FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
(Mark One)
For the period ended July 1, 2000
or
Commission File No. 1-9973
THE MIDDLEBY CORPORATION (Exact Name of Registrant as Specified in its Charter)
Registrant’s Telephone No., including Area Code (847) 741-3300
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 August 4, 2000, there were 10,157,521 shares of the registrant’s common stock outstanding.
See accompanying notes
The following table summarizes the results of operations for the Company’s business segments (in thousands):
Net sales by major geographic region, including those sales from the Cooking Systems Group direct to international customers, were as follows (in thousands):
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, changing market conditions; the availability and cost of raw materials; the impact of competitive products and pricing; the timely development and market acceptance of the Company’s products; foreign exchange and political risks affecting international sales; and other risks detailed herein and from time to time in the Company’s Securities and Exchange Commission filings, including those discussed under “Risk Factors” in the Company’s Registration Statement on Form S-2 (Reg. No. 333-35397). Any forward looking statements contained in this report speak only as of the date of this filing. The Company undertakes no obligation to update publicly any forward looking information, whether as a result of new information, future events or otherwise.
The following table sets forth certain consolidated statements of earnings items as a percentage of net sales for the periods.
NET SALES. Net sales in the three-month period ended July 1, 2000 decreased 11% to $32.4 million as compared to $36.5 million in the three-month period ended July 3, 1999.
Sales of the Cooking Systems Group for the three-month period ended July 1, 2000 decreased slightly to $29.5 million from $29.7 million in the prior year. Sales of conveyor oven equipment decreased 4% due to lower sales volume to major restaurant chains. The prior year sales in the second quarter were unusually strong. Additionally, the Company experienced delays in certain orders resulting from new product introductions, as existing customers were delaying orders awaiting shipments of a new conveyor oven, which will begin shipment in the third quarter of 2000. Core cooking equipment sales increased 11% as sales of new products, including a new line of fryers, continue to increase. Sales of counterline equipment decreased 17% due to the discontinuance of certain low volume and unprofitable product offerings. Sales of international specialty equipment decreased 11% as a result of lower sales volume from a major restaurant chain and the refocusing of activities to the manufacture of low cost component parts to supplement the U.S. based production operations.
Sales of the International Distribution Division decreased 22% to $7.9 million from $10.1 million in the previous year period. The lower sales level reflects the discontinuance of certain distributed product of third-party manufacturers that occurred in the third quarter of 1999. The division has redirected its efforts to support a focused group of foodservice equipment manufacturers.
GROSS PROFIT. Gross profit decreased to $10.0 million from $10.7 million in the prior year period. However, as a percentage of sales, gross margins increased from 29.4% in the prior year to 31.0%. Gross margins at the Cooking Systems Group declined slightly as a result of increased manufacturing costs associated with new product introductions within the core cooking equipment product group. This decrease was offset by gross margin improvement within the conveyor oven equipment and international specialty equipment product groups as a result of cost control efforts and the transfer of production to the Company’s lower cost manufacturing facility in the Philippines. Gross margins at the International Distribution Division improved due to the more favorable product mix resulting from the Company’s product refocusing efforts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased 7% to $7.7 million as compared to $8.3 million in the prior year period. The decrease in expense was largely attributable to reduced costs within the International Distribution Division resulting from the closure of the division headquarters office which took place in the fourth quarter of 1999.
During the second quarter of 2000, the Company closed its former corporate headquarters and relocated its offices to the Cooking Systems Group headquarters in Elgin, IL. No significant costs were incurred as a result of this relocation.
NON-RECURRING EXPENSES. The Company recorded restructuring expenses of approximately $0.2 million during the second quarter of 1999 for severance and benefit costs associated with employee reduction efforts. There were no non-recurring charges recorded during the second quarter of 2000.
INTEREST AND DEFERRED FINANCING AMORTIZATION. Net financing costs decreased to $0.5 million from $0.7 million in the prior year as a result of increased interest income on higher cash balances and lower interest expense on reduced outstanding debt.
OTHER EXPENSE. Other expenses were $0.3 million in the current year and $0.1 million in the prior year. The increase from the prior year largely relates to exchange losses at the Company’s operations in Asia and Europe.
INCOME TAXES. A tax provision of $0.9 million, at an effective rate of 59%, was recorded during the quarter, primarily associated with taxable income reported at the Company’s operations in the United States, Latin America and Europe. No benefit was recognized for losses at international subsidiaries within Asia. Approximately $0.7 million of tax loss carry-forwards will be utilized to offset the liability associated with the recorded tax provision.
NET SALES. Net sales in the six-month period ended July 1, 2000 decreased 6% to $64.8 million as compared to $69.0 million in the six-month period ended July 3, 1999.
Sales of the Cooking Systems Group for the six-month period ended July 1, 2000 increased 3% to $58.4 million from $56.6 million in the prior year. Sales of conveyor oven equipment increased 6% due to improved sales to major restaurant chains. Core cooking equipment sales increased 10% largely due to success with new product introductions. Counterline equipment sales decreased 14% due to the discontinuation of certain low volume and unprofitable products. Sales of international specialty equipment decreased 28% as a result of lower sales volume from a major restaurant chain and the refocusing of activities to the manufacture of low cost component parts to supplement the U.S. based production operations.
Net sales of the International Distribution Division decreased by 12% as a result of the discontinuance of certain distributed products of third party manufacturers. Sales of products manufactured by the Company have increased from the prior year.
GROSS PROFIT. Gross profit increased 4% to $21.2 million from $20.3 million. As a percentage of sales, gross margins increased from 29.5% to 32.8%. For the first six months, gross margins have improved at both the Cooking Systems Group and the International Distribution Division. The improvement is a result of an improved product mix resulting from the product refocusing efforts at both divisions and reduced manufacturing costs at the Cooking Systems Group due to the transfer of production to the Company’s Philippine based operation and other cost control efforts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $16.3 million from $16.2 million. As a percentage of net sales, selling, general and administrative expenses increased to 25.2% as compared to 23.4%. Expenses were slightly higher than the prior year as a result of increased provision for bad debts and higher incentive compensation associated with the improved financial results.
NON-RECURRING EXPENSES. The Company recorded restructuring charges of approximately $1.0 million during the first and second quarters of 1999 for severance and benefit costs associated with employee reduction efforts. There were no non-recurring charges recorded during the first and second quarters of 2000.
INTEREST AND DEFERRED FINANCING AMORTIZATION. Net financing costs decreased to $1.0 million from $1.4 million in the prior year as a result of increased interest income on higher cash balances and lower interest expense on reduced outstanding debt.
OTHER EXPENSE. Other expenses were $0.5 million in the current year and $0.4 million in the prior year. The increase in expense from the prior year is largely a result of exchanges losses at the Company’s operations in Asia and Europe.
INCOME TAXES. A tax provision of $2.3 million was recorded associated with taxable income reported at the Company’s operations in the United States, Latin America and Europe while no benefit was recognized for losses at certain international subsidiaries within Asia. Approximately $1.6 million of tax loss carry-forwards will be utilized to offset the liability associated with the recorded tax provision.
Total cash and cash equivalents increased by $3.1 million to $17.6 million at July 1, 2000 from $14.5 million at January 1, 2000. Net borrowings declined from $28.1 million at January 1, 2000 to $25.3 million at July 1, 2000.
OPERATING ACTIVITIES. Net cash provided by operating activities before changes in assets and liabilities was $4.1 million in the six months ended July 1, 2000 as compared to $3.8 million in the prior year period. Net cash provided by operating activities after changes in assets and liabilities was $6.2 million as compared to net cash used of $0.6 million in the prior year period.
During the first six months of 2000, accounts receivable decreased $2.9 million due to lower sales and to the improvement in receivable collections. Inventories decreased by $0.3 million as a result of the Company’s inventory reduction efforts, particularly at the international operations. Accounts payable decreased $1.1 million due to the timing of payments. Accrued expenses and other liabilities increased $0.1 million.
INVESTING ACTIVITIES. During the first half of 2000, the Company had capital expenditures of $0.3 million primarily to purchase production related equipment.
FINANCING ACTIVITIES. Net borrowings under financing arrangements decreased from $28.1 million to $25.3 million during the first half of 2000. The net decrease is primarily due to net payments of $2.0 million under the intellectual property lease and repayments of $0.9 million against borrowings of a peseta-denominated loan under the Company’s multi-currency revolving line of credit.
As of July 1, 2000, the Company was in compliance with covenants pursuant to the multi-currency revolving credit facility and its $15.0 million senior note. Management believes that the Company will have sufficient financial resources available to meet its anticipated requirements for working capital, growth strategies, capital expenditures and debt amortization for the foreseeable future.
In July, 1998, the Company’s Board of Directors adopted a stock repurchase program and during 1998 authorized the purchase of up to 1,800,000 common shares in open market purchases. As of January 1, 2000, 837,800 shares had been purchased for $3.3 million. During the first quarter of 2000, the Company issued 19,750 shares out of treasury stock pursuant to the exercise of stock options for a former officer. During the second quarter, the Company acquired 28,200 shares in open market purchases at an aggregate purchase price of $191,432. As of July 1, 2000, the Company had 846,250 shares of treasury stock.
The Company has manufacturing operations located in Asia and distribution operations in Asia, Europe and Latin America. The Company’s operations are subject to the impact of economic downturns, political instability, and foreign trade restrictions, which may adversely affect the financial results. The Company anticipates that international sales will continue to account for a significant portion of consolidated net sales in the foreseeable future.
Countries within Asia and certain other regions continue to be impacted by adverse economic conditions which have affected the Company’s sales volumes into these markets. Some sales by the foreign operations are in local currency and an increase in the relative value of the U.S. dollar against such currencies would lead to the reduction in consolidated U.S. dollar sales and earnings. Additionally, foreign currency exposures are not fully hedged and there can be no assurances that the Company’s future results of operations will not be adversely affected by currency fluctuations.
The Company uses derivative financial instruments, principally 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 exposure to changes in foreign currency rates results from intercompany loans made between Middleby affiliates to minimize the need for borrowings from third parties. Additionally, the Company enters into foreign currency forward and sale contracts 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 exposures. The following table summarizes the forward purchase contracts outstanding at July 1, 2000:
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 debt is comprised of a $15.0 million unsecured senior note and $7.4 million due under lease arrangements. The senior note bears interest at a rate of 10.99% and the lease arrangements bear interest at an average implicit interest rate of 10.3%. Variable rate debt is comprised of borrowings under the Company’s $10.0 million revolving credit line, which includes a $2.7 million Yen denominated loan and a $0.2 million Euro denominated loan. Interest under the unsecured revolving credit facility is assessed based upon the bank’s reference rate in each respective country. The interest rate assessed to the Yen and Euro denominated loans at July 1, 2000 were 1.14% and 5.40%, respectively.
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 July 1, 2000, except as follows:
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.