Middleby Corporation: Reports Q3-2019 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 third quarter ended September 28, 2019. Net earnings for the third quarter were USD 82.0 million or USD 1.47 diluted earnings per share on net sales of USD 724.0 million as compared to the prior year third quarter net earnings of USD 72.9 million or USD 1.31 diluted earnings per share on net sales of USD 713.3 million. Net earnings in the current and prior year third quarter were negatively impacted by restructuring expenses, acquisition related inventory step-up charges and facility consolidation related expenses. Excluding these items, as well as other non-cash items, adjusted net earnings per share were USD 1.72 and USD 1.65 in the 2019 and 2018 third quarter periods.

2019 Third Quarter Financial Highlights

• Net sales increased 1.5 percent in the third quarter of 2019 over the comparative prior year period. Sales related to recent acquisitions added 5.8 percent in the third quarter. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars decreased net sales by approximately 1.1 percent during the third quarter. Excluding the impacts of acquisitions, closure of a non-core business and foreign exchange rates, sales decreased 2.9 percent in the third quarter.
• Net sales at the company’s Commercial Foodservice Equipment Group increased 6.2 percent in the third quarter of 2019 over the comparative prior year period. Excluding the impacts of acquisitions and foreign exchange, sales increased 0.5 percent in the third quarter. In fiscal 2018, the company completed the acquisition of Crown. In fiscal 2019, the company completed the acquisitions of EVO, the Standex Cooking Solutions Group (including APW Wyott, Bakers Pride, BKI and Ultrafryer), Powerhouse Dynamics and Ss Brewtech.
• Net sales at the company’s Residential Kitchen Equipment Group decreased 12.8 percent in the third 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 9.6 percent during the third quarter.
• Net sales at the company’s Food Processing Equipment Group increased 0.9 percent in the third quarter of 2019 over the comparative prior year period. Excluding the impacts of the acquisitions and foreign exchange rates, net sales decreased 9.7 percent during the third quarter. The company completed the acquisition of M-TEK in fiscal 2018 and Packaging Progressions, Inc. in fiscal 2019.
• Gross profit in the third quarter increased to USD 270.0 million from USD 261.2 million and the gross margin rate increased from 36.6 percent to 37.3 percent.
• Operating income in the third quarter increased 12.6 percent, to USD 121.3 million from USD 107.7 million in the prior year period.
• Operating income included USD 28.8 million of non-cash expenses during the third quarter, comprised of USD 9.5 million of depreciation expense, USD 17.3 million of intangible amortization and USD 2.0 million of share based compensation. Prior year third quarter non-cash expenses amounted to USD 31.0 million, including USD 9.9 million of depreciation expense, USD 17.6 million of intangible amortization and USD 3.5 million of share based compensation.
• The provision for income taxes in the third quarter amounted to USD 24.2 million at a 22.8 percent effective rate in comparison to USD 25.1 million at a 25.6 percent effective rate in the prior year quarter.
• Diluted net earnings per share was USD 1.47 in the third quarter as compared to USD 1.31 in the prior year quarter. Net earnings in the current and prior year third quarter were reduced by restructuring expenses, acquisition related inventory step-up charges and facility consolidation related expenses. The impact of these items reduced earnings per share by USD 0.10 and USD 0.22 in the 2019 and 2018 third quarter periods.
• Operating cash flows during the third quarter increased 21.6 percent, to USD 128.2 million in comparison to USD 105.4 million in the prior year period.
• Net debt, defined as debt less cash, at the end of the 2019 fiscal third quarter amounted to USD 1,872.1 million as compared to USD 1,820.4 million at the end of fiscal 2018. During fiscal 2019, the company invested USD 239.0 million to fund acquisitions.

Timothy FitzGerald, Chief Executive Officer, commented, «Third quarter market conditions proved to be challenging across the business segments. We continued, however, to invest in our long-term growth, as we re-invent our selling processes, introduce new technology-based customer solutions, launch several new product innovations, and target growing market trends and segments. We successfully implemented a number of profitability initiatives during the quarter, which are reflected in the third quarter Ebitda margin expansion and will carry into next year. We were also pleased to report a record quarterly operating cash flow.»

«At the Commercial Foodservice Equipment Group, we reported growth across all our international regions, although the impact of Brexit and generally slower conditions continue to affect Europe. Domestically, lower spending by restaurant chains is a headwind, specifically against strong comparisons of roll-out activity in the second half of the prior year.»

«We were excited to bring a revolutionary technology solution to the market last month at the Host Milan trade show. We introduced the propriety Open Kitchen IoT solution powered by our recently acquired Powerhouse Dynamics IoT division, a leader in kitchen intelligence and connectivity technology. This new platform connects virtually all equipment in the restaurant and captures critical information, allowing our customers the ability to make real time, data-driven performance decisions to improve kitchen efficiency. We have enabled the remote control and monitoring of a variety of restaurant operations, allowing our customers to achieve the best possible efficiencies in labor utilization, energy conservation, food costs and enhanced meal safety. Open Kitchen brings together the Powerhouse SiteSage IoT platform, successfully operating in thousands of restaurants, and the existing Middleby Connect IoT solution. This new and unique combined platform results in the most comprehensive solution available in the foodservice industry, enabling our customers to transform the management and profitability of their restaurant operations.»

«Open Kitchen is an example of one of many investments in technology we are making to strengthen our leadership position and support growth. We also continue to deliver exciting new products as we strive to be the most innovative partner to our customers. Great examples are the Joe Tap Nitro Brew system, the Lincat Cibo oven, and the TurboChef Bandito. We are adding to our industry-leading solutions addressing growing industry trends of ventless kitchens, food delivery and ghost kitchen concepts. Our capabilities and leading-edge technologies strongly position Middleby to address our customers’ most important needs.»

«As part of our plan to build upon the successful efforts of the past year to consolidate our sales representative partners, we recently launched several digital sales and communication tools to better enable our sales teams. This has enhanced our ability to present comprehensive solutions based on the unparalleled breadth of Middleby’s capabilities. These initiatives ensure the Middleby sales channel has access to the best in class sales support across our portfolio of brands. With these improvements, we expect to capitalize on market opportunities more quickly and efficiently.»

«We have been able to offset pressures from increasing material costs and tariffs with cost reduction initiatives, acquisition integration activities, and targeted pricing actions,» FitzGerald continued. «We are executing further margin improvement through several manufacturing facility consolidations that are currently underway. Additionally, we have expanded efforts in strategically leveraging our supply chain and realizing operating synergies across the business units. We continue making these improvements, while at the same time investing in marketing and new technology innovation.»

«Within the Residential Kitchen Equipment Group, declines in consumer spending in the appliance market led to reduced demand across many of our brands,» FitzGerald said. «Although Viking did realize a decline in the quarter, the brand is continuing to outperform the broader market. We are seeing consistent market share gains with our dealer partners. We have added new dealers to support our portfolio of premium brands and also continued to increase the number of displays on showroom floors. We are making ongoing investments for growth by further strengthening our sales organization and enhancing our award-winning new product offerings. During the third quarter, we further extended our line-up of built-in refrigeration under the Viking brand, which presents a significant market opportunity. We also continue to invest in our residential showrooms, which feature all of the Middleby premium brands.»

«At the Food Processing Equipment Group, the absence of large projects in our core meat processing business resulted in a disappointing quarter,» said FitzGerald. «However, we are seeing improving order trends and anticipate we will enter 2020 with a much improved backlog. We have made significant R+D investments over the past year resulting in a record number of new product launches. These introductions are being well received by customers and have gained initial traction across multiple customer segments, including alternative protein, bacon, cured-meats and the pet food categories. We believe these products add diversification to our end market concentration and will contribute to our sales in 2020.»

«We are very excited to have just opened our protein innovation center in Chicago supporting the broad array of brands and solutions in one state of the art facility. This investment also provides a central location to support our global customers and demonstrate the capabilities of our integrated solutions.»