of Follett were completed on January 4, 2015 (first day of fiscal year 2015). The following pro forma results include adjustments to reflect additional interest expense to fund the acquisitions, amortization of intangibles associated with the acquisitions, and the effects of adjustments made to the carrying value of certain assets (in thousands, except per share data):
Six Months Ended | |||||||
July 2, 2016 | July 4, 2015 | ||||||
Net sales | $ | 1,164,311 | $ | 1,142,066 | |||
Net earnings | 132,088 | 89,456 | |||||
Net earnings per share: | |||||||
Basic | 2.32 | 1.57 | |||||
Diluted | 2.32 | 1.57 |
The supplemental pro forma financial information presented above has been prepared for comparative purposes and is not necessarily indicative of either the results of operations that would have occurred had the acquisitions of these companies been effective on January 4, 2015 nor are they indicative of any future results. Also, the pro forma financial information does not reflect the costs which the company has incurred or may incur to integrate Desmon, Goldstein Eswood, Marsal, Thurne, Induc, AGA, Lynx and Follett.
3) | Litigation Matters |
From time to time, the company is subject to proceedings, lawsuits and other claims related to products, suppliers, employees, customers and competitors. The company maintains insurance to partially cover product liability, workers compensation, property and casualty, and general liability matters. The company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after assessment of each matter and the related insurance coverage. The required accrual may change in the future due to new developments or changes in approach such as a change in settlement strategy in dealing with these matters. The company does not believe that any pending litigation will have a material effect on its financial condition, results of operations or cash flows.
4) | Recently Issued Accounting Standards |
In May 2014, the Financial Accounts Standards Board ("FASB") issued ASU No. 2014-09, “Revenue from Contracts with Customers”. This update amends the current guidance on revenue recognition related to contracts with customers. Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In early 2016, the FASB issued additional updates: ASU No. 2016-10, 2016-11 and 2016-12. These updates provide further guidance and clarification on specific items within the previously issued update. In July 2015, the FASB decided to delay the effective date of the new revenue standard to be effective for interim and annual periods beginning on or after December 15, 2017 for public companies. Companies may elect to adopt the standard at the original effective date which, for the company is, for interim and annual periods beginning on or after December 15, 2016, but not earlier. The guidance can be applied using one of two retrospective application methods. The company is evaluating the impact the application of these ASU's will have, if any, on the company's financial position, results of operations or cash flows.
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In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation”. This update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update is effective for annual and corresponding interim reporting periods beginning on or after December 15, 2015. Early adoption is permitted. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In January 2015, the FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items". This update eliminates the concept of extraordinary items from the current guidance. This update is effective for annual and corresponding interim reporting periods beginning after December 15, 2015. Retrospective application is encouraged for all prior periods presented in the financial statements. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs to be recorded as a direct reduction of the debt liability on the balance sheet rather than as an asset. The standard is effective for fiscal years beginning after December 15, 2015. The new guidance will be applied retrospectively to each prior period presented. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-04, "Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets". This ASU is intended to provide a practical expedient for the measurement date of defined benefit plan assets and obligations. The practical expedient allows employers with fiscal year-end dates that do not fall on a calendar month-end (e.g., companies with a 52/53-week fiscal year) to measure pension and post-retirement benefit plan assets and obligations as of the calendar month-end date closest to the fiscal year-end. The FASB also provided a similar practical expedient for interim remeasurements for significant events. This ASU requires perspective application and is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
In August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest” which relates to the presentation of debt issuance costs. This standard clarifies the guidance set forth in FASB ASU 2015-03, which required that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability rather than as an asset. The new pronouncement clarifies that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The adoption of this guidance did not have a material impact on its consolidated balance sheets.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which is intended to simplify the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. Application of the standard, which should be applied prospectively, is required for the annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this guidance did not have an impact on the company's financial position, results of operations or cash flows.
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In November 2015, the FASB issued ASU 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes". The amendments in ASU 2015-17 simplify the accounting for, and presentation of, deferred taxes by eliminating the need to separately classify the current amount of deferred tax assets or liabilities. Instead, aggregated deferred tax assets and liabilities are classified and reported as non-current assets or liabilities. The update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been issued. The company early adopted ASU 2015-17 effective April 3, 2016 on a prospective basis. Adoption of this ASU resulted in a reclassification of the company's net current deferred tax asset to the net non-current deferred tax liability in the company's Consolidated Balance Sheet as of July 2, 2016. No prior periods were retrospectively adjusted.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". The amendments under this pronouncement will change the way all leases with a duration of one year of more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases are under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. This update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2018. The company is currently evaluating the impact this standard will have on its policies and procedures pertaining to its existing and future lease arrangements, disclosure requirements and on the company's financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships". The amendments in ASU 2016-05 clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of the hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this update may be applied on either a prospective basis or a modified retrospective basis. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2016. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows.
In March 2016, the FASB issues ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718)". The amendments in ASU-09 simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2016. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows.
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5) | Other Comprehensive Income |
The company reports changes in equity during a period, except those resulting from investments by owners and distributions to owners, in accordance with ASC 220, "Comprehensive Income".
Changes in accumulated other comprehensive income(1) were as follows (in thousands):
Currency Translation Adjustment | Pension Benefit Costs | Unrealized Gain/(Loss) Interest Rate Swap | Total | ||||||||||||
Balance as of January 2, 2016 | $ | (52,842 | ) | $ | (23,579 | ) | $ | 9 | $ | (76,412 | ) | ||||
Other comprehensive income before reclassification | (19,975 | ) | 4,856 | 76 | (15,043 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income | — | — | (199 | ) | (199 | ) | |||||||||
Net current-period other comprehensive income | $ | (19,975 | ) | $ | 4,856 | $ | (123 | ) | $ | (15,242 | ) | ||||
Balance as of July 2, 2016 | $ | (72,817 | ) | $ | (18,723 | ) | $ | (114 | ) | $ | (91,654 | ) |
(1) Pension and interest rate swap amounts are net of tax.
Components of other comprehensive income were as follows (in thousands)
Three Months Ended | Six Months Ended | ||||||||||||||
Jul 2, 2016 | Jul 4, 2015 | Jul 2, 2016 | Jul 4, 2015 | ||||||||||||
Net earnings | $ | 72,891 | $ | 54,267 | $ | 127,429 | $ | 92,498 | |||||||
Currency translation adjustment | (19,579 | ) | 6,669 | (19,975 | ) | (9,122 | ) | ||||||||
Pension liability adjustment, net of tax | 1,078 | (89 | ) | 4,856 | 25 | ||||||||||
Unrealized gain on interest rate swaps, net of tax | (2 | ) | 302 | (123 | ) | (170 | ) | ||||||||
Comprehensive income | $ | 54,388 | $ | 61,149 | $ | 112,187 | $ | 83,231 |
6) | Inventories |
Inventories are composed of material, labor and overhead and are stated at the lower of cost or market. Costs for inventories at two of the company's manufacturing facilities have been determined using the last-in, first-out ("LIFO") method. These inventories under the LIFO method amounted to $41.4 million at July 2, 2016 and $35.6 million at January 2, 2016 and represented approximately 10.6% and 10.1% of the total inventory at each respective period. The amount of LIFO reserve at July 2, 2016 and January 2, 2016 was not material. Costs for all other inventory have been determined using the first-in, first-out ("FIFO") method. The company estimates reserves for inventory obsolescence and shrinkage based on its judgment of future realization. Inventories at July 2, 2016 and January 2, 2016 are as follows:
Jul 2, 2016 | Jan 2, 2016 | ||||||
(in thousands) | |||||||
Raw materials and parts | $ | 163,630 | $ | 139,117 | |||
Work-in-process | 34,024 | 34,771 | |||||
Finished goods | 192,224 | 180,262 | |||||
$ | 389,878 | $ | 354,150 |
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7) | Goodwill |
Changes in the carrying amount of goodwill for the six months ended July 2, 2016 are as follows (in thousands):
Commercial Foodservice | Food Processing | Residential Kitchen | Total | ||||||||||||
Balance as of January 2, 2016 | $ | 473,127 | $ | 134,092 | $ | 376,120 | $ | 983,339 | |||||||
Goodwill acquired during the year | 76,220 | 1,816 | — | 78,036 | |||||||||||
Measurement period adjustments to goodwill acquired in prior year | (503 | ) | — | (58 | ) | (561 | ) | ||||||||
Exchange effect | (3,339 | ) | 337 | (5,858 | ) | (8,860 | ) | ||||||||
Balance as of July 2, 2016 | $ | 545,505 | $ | 136,245 | $ | 370,204 | $ | 1,051,954 |
8) | Accrued Expenses |
Accrued expenses consist of the following:
Jul 2, 2016 | Jan 2, 2016 | ||||||
(in thousands) | |||||||
Accrued payroll and related expenses | $ | 67,090 | $ | 65,623 | |||
Advanced customer deposits | 60,663 | 57,595 | |||||
Accrued warranty | 37,048 | 37,901 | |||||
Accrued customer rebates | 33,351 | 45,154 | |||||
Accrued agent commission | 11,633 | 9,948 | |||||
Accrued product liability and workers compensation | 11,632 | 11,635 | |||||
Accrued sales and other tax | 10,048 | 13,537 | |||||
Accrued professional fees | 8,046 | 7,019 | |||||
Product recall | 6,718 | 7,786 | |||||
Restructuring | 3,319 | 6,266 | |||||
Other accrued expenses | 55,974 | 57,690 | |||||
$ | 305,522 | $ | 320,154 |
9) | Warranty Costs |
In the normal course of business the company issues product warranties for specific product lines and provides for the estimated future warranty cost in the period in which the sale is recorded. The estimate of warranty cost is based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Because warranty estimates are forecasts that are based on the best available information, actual claims costs may differ from amounts provided. Adjustments to initial obligations for warranties are made as changes in the obligations become reasonably estimable.
A rollforward of the warranty reserve is as follows:
Six Months Ended | |||
Jul 2, 2016 | |||
(in thousands) | |||
Balance as of January 2, 2016 | $ | 37,901 | |
Warranty reserve related to acquisitions | — | ||
Warranty expense | 22,868 | ||
Warranty claims | (23,721 | ) | |
Balance as of July 2, 2016 | $ | 37,048 |
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10) | Financing Arrangements |
Jul 2, 2016 | Jan 2, 2016 | ||||||
(in thousands) | |||||||
Senior secured revolving credit line | $ | 861,500 | $ | 733,000 | |||
Foreign loans | 54,596 | 32,813 | |||||
Other debt arrangement | 230 | 248 | |||||
Total debt | $ | 916,326 | $ | 766,061 | |||
Less: Current maturities of long-term debt | 53,755 | 32,059 | |||||
Long-term debt | $ | 862,571 | $ | 734,002 |
On August 7, 2012, the company entered into a senior secured multi-currency credit facility. Terms of the company’s senior credit agreement provide for a total of $1.25 billion of availability under a revolving credit line. As of July 2, 2016, the company had $861.5 million of borrowings outstanding under this facility. The company also had $6.3 million in outstanding letters of credit as of July 2, 2016, which reduces the borrowing availability under the revolving credit line. Remaining borrowing availability under this facility was $382.2 million at July 2, 2016.
At July 2, 2016, borrowings under the senior secured credit facility were assessed at an interest rate of 1.50% above LIBOR for long-term borrowings or at the higher of the Prime rate and the Federal Funds Rate. The average interest rate on the senior debt amounted to 2.07%. 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 July 2, 2016.
In September 2015, the company completed its acquisition of Aga Rangemaster Group plc in the United Kingdom. At the time of acquisition, credit facilities denominated in British Pounds, Euro and U.S. dollars, had been established to fund local working capital needs. At July 2, 2016, these facilities amounted to $47.0 million in U.S. dollars. The average interest rate assessed on these facilities was approximately 2.46%.
In addition, the company has other international credit facilities to fund working capital needs outside the United States and the United Kingdom. At July 2, 2016, these foreign credit facilities amounted to $7.6 million in U.S. dollars with a weighted average interest rate of approximately 9.99%.
The company’s debt is reflected on the balance sheet at cost. Based on current market conditions, the company believes its interest rate margins on its existing debt are consistent with current market conditions and therefore the carrying value of debt reflects the fair value. However, the interest rate margin is based upon numerous factors, including but not limited to the credit rating of the borrower, the duration of the loan, the structure and restrictions under the debt agreement, current lending policies of the counterparty, and the company’s relationships with its lenders.
The company estimated the fair value of its loans by calculating the upfront cash payment a market participant would require to assume the company’s obligations. The upfront cash payment is the amount that a market participant would be able to lend to achieve sufficient cash inflows to cover the cash outflows under the company’s senior revolving credit facility assuming the facility was outstanding in its entirety until maturity. Since the company maintains its borrowings under a revolving credit facility and there is no predetermined borrowing or repayment schedule, for purposes of this calculation the company calculated the fair value of its obligations assuming the current amount of debt at the end of the period was outstanding until the maturity of the company’s senior revolving credit facility in August 2017. Although borrowings could be materially greater or less than the current amount of borrowings outstanding at the end of the period, it is not practical to estimate the amounts that may be outstanding during future periods. The carrying value and estimated aggregate fair value, a level 2 measurement, based primarily on market prices, of debt is as follows (in thousands):
Jul 2, 2016 | Jan 2, 2016 | ||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Total debt | $ | 916,326 | $ | 916,326 | $ | 766,061 | $ | 766,061 |
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The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the revolving credit line. At July 2, 2016, the company had outstanding floating-to-fixed interest rate swaps totaling $90.0 million notional amount carrying an average interest rate of 0.82% maturing in less than 12 months and $85.0 million notional amount carrying an average interest rate of 0.98% that mature in more than 12 months but less than 24 months.
The company believes that its current capital resources, including cash and cash equivalents, cash expected to be generated from operations, funds available from its current lenders and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and expenditures for the foreseeable future.
The terms of the senior secured credit facility limit the ability of the company and its subsidiaries to, with certain exceptions: incur indebtedness; grant liens; engage in certain mergers, consolidations, acquisitions and dispositions; make restricted payments; enter into certain transactions with affiliates; and require, among other things, a maximum ratio of indebtedness to EBITDA of 3.5 and a fixed charge coverage ratio (as defined in the senior secured credit facility) of 1.25. The senior secured credit facility is secured by substantially all of the assets of Middleby Marshall, the company and the company's domestic subsidiaries and is unconditionally guaranteed by, subject to certain exceptions, the company and certain of the company's direct and indirect material domestic subsidiaries. The senior secured credit facility contains certain customary events of default, including, but not limited to, the failure to make required payments; bankruptcy and other insolvency events; the failure to perform certain covenants; the material breach of a representation or warranty; non-payment of certain other indebtedness; the entry of undischarged judgments against the company or any subsidiary for the payment of material uninsured amounts; the invalidity of the company guarantee or any subsidiary guaranty; and a change of control of the company. The credit agreement also provides that if a material adverse change in the company’s business operations or conditions occurs, the lender could declare an event of default. Under terms of the agreement, a material adverse effect is defined as (a) a material adverse change in, or a material adverse effect upon, the operations, business properties, condition (financial and otherwise) or prospects of the company and its subsidiaries taken as a whole; (b) a material impairment of the ability of the company to perform under the loan agreements and to avoid any event of default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the company of any loan document. A material adverse effect is determined on a subjective basis by the company's creditors. At July 2, 2016, the company was in compliance with all covenants pursuant to its borrowing agreements.
Subsequent to the end of the second quarter, the company entered into an amended senior secured multi-currency credit facility. See Note 15 of the Notes to the Condensed Consolidated Financial Statements for further information.
11) | Financial Instruments |
ASC 815 “Derivatives and Hedging” requires an entity to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Derivatives that do not qualify as a hedge must be adjusted to fair value in earnings. If a derivative does qualify as a hedge under ASC 815, changes in the fair value will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments or recognized in other accumulated comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a hedge's change in fair value will be immediately recognized in earnings.
Foreign Exchange: The company uses foreign currency forward and option purchase and sales contracts with terms of less than one year to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The fair value of the forward and option contracts was a gain of $3.1 million at the end of the second quarter of 2016.
Interest Rate: The company has entered into interest rate swaps to fix the interest rate applicable to certain of its variable-rate debt. The agreements swap one-month LIBOR for fixed rates. The company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income. As of July 2, 2016, the fair value of these instruments was a liability of $0.6 million. The change in fair value of these swap agreements in the first six months of 2016 was a loss of less than $0.1 million, net of taxes.
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The following tables summarize the company’s fair value of interest rate swaps (in thousands):
Condensed Consolidated Balance Sheet Presentation | Jul 2, 2016 | Jan 2, 2016 | |||||||
Fair value | Other non-current liabilities | $ | (610 | ) | $ | (412 | ) |
The impact on earnings from interest rate swaps was as follows (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||||||
Presentation of Gain/(loss) | Jul 2, 2016 | Jul 4, 2015 | Jul 2, 2016 | Jul 4, 2015 | |||||||||||||
Gain/(loss) recognized in accumulated other comprehensive income | Other comprehensive income | $ | (211 | ) | $ | (4 | ) | $ | (730 | ) | $ | (1,301 | ) | ||||
Gain/(loss) reclassified from accumulated other comprehensive income (effective portion) | Interest expense | $ | (208 | ) | $ | (489 | ) | $ | (525 | ) | $ | (974 | ) | ||||
Gain/(loss) recognized in income (ineffective portion) | Other expense | $ | (4 | ) | $ | 2 | $ | 7 | $ | 15 |
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.
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12) | Segment Information |
The company operates in three reportable operating segments defined by management reporting structure and operating activities.
The Commercial Foodservice Equipment Group manufactures, sells, and distributes cooking equipment for the restaurant and institutional kitchen industry. This business segment has manufacturing facilities in California, Illinois, Michigan, New Hampshire, North Carolina, Pennsylvania, Tennessee, Texas, Vermont, Washington, Australia, China, Denmark, Italy, the Philippines, Poland and the United Kingdom. Principal product lines of this group include conveyor ovens, ranges, steamers, convection ovens, combi-ovens, broilers and steam cooking equipment, induction cooking systems, baking and proofing ovens, charbroilers, catering equipment, fryers, toasters, hot food servers, food warming equipment, griddles, coffee and beverage dispensing equipment, professional refrigerators, coldrooms, ice machines, freezers and kitchen processing and ventilation equipment. These products are sold and marketed under the brand names: Anets, Beech, Blodgett, Blodgett Combi, Blodgett Range, Bloomfield, Britannia, CTX, Carter-Hoffmann, Celfrost, Concordia, CookTek, Desmon, Doyon, Eswood, Follett, Frifri, Giga, Goldstein, Holman, Houno, IMC, Induc, Jade, Lang, Lincat, MagiKitch’n, Market Forge, Marsal, Middleby Marshall, MPC, Nieco, Nu-Vu, PerfectFry, Pitco, Southbend, Star, Toastmaster, TurboChef, Wells and Wunder-Bar.
The Food Processing Equipment Group manufactures preparation, cooking, packaging, food handling and food safety equipment for the food processing industry. This business segment has manufacturing operations in Georgia, Illinois, Iowa, North Carolina, Texas, Virginia, Wisconsin, France, Germany and the United Kingdom. Principal product lines of this group include batch ovens, belt ovens, continuous processing ovens, frying systems, automated thermal processing systems, automated loading and unloading systems, meat presses, breading, battering, mixing, water cutting systems, forming, grinding and slicing equipment, food suspension, reduction and emulsion systems, defrosting equipment, packaging and food safety equipment. These products are sold and marketed under the brand names: Alkar, Armor Inox, Auto-Bake, Baker Thermal Solutions, Cozzini, Danfotech, Drake, Maurer-Atmos, MP Equipment, RapidPak, Spooner Vicars, Stewart Systems and Thurne.
The Residential Kitchen Equipment Group manufactures, sells and distributes kitchen equipment for the residential market. This business segment has manufacturing facilities in California, Michigan, Mississippi, Wisconsin, France, Ireland, Romania, and the United Kingdom. Principal product lines of this group include ranges, cookers, ovens, refrigerators, dishwashers, microwaves, cooktops and outdoor equipment. These products are sold and marketed under the brand names of AGA, AGA Cookshop, Brigade, Falcon, Fired Earth, Grange, Heartland, La Cornue, Leisure Sinks, Lynx, Marvel, Mercury, Rangemaster, Rayburn, Redfyre, Sedona, Stanley, TurboChef, U-Line and Viking.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief operating decision maker evaluates individual segment performance based on operating income.
Net Sales Summary
(dollars in thousands)
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||
Jul 2, 2016 | Jul 4, 2015 | Jul 2, 2016 | Jul 4, 2015 | ||||||||||||||||||||||||
Sales | Percent | Sales | Percent | Sales | Percent | Sales | Percent | ||||||||||||||||||||
Business Segments: | |||||||||||||||||||||||||||
Commercial Foodservice | $ | 321,028 | 55.3 | % | $ | 288,831 | 66.2 | % | $ | 600,014 | 54.7 | % | $ | 551,047 | 65.4 | % | |||||||||||
Food Processing | 83,475 | 14.4 | 71,913 | 16.5 | 162,111 | 14.8 | 141,732 | 16.8 | |||||||||||||||||||
Residential Kitchen | 175,953 | 30.3 | 75,547 | 17.3 | 334,686 | 30.5 | 150,108 | 17.8 | |||||||||||||||||||
Total | $ | 580,456 | 100.0 | % | $ | 436,291 | 100.0 | % | $ | 1,096,811 | 100.0 | % | $ | 842,887 | 100.0 | % |
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The following table summarizes the results of operations for the company's business segments(1) (in thousands):
Commercial Foodservice | Food Processing | Residential Kitchen | Corporate and Other(2) | Total | |||||||||||||||
Three Months Ended July 2, 2016 | |||||||||||||||||||
Net sales | $ | 321,028 | $ | 83,475 | $ | 175,953 | $ | — | $ | 580,456 | |||||||||
Income (loss) from operations | 93,732 | 19,186 | 22,364 | (23,369 | ) | 111,913 | |||||||||||||
Depreciation and amortization expense | 5,575 | 1,520 | 8,238 | 977 | 16,310 | ||||||||||||||
Net capital expenditures | 3,322 | 884 | 1,078 | 131 | 5,415 | ||||||||||||||
Six Months Ended July 2, 2016 | |||||||||||||||||||
Net sales | $ | 600,014 | $ | 162,111 | $ | 334,686 | $ | — | $ | 1,096,811 | |||||||||
Income (loss) from operations | 170,301 | 37,049 | 32,215 | (41,277 | ) | 198,288 | |||||||||||||
Depreciation and amortization expense | 9,946 | 2,958 | 16,942 | 1,394 | 31,240 | ||||||||||||||
Net capital expenditures | 7,506 | 2,682 | 2,789 | 131 | 13,108 | ||||||||||||||
Total assets | $ | 1,367,664 | $ | 321,694 | $ | 1,195,379 | $ | 46,933 | $ | 2,931,670 | |||||||||
Three Months Ended July 4, 2015 | |||||||||||||||||||
Net sales | $ | 288,831 | $ | 71,913 | $ | 75,547 | $ | — | $ | 436,291 | |||||||||
Income (loss) from operations | 77,616 | 14,176 | 9,101 | (17,533 | ) | 83,360 | |||||||||||||
Depreciation and amortization expense | 5,027 | 3,545 | 2,260 | 96 | 10,928 | ||||||||||||||
Net capital expenditures | 3,296 | 1,782 | 309 | 180 | 5,567 | ||||||||||||||
Six Months Ended July 4, 2015 | |||||||||||||||||||
Net sales | $ | 551,047 | $ | 141,732 | $ | 150,108 | $ | — | $ | 842,887 | |||||||||
Income (loss) from operations | 141,342 | 27,486 | 14,042 | (32,930 | ) | 149,940 | |||||||||||||
Depreciation and amortization expense | 10,293 | 4,982 | 6,389 | 496 | 22,160 | ||||||||||||||
Net capital expenditures | 7,920 | 2,137 | 1,369 | 258 | 11,684 | ||||||||||||||
Total assets | $ | 1,159,298 | $ | 314,282 | $ | 629,210 | $ | 53,158 | $ | 2,155,948 | |||||||||
(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.
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Geographic Information
Long-lived assets, not including goodwill and other intangibles (in thousands):
Jul 2, 2016 | Jul 4, 2015 | ||||||
United States and Canada | $ | 170,854 |