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Middleby Corporation: Reports Q4-2018 and FY 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 fourth quarter and full fiscal year ended December 29, 2018. Net earnings for the fourth quarter were USD 94.8 million or USD 1.70 diluted earnings per share on net sales of USD 756.7 million as compared to the prior year fourth quarter net earnings of USD 75.2 million or USD 1.35 diluted earnings per share on net sales of USD 632.9 million. Net earnings for the fiscal year ended December 29, 2018 were USD 317.2 million or USD 5.70 diluted earnings per share on net sales of USD 2,722.9 million as compared to the prior year net earnings of USD 298.1 million or USD 5.26 diluted earnings per share on net sales of USD 2,335.5 million. Net earnings in the current quarter were impacted by the dilutive impact of the Taylor acquisition and restructuring. Net earnings in the prior year were impacted by restructuring, 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. Excluding these items, adjusted earnings per share was USD 1.79 and USD 1.62 for the 2018 and 2017 fourth quarter periods, respectively.

2018 Fourth Quarter and Full Year Financial Highlights

  • Net sales increased 19.6 percent in the fourth quarter and 16.6 percent for the full fiscal year of 2018 over the comparative prior year periods. Sales related to recent acquisitions added 17.2 percent in the fourth quarter and 16.1 percent for the year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars decreased net sales by approximately 1.5 percent during the fourth quarter and increased net sales by 0.4 percent during the full fiscal year. The adoption of ASC 606 increased net sales by approximately 0.5 percent during the fourth quarter and 0.9 percent for the full fiscal year. Excluding the impacts of acquisitions, foreign exchange rates and the adoption of ASC 606, sales increased 3.3 percent in the fourth quarter and decreased 0.8 percent for the full fiscal year 2018.
  • Net sales at the company’s Commercial Foodservice Equipment Group increased 27.0 percent in the fourth quarter and increased 25.2 percent for the full fiscal year of 2018 over the comparative prior year periods. During fiscal 2017, the company completed the acquisitions of Sveba Dahlen, QualServ, L2F and Globe. During fiscal 2018, the company completed the acquisitions of Josper, Firex, Taylor and Crown. Excluding the impacts of acquisitions and foreign exchange, sales increased 5.3 percent in the fourth quarter and 3.1 percent for the full year.
  • Net sales at the company’s Residential Kitchen Equipment Group decreased 1.3 percent in the fourth quarter and increased 0.5 percent for the full fiscal year of 2018 over comparative prior year periods. Excluding the impact of foreign exchange rates, sales increased 0.5 percent during the fourth quarter and decreased 0.9 percent for the full year. Excluding the impact of sales declines at the non-core businesses, sales growth for the quarter increased to 3.0 percent and increased to 0.9 percent for the full year. Sales at Viking increased by over 15 percent during the quarter and the full fiscal year. The increase in Viking sales was offset by a decline at the AGA Rangemaster business resulting from market conditions in the UK.
  • Net sales at the company’s Food Processing Equipment Group increased 23.8 percent in the fourth quarter and 10.5 percent for the full fiscal year of 2018 over the comparative prior year periods. During fiscal 2017, the company completed the acquisitions of Burford, CVP Systems and Scanico. During fiscal 2018, the company completed the acquisitions of Hinds-Bock, Ve.Ma.C and M-TEK. Excluding the impacts of acquisitions, foreign exchange rates and the adoption of ASC 606, net sales were approximately flat in the fourth quarter and decreased 15.7 percent for the full year.
  • Gross profit in the fourth quarter increased to USD 280.6 million from USD 240.2 million and the gross margin rate decreased from 37.9 percent to 37.1 percent. For the full fiscal year of 2018, gross profit increased to USD 1,004.1 million from USD 912.7 million and the gross margin rate decreased from 39.1 percent to 36.9 percent. The decrease in gross margin rate for the quarter and full year was primarily due to lower margins at the Food Processing Equipment Group and acquisitions, offset by an increase related to the adoption of ASC 606. Excluding the impact of acquisitions, adoption of ASC 606 and foreign exchange, the gross margin rate would have been 37.7 percent in the fourth quarter and 38.4 percent in the full year of 2018.
  • Operating income in the fourth quarter increased to USD 140.0 million from USD 62.9 million in the prior year period and increased to USD 446.0 million from USD 378.6 million in the prior year. Operating income in 2018 included USD 1.1 million of restructuring costs in the fourth quarter and USD 19.3 million for the full year primarily associated with the closure of Grange, a non-core furniture business in France which was acquired in conjunction with AGA Rangemaster, and other integration initiatives with AGA Rangemaster and Taylor.
  • Operating income included USD 27.7 million of non-cash expenses during the fourth quarter, comprised of USD 9.3 million of depreciation expense, USD 21.2 million of intangible amortization and USD 2.8 million benefit from an adjustment to share based compensation. Operating income included USD 98.3 million of non-cash expenses for the full fiscal year of 2018, comprised of USD 35.8 million of depreciation expense, USD 60.0 million of intangible amortization and USD 2.5 million of share based compensation.
  • The provision for income taxes in the fourth quarter amounted to USD 33.4 million at a 26.0 percent effective rate in comparison to USD (14.0) million at a (22.8) percent effective rate in the prior year quarter. The tax rate in the fourth quarter was favorably impacted by the reduction in the federal tax rate from 35 percent to 21 percent. For the full fiscal year of 2018, the provision for income taxes amounted to USD 106.4 million at a 25.1 percent effective rate in comparison to USD 85.4 million at a 22.3 percent effective rate in the prior year.
  • Diluted net earnings per share was USD 1.70 in the fourth quarter as compared to USD 1.35 in the prior year quarter and USD 5.70 for the full year in 2018 as compared to USD 5.26 in the prior year. Net earnings in the current year were impacted by the dilutive impact of the Taylor acquisition and restructuring. The prior year net earnings were impacted by restructuring, 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 0.09 and USD 0.27 for the fourth quarter periods, respectively, and reduced earnings per share by USD 0.40 and USD 0.90 for the full fiscal years, respectively.
  • Operating cash flows during the fourth quarter increased to USD 116.9 million from USD 99.6 million in the prior year period. Operating cash flows during the full fiscal year increased to USD 368.9 million from USD 304.5 million in the prior year.
  • Net debt, defined as debt less cash, at the end of the 2018 fiscal fourth quarter amounted to USD 1,820.4 million as compared to USD 1,881.8 million at the end of the third quarter and USD 939.2 million at the end of fiscal 2017. During the year, the company invested USD 1,197.7 million to fund 2018 acquisitions.

Timothy FitzGerald, Chief Executive Officer, commented, «At the Commercial Foodservice Equipment Group, we realized growth in sales to major restaurant chains and improved sales in international markets, including Asia and Latin America. We anticipate the growth with chains will carry forward into 2019 as our ongoing pipeline of innovations, particularly in beverage, accelerated ventless cooking and automated conveyorized equipment are adopted by customers to address challenges of labor cost and availability, menu flexibility, kitchen footprint and operating costs. The disruption from the realignment of our sales representatives is largely behind us. As we enter 2019, we are excited about the opportunity to work with a very dedicated team of professional sales representatives that has invested in the Middleby relationship. These investments have included the addition of test kitchens, chefs, and sales personnel. We remain focused on working closely with our rep partners to drive solution selling across the brands, which will allow for greater efficiency in bringing our best innovation to our customers. We realized solid sales growth internationally in the quarter although the markets remain somewhat mixed heading into 2019, particularly with challenges in the U.K. and Europe. We however continue to position Middleby for long-term growth with continuing investments overseas, particularly in the emerging markets.

At the NAFEM show a few weeks ago, we debuted the Crown Steam Group. The acquisition of Crown late in 2018 solidified a dedicated lineup of the most innovative steam cooking solutions in the industry. The combination of the highly-respected Crown brand with the recent acquisitions of Firex and Market Forge provides a consolidated group in the U.S. market and positions Middleby as a technology leader in this product category.

Middleby also announced the addition of EVO to the Middleby family of brands. This acquisition further positions Middleby as a leader in ventless cooking with the broadest portfolio of offerings in the industry. The patented EVO ventless downdraft system provides a unique solution that complements our diverse suite of ventless products under the TurboChef, Wells, PerfectFry, Doyon, Middleby Marshall and CookTek brands. There is a continued demand for ventless cooking options as operators understand the significant costs associated with the installation of traditional ventilation. Additionally, customers are increasingly in search of solutions not to be restricted by externally vented hoods and duct work, as they cook in non-traditional locations and add new equipment to existing kitchens.

At Taylor, our integration efforts are on track and we remain confident in our ability to achieve profitability targets, as we have made significant progress since the acquisition in mid-2018. We remain focused on supply chain and manufacturing investments to further improve profitability and production efficiencies. Most importantly, we are focusing our efforts toward delivering innovative, new products to the market in core product categories, including frozen beverages and desserts, which we anticipate will provide future growth and margin enhancement opportunities.»

FitzGerald added, «At our Residential Kitchen Equipment Group, Viking continued to grow at double-digit rates. The momentum remains strong for our innovative, new lineup of Viking products. Most recent new product launches include expanded offerings in refrigeration and the introduction of our new Virtuoso cooking line. Investments we previously made in our company-owned Middleby Residential sales, distribution and service organizations have given us a competitive advantage and a vehicle to support all of the brands with our dealer partners and end-user customers. There will be minimal disruption in the future as we have largely completed the transition with our third-party distributors as we enter into 2019 and are well-positioned for growth in North America. Domestic gains were again offset by the AGA Rangemaster business which has been negatively impacted by the challenging market conditions in the U.K. given the uncertainty of Brexit. Despite the market conditions in the U.K., we are pleased with continued improvement at AGA Rangemaster as we have simplified the business both in manufacturing and sales operations. During the fourth quarter we also completed the closure of the non-core Grange furniture business, which had adversely impacted both sales growth and profitability during 2018.»

FitzGerald concluded, «At the Food Processing Equipment Group, we have seen improvement as compared to recent quarters. However, the absence of large projects due to market dynamics, particularly on the higher profitability meat processing side of our business remains a challenge. Against the backdrop of a difficult 2018, we have made significant investments in new product development and are excited about the launch of these innovations in 2019.»