Middleby Corporation: Reports Q2-2019 Results

Elgin / IL. (tmc) The Middleby Corporation, a leading worldwide manufacturer of equipment for the commercial foodservice, food processing, and residential kitchen industries, reported net sales and earnings for the second quarter ended June 29, 2019. Net earnings for the second quarter were USD 92.2 million or USD 1.66 diluted earnings per share on net sales of USD 761.0 million as compared to the prior year second quarter net earnings of USD 84.0 million or USD 1.51 diluted earnings per share on net sales of USD 668.1 million. Net earnings in the current and prior year second quarter were negatively impacted by restructuring expenses and acquisition related inventory step-up charges. Excluding these items, earnings per share would have been USD 1.70 and USD 1.59 in the 2019 and 2018 second quarter periods.

2019 Second Quarter Financial Highlights

• Net sales increased 13.9 percent in the second quarter of 2019 over the comparative prior year period. Sales related to recent acquisitions added 14.7 percent in the second quarter. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars decreased net sales by approximately 1.6 percent during the second quarter. Excluding the impacts of acquisitions, closure of a non-core business and foreign exchange rates, sales increased 1.3 percent in the second quarter.
• Net sales at the company’s Commercial Foodservice Equipment Group increased 24.0 percent in the second quarter of 2019 over the comparative prior year period. Excluding the impacts of acquisitions and foreign exchange, sales increased 2.3 percent in the second quarter. In fiscal 2018, the company completed the acquisitions of Firex, Josper, Taylor and Crown. In fiscal 2019, the company completed the acquisitions of EVO, Cooking Solutions Group, Powerhouse Dynamics, and Ss Brewtech.
• Net sales at the company’s Residential Kitchen Equipment Group decreased 6.5 percent in the second quarter of 2019 over the comparative prior year period. Excluding the impact of foreign exchange rates and closure of a non-core business, sales decreased 2.6 percent during the second quarter.
• Net sales at the company’s Food Processing Equipment Group increased 4.5 percent in the second quarter of 2019 over the comparative prior year period. Excluding the impacts of the acquisition and foreign exchange rates, net sales increased 3.4 percent during the second quarter. In fiscal 2018, the company completed the acquisition of M-TEK.
• Gross profit in the second quarter increased to USD 286.5 million from USD 250.8 million and the gross margin rate increased from 37.5 percent to 37.6 percent.
• Operating income in the second quarter increased to USD 139.6 million from USD 111.3 million in the prior year period.
• Operating income included USD 24.5 million of non-cash expenses during the second quarter, comprised of USD 9.5 million of depreciation expense, USD 14.7 million of intangible amortization and USD 0.3 million of share based compensation. Prior year second quarter non-cash expenses amounted to USD 20.0 million, including USD 8.5 million of depreciation expenses, USD 9.8 million of intangible amortization and USD 1.7 million of share based compensation.
• The provision for income taxes in the second quarter amounted to USD 33.2 million at a 26.5 percent effective rate in comparison to USD 26.6 million at a 24.0 percent effective rate in the prior year quarter.
• Diluted net earnings per share was USD 1.66 in the second quarter as compared to USD 1.51 in the prior year quarter. Net earnings in the current and prior year second quarter were reduced by restructuring expenses and acquisition related inventory step-up charges. The impact of these items reduced earnings per share by USD 0.04 and USD 0.07 in the 2019 and 2018 second quarter periods.
• Operating cash flows during the second quarter amounted to USD 67.6 million in comparison to USD 101.9 million in the prior year period.
• Net debt, defined as debt less cash, at the end of the 2019 fiscal second quarter amounted to USD 1,913.7 million as compared to USD 1,820.4 million at the end of fiscal 2018. During the second quarter, the company invested USD 167.3 million to fund acquisitions.

Timothy FitzGerald, Chief Executive Officer, commented, «At the Commercial Foodservice Equipment Group, we reported modest growth both domestically and internationally. Our focus on innovative solutions addressing demands for ventless cooking, automation, speed of service, and flexible equipment, position us well as our restaurant customers continue to evolve their kitchen operations. Given the strategic importance of equipment solutions to address customer issues around labor, operating footprint and menu, the timing and length of decision approval processes is often extended, affecting the timing of customer rollouts and replacement cycles. Internationally, we continue to face challenging conditions in Europe and the U.K. with uncertainty from Brexit, as well as headwinds with China. Despite the short-term disruptions and challenges, we continue to invest in the international markets and expand our footprint as we see long-term growth opportunities in emerging markets.»

FitzGerald added, «Expanding margins remains a priority. During the quarter we realized anticipated margin pressure from increasing materials costs related to tariffs. We have announced mid-year price increases to offset these increasing costs. Furthermore, integration of commercial foodservice acquisitions completed over the past several years is ongoing and will contribute to margin expansion. Taylor Ebitda margins have expanded to 25 percent and added to our earnings by approximately USD 0.07 this quarter. This was offset by the second quarter acquisition of the highly-respected brands Ultrafryer, BKI, APW and Bakers Pride. Efforts are underway to improve the profit contributions from these brands, and we are confident identified actions to be implemented in the second half of 2019 should generate significant benefits in 2020.»

«We are making significant technology investments related to automation, controls, and our IoT cloud-based offering, which we believe is critical to support our customer needs as they evolve their kitchen operations,» FitzGerald emphasized. «We have increased our operating spend related to these developments and are quickly developing unique solutions that enhance our broad portfolio of restaurant equipment. In conjunction with these initiatives we were pleased to recently acquire Powerhouse Dynamics, complementing our Middleby Connect IoT platform. Today we can enable customers to remotely operate and monitor a broad set of operations for restaurants, allowing our customers to achieve gains in labor efficiency, energy conservation, food cost and enhanced food safety. We are confident these ongoing investments will generate long-term growth and margin enhancement opportunities.»

«We were also excited to announce our recent acquisition of Ss Brewtech, a leader in professional-grade equipment for the small scale craft brewing industry. This acquisition further adds to our growing beverage platform. Ss Brewtech allows us to capitalize on the growing popularity of on-site brewing in bars and restaurants. We anticipate there are opportunities to further leverage this platform with other Middleby technologies to expand into other adjacent beverage categories.»

FitzGerald added, «At our Residential Kitchen Equipment Group, we faced challenging market dynamics. Viking again reported sales growth, but at slower rates than we have seen in recent quarters as domestic consumer spending in the appliance market declined. Although Viking has grown less quickly this quarter, the brand is outperforming the market. We gained share with our dealer partners and our displays increased on showroom floors. We continue to introduce new innovation for the consumer kitchen, including the expansion of our built-in refrigeration line as updated availability in the third quarter will feature a full suite of sizes. We are also actively promoting the Viking Virtuoso product line which debuted earlier this year.»

«Challenging international market conditions were also evident with the overhang of Brexit affecting our U.K- based businesses, including AGA, Rangemaster and Fired Earth. However, we are optimistic about the U.K. pipeline of new products including AGA-branded Mercury and Elise ranges which will enter the U.S. market in the coming months. We remain focused on margin improvements across the residential platform, driven by manufacturing efficiencies and addressing lower profitability at non-core businesses. Recently, the consolidation of our outdoor cooking brands into our Greenwood, Mississippi operations was announced, and will be completed by year end. We are pleased with the consistent progress in gaining market share, launching new products and increasing profitability across this segment despite the current market challenges. We believe we are well-positioned for long-term profitable growth.»

FitzGerald further noted, «At the Food Processing Equipment Group, we realized modest growth. Demand from growing international markets was offset by less domestic business. The absence of large projects in our core meat processing business is an ongoing challenge to top line growth and margins due to profitability mix. Although order rates declined in the quarter, the pipeline of activity related to new opportunities is building and improved bookings are anticipated in upcoming quarters. Our investments over the past year in new products have been well received by customers and have gained initial traction and interest across multiple customer segments. We are focused on penetrating growing market categories and supporting trends such as pet foods, dried cured meats and jerky, and sous-vide cooking. We were pleased to recently announce the acquisition of Pacpronic, a market leader in automated packaging technologies for customers in both protein and bakery. With this acquisition, we further expand our capabilities to offer a more comprehensive and integrated solution to our customers.»