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EX-32.2 - EXHIBIT 32.2 - MIDDLEBY CORPmidd-ex322x201793017x10q.htm
EX-32.1 - EXHIBIT 32.1 - MIDDLEBY CORPmidd-ex321x201793017x10q.htm
EX-31.2 - EXHIBIT 31.2 - MIDDLEBY CORPmidd-ex312x201793017x10q.htm
EX-31.1 - EXHIBIT 31.1 - MIDDLEBY CORPmidd-ex311x201793017x10q.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 September 30, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer, large accelerated filer, smaller reporting and emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
As of November 3, 2017, there were 55,912,876 shares of the registrant's common stock outstanding.




THE MIDDLEBY CORPORATION AND SUBSIDIARIES
 
QUARTER ENDED SEPTEMBER 30, 2017
  
INDEX
DESCRIPTION
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2017 and DECEMBER 31, 2016
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME SEPTEMBER 30, 2017 and OCTOBER 1, 2016
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SEPTEMBER 30, 2017 and OCTOBER 1, 2016
 
 
 
 
 
 
 
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
Sep 30, 2017

 
Dec 31, 2016

Current assets:
 

 
 

Cash and cash equivalents
$
81,726

 
$
68,485

Accounts receivable, net of reserve for doubtful accounts of $13,594 and $12,600
336,805

 
325,868

Inventories, net
425,932

 
368,243

Prepaid expenses and other
46,550

 
42,704

Prepaid taxes
10,512

 
6,399

Total current assets
901,525

 
811,699

Property, plant and equipment, net of accumulated depreciation of $135,922 and $119,435
275,365

 
221,571

Goodwill
1,158,654

 
1,092,722

Other intangibles, net of amortization of $195,835 and $168,369
786,352

 
696,171

Long-term deferred tax assets
45,225

 
51,699

Other assets
34,022

 
43,274

Total assets
$
3,201,143

 
$
2,917,136

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
5,192

 
$
5,883

Accounts payable
144,474

 
146,921

Accrued expenses
316,983

 
335,605

Total current liabilities
466,649

 
488,409

Long-term debt
945,516

 
726,243

Long-term deferred tax liability
108,190

 
77,760

Accrued pension benefits
325,127

 
322,988

Other non-current liabilities
44,159

 
36,418

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; 62,675,917 and 62,445,315 shares issued in 2017 and 2016, respectively
145

 
144

Paid-in capital
374,093

 
355,287

Treasury stock, at cost; 6,763,041 and 4,905,549 shares in 2017 and 2016, respectively
(430,275
)
 
(205,280
)
Retained earnings
1,622,432

 
1,399,490

Accumulated other comprehensive loss
(254,893
)
 
(284,323
)
Total stockholders' equity
1,311,502

 
1,265,318

Total liabilities and stockholders' equity
$
3,201,143

 
$
2,917,136

 


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
 
Nine Months Ended
 
Sep 30, 2017

 
Oct 1, 2016

 
Sep 30, 2017

 
Oct 1, 2016

Net sales
$
593,043

 
$
574,224

 
$
1,702,683

 
$
1,671,035

Cost of sales
364,524

 
342,496

 
1,030,106

 
1,009,032

Gross profit
228,519

 
231,728

 
672,577

 
662,003

Selling, general and administrative expenses
106,044

 
109,140

 
325,710

 
334,131

Restructuring expenses
4,218

 
1,149

 
17,437

 
8,145

Gain on sale of plant

 

 
(12,042
)
 

Income from operations
118,257

 
121,439

 
341,472

 
319,727

Interest expense and deferred financing amortization, net
6,550

 
6,440

 
18,057

 
17,775

Other (income) expense, net
(1,068
)
 
3,152

 
1,101

 
(1,486
)
Earnings before income taxes
112,775

 
111,847

 
322,314

 
303,438

Provision for income taxes
38,104

 
35,996

 
99,372

 
100,158

Net earnings
$
74,671

 
$
75,851

 
$
222,942

 
$
203,280

 
 
 
 
 
 
 
 
Net earnings per share:
 

 
 

 
 
 
 
Basic
$
1.31

 
$
1.33

 
$
3.91

 
$
3.56

Diluted
$
1.31

 
$
1.33

 
$
3.91

 
$
3.56

Weighted average number of shares
 

 
 

 
 
 
 
Basic
56,810

 
57,022

 
57,070

 
57,032

Dilutive common stock equivalents1

 

 

 

Diluted
56,810

 
57,022

 
57,070

 
57,032

Comprehensive income
$
84,320

 
$
55,345

 
$
252,372

 
$
167,532

 


















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)
 
Nine Months Ended
 
Sep 30, 2017

 
Oct 1, 2016

Cash flows from operating activities--
 

 
 

Net earnings
$
222,942

 
$
203,280

Adjustments to reconcile net earnings to net cash provided by operating activities--
 

 
 

Depreciation and amortization
49,276

 
44,409

Non-cash share-based compensation
6,478

 
17,346

Deferred income taxes
21,369

 
19,325

Gain on sale of plant
(12,042
)
 

Impairment of equipment
2,894

 

Changes in assets and liabilities, net of acquisitions
 

 
 

Accounts receivable, net
13,834

 
(35,984
)
Inventories, net
(19,967
)
 
(35,229
)
Prepaid expenses and other assets
(3,359
)
 
(8,354
)
Accounts payable
(17,639
)
 
(12,933
)
Accrued expenses and other liabilities
(58,894
)
 
(16,763
)
Net cash provided by operating activities
204,892

 
175,097

Cash flows from investing activities--
 

 
 

Additions to property, plant and equipment
(42,434
)
 
(18,799
)
Proceeds on sale of plant
14,278

 

Acquisitions, net of cash acquired
(159,458
)
 
(210,921
)
Net cash used in investing activities
(187,614
)
 
(229,720
)
Cash flows from financing activities--
 

 
 

Net proceeds under Credit Facility
217,299

 
100,362

Net (repayments) under international credit facilities
(1,062
)
 
(25,954
)
Net (repayments) under other debt arrangement
(26
)
 
(26
)
Repurchase of treasury stock
(224,996
)
 
(4,418
)
Debt issuance costs

 
(6,254
)
Excess tax (detriment) related to share-based compensation

 
(830
)
Net cash (used in) provided by financing activities
(8,785
)
 
62,880

Effect of exchange rates on cash and cash equivalents
4,748

 
(2,005
)
Changes in cash and cash equivalents--
 

 
 

Net increase in cash and cash equivalents
13,241

 
6,252

Cash and cash equivalents at beginning of year
68,485

 
55,528

Cash and cash equivalents at end of period
$
81,726

 
$
61,780

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Stock issuance related to the acquisition of CVP Systems
$
12,330

 
$

 

See accompanying notes

3



THE MIDDLEBY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(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 2016 Form 10-K. The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2017
In the opinion of management, the financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position of the company as of September 30, 2017 and December 31, 2016, the results of operations for the three and nine months ended September 30, 2017 and October 1, 2016 and cash flows for the nine months ended September 30, 2017 and October 1, 2016.
Certain prior year amounts have been reclassified to be consistent with current year presentation, including combining selling and distribution expenses with general and administrative expenses.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long-lived and intangible assets, warranty reserves, insurance reserves, income tax reserves, non-cash share-based compensation and post-retirement obligations. Actual results could differ from the company's estimates.
B)
Non-Cash Share-Based Compensation
The company estimates the fair value of market-based stock awards and stock options at the time of grant and recognizes compensation cost over the vesting period of the awards and options. Non-cash share-based compensation expense was less than $0.1 million and $6.2 million for the third quarter periods ended September 30, 2017 and October 1, 2016, respectively. Non-cash share-based compensation expense was $6.5 million and $17.3 million for the nine months ended September 30, 2017 and October 1, 2016, respectively.
During the first quarter ended April 1, 2017, 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 $9.6 million, based on the closing share price of the company's stock at the date of the grant.
C)
Income Taxes
As of December 31, 2016, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $20.3 million (of which $20.0 million would impact the effective tax rate if recognized) plus approximately $2.7 million of accrued interest and $4.9 million of penalties. The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. As of September 30, 2017, the company recognized a tax expense of $3.9 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 $1.9 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



The effective rate for the three months period ended September 30, 2017 was 33.8% as compared to 32.2% for the prior year quarter. In comparison to the prior year, the tax provision reflects a higher effective tax rate attributable to increased tax reserve and a reduction of tax credits. The effective rate for the nine months period ended September 30, 2017 was 30.8% as compared to 33.0% for the nine months period ended October 1, 2016. The tax rate in the nine months period ended September 30, 2017 was favorably impacted by a tax benefit from the adoption of ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting," which resulted in the recognition of excess tax benefits from share-based payments to be recognized as income tax benefit in the condensed consolidated statement of comprehensive income.
A summary of the tax years that remain subject to examination in the company’s major tax jurisdictions are: 
United States - federal
2013 – 2016
United States - states
2007 – 2016
Australia
2012 – 2016
Brazil
2012 – 2016
Canada
2007 – 2016
China
2007 – 2016
Czech Republic
2014 – 2016
Denmark
2012 – 2016
Estonia
2013 – 2016
France
2014 – 2016
Germany
2014 – 2016
India
2013 – 2016
Ireland
2011 – 2016
Italy
2012 – 2016
Luxembourg
2012 – 2016
Mexico
2012 – 2016
Netherlands
2005 – 2016
Philippines
2014 – 2016
Poland
2011 – 2016
Romania
2007 – 2016
Spain
2013 – 2016
Sweden
2010 – 2016
Switzerland
2008 – 2016
Taiwan
2012 – 2012
United Kingdom
2015 – 2016

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 September 30, 2017
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
    Interest rate swaps
$

 
$
7,705

 
$

 
$
7,705

 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
    Contingent consideration


 


 
$
2,864

 
$
2,864

 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
    Interest rate swaps
$

 
$
8,842

 
$

 
$
8,842

 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
    Interest rate swaps
$

 
$
100

 
$

 
$
100

    Contingent consideration
$

 
$

 
$
6,612

 
$
6,612

The contingent consideration as of September 30, 2017 relates to the earnout provisions recorded in conjunction with the acquisitions of Desmon and Induc.
The contingent consideration as of December 31, 2016 relates to the earnout provisions recorded in conjunction with the acquisitions of PES, 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. During the nine months ended September 30, 2017, the change in contingent consideration is primarily related to payments on earnout provisions.
E)    Consolidated Statements of Cash Flows
Cash paid for interest was $17.4 million and $15.7 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. Cash payments totaling $96.7 million and $80.3 million were made for income taxes for the nine months ended September 30, 2017 and October 1, 2016, 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.
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 $1.7 million in aggregate are also due to the seller during the two year period subsequent to the acquisition. During the second quarter of 2017, deferred payments of $1.0 million in aggregate were paid to the seller.
The final allocation of cash paid for the Emico acquisition is summarized as follows (in thousands):
 
(as initially reported) May 20, 2016
 
Measurement Period Adjustments
 
(as adjusted) May 20, 2016
Current assets
$
746

 
(65
)
 
681

Goodwill
1,816

 
183

 
1,999

Current liabilities
(934
)
 
(62
)
 
(996
)
Other non-current liabilities
(628
)
 
(56
)
 
(684
)
 
 
 
 
 
 
   Consideration paid at closing
$
1,000

 
$

 
$
1,000

 
 
 
 
 
 
Deferred payments
1,559

 
118

 
1,677

 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
2,559

 
$
118

 
$
2,677

The goodwill is subject to the non-amortization provisions of ASC 350 "Intangibles - Goodwill and Other", is allocated to the Food Processing Equipment Group for segment reporting purposes and is expected to be deductible for tax purposes.











7



Follett
On May 31, 2016, the company completed its acquisition of substantially all of the assets 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 $206.9 million, net of cash acquired. During the first quarter of 2017, the company finalized the working capital provision provided by the purchase agreement resulting in an additional payment to the seller of $0.7 million.
The final allocation of cash paid for the Follett acquisition is summarized as follows (in thousands):
 
(as initially reported) May 31, 2016
 
Measurement Period Adjustments
 
(as adjusted) May 31, 2016
Cash
$
22,620

 
$
2,888

 
$
25,508

Current assets
41,602

 
(2,249
)
 
39,353

Property, plant and equipment
19,868

 
8,598

 
28,466

Goodwill
76,220

 
(35,656
)
 
40,564

Other intangibles
82,450

 
41,810

 
124,260

Other assets
1,358

 
170

 
1,528

Current liabilities
(11,779
)
 
(10,801
)
 
(22,580
)
Other non-current liabilities
(616
)
 
(4,064
)
 
(4,680
)
 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
231,723

 
$
696

 
$
232,419

The goodwill and $67.8 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $55.2 million allocated to customer relationships and $1.3 million allocated to backlog, which are to be amortized over periods of 8 years and 3 months, respectively. Goodwill and other intangibles of Follett are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes.















8



Burford
On May 1, 2017, the company completed its acquisition of all of the capital stock of Burford Corp. ("Burford"). Burford is a leading manufacturer of industrial baking equipment for the food processing industry located in Maysville, Oklahoma, for a purchase price of $15.2 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 2017.
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 1, 2017
 
Preliminary Measurement Period Adjustments
 
(as adjusted) May 1, 2017
Cash
$
2,514

 
$

 
$
2,514

Current assets
6,424

 
36

 
6,460

Property, plant and equipment
656

 
(13
)
 
643

Goodwill
7,289

 
(1,050
)
 
6,239

Other intangibles
4,900

 
1,840

 
6,740

Current liabilities
(2,254
)
 
(33
)
 
(2,287
)
Long term deferred tax liability
(1,840
)
 
(780
)
 
(2,620
)
 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
17,689

 
$

 
$
17,689

The long term deferred tax liability amounted to $2.6 million. The net liability is comprised of $2.7 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets, net of $0.1 million of assets arising from the difference between the book and tax basis of tangible asset and liability accounts.
The goodwill and $2.7 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $3.1 million allocated to customer relationships, $0.7 million allocated to developed technology and $0.3 million allocated to backlog, which are to be amortized over periods of 6 years, 7 years and 3 months, respectively. Goodwill and other intangibles of Burford are allocated to the Food Processing 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.











9



CVP Systems
On June 30, 2017, the company completed its acquisition of all of the capital stock of CVP Systems, Inc. ("CVP Systems"), a leading manufacturer of high-speed packaging systems for the meat processing industry located in Downers Grove, Illinois, for a purchase price of $30.5 million, net of cash acquired. The purchase price included $18.2 million in cash and 106,254 shares of Middleby common stock valued at $12.3 million. 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 2017.
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) June 30, 2017
 
Preliminary Measurement Period Adjustments
 
(as adjusted) June 30, 2017
Cash
$
621

 
$

 
$
621

Current assets
5,973

 
(1,435
)
 
4,538

Property, plant and equipment
238

 
(91
)
 
147

Goodwill
20,297

 
(853
)
 
19,444

Other intangibles
8,700

 
4,350

 
13,050

Current liabilities
(1,532
)
 
(187
)
 
(1,719
)
Long term deferred tax liability
(3,168
)
 
(1,784
)
 
(4,952
)
 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
31,129

 
$

 
$
31,129

The long term deferred tax liability amounted to $5.0 million. The net liability is comprised of $5.1 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets, net of $0.1 million of assets arising from the difference between the book and tax basis of tangible asset and liability accounts.
The goodwill and $6.2 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $5.7 million allocated to customer relationships, $0.8 million allocated to developed technology and $0.3 million allocated to backlog, which are to be amortized over periods of 5 years, 7 years and 3 months, respectively. Goodwill and other intangibles of CVP Systems are allocated to the Food Processing 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.










10



Sveba Dahlen
On June 30, 2017, the company completed its acquisition of all of the capital stock of Sveba Dahlen Group ("Sveba Dahlen"), a developer and manufacturer of ovens and baking equipment for the commercial foodservice and industrial baking industries headquartered in Fristad, Sweden, for a purchase price of $81.4 million, net of cash acquired.
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands):
 
(as initially reported) June 30, 2017
 
Preliminary Measurement Period Adjustments
 
(as adjusted) June 30, 2017
Cash
$
4,569

 
$

 
$
4,569

Current assets
22,686

 
(359
)
 
22,327

Property, plant and equipment
9,128

 
(332
)
 
8,796

Goodwill
33,785

 
485

 
34,270

Other intangibles
34,175

 

 
34,175

Other assets
1,170

 
(11
)
 
1,159

Current portion of long-term debt

 
(14
)
 
(14
)
Current liabilities
(11,782
)
 
945

 
(10,837
)
Long-term debt

 
(140
)
 
(140
)
Long term deferred tax liability
(7,751
)
 
(699
)
 
(8,450
)
Other non-current liabilities
(42
)
 
125

 
83

 
 
 
 
 
 
Net assets acquired and liabilities assumed
$
85,938

 
$

 
$
85,938

The long term deferred tax liability amounted to $8.5 million. The liability is comprised of $7.5 million of deferred tax liability related to the difference between the book and tax basis of identifiable assets and $1.0 million of liabilities arising from the difference between the book and tax basis of tangible asset and liability accounts.
The goodwill and $20.7 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $12.0 million allocated to customer relationships, $1.2 million allocated to developed technology and $0.3 million allocated to backlog, which are to be amortized over periods of 7 years, 5 years and 3 months, respectively. Goodwill and other intangibles of Sveba Dahlen 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. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.








11



QualServ
On August 31, 2017, the company completed its acquisition of substantially all of the assets of QualServ Solutions LLC ("QualServ"), a global commercial kitchen design, manufacturing, engineering, project management and equipment solutions provider located in Fort Smith, Arkansas, for a purchase price of $40.2 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 first quarter of 2018.
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) August 31, 2017
Cash
$
1,130

Current assets
18,031

Property, plant and equipment
4,785

Goodwill
14,590

Other intangibles
9,600

Current liabilities
(6,810
)
 
 
Net assets acquired and liabilities assumed
$
41,326

The goodwill and $6.2 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $3.3 million allocated to customer relationships and $0.1 million allocated to backlog, which are to be amortized over periods of 6 years and 3 months, respectively. Goodwill and other intangibles of QualServ are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. 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.














12



Pro Forma Financial Information
 
In accordance with ASC 805 “Business Combinations”, the following unaudited pro forma results of operations for the nine months ended September 30, 2017 and October 1, 2016, assumes the 2016 acquisition of Follett and the 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen and QualServ were completed on January 3, 2016 (first day of fiscal year 2016). 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): 
 
Nine Months Ended
 
September 30, 2017
 
October 1, 2016
Net sales
$
1,803,636

 
$
1,879,104

Net earnings
225,987

 
211,785

 
 
 
 
Net earnings per share:
 

 
 

Basic
3.96

 
3.71

Diluted
3.96

 
3.71

 
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 Follett, Burford, CVP Systems, Sveba Dahlen and QualServ been effective on January 3, 2016 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 Follett, Burford, CVP Systems, Sveba Dahlen and QualServ.
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.

13



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. The guidance can be applied using one of two retrospective application methods. The company established a global steering committee with a project plan to analyze the impact of this standard. The company has surveyed businesses within each reporting segment to validate the various revenue streams and identify potential differences in the timing of revenue recognition, which could result from applying the requirements of the new standard. The company also conducted workshops and initiated contract reviews to further corroborate information about the nature, magnitude, and frequency of the underlying transactions identified during the surveys as having a potential impact on revenue recognition. Based on the results, the company is reviewing and revising its accounting policies and formulating plans to address any variations from current practices (including additional disclosure requirements). The company will adopt this standard, as required, for fiscal year 2018 and expects to use the modified retrospective approach, with the cumulative effect, if any, recognized in the opening balance of retained earnings. The company is continuing to evaluate the impact the application of these ASU's will have, if any, on the company's financial position, results of operations or cash flows.

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. We adopted this guidance on January 1, 2017 and it did not have an impact on the company's financial position, results of operations or cash flows.

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. We adopted this guidance on January 1, 2017 and it did not have an impact on the company's financial position, results of operations or cash flows.





14



In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting". 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 adopted ASU No. 2016-09 effective January 1, 2017 on a prospective basis. The adoption of this guidance resulted in the recognition of excess tax benefits in the company's provision for income taxes within the Condensed Consolidated Statements of Comprehensive Income rather than paid-in-capital of approximately $7.9 million for the nine months period ended September 30, 2017. Additionally, the company's Condensed Consolidated Statement of Cash Flows now presents excess tax benefits as an operating activity rather than a financing activity.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments". The amendments in ASU-15 address eight specific cash flow classification issues to reduce current and potential future diversity in practice. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2017. The company is evaluating the impact the application of this ASU will have, if any, on the company's cash flows.

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory". The amendments in ASU-16 prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer other than inventory until the asset has been sold to an outside party. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2017. 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 January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business". The amendments in ASU-01 clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2017. The company does not expect the adoption of this ASU to have a material impact on its financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in ASU-04 simplify the subsequent measurement of goodwill, by removing the second step of the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This ASU is effective for annual reporting periods, and interim reporting periods, beginning after December 15, 2019. Early adoption is permitted for testing dates after January 1, 2017. The company does not expect the adoption of this ASU to have a material impact on its financial position, results of operations or cash flows.

In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". The amendments in ASU-07 require that an employer report the service costs component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2017. Early adoption is permitted. Net income will not change as a result of the adoption of this standard. The company is currently evaluating the remaining impacts the ASU will have on its condensed consolidated financial statements.

In the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". The amendments in ASU-12 provide new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (OCI) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2018 with early adoption permitted. The company is currently evaluating the impacts the ASU will have on its condensed consolidated financial statements.

15



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 December 31, 2016
$
(116,411
)
 
$
(173,394
)
 
$
5,482

 
$
(284,323
)
Other comprehensive income before reclassification
44,897

 
(14,838
)
 
258

 
30,317

Amounts reclassified from accumulated other comprehensive income

 

 
(887
)
 
(887
)
Net current-period other comprehensive income
$
44,897

 
$
(14,838
)
 
$
(629
)
 
$
29,430

Balance as of September 30, 2017
$
(71,514
)
 
$
(188,232
)
 
$
4,853

 
$
(254,893
)
(1) As of September 30, 2017 pension and interest rate swap amounts are net of tax of $(41.1) million and $3.2 million, respectively.
Components of other comprehensive income were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
Net earnings
$
74,671

 
$
75,851

 
$
222,942

 
$
203,280

Currency translation adjustment
15,441

 
(20,194
)
 
44,897

 
(40,169
)
Pension liability adjustment, net of tax
(5,664
)
 
(505
)
 
(14,838
)
 
4,351

Unrealized gain on interest rate swaps, net of tax
(128
)
 
193

 
(629
)
 
70

Comprehensive income
$
84,320

 
$
55,345

 
$
252,372

 
$
167,532

6)
Inventories
Inventories are composed of material, labor and overhead and are stated at the lower of cost or market. Costs for inventory have been determined using the first-in, first-out ("FIFO") method. The company estimates reserves for inventory obsolescence and shrinkage based on its judgment of future realization. Inventories at September 30, 2017 and December 31, 2016 are as follows: 
 
Sep 30, 2017
 
Dec 31, 2016
 
(in thousands)
Raw materials and parts
$
180,323

 
$
154,647

Work-in-process
41,743

 
35,975

Finished goods
203,866

 
177,621

 
$
425,932

 
$
368,243


16



7)
Goodwill
Changes in the carrying amount of goodwill for the nine months ended September 30, 2017 are as follows (in thousands):
 
Commercial
Foodservice
 
Food
Processing
 
Residential Kitchen
 
Total
Balance as of December 31, 2016
$
542,090

 
$
134,680

 
$
415,952

 
$
1,092,722

Goodwill acquired during the year
48,860

 
25,683

 

 
74,543

Measurement period adjustments to goodwill acquired in prior year
(36,408
)
 
41

 

 
(36,367
)
Exchange effect
7,175

 
3,779

 
16,802

 
27,756

Balance as of September 30, 2017
$
561,717

 
$
164,183

 
$
432,754

 
$
1,158,654


8)
Intangibles

Intangible assets consist of the following (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
Estimated
Weighted Avg
Remaining
Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization

 
Estimated
Weighted Avg
Remaining
Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization

Amortized intangible assets: 
 
 
 
 
 
 
 
 
 
 
 
Customer lists
5.1
 
$
307,502

 
$
(161,823
)
 
5.5
 
$
251,025

 
$
(136,895
)
Backlog
0.2
 
16,030

 
(15,963
)
 
0.0
 
13,550

 
(13,550
)
Developed technology
4.2
 
22,805

 
(18,049
)
 
4.8
 
24,874

 
(17,924
)
 
 
 
$
346,337

 
$
(195,835
)
 
 
 
$
289,449

 
$
(168,369
)
Indefinite-lived assets:
 
 
 

 
 

 
 
 
 

 
 

Trademarks and tradenames
 
 
$
635,850

 
 

 
 
 
$
575,091

 
 

 
The aggregate intangible amortization expense was $9.1 million and $5.1 million for the third quarter periods ended September 30, 2017 and October 1, 2016, respectively. The aggregate intangible amortization expense was $26.5 million and $23.1 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands):
  
Twelve Month Period Ending
 
Amortization Expense
 
 
 
September 30, 2018
 
$
33,402

September 30, 2019
 
27,243

September 30, 2020
 
25,054

September 30, 2021
 
21,566

September 30, 2022
 
18,919

September 30, 2023 and thereafter
 
24,318

 
 
$
150,502








17



9) Accrued Expenses
Accrued expenses consist of the following:
 
Sep 30, 2017
 
Dec 31, 2016
 
(in thousands)
Accrued payroll and related expenses
$
67,859

 
$
74,505

Accrued warranty
50,098

 
40,851

Advanced customer deposits
40,039

 
41,735

Accrued customer rebates
39,110

 
49,923

Accrued professional fees
19,116

 
16,605

Accrued sales and other tax
16,834

 
13,565

Accrued agent commission
12,528

 
12,834

Accrued product liability and workers compensation
12,138

 
11,417

Product recall
6,046

 
7,003

Restructuring
3,352

 
2,295

Other accrued expenses
49,863

 
64,872

 
 
 
 
 
$
316,983

 
$
335,605

10)
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
 
Sep 30, 2017
 
(in thousands)
Balance as of December 31, 2016
$
40,851

Warranty reserve related to acquisitions
6,474

Warranty expense
41,699

Warranty claims
(38,926
)
Balance as of September 30, 2017
$
50,098


18



11)
Financing Arrangements
 
Sep 30, 2017
 
Dec 31, 2016
 
(in thousands)
Credit Facility
$
944,663

 
$
725,500

Other international credit facilities
5,858

 
6,413

Other debt arrangement
187

 
213

     Total debt
$
950,708

 
$
732,126

Less:  Current maturities of long-term debt
5,192

 
5,883

     Long-term debt
$
945,516

 
$
726,243

On July 28, 2016, the company entered into an amended and restated five-year $2.5 billion multi-currency senior secured revolving credit agreement (the "Credit Facility"), with the potential under certain circumstances to increase the amount of the Credit Facility to $3.0 billion. As of September 30, 2017, the company had $944.7 million of borrowings outstanding under the Credit Facility, including $921.5 million of borrowings in U.S. Dollars and $23.2 million of borrowings denominated in British Pounds. The company also had $9.5 million in outstanding letters of credit as of September 30, 2017, which reduces the borrowing availability under the Credit Facility. Remaining borrowing availability under this facility was $1.5 billion at September 30, 2017.
At September 30, 2017, borrowings under the Credit Facility accrued interest at a rate of 1.13% above LIBOR per annum or 0.13% above the highest of the prime rate, the federal funds rate plus 0.50% and one month LIBOR plus 1.00%. The average interest rate per annum on the debt under the Credit Facility was equal to 2.33% for the period. The interest rates on borrowings under the Credit Facility may be adjusted quarterly based on the company’s Funded Debt less Unrestricted Cash to Pro Forma EBITDA (the “Leverage Ratio”) on a rolling four-quarter basis. Additionally, a commitment fee based upon the Leverage Ratio is charged on the unused portion of the commitments under the Credit Facility. This variable commitment fee was equal to 0.150% per annum as of September 30, 2017.
In addition, the company has other international credit facilities to fund working capital needs outside the United States and the United Kingdom. At September 30, 2017, these foreign credit facilities amounted to $5.9 million in U.S. Dollars with a weighted average per annum interest rate of approximately 6.79%.
The company’s debt is reflected on the balance sheet at cost. The company believes its interest rate margins on its existing debt are consistent with current market conditions and therefore the carrying value of debt reflects the fair value. The interest rate margin is based on the company's Leverage Ratio.
The 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 secured 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 Credit Facility in July 2021. 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):
 
Sep 30, 2017
 
Dec 31, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Total debt
$
950,708

 
$
950,708

 
$
732,126

 
$
732,126

The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At September 30, 2017, the company had outstanding floating-to-fixed interest rate swaps totaling $324.0 million notional amount carrying an average interest rate of 1.30% that mature in more than 12 months but less than 84 months.


19



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 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 requires, among other things, the company to satisfy certain financial covenants: (i) a minimum Interest Coverage Ratio (as defined in the Credit Facility) of 3.00 to 1.00 and (ii) a maximum Leverage Ratio of Funded Debt less Unrestricted Cash to Pro Forma EBIDTA (each as defined in the Credit Facility) of 3.50 to 1.00, which may be adjusted to 4.00 to 1.00 for a four consecutive fiscal quarter period in connection with certain qualified acquisitions, subject to the terms and conditions contained in the Credit Facility. The Credit Facility is secured by substantially all of the assets of Middleby Marshall, the company and the company's domestic subsidiaries and is unconditionally guaranteed by, subject to certain exceptions, the company and certain of the company's direct and indirect material foreign and domestic subsidiaries. The Credit Facility contains certain customary events of default, including, but not limited to, the failure to make required payments; bankruptcy and other insolvency events; the failure to perform certain covenants; the material breach of a representation or warranty; non-payment of certain other indebtedness; the entry of undischarged judgments against the company or any subsidiary for the payment of material uninsured amounts; the invalidity of the company guarantee or any subsidiary guaranty; and a change of control of the company. At September 30, 2017, the company was in compliance with all covenants pursuant to its borrowing agreements.
12)
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, foreign exchange swaps and option purchase and sales contracts to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The fair value of the forward and option contracts was a loss of $4.1 million at the end of the third quarter of 2017.
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 September 30, 2017, the fair value of these instruments was an asset of $7.7 million. The change in fair value of these swap agreements in the first nine months of 2017 was a loss of $0.1 million, net of taxes.
The following table summarizes the company’s fair value of interest rate swaps (in thousands):
 
Condensed Consolidated
Balance Sheet Presentation
 
Sep 30, 2017

 
Dec 31, 2016

Fair value
Other assets
 
$
7,705

 
$
8,842

Fair value
Accrued expenses
 
$

 
$
(100
)






20



The impact on earnings from interest rate swaps was as follows (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
Presentation of Gain/(loss)
 
Sep 30, 2017
 
Oct 1, 2016

 
Sep 30, 2017
 
Oct 1, 2016

Gain/(loss) recognized in accumulated other comprehensive income
Other comprehensive income
 
$
(294
)
 
$
141

 
$
(1,937
)
 
$
(589
)
Gain/(loss) reclassified from accumulated other comprehensive income (effective portion)
Interest expense
 
$
(81
)
 
$
(181
)
 
$
(887
)
 
$
(706
)
Gain/(loss) recognized in income (ineffective portion)
Other expense
 
$
28

 
$
(7
)
 
$
13

 
$

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

21



13)
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 Arkansas, California, Illinois, Michigan, New Hampshire, North Carolina, Pennsylvania, Tennessee, Texas, Vermont, Washington, Australia, China, Denmark, Estonia, Italy, the Philippines, Poland, Sweden 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, Bear Varimixer, 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, QualServ, Southbend, Star, Sveba Dahlen, 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, Oklahoma, 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, seeding, 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, Burford, Cozzini, CVP Systems, Danfotech, Drake, Glimek, 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, 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
 
Nine Months Ended
 
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
 
Sales
 
Percent
 
Sales
 
Percent
 
Sales
 
Percent
 
Sales
 
Percent
Business Segments:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Commercial Foodservice
$
354,828

 
59.8
%
 
$
331,571

 
57.7
%
 
$
1,000,830

 
58.8
%
 
$
931,585

 
55.8
%
Food Processing
86,871

 
14.7

 
82,196

 
14.3

 
256,515

 
15.1

 
244,307

 
14.6

Residential Kitchen
151,344

 
25.5

 
160,457

 
28.0

 
445,338

 
26.1

 
495,143

 
29.6

    Total
$
593,043

 
100.0
%
 
$
574,224

 
100.0
%
 
$
1,702,683

 
100.0
%
 
$
1,671,035

 
100.0
%

22



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 September 30, 2017
 

 
 

 
 
 
 

 
 

Net sales
$
354,828

 
$
86,871

 
$
151,344

 
$

 
$
593,043

Income (loss) from operations (3)
89,028

 
19,975

 
25,087

 
(15,833
)
 
118,257

Depreciation and amortization expense
6,977

 
2,101

 
7,422

 
461

 
16,961

Net capital expenditures
7,978

 
484

 
2,813

 
869

 
12,144

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
Net sales
$
1,000,830

 
$
256,515

 
$
445,338

 
$

 
$
1,702,683

Income (loss) from operations (3,4)
264,576

 
62,163

 
66,005

 
(51,272
)
 
341,472

Depreciation and amortization expense
20,455

 
5,145

 
22,256

 
1,420

 
49,276

Net capital expenditures
34,727

 
2,430

 
5,756

 
(479
)
 
42,434

 
 
 
 
 
 
 
 
 
 
Total assets
$
1,559,757

 
$
393,272

 
$
1,211,388

 
$
36,726

 
$
3,201,143

 
 
 
 
 
 
 
 
 
 
Three Months Ended October 1, 2016
 

 
 

 
 
 
 

 
 

Net sales
$
331,571

 
$
82,196

 
$
160,457

 
$

 
$
574,224

Income (loss) from operations (3)
90,159

 
19,360

 
30,560

 
(18,640
)
 
121,439

Depreciation and amortization expense
5,272

 
1,419

 
5,249

 
1,229

 
13,169

Net capital expenditures
3,469

 
618

 
1,604

 

 
5,691

 
 
 
 
 
 
 
 
 
 
Nine Months Ended October 1, 2016
 
 
 
 
 
 
 
 
 
Net sales
$
931,585

 
$
244,307

 
$
495,143

 
$

 
$
1,671,035

Income (loss) from operations (3)
260,460

 
56,409

 
62,775

 
(59,917
)
 
319,727

Depreciation and amortization expense
15,218

 
4,377

 
22,191

 
2,623

 
44,409

Net capital expenditures
10,975

 
3,300

 
4,393

 
131

 
18,799

 
 
 
 
 
 
 
 
 
 
Total assets
$
1,361,244

 
$
333,056

 
$
1,163,992

 
$
57,176

 
$
2,915,468

 
 
 
 
 
 
 
 
 
 

(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.
(3)Restructuring expenses are allocated in operating income by segment. See note 15 for further details.
(4)Gain on sale of plant allocated to Commercial Foodservice.





23



Geographic Information
Long-lived assets, not including goodwill and other intangibles (in thousands):
 
Sep 30, 2017
 
Oct 1, 2016
United States and Canada
$
212,033

 
$
181,397

Asia
15,705

 
15,188

Europe and Middle East
125,892

 
76,498

Latin America
982

 
1,193

Total international
$
142,579

 
$
92,879

 
$
354,612

 
$
274,276

Net sales (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
Sep 30, 2017

 
Oct 1, 2016

 
Sep 30, 2017

 
Oct 1, 2016

United States and Canada
$
390,142

 
$
383,634

 
$
1,144,247

 
$
1,090,944

Asia
48,842

 
49,219

 
136,407

 
130,809

Europe and Middle East
129,567

 
119,835

 
353,334

 
390,923

Latin America
24,492

 
21,536

 
68,695

 
58,359

Total international
$
202,901

 
$
190,590

 
$
558,436

 
$
580,091

 
$
593,043

 
$
574,224

 
$
1,702,683

 
$
1,671,035

14)
Employee Retirement Plans
(a)
Pension Plans

U.S. Plans:

The company maintains a non-contributory defined benefit plan for its union employees at the Elgin, Illinois facility. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2002, and no further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 30, 2002 upon reaching retirement age.
 
The company maintains a non-contributory defined benefit plan for its employees at the Smithville, Tennessee facility, which was acquired as part of the 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 also maintains a retirement benefit agreement with its Chairman ("Chairman Plan"). The retirement benefits are based upon a percentage of the Chairman’s final base salary.

Non-U.S. Plans:

The company maintains a defined benefit plan for its employees at the Wrexham, the United Kingdom facility, which was acquired as part of the Lincat acquisition. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2010 prior to Middleby’s acquisition of the company. No further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 30, 2010 upon reaching retirement age.





24



The company maintains several pension plans related to AGA and its subsidiaries (collectively, the "AGA Group"), the most significant being the Aga Rangemaster Group Pension Scheme, which covers the majority of employees in the United Kingdom.  Membership in the plan on a defined benefit basis of pension provision was closed to new entrants in 2001.  The plan became open to new entrants on a defined contribution basis of pension provision in 2002, but was generally closed to new entrants on this basis during 2014. 

The other, much smaller, defined benefit pension plans operating within the AGA Group cover employees in France, Ireland and the United Kingdom.  All pension plan assets are held in separate trust funds although the net defined benefit pension obligations are included in the company's consolidated balance sheet.

The following table summarizes the company's net periodic pension benefit related to the AGA Group pension plans (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Net Periodic Pension Benefit:
 
 

 
 

 
 
 
 
Service cost
 
$
1,019

 
$
824

 
$
2,979

 
$
2,601

Interest cost
 
8,205

 
9,890

 
23,986

 
31,214

Expected return on assets
 
(17,728
)
 
(16,254
)
 
(51,825
)
 
(51,503
)
Amortization of net loss (gain)
 
761

 

 
2,224

 

Pension settlement
 
(51
)
 

 
(148
)
 

 
 
$
(7,794
)
 
$
(5,540
)
 
$
(22,784
)
 
$
(17,688
)

The pension costs for all other plans of the company were not material during the period.

(b)
Defined Contribution 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 also maintains defined contribution plans for its U.K. based employees.

15)
Restructuring

Commercial Foodservice Equipment Group:

During the fiscal year 2017, the company undertook cost reduction initiatives related to the entire Commercial Foodservice Equipment Group. This action, which is not material to the company's operations, resulted in a charge of $2.6 million and $4.6 million in the three and nine months ended September 30, 2017, respectively, primarily for severance related to headcount reductions and consolidation of manufacturing operations. These expenses are reflected in restructuring expenses in the consolidated statements of comprehensive income. The company estimates that these restructuring initiatives will result in future cost savings of approximately $10.0 million annually, beginning in fiscal year 2018 and the restructuring costs in the future are not expected to be significant related to these actions.
 
Food Processing Equipment Group:

During the fiscal year 2017, the company undertook cost reduction initiatives related to the entire Food Processing Equipment Group. This action, which is not material to the company's operations, resulted in a charge of $0.3 million and $0.5 million in the three and nine months ended September 30, 2017, respectively, primarily for severance related to headcount reductions and is reflected in restructuring expenses in the consolidated statements of comprehensive income. The company estimates that these restructuring initiatives will result in future cost savings of approximately $4.0 million annually, beginning in fiscal year 2018 and no significant future costs related to this action are expected.






25



Residential Kitchen Equipment Group:

During fiscal years 2015 and 2016, the company undertook acquisition integration initiatives related to the AGA Group within the Residential Kitchen Equipment Group. These initiatives included organizational restructuring and headcount reductions, consolidation and disposition of certain facilities and business operations. The company recorded additional expense of $1.3 million and $12.3 million in the three and nine months ended September 30, 2017, respectively, primarily related to the AGA Group. The initiatives primarily included additional headcount reductions and impairment of equipment in conjunction of the disposition of certain facilities and business operations. This expense is reflected in restructuring expenses in the consolidated statements of comprehensive income. The cumulative expenses incurred to date for these initiatives is approximately $40.0 million. The company estimated that these restructuring initiatives in 2017 will result in future cost savings of approximately $20.0 million annually, beginning in fiscal year 2018, primarily related to compensation and facility costs. The company anticipates that all severance obligations for the Residential Kitchen Equipment Group will be satisfied by the end of fiscal of 2018. The lease obligations extend through November 2018.
 
 
Severance/Benefits
 
Facilities/Operations
 
Other
 
Total
Balance as of December 31, 2016
 
$
5,145

 
$
2,032

 
$
69

 
$
7,246

Expenses
 
6,938

 
4,979

 
374

 
12,291

Exchange
 
476

 
343

 
14

 
833

Payments/Utilization
 
(5,857
)
 
(4,350
)
 
(457
)
 
(10,664
)
Balance as of September 30, 2017
 
$
6,702

 
$
3,004

 
$

 
$
9,706


16)
Share Repurchases
In July 1998, the company's Board of Directors adopted a stock repurchase program and subsequently authorized the purchase of common shares in open market purchases. During 2013, the company's Board of Directors authorized the purchase of additional common shares in open market purchases. For the three months period ended September 30, 2017 the company repurchased 1,680,395 shares of its common stock under the program for $200.4 million, including applicable commissions, which represented an average price of $119.23. As of September 30, 2017, the total number of shares authorized for repurchase under the program is 4,570,266. As of September 30, 2017, 3,860,996 shares had been purchased under the 1998 stock repurchase program.   

17)
Subsequent Event
On October 17, 2017, subsequent to the end of the third quarter, the company completed its acquisition of all of the capital stock of Globe Food Equipment Company ("Globe"). Globe is a leading brand in slicers and mixers for the commercial foodservice industry located in Dayton, Ohio, with annual revenues of approximately $50.0 million.

26



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 2016 Annual Report on Form 10-K.
 
Net Sales Summary
(dollars in thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
 
Sales
 
Percent
 
Sales
 
Percent
 
Sales
 
Percent
 
Sales
 
Percent
Business Segments:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Commercial Foodservice
$
354,828

 
59.8
%
 
$
331,571

 
57.7
%
 
$
1,000,830

 
58.8
%
 
$
931,585

 
55.8
%
Food Processing
86,871

 
14.7

 
82,196

 
14.3

 
256,515

 
15.1

 
244,307

 
14.6

Residential Kitchen
151,344

 
25.5

 
160,457

 
28.0

 
445,338

 
26.1

 
495,143

 
29.6

    Total
$
593,043

 
100.0
%
 
$
574,224

 
100.0
%
 
$
1,702,683

 
100.0
%
 
$
1,671,035

 
100.0
%
 

Results of Operations
 
The following table sets forth certain consolidated statements of earnings items as a percentage of net sales for the periods:
 
 
Three Months Ended
 
Nine Months Ended
 
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
Net sales
100.0
%
 
100.0
%
 
100.0
 %
 
100.0
%
Cost of sales
61.5

 
59.6

 
60.5

 
60.4

Gross profit
38.5

 
40.4

 
39.5

 
39.6

Selling, general and administrative expenses
17.9

 
19.0

 
19.1

 
20.0

Restructuring expenses
0.7

 
0.2

 
1.0

 
0.5

Gain on sale of plant

 

 
(0.7
)
 

Income from operations
19.9

 
21.1

 
20.1

 
19.1

Interest expense and deferred financing amortization, net
1.1

 
1.1

 
1.1

 
1.1

Other (income) expense, net
(0.2
)
 
0.5

 
0.1

 
(0.1
)
Earnings before income taxes
19.0

 
19.5

 
18.9

 
18.2

Provision for income taxes
6.4

 
6.3

 
5.8

 
6.0

Net earnings
12.6
%
 
13.2
%
 
13.1
 %

12.2
%




27



Three Months Ended September 30, 2017 as compared to Three Months Ended October 1, 2016
 
NET SALES. Net sales for the three months period ended September 30, 2017 increased 3.3% to $593.0 million as compared to $574.2 million in the three months period ended October 1, 2016. The $18.8 million increase in net sales included an increase of $28.6 million, or 5.0%, which was attributable to acquisition growth, resulting from the fiscal 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen, and QualServ. Excluding the acquisitions, net sales decreased $9.8 million, or 1.7%, from the prior year quarter. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the