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(Mark One)

or

 

Commission File No. 1-9973

 

(Exact name of registrant as specified in its charter)  

 

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.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

As of May 3, 2024, there were 53,768,507 shares of the registrant's common stock outstanding.

 

  

(Unaudited)

 

 

(Unaudited)

 

 

 

(Unaudited)

(Unaudited)

 

(Unaudited)

1)Summary of Significant Accounting Policies

a)Basis of Presentation

The condensed consolidated financial statements have been prepared by The Middleby Corporation (the "company" or “Middleby”), pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements are unaudited and certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information not misleading. These financial statements should be read in conjunction with the financial statements and related notes contained in the company's 2023 Form 10-K. The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2024.

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 March 30, 2024 and December 30, 2023, the results of operations for the three months ended March 30, 2024 and April 1, 2023, cash flows for the three months ended March 30, 2024 and April 1, 2023 and statement of stockholders' equity for the three months ended March 30, 2024 and April 1, 2023.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed in the notes herein.

b)Non-Cash Share-Based Compensation

The company estimates the fair value of market-based stock awards and stock options at the time of grant and recognizes compensation cost over the vesting period of the awards and options. Non-cash share-based compensation expense was $13.8 million and $12.2 million for the three months period ended March 30, 2024 and April 1, 2023, respectively.

c)Income Taxes

A tax provision of $28.3 million, at an effective rate of 24.6%, was recorded during the three months period ended March 30, 2024, as compared to a $32.8 million tax provision at an effective rate of 24.9% in the prior year period. The effective tax rate for the three months period ended March 30, 2024 is higher than the U.S. statutory tax rate of 21% primarily due to state taxes and foreign tax rate differentials.

d)Fair Value Measures 

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

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

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

Level 3 – Unobservable inputs based the company's own assumptions.

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

The contingent consideration as of March 30, 2024 and December 30, 2023, relates to the earnout provisions recorded in conjunction with various purchase agreements.

Earn-out liabilities are classified within Level 3 in the fair value hierarchy, as the methodology used to estimate fair value includes significant unobservable inputs reflecting management’s own assumptions. The earnout provisions associated with these acquisitions are based upon performance measurements related to sales and earnings, as defined in the respective purchase agreement. On a quarterly basis, the company assesses the projected results for each of the acquisitions in comparison to the earnout targets and adjusts the liability accordingly. Discount rates for valuing contingent consideration are determined based on the company rates and specific acquisition risk considerations. Changes in fair value associated with the earnout provisions are recognized in Selling, general and administrative expenses within the Condensed Consolidated Statements of Comprehensive Income.

The following table represents changes in the fair value of the contingent consideration liabilities:

Cash paid for interest was $27.9 million and $30.5 million for the three months ended March 30, 2024 and April 1, 2023, respectively. Cash payments totaling $8.4 million and $8.0 million were made for income taxes for the three months ended March 30, 2024 and April 1, 2023, respectively.

Other non-cash items in the adjustments to reconcile net earnings to net cash provided by operating activities consists primarily of unrealized foreign exchange on non-functional currency third party debt.

“Basic earnings per share” is calculated based upon the weighted average number of common shares actually outstanding, and “diluted earnings per share” is calculated based upon the weighted average number of common shares outstanding and other dilutive securities.

The company’s potentially dilutive securities consist of shares issuable on vesting of restricted stock grants computed using the treasury method and amounted to 3,000 and 2,000 for the three months ended March 30, 2024 and April 1, 2023, respectively. For the three months ended March 30, 2024 and April 1, 2023, the average market price of the company's common stock exceeded the exercise price of the Convertible Notes (as defined below) resulting in 737,000 and 781,000 diluted common stock equivalents to be included in the diluted net earnings per share, respectively. There have been no material conversions to date. See Note 12, Financing Arrangements for further details on the Convertible Notes. There were no anti-dilutive restricted stock grants excluded from common stock equivalents in any period presented.

The company accounts for all business combinations using the acquisition method to record a new cost basis for the assets acquired and liabilities assumed. The difference between the purchase price and the fair value of the assets acquired and liabilities assumed has been recorded as goodwill in the financial statements. The company recognizes identifiable intangible assets, primarily trade names and customer relationships, at their fair value using a discounted cash flow model. The significant assumptions used to estimate the value of the intangible assets include revenue growth rates, projected profit margins, discount rates, royalty rates, and customer attrition rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions. The results of operations are reflected in the consolidated financial statements of the company from the dates of acquisition.

The company completed no material acquisitions during the three months ended March 30, 2024.

During 2023, the company completed various acquisitions that were not individually material. The following estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition dates for the 2023 acquisitions and are summarized as follows (in thousands):

The net long-term deferred tax liability amounted to $0.9 million. The net deferred tax liability is comprised of $0.3 million related to the difference between the book and tax basis of identifiable intangible assets and $0.6 million related to the difference between the book and tax basis on identifiable tangible asset and liability accounts.

The goodwill and $17.9 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $7.2 million allocated to customer relationships, $7.9 million allocated to developed technology, and $0.6 million allocated to backlog, which are being amortized over periods of 7 years, 7 to 12 years, and 9 months, respectively. Goodwill of $17.9 million and other intangibles of $7.8 million are allocated to the Food Processing Equipment Group for segment reporting purposes. Goodwill of $9.9 million and other intangibles of $14.1 million are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. Goodwill of $13.6 million and other intangibles of $11.7 million are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Of these assets, goodwill of $39.7 million and intangibles of $32.2 million are expected to be deductible for tax purposes.

Four purchase agreements include earnout provisions providing for a contingent payment due to the sellers for the achievement of certain targets. Four earnouts are payable to the extent certain sales and EBITDA targets are met with measurement dates ending between 2024 and 2026. One earnout is payable upon the achievement of certain product rollout targets specific to the year of measurement. The contractual obligation associated with the contingent earnout provisions recognized on the acquisition date amount to $15.0 million.

The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the company is waiting for additional information necessary to finalize those fair values for certain acquisitions completed during 2023. Certain intangible assets are preliminarily valued using historical information from the Commercial Foodservice Equipment Group, Food Processing Equipment Group and Residential Kitchen Equipment Group, and qualitative assessments of the individual businesses at acquisition date. Specifically, the company estimated the fair values of the intangible assets based on the percentage of purchase price assigned to similar intangible assets in previous acquisitions. Thus, the provisional measurements of fair values set forth above are subject to change. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

 

In accordance with ASC 805 Business Combinations, the following unaudited pro forma results of operations for the three months ended March 30, 2024 and April 1, 2023, assumes the 2023 and 2024 acquisitions described above were completed on January 1, 2023 (first day of fiscal year 2023). The following pro forma results include adjustments to reflect amortization of intangibles associated with the acquisition and the effects of adjustments made to the carrying value of certain assets (in thousands, except per share data): 

 

The historical consolidated financial information of the company and the acquisitions have been adjusted in the pro forma information to give effect to events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. Pro forma data may not be indicative of the results that would have been obtained had these acquisitions occurred at the beginning of the periods presented, nor is it intended to be a projection of future results. Additionally, the pro forma financial information does not reflect the costs which the company has incurred or may incur to integrate the acquired businesses.

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.

In November 2023, the FASB issued Accounting Standard Update ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendment requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker, as well as disclosure of the title and position of the Chief Operating Decision Maker (“CODM”). This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted and the amendments in this update are required to be applied on a retrospective basis. The company is currently evaluating the impact the adoption of this guidance will have on its Consolidated Financial Statements and disclosures.

In December 2023, the FASB issued Accounting Standard Update ASU No. 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands the disclosures required in an entity’s income tax rate reconciliation table. This ASU requires consistent categories and greater disaggregation of information presented in the effective tax rate reconciliation and requires disclosure of income taxes paid both domestic and foreign jurisdictions, and also for individual jurisdictions that are greater than 5% of total income taxes paid. The guidance is effective for the company beginning on January 1, 2025 and is required to be applied prospectively, with retrospective application to prior periods allowed. Early adoption is permitted. The company is currently evaluating the impact the adoption of this guidance will have on its Consolidated Financial Statements and disclosures.

In March 2024, the SEC issued a final rule under SEC Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors. This rule will require large accelerated filers to disclose material climate-related risks that are reasonably likely to have a material impact on its business, results of operations or financial condition. Additionally, required information about climate-related risks involves the disclosure of material direct and indirect greenhouse gas emissions from operations. The new rules will also require disclosure within the notes to the financial statements of the effects of severe weather events and natural conditions and information on any climate-related targets or goals, subject to certain materiality thresholds. The final rule, if adopted, includes a phased-in compliance period which will begin phasing in with the company's annual report for the year ending December 31, 2025.

In April 2024, the SEC determined to voluntarily stay the final rules pending certain legal challenges. The company is currently evaluating the impact the adoption of this guidance will have on its Consolidated Financial Statements and disclosures.

The company disaggregates its net sales by reportable operating segment and geographical location as the company believes it best depicts how the nature, timing and uncertainty of its net sales and cash flows are affected by economic factors. In general, the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups recognize revenue at the point in time control transfers to their customers based on contractual shipping terms. Revenue from equipment sold under the company's long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. The following table summarizes the company's net sales by reportable operating segment and geographical location (in thousands):

Contract assets primarily relate to the company's right to consideration for work completed but not billed at the reporting date and are recorded in prepaid expenses and other in the Condensed Consolidated Balance Sheet. Contract assets are transferred to receivables when the right to consideration becomes unconditional. Accounts receivable are not considered contract assets under the revenue standard as contract assets are conditioned upon the company's future satisfaction of a performance obligation. Accounts receivable, in contracts, are unconditional rights to consideration.

Contract liabilities relate to advance consideration received from customers for which revenue has not been recognized. Current contract liabilities are recorded in accrued expenses in the Condensed Consolidated Balance Sheet. Non-current contract liabilities are recorded in other non-current liabilities in the Condensed Consolidated Balance Sheet. Contract liabilities are reduced when the associated revenue from the contract is recognized.

The following table provides information about contract assets and contract liabilities from contracts with customers (in thousands):

During the three months period ended March 30, 2024, the company reclassified $17.4 million to receivables, which was included in the contract asset balance at the beginning of the period. During the three months period ended March 30, 2024, the company recognized revenue of $38.5 million which was included in the contract liability balance at the beginning of the period. Additions to contract liabilities representing amounts billed to clients in excess of revenue recognized to date were $52.9 million during the three months period ended March 30, 2024. Substantially all of the company's outstanding performance obligations will be satisfied within 12 to 36 months. There were no contract asset impairments during the three months period ended March 30, 2024.

Changes in accumulated other comprehensive income(1) were as follows (in thousands):

(1) As of March 30, 2024, pension and unrealized gain on interest rate swap amounts, net of tax, are $4.2 million and $11.1 million, respectively. During the three months ended March 30, 2024, the adjustments to pension and unrealized gain/(loss) on interest rate swap amounts, net of tax, are $0.2 million and $0.1 million, respectively. As of April 1, 2023, pension and unrealized gain/(loss) on interest rate swap amounts, net of tax, were $(2.1) million and $13.9 million, respectively. During the three months ended April 1, 2023, the adjustments to pension and unrealized loss on interest rate swap amounts, net of tax, were $(0.1) million and $(2.9) million, respectively.

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

Inventories are composed of material, labor and overhead and are stated at the lower of cost or net realizable value. Costs for inventory have been determined using the first-in, first-out ("FIFO") method. The company estimates reserves for inventory obsolescence and shrinkage based on its judgment of future realization. Inventories at March 30, 2024 and December 30, 2023 are as follows (in thousands): 

Changes in the carrying amount of goodwill for the three months ended March 30, 2024 are as follows (in thousands):

The annual impairment assessment for goodwill and indefinite-lived intangible assets is performed as of the first day of the fourth quarter and since that assessment, the company does not believe there are any indicators of impairment requiring subsequent analysis. This is supported by the review of order rates, backlog levels and financial performance across business segments.

Intangible assets consist of the following (in thousands):

 

The aggregate intangible amortization expense was $17.4 million and $21.2 million for the three months period ended March 30, 2024 and April 1, 2023, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands):

 

Twelve Month Period coinciding with the end of the company's Fiscal First Quarter						Amortization Expense
2025						$	60,802
2026						56,607
2027						52,086
2028						44,031
2029						37,581
Thereafter						100,387
						$	351,494

Accrued expenses consist of the following (in thousands):

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

A rollforward of the warranty reserve is as follows (in thousands):

As of March 30, 2024, the company had $1.7 billion of borrowings outstanding under its credit facility (the "Credit Facility"), including $943.8 million outstanding under the term loan ($940.0 million, net of unamortized issuance fees) and $721.9 million outstanding under the delayed draw term loan. The company also had $1.5 million in outstanding letters of credit as of March 30, 2024, which reduces the borrowing availability under the Credit Facility. Remaining borrowing capacity under this facility was $2.8 billion at March 30, 2024.

On August 11, 2022, the company borrowed $750.0 million against the delayed draw term facility as provided under the Credit Agreement. The funds were used to reduce outstanding borrowings under the revolver. The delayed draw term loan amortizes in quarterly installments due on the last day of each fiscal quarter, and commenced on December 31, 2022, in an amount equal to 0.625% of the principal drawn, with the balance, plus any accrued interest payable by October 21, 2026.

At March 30, 2024, borrowings under the Credit Facility accrued interest at a rate of 1.375% above the daily simple or term Secured Overnight Financing Rate (“SOFR”) per annum or 0.375% above the highest of the prime rate, the federal funds rate plus 0.50% and one month Term SOFR plus 1.00%. The interest rates on borrowings under the Credit Facility may be adjusted quarterly based on the company’s Funded Debt less Unrestricted Cash to Pro Forma EBITDA (the “Leverage Ratio”) on a rolling four-quarter basis. Additionally, a commitment fee based upon the Leverage Ratio is charged on the unused portion of the commitments under the Credit Facility. As of March 30, 2024, borrowings under the Credit Facility accrued interest at a minimum of 1.375% above SOFR and the variable unused commitment fee will be at a minimum of 0.20%. Borrowings under the Credit Facility accrue interest at a minimum of 1.375% above the daily simple SOFR or term SOFR for the applicable interest period (each of which includes a spread adjustment of 0.10%). The average interest rate per annum, inclusive of hedging instruments, on the debt under the Credit Facility was equal to 5.18% at the end of the period and the variable commitment fee was equal to 0.20% per annum as of March 30, 2024.

The term loan and delayed draw term loan facilities had an average interest rate per annum, inclusive of hedging instruments, of 5.18% as of March 30, 2024.

In addition, the company has international credit facilities to fund working capital needs outside the United States. At March 30, 2024, these foreign credit facilities amounted to $9.7 million in U.S. Dollars with a weighted average per annum interest rate of approximately 2.35%.

The company’s debt is reflected on the balance sheet at cost. The fair values of the Credit Facility, term debt and foreign and other debt is based on the amount of future cash flows associated with each instrument discounted using the company's incremental borrowing rate. The company believes its interest rate margins, based on the company’s Leverage Ratio, on its existing debt are consistent with current market conditions and therefore the carrying value of debt reflects the fair value. The carrying value and estimated aggregate fair value, a level 2 measurement, based primarily on market prices, of debt excluding the Convertible Notes is as follows (in thousands):

The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At March 30, 2024, the company had outstanding floating-to-fixed interest rate swaps totaling $70.0 million notional amount carrying an average interest rate of 2.19% maturing in less than 12 months and $670.0 million notional amount carrying an average interest rate of 1.64% that mature in more than 12 months but less than 47 months.

At March 30, 2024, the company was in compliance with all covenants pursuant to its borrowing agreements.

The following table summarizes the outstanding principal amount and carrying value of the Convertible Notes:

The following table summarizes total interest expense recognized related to the Convertible Notes:

The estimated fair value of the Convertible Notes was $977.9 million as of March 30, 2024 and was determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 1(d), Fair Value Measurements, in these Notes to the Condensed Consolidated Financial Statement. The if-converted value of the Convertible Notes did not exceed their respective principal value as of March 30, 2024.

In connection with the pricing of the Convertible Notes, the company entered into privately negotiated Capped Call Transactions (the "2020 Capped Call Transactions") and the company used the net proceeds of the offering of the Convertible Notes to pay the aggregate amount of $104.7 million for them. The company entered into two tranches of privately negotiated Capped Call Transactions in December 2021 (the "2021 Capped Call Transactions") in the aggregate amount of $54.6 million. On March 15, 2022, the company entered into an additional tranche of privately negotiated Capped Call Transactions (the "2022 Capped Call Transactions") in the amount of $9.7 million.

The 2020, 2021, and 2022 Capped Call Transactions (collectively, the "Capped Call Transactions") are expected generally to reduce the potential dilution and/or offset the cash payments the company is required to make in excess of the principal amount of the Convertible Notes upon conversion of the Convertible Notes in the event that the market price per share of the company's common stock is greater than the strike price of the Capped Call Transactions (which initially corresponds to the initial conversion price of the Convertible Notes and is subject to certain adjustments under the terms of the Capped Call Transactions), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Transactions. The 2020 Capped Call Transactions have an initial cap price of $207.93 per share of the company's common stock. The 2021 Capped Call Transactions have initial cap prices of $216.50 and $225.00 per share of the company's common stock. The 2022 Capped Call Transactions have an initial cap price of $229.00 per share. The Capped Call Transactions cover, initially, the number of shares of the company's common stock underlying the Convertible Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes.

The Capped Call Transactions are separate transactions entered into by the company with the capped call counterparties, and are not part of the terms of the Convertible Notes and will not affect any holder's right under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Capped Call Transactions. The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the company's stock. The premiums paid of the Capped Call Transactions have been included as a net reduction to additional paid-in capital with stockholders' equity.

Foreign Exchange: The company uses foreign currency forward, foreign exchange swaps and option purchase and sales contracts to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third-party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The notional amount of foreign currency contracts outstanding was $267.5 million and $253.1 million as of March 30, 2024 and December 30, 2023, respectively. The fair value of the forward and option contracts was a loss of $0.2 million at the end of the first quarter of 2024.

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 swapped one-month LIBOR for fixed rates. In February 2022, the company entered into an additional floating-to-fixed interest rate swap agreement that uses a daily SOFR in lieu of LIBOR. In April 2023, all outstanding LIBOR swap agreements were amended to one month term SOFR. 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 March 30, 2024, the fair value of these instruments was an asset of $46.1 million. The change in fair value of these swap agreements in the first three months of 2024 was a gain of $3.4 million, net of taxes.

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

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

															Three Months Ended
			Presentation of Gain/(loss)																		Mar 30, 2024						Apr 1, 2023
Gain/(loss) recognized in accumulated other comprehensive income			Other comprehensive income																		$	10,847					$	(4,222)
Gain/(loss) reclassified from accumulated other comprehensive income (effective portion)			Interest expense																		$	7,566					$	7,009

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.

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

 

The Commercial Foodservice Equipment Group has a broad portfolio of foodservice equipment, which enables it to serve virtually any cooking, warming, holding, refrigeration, freezing and beverage application within a commercial kitchen or foodservice operation. This equipment is used across all types of foodservice operations, including quick-service restaurants, full-service restaurants, ghost kitchens, convenience stores, supermarkets, retail outlets, hotels and other institutions. The products offered by this group include conveyor ovens, combi-ovens, convection ovens, baking ovens, proofing ovens, deck ovens, speed cooking ovens, hydrovection ovens, ranges, fryers, rethermalizers, steam cooking equipment, food warming equipment, catering equipment, heated cabinets, charbroilers, ventless cooking systems, kitchen ventilation, induction cooking equipment, countertop cooking equipment, toasters, griddles, charcoal grills, professional mixers, stainless steel fabrication, custom millwork, professional refrigerators, blast chillers, coldrooms, ice machines, freezers, soft serve ice cream equipment, coffee and beverage dispensing equipment, home and professional craft brewing equipment, fry dispensers, bottle filling and canning equipment, IoT solutions and controls development and manufacturing.

 

The Food Processing Equipment Group offers a broad portfolio of processing solutions for customers producing protein products, such as bacon, salami, hot dogs, dinner sausages, poultry and lunchmeats and baked goods such as muffins, cookies, crackers, pies, bread and buns. Through its broad line of products, the company is able to deliver a wide array of food preparation, thermal processing, slicing/packaging, facility automation and equipment sanitation solutions to service a variety of food processing requirements demanded by its customers. The company can offer highly integrated full processing line solutions that provide a food processing operation a uniquely integrated solution providing for the highest level of food quality, product consistency, and reduced operating costs resulting from increased product yields, increased capacity and greater throughput and reduced labor costs through automation. The products offered by this group include a wide array of cooking and baking solutions, including batch ovens, baking ovens, proofing ovens, conveyor belt ovens, continuous processing ovens, frying systems and automated thermal processing systems. The company also provides a comprehensive portfolio of complementary food preparation equipment such as tumblers, massagers, grinders, slicers, reduction and emulsion systems, mixers, blenders, battering equipment, breading equipment, seeding equipment, water cutting systems, food presses, food suspension equipment, filling and depositing solutions, and forming equipment, as well as a variety of automated loading and unloading systems, automated washing systems, auto-guided vehicles, food safety, food handling, freezing, defrosting and packaging equipment. This portfolio of equipment can be integrated to provide customers a highly efficient and customized solution.

The Residential Kitchen Equipment Group has a broad portfolio of innovative and professional-style residential kitchen equipment. The products offered by this group include ranges, cookers, stoves, cooktops, microwaves, ovens, refrigerators, dishwashers, undercounter refrigeration, wine cellars, ice machines, beer dispensers, ventilation equipment, mixers, rotisseries and outdoor cooking equipment.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief operating decision maker evaluates individual segment performance based on operating income.

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

(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.

(4)Includes depreciation on right of use assets.

(5)Includes amortization of deferred financing costs and Convertible Notes issuance costs.

Geographic Information

Long-lived assets, not including goodwill and other intangibles (in thousands):

The following table summarizes the company's net periodic pension benefit related to the AGA Group pension plans (in thousands):

The pension costs for all other plans of the company were not material during the period. The service cost component is recognized within Selling, general and administrative expenses and the non-operating components of pension benefit are included within Net periodic pension benefit (other than service cost) in the Condensed Consolidated Statements of Comprehensive Income.

In November 2017, the company's Board of Directors approved a stock repurchase program authorizing the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock. In May 2022, the company's Board of Directors approved the company to repurchase an additional 2,500,000 shares of its outstanding common stock under the current program. The company did not purchase shares of its common stock under the program during the three months ended March 30, 2024. As of March 30, 2024, 3,116,364 shares had been purchased under the stock repurchase program and 1,883,636 shares remained authorized for repurchase.

The company also treats shares withheld for tax purposes on behalf of employees in connection with the vesting of restricted share grants as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. During the three months ended March 30, 2024, the company repurchased 109,859 shares of its common stock that were surrendered to the company for withholding taxes related to restricted stock vestings for $17.0 million.

 

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 and interest rates; quarterly variations in operating results; dependence on key customers; international exposure; foreign exchange and political risks affecting international sales; unfavorable tax law changes and tax authority rulings; ability to protect trademarks, copyrights and other intellectual property; cybersecurity attacks and other breaches in security; changing market conditions, including inflation; 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; the company's continued ability to realize profitable growth through the sourcing and completion of strategic acquisitions; and other risks detailed herein and from time-to-time in the company’s SEC filings, including the company’s 2023 Annual Report on Form 10-K. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this report are made only as of the date hereof and, except as required by federal securities laws and rules and regulations of the SEC, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The company has been negatively impacted by inflation in wages, logistics, energy, raw materials and component costs. Price increases and pricing strategies have been implemented to mitigate the impact of cost inflation on margins and the company continues to actively monitor costs. High inflation an uncertainty surrounding the Federal Reserve's interest rate policy decisions have led to increased interest rates 2023 and the first quarter of 2024, which combined with global macroeconomic uncertainty has and may continue to impact customer demand. Most notably in our residential segment, we have faced recent demand headwinds due to macroeconomic conditions. Even in light of such headwinds, we remain focused on delivering strong financial results and executing on our long-term strategy and profitability objectives.

The company continues to actively monitor global supply chain, labor and logistics constraints, which have had a negative impact on the company's ability to source parts and complete and ship units. While the company is seeing improvement on certain supply chain and logistics constraints, supply chains for certain key components remain distressed. The decreased availability of resources and inflationary costs have resulted in heightened inventory levels. To combat these pressures, the company has evaluated alternative sourcing, dual sourcing and collaborated across the organization, where appropriate, without materially presenting new risks or increasing current risks around quality and reliability. Our capital resources have been and the company expects they will continue to be sufficient to address these challenges.

 

 The following table sets forth certain consolidated statements of earnings items as a percentage of net sales for the periods:

 

NET SALES. Net sales for the three months period ended March 30, 2024 decreased by $80.5 million or 8.0% to $926.9 million as compared to $1,007.4 million in the three months period ended April 1, 2023. Net sales increased by $3.8 million, or 0.4%, from the fiscal 2023 acquisitions of Flavor Burst, Blue Sparq, Filtration Automation, Terry, and Trade-Wind. Excluding acquisitions, net sales decreased $84.3 million, or 8.4%, from the prior year period. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the three months period ended March 30, 2024 increased net sales by approximately $3.6 million or 0.4%. Excluding the impact of foreign exchange and acquisitions, sales decreased 8.7% for the three months period ended March 30, 2024 as compared to the prior year period, including a net sales decrease of 4.2% at the Commercial Foodservice Equipment Group, a net sales decrease of 7.7% at the Food Processing Equipment Group and a net sales decrease of 22.3% at the Residential Kitchen Equipment Group.

•Net sales of the Commercial Foodservice Equipment Group decreased by $23.6 million, or 3.8%, to $590.3 million in the three months period ended March 30, 2024, as compared to $613.9 million in the prior year period. Net sales from the acquisitions of Flavor Burst, Blue Sparq, and Terry, which were acquired on January 24, 2023, April 3, 2023 and July 5, 2023, respectively, accounted for an increase of $1.0 million during the three months period ended March 30, 2024. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group decreased $24.6 million, or 4.0%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales decreased $25.6 million, or 4.2%, at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales decrease of $26.1 million, or 5.8%, to $426.5 million, as compared to $452.6 million in the prior year period. This includes an increase of $0.9 million from the recent acquisitions. Excluding the acquisitions, the net decrease in domestic sales was $27.0 million, or 6.0%. The decrease in domestic sales is related to slow market conditions. International sales increased $2.5 million, or 1.5%, to $163.8 million, as compared to $161.3 million in the prior year period. This includes an increase of $0.1 million from the recent acquisitions and an increase of $1.0 million related to the favorable impact of exchange rates. Excluding the impact of foreign exchange and acquisitions, the net sales increase in international sales was $1.4 million, or 0.9%. The increase in international sales is related to improvements in market conditions, primarily in the European and Latin American markets.

•Net sales of the Food Processing Equipment Group decreased by $10.8 million, or 6.2%, to $162.7 million in the three months period ended March 30, 2024, as compared to $173.5 million in the prior year period. Excluding the impact of the acquisition of Filtration Automation, acquired June 13, 2023, net sales of the Food Processing Equipment Group decreased $12.6 million, or 7.3%, as compared to the prior year period. Excluding the impact of foreign exchange and the acquisition, net sales decreased $13.3 million, or 7.7%, at the Food Processing Equipment Group. Domestically, the company realized a sales decrease of $13.9 million, or 11.9%, to $103.0 million, as compared to $116.9 million in the prior year period. This includes an increase of $1.7 million from the recent acquisitions. Excluding the acquisition, the net decrease in domestic sales was $15.6 million, or 13.3%. International sales increased $3.1 million, or 5.5%, to $59.7 million, as compared to $56.6 million in the prior year period. This includes an increase of $0.1 million from the recent acquisitions and an increase of $0.7 million related to the favorable impact of exchange rates. Excluding the impact of foreign exchange and the acquisition, the net sales increase in international sales was $2.3 million, or 4.1%. The increase in international sales is primarily related to bakery product growth in the European markets.

•Net sales of the Residential Kitchen Equipment Group decreased by $46.1 million, or 21.0%, to $173.9 million in the three months period ended March 30, 2024, as compared to $220.0 million in the prior year period. Excluding the impact of the acquisition of Trade-Wind, acquired August 1, 2023, net sales decreased $47.1 million, or 21.4%. Excluding the impact of foreign exchange and the acquisition, net sales decreased $49.0 million, or 22.3% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales decrease of $37.0 million, or 25.7%, to $107.0 million, as compared to $144.0 million in the prior year period. Excluding the acquisition, the net decrease in domestic sales was $38.0 million, or 26.4%. International sales decreased $9.1 million, or 12.0%, to $66.9 million, as compared to $76.0 million in the prior year period. This includes an increase of $1.9 million related to the favorable impact of exchange rates. Excluding the impact of foreign exchange, the net sales decrease in international sales was $11.0 million, or 14.5%. The decrease in domestic and international sales was primarily driven by challenging market conditions.

GROSS PROFIT. Gross profit decreased to $346.4 million in the three months period ended March 30, 2024, as compared to $378.7 million in the prior year period, primarily reflecting lower sales volumes. The impact of foreign exchange rates increased gross profit by approximately $1.2 million. The gross margin rate was 37.4% in the three months period ended March 30, 2024, as compared to 37.6% in the prior year period.

•Gross profit at the Commercial Foodservice Equipment Group decreased by $11.1 million, or 4.6%, to $231.0 million in the three months period ended March 30, 2024, as compared to $242.1 million in the prior year period. Gross profit from the acquisitions of Flavor Burst, Blue Sparq, and Terry increased gross profit by $0.5 million. Excluding acquisitions, gross profit decreased by $11.6 million. The impact of foreign exchange rates increased gross profit by approximately $0.3 million. The gross margin rate decreased to 39.1%, as compared to 39.4% in the prior year period related to lower sales volumes. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 39.1%.

•Gross profit at the Food Processing Equipment Group decreased by $2.2 million, or 3.4%, to $63.4 million in the three months period ended March 30, 2024, as compared to $65.6 million in the prior year period. The impact of foreign exchange rates increased gross profit by approximately $0.3 million. Excluding the acquisition, gross profit decreased by $3.0 million. The gross profit margin rate increased to 39.0%, as compared to 37.8% in the prior year period. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 38.9%.

•Gross profit at the Residential Kitchen Equipment Group decreased by $19.2 million, or 27.3%, to $51.2 million in the three months period ended March 30, 2024, as compared to $70.4 million in the prior year period. The impact of foreign exchange rates increased gross profit by approximately $0.6 million. Excluding the acquisition, gross profit decreased by $19.8 million related to lower sales volume. The gross margin rate decreased to 29.4%, as compared to 32.0% in the prior year period. The gross margin rate excluding the acquisition and the impact of foreign exchange was 29.2%.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses decreased to $206.0 million in the three months period ended March 30, 2024, as compared to $215.4 million in the three months period ended April 1, 2023. As a percentage of net sales, selling, general, and administrative expenses were 22.2% in the three months period ended March 30, 2024 as compared to 21.4% in the three months period ended April 1, 2023.

Selling, general and administrative expenses reflect increased costs of $2.5 million associated with acquisitions, including $0.3 million of intangible amortization expense. Selling, general and administrative expenses decreased primarily due to lower compensation costs, selling and marketing expenses and intangible amortization expense. Foreign exchange rates had an unfavorable impact of $0.9 million.

RESTRUCTURING EXPENSES. Restructuring expenses increased $0.9 million to $3.2 million for the three months period ended March 30, 2024, as compared to $2.3 million for the three months period ended April 1, 2023. Restructuring expenses in the three months period ended March 30, 2024 related primarily to headcount reductions and facility consolidations within all three segments. Restructuring expenses in the three months period ended April 1, 2023 related primarily to headcount reductions and facility consolidations within the Residential Kitchen Equipment Group.

NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were $26.3 million in the three months period ended March 30, 2024, as compared to $29.5 million in the prior year period primarily reflecting the decrease in debt levels on our current debt structure. Net periodic pension benefit (other than service costs) increased $1.4 million to $3.7 million in the three months period ended March 30, 2024, as compared to $2.3 million in the prior year period related to the slight decrease in discount rate used to calculate the interest cost and increase in expected return on assets as a result of the higher assets value. Other income was $0.3 million in the three months period ended March 30, 2024, as compared to other expense $1.9 million in the prior year period and consists mainly of foreign exchange gains and losses.

INCOME TAXES. A tax provision of $28.3 million, at an effective rate of 24.6%, was recorded during the three months period ended March 30, 2024, as compared to $32.8 million at an effective rate of 24.9%, in the prior year period. The effective tax rate for the three months period ended March 30, 2024 is higher than the U.S. statutory tax rate of 21% primarily due to state taxes and foreign tax rate differentials.

 Total cash and cash equivalents increased by $184.5 million to $341.0 million at March 30, 2024 from $156.5 million at April 1, 2023. Total debt amounted to $2.4 billion at March 30, 2024 and December 30, 2023.

 

OPERATING ACTIVITIES. Net cash provided by operating activities after changes in assets and liabilities amounted to $140.9 million as compared to $92.0 million in the prior year.

During the three months period ended March 30, 2024, working capital changes meaningfully impacted operating cash flows primarily driven by increased inventory levels of $13.0 million, a decrease in accounts receivable of $36.3 million due to lower sales volumes and a decrease of $19.9 million in accrued expenses and other liabilities including impacts from the timing of payments made for taxes, various customer programs and incentive programs.

INVESTING ACTIVITIES. During the three months period ended March 30, 2024, net cash used for investing activities amounted to $16.1 million. Cash used to fund an acquisition amounted to $2.3 million. Additionally, $13.7 million was expended, primarily for upgrades of production equipment and manufacturing facilities.

FINANCING ACTIVITIES. Net cash flows used for financing activities amounted to $28.6 million during the three months period ended March 30, 2024. The company’s borrowing activities during 2024 included $10.9 million of net repayments under its Credit Facility. Additionally, during 2024, the company used $17.0 million to repurchase 109,859 shares of Middleby common stock that were surrendered to the company for withholding taxes related to restricted stock vestings.

At March 30, 2024, the company was in compliance with all covenants pursuant to its borrowing agreements. 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.

See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 4 - Recently Issued Accounting Standards, of this Quarterly Report on Form 10-Q.

Management's discussion and analysis of financial condition and results of operations are based upon the company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions and any such differences could be material to the company's consolidated financial statements. There have been no changes in the company's critical accounting policies, which include revenue recognition, inventories, goodwill and indefinite-life intangibles, convertible debt, pensions benefits, and income taxes, as discussed in the company's Annual Report on Form 10-K for the year ended December 30, 2023 (the “2023 Annual Report on Form 10-K”).

The company is exposed to market risk related to changes in interest rates. The following table summarizes the maturity of the company’s debt obligations:

The company is exposed to interest rate risk on its floating-rate debt. The company has entered into interest rate swaps to fix the interest rate applicable to certain of its variable-rate debt. The agreements swapped one-month LIBOR for fixed rates. In February 2022, the company entered into an additional floating-to-fixed interest rate swap agreement that uses a daily SOFR in lieu of LIBOR. In April 2023, all outstanding LIBOR swap agreements were amended to one month term SOFR. 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 March 30, 2024, the fair value of these instruments was an asset of $46.1 million. The change in fair value of these swap agreements in the first three months of 2024 was a gain of $3.4 million, net of taxes. The potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted interest rates would not have a material impact on the company's financial position, results of operations and cash flows.

The company has Convertible Notes that were issued in August 2020, which carry a fixed annual interest rate of 1.00%. As such, the company does not have economic interest rate exposure on the Convertible Notes. The fair value of the Convertible Notes is subject to interest rate risk, market risk and other factors due to its conversion feature. The fair value of the Convertible Notes is also affected by the price and volatility of the company’s common stock and will generally increase or decrease as the market price of our common stock changes. The interest and market value changes affect the fair value of the Convertible Notes but do not impact the company’s financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, the company carries the Convertible Notes at face value, less any unamortized discount on the balance sheet and presents the fair value for disclosure purposes only.

The company uses derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third-party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted foreign exchange rates would not have a material impact on the company's financial position, results of operations and cash flows. The fair value of the forward and option contracts was a loss of $0.2 million at the end of the first quarter of 2024.

The company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of March 30, 2024, the company carried out an evaluation, under the supervision and with the participation of the company's management, including the company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the company's disclosure controls and procedures. Based on the foregoing, the company's Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of this period. 

During the quarter ended March 30, 2024, there has been no change in the company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.

The company was not required to report the information pursuant to Items 1 through 6 of Part II of Form 10-Q for the three months ended March 30, 2024, except as follows:

(1) On November 7, 2017, the company's Board of Directors resolved to terminate the company's existing share repurchase program, effective as of such date, which was originally adopted in 1998, and approved a new stock repurchase program. This program authorizes the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock. In May 2022, the company's Board of Directors approved the company to repurchase an additional 2,500,000 shares of its outstanding common stock under the current program. As of March 30, 2024, the total number of shares authorized for repurchase under the program is 5,000,000. As of March 30, 2024, 3,116,364 shares had been purchased under the stock repurchase program and 1,883,636 shares remained authorized for repurchase.  

    In the consolidated financial statements, the company also treats shares withheld for tax purposes on behalf of employees in connection with the vesting of restricted share grants as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. These withheld shares are not considered common stock repurchases under the authorized common stock repurchase plan and accordingly are not included in the common stock repurchase totals in the preceding table.