(Mark One)
or
Commission File No. 1-9973
THE MIDDLEBY CORPORATION(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation or Organization)
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 twelve (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. YES |X| NO |_|
As of November 8, 2002, there were 9,024,047 shares of the registrant’s common stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION
See accompanying notes
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Restatement
Subsequent to the issuance of the company’s financial statements for the year ended December 29, 2001, it was determined that the stock warrant rights issued in conjunction with the subordinated senior notes should have been accounted for as a derivative financial instrument in accordance with the Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), instead of as stockholders’ equity, as the warrant rights contain a provision which provides the noteholder with the option to require the company to repurchase the warrant rights from the noteholder at their fair market value (“Put Option”) for cash or debt. Additionally, it was determined that the initial value assigned to the warrant rights was based upon assumptions utilizing the maturity of the notes as the expiry, rather than the 10 year life of the stock warrant rights. Management has determined that the initial value assigned to the stock warrant rights should be revalued based upon the 10 year life and reclassified from Shareholders’ Equity to Other Non-Current Liabilities on the balance sheet due to the terms of the Put Option. The impact of the restatement to the fiscal 2001 balance sheet is a $0.8 million reduction in Long-Term Debt, a $3.3 million increase in Other Non-Current Liabilities and a $2.5 million reduction in Shareholders’ Equity. The impact of this revision on net earnings in 2001 is de minimis and does not change reported earnings per share for the year ended December 29, 2001.
In accordance with SFAS 133, this derivative financial instrument should be recorded at its fair market value. As a result the company determined that the stock right warrants should be adjusted to $3.0 million as of March 30, 2002 and restated in the balance sheet as of that date. The change in fair market value of $0.3 million was recorded as a gain in the restated income statement for the first quarter of 2002.
Additionally, on January 11, 2002 the company entered into a interest rate swap agreement with a $20.0 million notional amount, as required by the senior bank agreement. Subsequent to the issuance of the company’s financial statements for the first quarter ended March 30, 2002, it was determined that this derivative financial instrument did not qualify for hedge accounting treatment under SFAS 133. As a result, the company recorded the interest rate swap in other non-current liabilities at its fair value of $0.2 million at March 30, 2002. The increase in the fair value of the interest rate swap from zero at inception to $0.2 million at March 30, 2002 was recorded as a gain in the restated financial statements for the first quarter of 2002.
See Note 2 to the financial statements for summary of principal effects of restatement.
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On December 21, 2001, the company completed its acquisition of Blodgett Holdings, Inc. (“Blodgett”) from Maytag Corporation.
The company has accounted for this business combination using the purchase method to record a new cost basis for the assets acquired and liabilities assumed. The allocation of the purchase price and acquisition costs to the assets acquired and liabilities assumed is subject to change pending additional information that may come to the attention of the company pertaining to the fair values of acquired assets and liabilities. The difference between the purchase price and the fair value of the assets acquired and liabilities assumed was recorded as goodwill. Under SFAS 142, goodwill and certain other intangible assets with indefinite lives acquired in conjunction with the Blodgett acquisition will be subject to the nonamortization provisions of this statement from the date of acquisition.
The consolidated financial statements include the operating results and the financial position of Blodgett for the period subsequent to its acquisition on December 21, 2001. The results of operations prior to and including December 21, 2001 are not reflected in the consolidated statements of earnings.
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, changes in the value of stock warrant rights issued in conjunction with the acquisition financing caused by fluctuations in Middleby’s stock price and other valuation factors; variability in financing costs; quarterly variations in operating results; dependence on key customers; international exposure; foreign exchange and political risks affecting international sales; changing market conditions; 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 ability to successfully integrate the acquired operations of Blodgett; and other risks detailed herein and from time-to-time in the company’s SEC filings, including the 2001 report on Form 10-K.
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The following table sets forth certain consolidated statements of earnings items as a percentage of net sales for the periods.
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NET SALES. Net sales for the third quarter of fiscal 2002 were $57.7 million as compared to $25.7 million in the third quarter of 2001. The increase in net sales resulted from the incremental business associated with the acquired Blodgett operations. On a proforma basis in the third quarter of 2001 net sales for combined Middleby and Blodgett amounted to $57.2 million.
Net sales at the Cooking Systems Group amounted to $55.4 million in the third quarter of 2002 as compared to $23.7 million in the prior year quarter. Core cooking equipment sales amounted to $40.3 million as compared to $8.8 million, primarily due to the addition of the acquired product lines which amounted to $30.6 million in the third quarter. Excluding the acquired product lines, core product sales increased by $0.9 million due to improved market conditions as compared to the prior year. Conveyor oven equipment sales amounted to $11.5 million as compared to $11.4 million in the prior year quarter. Counterline cooking equipment sales increased to $2.9 million from $2.8 million in the prior year. International specialty equipment sales of $0.8 million remained constant with the prior year quarter.
Net sales at the International Distribution Division increased by $4.1 million to $8.9 million, due in part to the addition of Frialator International – a distribution operation in the United Kingdom, which was acquired as part of the Blodgett purchase. Net sales of Frialator International amounted to $2.2 million. Excluding the impact of Frialator International, the sales of this division increased by $1.9 million, primarily due to the revenues associated with the acquired product lines which began to be distributed through this division late in the first quarter of 2002.
GROSS PROFIT. Gross profit increased to $20.5 million from $8.5 million in the prior year period as a result of the increased sales volumes resulting from the acquisition. The gross margin rate was 35.5% in the quarter as compared to 33.0% in the prior year quarter. The increase in the overall gross margin rate is largely attributable to an improved cost structure and a greater leverage resulting from the increased volume associated with the acquisition. As part of the cost structure improvements, the company consolidated manufacturing for several Blodgett product lines into existing manufacturing operations, enabling the exit of two production facilities during the second quarter of 2002.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general, and administrative expenses increased from $6.1 million in the third quarter of 2001 to $11.5 million in the third quarter of 2002. The increased expense reflects the incremental cost associated with the acquired Blodgett operations. As a percentage of net sales operating expenses amounted to 20.0% in the third quarter of 2002 versus 23.5% in the prior year reflecting improved leverage on the greater combined sales base.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs increased to $2.7 million from $0.1 million in the prior year as a result of increased interest expense associated with the debt incurred to finance the Blodgett acquisition. The gain on acquisition related financing derivatives amounted $0.1 million. Other expense was $0.5 million in the current year compared to other income of $0.1 million in the prior year quarter due primarily to foreign exchange losses, which resulted from the weakness in certain foreign currencies against the U.S. Dollar.
INCOME TAXES. A tax provision of $1.6 million, at an effective rate of 26%, was recorded during the quarter. The provision was recorded net of $1.3 million one-time deduction associated with the closing of a Japanese subsidiary. The Japanese closing had no other material impact to the third quarter results.
NET SALES. Net sales in the nine-month period ended September 28, 2002 were $174.6 million as compared to $75.8 million in the nine-month period ended September 29, 2001. The increase in net sales resulted from the incremental business associated with the acquired Blodgett operations. On a proforma basis in the nine-month period ended September 29, 2001 net sales for combined Middleby and Blodgett amounted to $169.9 million.
Net sales at the Cooking Systems Group for the nine-month period ended September 28, 2002 amounted to $167.7 million as compared to $71.2 million in the prior year nine-month period. Core cooking equipment sales amounted to $120.5 million as compared to $28.6 million, primarily due to the addition of Blodgett product lines which amounted to $91.9 million in the nine-month period. Conveyor oven equipment sales amounted to $35.7 million as compared to $30.5 million in the prior year nine-month period. The increase in conveyor oven sales reflects the addition of $5.1 million in Blodgett conveyor oven sales resulting from the acquisition. Counterline cooking equipment sales decreased to $8.1 million from $8.5 million in the prior year.
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International specialty equipment sales decreased from $3.6 million to $3.4 million as a result of lower sales into the Philippines which has been impacted by a slowed economy and reduced foreign investment in that country.
Net sales at the International Distribution Division increased by $10.2 million to $25.2 million, due in part to the addition of Frialator International – a distribution operation in the United Kingdom, which was acquired as part of the Blodgett purchase. Net sales of Frialator International amounted to $6.1 million. Excluding the sales from Frialator International, sales increased $4.1 million primarily due to revenues associated in the acquired product lines, which began to be distributed by this division late in the first quarter of 2002.
GROSS PROFIT. Gross profit increased to $59.9 million from $24.9 million in the prior year period as a result of the increased sales volumes resulting from the acquisition. The gross margin rate was 34.3% for the nine-month period as compared to 32.9% in the prior year period. The increase in the overall gross margin rate is largely attributable to an improved cost structure and greater leverage resulting from the increased volume associated with the acquisition. As part of the cost structure improvements, the company consolidated manufacturing for several Blodgett product lines into existing manufacturing operations, enabling the exit of two production facilities during the second quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general, and administrative expenses increased from $18.4 million for the nine-month period ended September 29, 2001 to $38.0 million for the nine-month period ended September 28, 2002. The increased expense reflects the incremental cost associated with the acquired Blodgett operations. As a percentage of net sales operating expenses amounted to 21.8% in the nine-month period ended September 28, 2002 versus 24.3% in the prior year reflecting improved leverage on the greater combined sales base.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs increased to $8.8 million from $0.5 million in the prior year as a result of increased interest expense associated with the debt incurred to finance the Blodgett acquisition. Other expense was $0.4 million in the current year compared to other expense of $0.5 million in the prior year due to the unfavorable impact of foreign exchange fluctuations.
INCOME TAXES. A tax provision of $4.6 million, at an effective rate of 36%, was recorded for the nine-month period, as compared to a provision of $3.2 million at a 58% rate in the prior year period. The current year provision is recorded net of a $1.3 million one-time deduction in the third quarter related to the closure of a Japanese subsidiary. Except for the tax deduction, the Japanese closing did not have a material impact to the financial statements. The effective rate in the prior year quarter reflects the impact of foreign losses with no recorded tax benefit.
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During the nine months ended September 28, 2002, cash and cash equivalents decreased by $1.5 million to $2.3 million at September 28, 2002 from $3.8 million at December 29, 2001. Net borrowings decreased from $96.2 million at December 29, 2001 to $79.5 million at September 28, 2002.
OPERATING ACTIVITIES. Net cash provided by operating activities before changes in assets and liabilities was $12.9 million in the nine months ended September 28, 2002 as compared to $7.3 million in the prior year period. Net cash provided by operating activities after changes in assets and liabilities was $16.9 million as compared to net cash provided of $4.9 million in the prior year period.
During the nine months ended September 28, 2002, accounts receivable increased $3.2 million due to increased sales. Inventories decreased $2.4 million due to inventory reduction initiatives. Accounts payable increased $4.6 million due to increased inventory purchases on higher volumes and management of vendor payments to enhance cash flows. Accrued expenses and other liabilities increased $0.6 million primarily as a result of a $2.1 million increase in interest accrued on the subordinated senior notes and the seller notes due Maytag, offset in part by the payment of accrued severance obligations associated with headcount reductions completed during the first half of the year. The interest on the subordinated notes and the notes due Maytag are paid in kind and added to the principal balance of the note, in accordance with the terms of the respective borrowing agreements.
INVESTING ACTIVITIES. During the nine months ending September 28, 2002, the company had capital expenditures of $1.0 million associated with enhancements to existing manufacturing facilities. This included expenditures required to consolidate the production for several product lines that were moved from two manufacturing facilities that were closed in the second quarter.
FINANCING ACTIVITIES. Net cash flows used in the financing activities was $17.4 million during the nine months ending September 28, 2002. This included $13.9 million of repayments of borrowings under the revolving credit line and $3.5 million of scheduled payments under the senior term loan.
At September 28, 2002, the company was in compliance with all covenants pursuant to its borrowing agreements. Management believes that future cash flows from operating activities and borrowing availability under the revolving credit facility will provide the company with sufficient financial resources to meet its anticipated requirements for working capital, capital expenditures and debt amortization for the foreseeable future.
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In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 “Business Combinations”. This statement addresses financial accounting and reporting for business combinations initiated after June 30, 2001, superseding APB Opinion No. 16 “Business Combinations” and SFAS No. 38 “Accounting for Preacquisition Contingencies of Purchased Enterprises”. All business combinations in the scope of this statement are to be accounted for using the purchase method of accounting. The company has accounted for its acquisition of Blodgett Holdings, Inc. (“Blodgett”) in accordance with SFAS No. 141.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142 “Goodwill and Other Intangible Assets”, superseding APB Opinion No. 17, “Intangible Assets”. This statement addresses how intangible assets that are acquired individually or with a group of other assets (excluding assets acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. In accordance with this statement, goodwill and certain other intangible assets with indefinite lives will no longer be amortized, but evaluated for impairment based upon financial tests related to the current value for the related assets. As a result there may be more volatility in reported income than under the previous standards because impairment losses are likely to occur irregularly and in varying amounts. The company has adopted this statement in the first quarter of fiscal 2002. Upon initial adoption of this statement, the company has determined no impairment of goodwill or other intangible assets had occurred. Goodwill of $63.6 million and other intangible assets (trademarks) of $26.3 million have been accounted for consistently with the nonamortization provisions of this statement. As of September 28, 2002, the company does not have any intangible assets subject to amortization. In the first nine months of 2001, the company had recorded goodwill and other intangible asset amortization, which reduced net income by $405,000 from $2,722,000 or $0.30 per share.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143 “Accounting for Asset Retirement Obligations”. This statement addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and requires that such costs be recognized as a liability in the period in which incurred. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The company does not expect the adoption of this statement to have a material impact to the financial statements.
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In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121 and requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired and broadens the presentation of discontinued operations to include more disposal transactions. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on the company’s financial position, results of operations or cash flows.
In April 2002, the Financial Accounting Standards Board issued SFAS 145, “Rescission of FASB Statements SFAS 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections”. SFAS No. 145 eliminates the current requirement that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses will be classified as extraordinary items only if they are deemed to be unusual and infrequent. The changes related to debt extinguishment will be effective for fiscal years beginning after May 15, 2002, and the changes related to lease accounting will be effective for transactions occurring after May 15, 2002. The company will apply this guidance prospectively on the effective dates.
In June 2002, the Financial Accounting Standards Board issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. This statement is effective for financial statements issued for fiscal years beginning after December 31, 2002. The company will apply this guidance prospectively.
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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.
Fixed rate obligations of $42.5 million due in the twelve month period ending September 30, 2007 include $22.5 million of subordinated senior notes which bear an interest rate of 15.5%, of which 2% is payable in kind, for which the unpaid interest will be added to the principal balance of the notes. The subordinated senior notes are reflected net of a debt discount of $2.9 million, representing the unamortized balance of the prescribed value of warrants issued in connection with the notes. Additional fixed rate debt consists of approximately $20.0 million of notes due to Maytag arising from the acquisition of Blodgett. The notes bear interest at an average rate of approximately 12.4%. The notes due to Maytag were reduced by $1.8 million in the third quarter of 2002 in connection with a post-close purchase price adjustment.
Variable rate debt consists of $37.0 million in senior bank notes. As of September 28, 2002 the revolving credit facility had borrowing availability of $22.6 million based upon the company’s collateral base as determined per the senior bank agreement. The company had $1.1 million outstanding in letters of credit against this facility at the end of the third quarter. The secured senior bank notes are comprised of two separate tranches of debt. The first tranche of debt for $34.0 million is repaid on a quarterly basis over the four-year term ending December 2005. The second tranche of debt for $3.0 million matures with a single payment in December 2005. The secured revolving credit facility and $34.0 million senior bank note bear interest at a rate of 3.0% above LIBOR, or 4.82% as of September 28, 2002. The $3.0 million senior bank note accrues interest at a rate of 4.5% above LIBOR, or 6.33% as of September 28, 2002.
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On January 11, 2002, in accordance with the senior bank agreement, the company entered into an interest rate swap agreement, with a notional amount of $20.0 million to fix the interest rate applicable to certain of its variable-rate debt. The agreement swaps one-month LIBOR for a fixed rate of 4.03% and is in effect through December 31, 2004. As of September 28, 2002, the fair value of this derivative financial instrument was $(0.8) million. A loss of ($0.4) million was recorded in earnings for the nine-month period. The remaining ($0.4) million was recorded as a component of other comprehensive income.
In conjunction with subordinated senior notes issued in connection with the financing for the Blodgett acquisition, the company issued 362,226 stock warrant rights and 445,100 conditional stock warrant rights to the subordinated senior noteholder. The warrant rights allow the noteholder to purchase Middleby common stock at $4.67 per share through their expiration on December 21, 2011. The conditional stock warrant rights are exercisable in the circumstance that the noteholder fails to achieve certain prescribed rates of return as defined per the note agreement. After March 15, 2007 or upon a Change in Control as defined per the note agreement, the subordinated senior noteholder has the ability to require the company to repurchase these warrant rights at the fair market value. The obligation pertaining to the repurchase of these warrant rights is recorded in Other Non-Current Liabilities at fair market value utilizing a Black-Scholes valuation model. As of September 28, 2002, the fair value of the warrant rights was assessed at $2.8 million. The change in the fair value of the stock warrant rights during the first nine months amounted to $0.5 million and was recorded as a gain in the income statement for the nine month period ended September 28, 2002. The company may experience volatility in earnings caused by fluctuations in the market value of the stock warrant rights resulting from changes in Middleby’s stock price, interest rates, or other factors that are incorporated into the valuation of these financial instruments.
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The company uses 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 following table summarizes the forward and option purchase contracts outstanding at September 28, 2002, the fair value of which was less than $0.1 million at the end of the quarter:
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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.
Within 90 days prior to the date of this report, 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 the company’s Chief Financial Officer, of the effectiveness of the design and operation 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.
There have been no significant changes in the company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the company completed its evaluation.
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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 September 28, 2002, except as follows:
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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I, Selim A. Bassoul, President and Chief Executive Officer (principal executive officer), certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Middleby Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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I, David B. Baker, Chief Financial Officer, (principal financial officer), certify that:
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