The Middleby Corporation Reports Q4 and FY-2017 Results

Elgin / IL. (tmc) The Middleby Corporation, a leading worldwide manufacturer of equipment for the commercial foodservice, food processing, and residential kitchen industries, today reported net sales and earnings for the fourth quarter and full fiscal year ended December 30, 2017. Net earnings for the fourth quarter were USD 75’186’000 or USD 1.35 diluted earnings per share on net sales of USD 632’859’000 as compared to the prior year fourth quarter net earnings of USD 80’936’000 or USD 1.41 diluted earnings per share on net sales of USD 596’817’000. Net earnings for the fiscal year ended December 30, 2017 were USD 298’128’000 or USD 5.26 diluted earnings per share on net sales of USD 2’335’542’000 as compared to net earnings of USD 284’216’000 or USD 4.98 diluted earnings per share on net sales of USD 2’267’852’000 in the prior year.

2017 Fourth Quarter and Full Year Financial Highlights

• Net sales increased 6.0 percent in the fourth quarter and 3.0 percent for the full fiscal year of 2017 over the comparative prior year periods. Sales related to recent acquisitions added 10.0 percent in the fourth quarter and 7.1 percent for the year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars increased net sales by approximately 1.8 percent during the fourth quarter and reduced net sales by 0.5 percent during the full fiscal year of 2017. Excluding the impact of acquisitions and foreign exchange, sales decreased 5.7 percent during the fourth quarter and 3.6 percent for the full year.
• Net sales at the company’s Commercial Foodservice Equipment Group increased 13.7 percent in the fourth quarter and increased 9.1 percent for the full fiscal year of 2017 over the comparative prior year periods. During fiscal 2016, the company completed the acquisition of Follett. During fiscal 2017, the company completed the acquisitions of Sveba Dahlen, QualServ, L2F and Globe. Excluding the impact of these acquisitions, sales decreased 0.7 percent in the fourth quarter and 2.0 percent for the full fiscal year. Excluding the impact of acquisitions and foreign exchange, sales decreased 2.0 percent during the fourth quarter and 1.8 percent for the full year.
• Net sales at the company’s Food Processing Equipment Group decreased 1.8 percent in the fourth quarter and increased 3.1 percent for the full fiscal year of 2017 over the comparative prior year periods. During fiscal 2017, the company completed the acquisitions of Burford, CVP Systems, and Scanico. Excluding the impact of these acquisitions, sales decreased 13.1 percent in the fourth quarter and 3.3 percent for the full fiscal year. Excluding the impact of acquisitions and foreign exchange, sales decreased 14.4 percent during the fourth quarter and 3.5 percent for the full year.
• Net sales at the company’s Residential Kitchen Equipment Group decreased 5.0 percent in the fourth quarter and 8.8 percent for the full fiscal year of 2017 over the comparative prior year periods. Excluding the impact of foreign exchange, sales decreased 8.2 percent during the fourth quarter and 7.2 percent for the full year.
• Gross profit in the fourth quarter increased to USD 240.2 million from USD 239.2 million and gross margin rate decreased from 40.1 percent to 37.9 percent. For the full fiscal year of 2017, gross profit increased to USD 912.7 million from USD 901.2 million due to increased sales from acquisitions, offset by the impact of foreign exchange. The gross margin rate decreased from 39.7 percent to 39.1 percent. The decrease in the gross margin rate for the quarter and full year was primarily due to lower margins at recent acquisitions. Excluding the dilutive impact of lower margins at recent acquisitions the gross rate amounted to 39.8 percent for the fourth quarter and full year of 2017, respectively.
• Operating income decreased to USD 68.9 million from USD 126.5 million in the prior year quarter and decreased for the full fiscal year of 2017 to USD 410.3 million from USD 446.2 million in the prior year. Operating income in the fourth quarter and full year included impairment of intangible assets in the amount of USD 58.0 million related to the Viking tradename. The impairment of the Viking tradename is a result of the continued decline in revenues resulting from the product recall and legacy issues. Additionally, operating income in 2017 included USD 2.5 million of restructuring costs in the fourth quarter and USD 20.0 million for the full year associated with cost reduction initiatives primarily related to headcount reductions at each of the company’s reportable operating segments. Operating income in the full fiscal year of 2017 also included USD 12.0 million gain on the sale of a manufacturing facility in connection with relocation to a larger facility which will allow for improvement in production efficiencies and allow for future manufacturing consolidation efforts of certain operations.
• Operating income included USD 19.9 million of non-cash expenses during the fourth quarter, including USD 8.0 million of depreciation expense, USD 12.1 million of intangible amortization and ( USD 0.2) million of share based compensation. Operating income included USD 74.5 million of non-cash expenses for the full fiscal year of 2017, including USD 29.7 million of depreciation expense, USD 38.6 million of intangible amortization and USD 6.2 million of share based compensation.
• The provision for income taxes in the fourth quarter amounted to ( USD 14.0) million at a (22.8 percent) effective rate in comparison to USD 36.9 million at a 31.3 percent effective rate in the prior year quarter. For the full fiscal year of 2017, the provision for income taxes amounted to USD 85.4 million at a 22.3 percent effective rate in comparison to USD 137.1 million at a 32.5 percent effective rate in the prior year. The fourth quarter and full year effective tax rate reflects the impact of the Tax Cuts and Job Act of 2017, including a tax benefit for revaluing U.S. deferred taxes at the lower corporate income tax partially offset by the transition tax for the move to a territorial tax system. Additionally, the full fiscal year of 2017 effective tax rate was impacted by the adoption of ASU No. 2016-09, «Compensation – Stock Compensation (Topic718)», which resulted in the recognition of excess tax benefits as tax benefits.
• Net earnings per share amounted to USD 1.35 in the fourth quarter as compared to USD 1.41 in the prior year quarter and USD 5.26 for the full year in 2017 as compared to USD 4.98 in 2016. Net earnings in the current and prior year were impacted by restructuring expenses, the gain on sale of plant, the impairment of intangible assets, complying with the Tax Cuts and Job Act of 2017 and the adoption of ASU No. 2016-09. The impact of these items reduced earnings per share by USD 0.13 and USD 0.03 for the fourth quarter periods, respectively, and USD 0.90 and USD 0.12 for the full fiscal year, respectively.
• Operating cash flows amounted to USD 99.6 million during the fourth quarter and USD 304.5 million for the full fiscal year of 2017. In comparison, operating cash flows for the full year increased from USD 294.1 million in the prior year.
• Net debt, defined as debt less cash, at the end of 2017 fiscal fourth quarter amounted to USD 939.2 million as compared to USD 869.0 million at the end of the third quarter and USD 663.6 million at the end of fiscal 2016. During the year, the company invested USD 300.2 million to fund 2017 acquisitions and USD 239.8 million related to the repurchase of Middleby common shares.

Selim A. Bassoul Chairman and Chief Executive Officer, commented, «At the Commercial Foodservice Equipment Group, we realized a modest sales increase in the general market, which was more than offset by lower sales to our major restaurant chain customers. Sales to our major restaurant chain customers remained impacted in the quarter as replacement purchases were less than prior years as customers evaluated new equipment solutions, supporting operational improvements and new menu initiatives. We have a healthy pipeline of sales opportunities and momentum with these existing and new chain customers, which we anticipate will convert into in sales in 2018. Sales were also impacted by strategic initiatives to consolidate our independent selling organization, which resulted in disruption during the quarter. We are excited about this initiative allowing us to strengthen and simplify our selling organization for the future. This effort has allowed us to align with our strongest sales representatives to carry our portfolio of leading brands and product innovations. We expect this reorganization will be largely completed during the first quarter of 2018 and we will realize benefits during the remainder of 2018. We also anticipate the new tax law changes may provide further momentum in purchase from our restaurant customers.»

Bassoul continued, «At our Residential Kitchen Equipment Group, the fourth quarter sales decline reflects the impact of lower revenues at the AGA Group due to acquisition integration initiatives and reorganization of non-core businesses within the AGA portfolio. We have remained focused on simplifying those businesses and reducing costs, which have resulted in significant improvements in profitability. Sales at Viking also continued to be lower in the fourth quarter reflecting the lingering impact of the product recall and legacy service and quality issues, however we have seen improvement in order trends and the favorable impact of leveraging the investments made in the past several years in company owned distribution and service. We are very excited about the new portfolio of products introduced across all the brands in the segment and have increased products displays at our dealer partners in addition to our newly established brand centers in New York and Chicago.»

«At the Food Processing Equipment Group, the decline in revenues reflects the nature of this business with large projects resulting in sales volatility. While the pipeline moving into 2018 remains strong, orders have slowed on large projects, which will continue to impact the first half of the year. However, we have a positive view on the food processing industry and are working with our customers on new and innovative solutions to support production and new food product initiatives.»

«Although 2017 was a challenging year, we were pleased with the continued positioning of the company for future profitable growth and success. Our focus continued to be on reducing our cost structure and gaining further operational efficiencies at recently acquired companies and across all three of our business segments. As we have expanded the business platforms, we enhance the realization of synergies across these units including initiatives focused on supply chain, production capabilities, and sales organization simplification. We expect this will be reflected in continued profit margin improvements in 2018 and beyond.»

«We are also pleased to have completed seven acquisitions in 2017 which have further added to our Commercial Foodservice and Food Processing platforms. These acquisitions have added approximately USD 300 million in annualized revenues and expanded our product portfolio with highly complementary and innovative products.»