From time to time, the company is subject to proceedings, lawsuits and other claims related to products, suppliers, employees, customers and competitors. The company maintains insurance to partially cover product liability, workers compensation, property and casualty, and general liability matters. The company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses.
A determination of the amount of accrual required, if any, for these contingencies is made after assessment of each matter and the related insurance coverage. The required accrual may change in the future due to new developments or changes in approach, such as a change in settlement strategy in dealing with these matters. The company does not believe that any pending litigation will have a material adverse effect on its financial condition, results of operations or cash flows.
4) Recently Issued Accounting Standards
In November 2023, the FASB issued Accounting Standard Update ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendment requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker, as well as disclosure of the title and position of the Chief Operating Decision Maker (“CODM”). This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted and the amendments in this update are required to be applied on a retrospective basis. The company is currently evaluating the impact the adoption of this guidance will have on its Consolidated Financial Statements and disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU includes amendments requiring enhanced income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and should be applied either prospectively or retrospectively. The company is currently evaluating the impact the adoption of this guidance will have on its Consolidated Financial Statements and disclosures.
In March 2024, the Securities and Exchange Commission ("SEC") issued its final climate disclosure rules. The rules require disclosure of climate-related information outside of the audited financial statements and disclosure in the footnotes addressing specified financial statement effects of severe weather events and other natural conditions above certain financial thresholds, certain carbon offsets and renewable energy credits or certificates, if material.
In April 2024, the SEC determined to voluntarily stay the final rules pending certain legal challenges. The company is currently evaluating the impact of adoption for the new rules and intends to include the updated climate-related disclosures in future filings when required.
The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At September 28, 2024, the company had outstanding floating-to-fixed interest rate swaps totaling $270.0 million notional amount carrying an average interest rate of 2.51% maturing in less than 12 months and $470.0 million notional amount carrying an average interest rate of 1.22% that mature in more than 12 months but less than 41 months.
At September 28, 2024, the company was in compliance with all covenants pursuant to its borrowing agreements.
Convertible Notes
The following table summarizes the outstanding principal amount and carrying value of the Convertible Notes:
Sep 28, 2024
Dec 30, 2023
(in thousands)
Principal amounts:
Principal
$
747,499
$
747,499
Unamortized issuance costs
(3,324)
(5,998)
Net carrying amount
$
744,175
$
741,501
The following table summarizes total interest expense recognized related to the Convertible Notes:
Three Months Ended
Nine Months Ended
Sep 28, 2024
Sep 30, 2023
Sep 28, 2024
Sep 30, 2023
Contractual interest expense
$
1,849
$
1,847
$
5,565
$
5,585
Interest cost related to amortization of issuance costs
889
889
2,675
2,685
Total interest expense
$
2,738
$
2,736
$
8,240
$
8,270
The estimated fair value of the Convertible Notes was $874.6 million as of September 28, 2024 and was determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 1(d), Fair Value Measurements, in these Notes to the Condensed Consolidated Financial Statement. The if-converted value of the Convertible Notes exceeded their respective principal value by $76.0 million as of September 28, 2024.
Capped Call Transactions
In connection with the pricing of the Convertible Notes, the company entered into privately negotiated Capped Call Transactions (the "2020 Capped Call Transactions") and the company used the net proceeds of the offering of the Convertible Notes to pay the aggregate amount of $104.7 million for them. The company entered into two tranches of privately negotiated Capped Call Transactions in December 2021 (the "2021 Capped Call Transactions") in the aggregate amount of $54.6 million. On March 15, 2022, the company entered into an additional tranche of privately negotiated Capped Call Transactions (the "2022 Capped Call Transactions") in the amount of $9.7 million.
The 2020, 2021, and 2022 Capped Call Transactions (collectively, the "Capped Call Transactions") are expected generally to reduce the potential dilution and/or offset the cash payments the company is required to make in excess of the principal amount of the Convertible Notes upon conversion of the Convertible Notes in the event that the market price per share of the company's common stock is greater than the strike price of the Capped Call Transactions (which initially corresponds to the initial conversion price of the Convertible Notes and is subject to certain adjustments under the terms of the Capped Call Transactions), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Transactions. The 2020 Capped Call Transactions have an initial cap price of $207.93 per share of the company's common stock. The 2021 Capped Call Transactions have initial cap prices of $216.50 and $225.00 per share of the company's common stock. The 2022 Capped Call Transactions have an initial cap price of $229.00 per share. The Capped Call Transactions cover, initially, the number of shares of the company's common stock underlying the Convertible Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes.
17
The Capped Call Transactions are separate transactions entered into by the company with the capped call counterparties, and are not part of the terms of the Convertible Notes and will not affect any holder's right under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Capped Call Transactions. The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the company's stock. The premiums paid of the Capped Call Transactions have been included as a net reduction to additional paid-in capital with stockholders' equity.
13) Financial Instruments
Foreign Exchange: The company uses foreign currency forward, foreign exchange swaps and option purchase and sales contracts 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 notional amount of foreign currency contracts outstanding was $265.7 million and $253.1 million as of September 28, 2024 and December 30, 2023, respectively. The fair value of the forward and option contracts was a gain of $0.1 million at the end of the third quarter of 2024.
Interest Rate: The company has entered into interest rate swaps to fix the interest rate applicable to certain of its variable-rate debt. The agreements swapped one-month LIBOR for fixed rates. In February 2022, the company entered into an additional floating-to-fixed interest rate swap agreement that uses a daily SOFR in lieu of LIBOR. In April 2023, all outstanding LIBOR swap agreements were amended to one month term SOFR. The company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income. As of September 28, 2024, the fair value of these instruments was an asset of $25.6 million. The change in fair value of these swap agreements in the first nine months of 2024 was a loss of $12.2 million, net of taxes.
The following table summarizes the company’s fair value of interest rate swaps (in thousands):
Condensed Consolidated Balance Sheet Presentation
Sep 28, 2024
Dec 30, 2023
Fair value
Prepaid expense and other
$
2,808
$
2,897
Fair value
Other assets
$
22,821
$
39,882
The impact on earnings from interest rate swaps was as follows (in thousands):
Three Months Ended
Nine Months Ended
Presentation of Gain/(loss)
Sep 28, 2024
Sep 30, 2023
Sep 28, 2024
Sep 30, 2023
Gain/(loss) recognized in accumulated other comprehensive income
Other comprehensive income
$
(10,409)
$
8,706
$
4,159
$
21,141
Gain/(loss) reclassified from accumulated other comprehensive income (effective portion)
Interest expense
$
6,884
$
8,679
$
21,309
$
23,963
Interest rate swaps are subject to default risk to the extent the counterparties are unable to satisfy their settlement obligations under the interest rate swap agreements. As a result, the company has counterparty credit exposure to large global financial institutions, which the company monitors on a regular basis.
14) Segment Information
The company operates in three reportable operating segments defined by management reporting structure and operating activities.
18
The Commercial Foodservice Equipment Group has a broad portfolio of foodservice equipment, which enables it to serve virtually any cooking, warming, holding, refrigeration, freezing and beverage application within a commercial kitchen or foodservice operation. This equipment is used across all types of foodservice operations, including quick-service restaurants, full-service restaurants, ghost kitchens, convenience stores, supermarkets, retail outlets, hotels and other institutions. The products offered by this group include conveyor ovens, combi-ovens, convection ovens, baking ovens, proofing ovens, deck ovens, speed cooking ovens, hydrovection ovens, ranges, fryers, rethermalizers, steam cooking equipment, food warming equipment, catering equipment, heated cabinets, charbroilers, ventless cooking systems, kitchen ventilation, induction cooking equipment, countertop cooking equipment, toasters, griddles, charcoal grills, professional mixers, stainless steel fabrication, custom millwork, professional refrigerators, blast chillers, coldrooms, ice machines, freezers, soft serve ice cream equipment, coffee and beverage dispensing equipment, home and professional craft brewing equipment, fry dispensers, bottle filling and canning equipment, IoT solutions and controls development and manufacturing.
The Food Processing Equipment Group offers a broad portfolio of processing solutions for customers producing protein products, such as bacon, salami, hot dogs, dinner sausages, poultry and lunchmeats and baked goods such as muffins, cookies, crackers, pies, bread and buns. Through its broad line of products, the company is able to deliver a wide array of food preparation, thermal processing, slicing/packaging, facility automation and equipment sanitation solutions to service a variety of food processing requirements demanded by its customers. The company can offer highly integrated full processing line solutions that provide a food processing operation a uniquely integrated solution providing for the highest level of food quality, product consistency, and reduced operating costs resulting from increased product yields, increased capacity and greater throughput and reduced labor costs through automation. The products offered by this group include a wide array of cooking and baking solutions, including batch ovens, baking ovens, proofing ovens, conveyor belt ovens, continuous processing ovens, frying systems and automated thermal processing systems. The company also provides a comprehensive portfolio of complementary food preparation equipment such as tumblers, massagers, grinders, slicers, reduction and emulsion systems, mixers, blenders, battering equipment, breading equipment, seeding equipment, water cutting systems, food presses, food suspension equipment, filling and depositing solutions, and forming equipment, as well as a variety of automated loading and unloading systems, automated washing systems, auto-guided vehicles, food safety, food handling, freezing, defrosting and packaging equipment. This portfolio of equipment can be integrated to provide customers a highly efficient and customized solution.
The Residential Kitchen Equipment Group has a broad portfolio of innovative and professional-style residential kitchen equipment. The products offered by this group include ranges, cookers, stoves, cooktops, microwaves, ovens, refrigerators, dishwashers, undercounter refrigeration, wine cellars, ice machines, beer dispensers, ventilation equipment, mixers, rotisseries and outdoor cooking equipment.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief operating decision maker evaluates individual segment performance based on operating income.
Net Sales Summary
(dollars in thousands)
Three Months Ended
Nine Months Ended
Sep 28, 2024
Sep 30, 2023
Sep 28, 2024
Sep 30, 2023
Sales
Percent
Sales
Percent
Sales
Percent
Sales
Percent
Business Segments:
Commercial Foodservice
$
600,068
63.6
%
$
634,009
64.7
%
$
1,809,790
63.3
%
$
1,893,607
62.5
%
Food Processing
169,523
18.0
166,667
17.0
511,610
17.8
528,918
17.5
Residential Kitchen
173,218
18.4
179,975
18.3
539,881
18.9
605,504
20.0
Total
$
942,809
100.0
%
$
980,651
100.0
%
$
2,861,281
100.0
%
$
3,028,029
100.0
%
19
The following table summarizes the results of operations for the company's business segments(1) (dollars in thousands):
Commercial Foodservice
Food Processing
Residential Kitchen
Corporate
and Other(2)
Total
Three Months Ended September 28, 2024
Net sales
$
600,068
$
169,523
$
173,218
$
—
$
942,809
Income (loss) from operations (3)
146,088
37,497
13,170
(23,316)
173,439
Depreciation expense (4)
7,115
2,504
3,906
450
13,975
Amortization expense (5)
11,479
1,736
1,814
1,776
16,805
Net capital expenditures
6,049
3,585
1,809
46
11,489
Nine Months Ended September 28, 2024
Net sales
$
1,809,790
$
511,610
$
539,881
$
—
$
2,861,281
Income (loss) from operations (3)
429,459
110,333
27,840
(81,352)
486,280
Depreciation expense (4)
21,043
6,811
11,680
1,295
40,829
Amortization expense (5)
37,801
5,451
5,415
5,341
54,008
Net capital expenditures
16,338
7,941
10,828
1,062
36,169
Total assets
$
3,703,812
$
999,337
$
1,963,444
$
534,488
$
7,201,081
Three Months Ended September 30, 2023
Net sales
$
634,009
$
166,667
$
179,975
$
—
$
980,651
Income (loss) from operations (3)
158,582
37,472
10,915
(32,528)
174,441
Depreciation expense (4)
6,957
1,924
3,304
403
12,588
Amortization expense (5)
13,959
2,677
2,280
1,777
20,693
Net capital expenditures
7,056
6,672
6,825
777
21,330
Nine Months Ended September 30, 2023
Net sales
$
1,893,607
$
528,918
$
605,504
$
—
$
3,028,029
Income (loss) from operations (3)
452,113
111,483
51,197
(94,559)
520,234
Depreciation expense (4)
20,134
5,910
10,070
974
37,088
Amortization expense (5)
42,905
6,946
6,768
5,351
61,970
Net capital expenditures
34,805
11,744
20,579
2,517
69,645
Total assets
$
3,775,421
$
1,030,366
$
1,976,071
$
140,750
$
6,922,608
(1)Non-operating expenses are not allocated to the operating segments. Non-operating expenses consist of interest expense and deferred financing amortization, foreign exchange gains and losses and other income and expense items outside of income from operations.
(2)Includes corporate and other general company assets and operations.
(3)Restructuring expenses are allocated in operating income by segment.
(4)Includes depreciation on right of use assets.
(5)Includes amortization of deferred financing costs and Convertible Notes issuance costs.
20
Geographic Information
Long-lived assets, not including goodwill and other intangibles (in thousands):
Sep 28, 2024
Sep 30, 2023
United States and Canada
$
473,941
$
525,347
Asia
40,953
39,294
Europe and Middle East
225,847
154,794
Latin America
10,958
14,351
Total international
$
277,758
$
208,439
$
751,699
$
733,786
15) Employee Retirement Plans
The following table summarizes the company's net periodic pension benefit related to the AGA Group pension plans (in thousands):
Three Months Ended
Nine Months Ended
Sep 28, 2024
Sep 30, 2023
Sep 28, 2024
Sep 30, 2023
Net Periodic Pension Benefit:
Interest cost
$
11,225
$
11,606
$
32,814
$
34,220
Expected return on assets
(15,930)
(14,816)
(46,567)
(43,687)
Amortization of net loss
14
7
40
21
Amortization of prior service cost
686
657
2,005
1,939
$
(4,005)
$
(2,546)
$
(11,708)
$
(7,507)
The pension costs for all other plans of the company were not material during the period. The service cost component is recognized within Selling, general and administrative expenses and the non-operating components of pension benefit are included within Net periodic pension benefit (other than service cost) in the Condensed Consolidated Statements of Comprehensive Income.
16) Share Repurchases
In November 2017, the company's Board of Directors approved a stock repurchase program authorizing the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock. In May 2022 and July 2024, the company's Board of Directors approved the repurchase of an additional 2,500,000 shares of its outstanding common stock under the current program. The company did not purchase shares of its common stock under the program during the three months ended September 28, 2024. As of September 28, 2024, 3,116,364 shares had been purchased under the stock repurchase program and 4,383,636 shares remained authorized for repurchase.
The company also treats shares withheld for tax purposes on behalf of employees in connection with the vesting of restricted share grants as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. During the three and nine months ended September 28, 2024, the company repurchased 1,871 and 118,026 shares of its common stock that were surrendered to the company for withholding taxes related to restricted stock vestings for $0.3 million and $18.3 million.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Notes Regarding Forward-Looking Statements
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; variability in financing costs and interest rates; quarterly variations in operating results; dependence on key customers; international exposure; foreign exchange and political risks affecting international sales; unfavorable tax law changes and tax authority rulings; ability to protect trademarks, copyrights and other intellectual property; cybersecurity attacks and other breaches in security; changing market conditions, including inflation; 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 company's continued ability to realize profitable growth through the sourcing and completion of strategic acquisitions; and other risks detailed herein and from time-to-time in the company’s SEC filings, including the company’s 2023 Annual Report on Form 10-K. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this report are made only as of the date hereof and, except as required by federal securities laws and rules and regulations of the SEC, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Current Events
Inflation and Interest Rate Environment
The company has been negatively impacted by inflation in wages, logistics, energy, raw materials and component costs. Price increases and pricing strategies have been implemented to mitigate the impact of cost inflation on margins and the company continues to actively monitor costs. High inflation and uncertainty surrounding the Federal Reserve's interest rate policy
decisions led to increased interest rates in 2023 and into the first quarter of 2024, which combined with global macroeconomic uncertainty, has and may continue to impact customer demand. The Federal Reserve cut interest rates in the third quarter of 2024, the first in a string of cuts expected into 2025. Interest rates and global macroeconomic uncertainty has and may continue to impact customer demand across our businesses. Even in light of such headwinds, we remain focused on delivering strong financial results and executing on our long-term strategy and profitability objectives.
Supply Chain, Labor and Logistics Constraints
The company continues to actively monitor global supply chain, labor and logistics constraints, which have had a negative impact on the company's ability to source parts and complete and ship units. While the company is seeing improvement on certain supply chain and logistics constraints, supply chains for certain key components remain distressed. The decreased availability of resources and inflationary costs have resulted in heightened inventory levels. To combat these pressures, the company has evaluated alternative sourcing, dual sourcing and collaborated across the organization, where appropriate, without materially presenting new risks or increasing current risks around quality and reliability. Our capital resources have been and the company expects they will continue to be sufficient to address these challenges.
22
Net Sales Summary
(dollars in thousands)
Three Months Ended
Nine Months Ended
Sep 28, 2024
Sep 30, 2023
Sep 28, 2024
Sep 30, 2023
Sales
Percent
Sales
Percent
Sales
Percent
Sales
Percent
Business Segments:
Commercial Foodservice
$
600,068
63.6
%
$
634,009
64.7
%
$
1,809,790
63.3
%
$
1,893,607
62.5
%
Food Processing
169,523
18.0
166,667
17.0
511,610
17.8
528,918
17.5
Residential Kitchen
173,218
18.4
179,975
18.3
539,881
18.9
605,504
20.0
Total
$
942,809
100.0
%
$
980,651
100.0
%
$
2,861,281
100.0
%
$
3,028,029
100.0
%
23
Results of Operations
The following table sets forth certain consolidated statements of earnings items as a percentage of net sales for the periods:
Three Months Ended
Nine Months Ended
Sep 28, 2024
Sep 30, 2023
Sep 28, 2024
Sep 30, 2023
Net sales
100.0
%
100.0
%
100.0
%
100.0
%
Cost of sales
62.3
61.7
62.2
62.1
Gross profit
37.7
38.3
37.8
37.9
Selling, general and administrative expenses
19.0
20.0
20.4
20.3
Restructuring
0.3
0.5
0.4
0.4
Income from operations
18.4
17.8
17.0
17.2
Interest expense and deferred financing amortization, net
2.3
3.2
2.5
3.0
Net periodic pension benefit (other than service costs)
(0.4)
(0.2)
(0.4)
(0.2)
Other expense (income), net
0.1
0.1
—
0.1
Earnings before income taxes
16.4
14.7
14.9
14.3
Provision for income taxes
4.3
3.6
3.8
3.6
Net earnings
12.1
%
11.1
%
11.1
%
10.7
%
24
Three Months Ended September 28, 2024 as compared to Three Months Ended September 30, 2023
NET SALES. Net sales for the three months period ended September 28, 2024 decreased by $37.9 million or 3.9% to $942.8 million as compared to $980.7 million in the three months period ended September 30, 2023. Net sales increased by $1.6 million, or 0.2%, from the fiscal 2023 acquisition of Trade-Wind and the fiscal 2024 acquisitions of GBT GmbH Bakery and MaxMac. Excluding acquisitions, net sales decreased $39.5 million, or 4.0%, from the prior year period. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the three months period ended September 28, 2024 increased net sales by approximately $1.0 million or 0.1%. Excluding the impact of foreign exchange and acquisitions, sales decreased 4.1% for the three months period ended September 28, 2024 as compared to the prior year period, including a net sales decrease of 5.3% at the Commercial Foodservice Equipment Group, a net sales increase of 0.7% at the Food Processing Equipment Group and a net sales decrease of 4.5% at the Residential Kitchen Equipment Group.
•Net sales of the Commercial Foodservice Equipment Group decreased by $33.9 million, or 5.3%, to $600.1 million in the three months period ended September 28, 2024, as compared to $634.0 million in the prior year period. Excluding the impact of foreign exchange, net sales decreased $33.5 million, or 5.3%, at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales decrease of $39.0 million, or 8.5%, to $419.5 million, as compared to $458.5 million in the prior year period. The decrease in domestic sales is related to slow market conditions. International sales increased $5.1 million, or 2.9%, to $180.6 million, as compared to $175.5 million in the prior year period. Excluding the impact of foreign exchange, net sales increase in international sales was $5.5 million, or 3.1%. The increase in international sales is related to improvements in market conditions, primarily in the European and Latin American markets.
•Net sales of the Food Processing Equipment Group increased by $2.8 million, or 1.7%, to $169.5 million in the three months period ended September 28, 2024, as compared to $166.7 million in the prior year period. Net sales from the acquisitions of GBT GmbH Bakery and MaxMac, acquired February 7, 2024 and April 19, 2024, respectively, accounted for an increase of $1.4 million during the three months period ended September 28, 2024. Excluding the impact of foreign exchange and acquisitions, net sales increased $1.1 million, or 0.7%, at the Food Processing Equipment Group. Domestically, the company realized a sales decrease of $7.7 million, or 6.9%, to $103.4 million, as compared to $111.1 million in the prior year period. Excluding acquisitions, the net decrease in domestic sales was $7.7 million, or 6.9%. International sales increased $10.5 million, or 18.9%, to $66.1 million, as compared to $55.6 million in the prior year period. Excluding the impact of foreign exchange and acquisitions, the net sales increase in international sales was $8.8 million, or 15.8%. The increase in international sales is primarily related to growth in the European markets.
•Net sales of the Residential Kitchen Equipment Group decreased by $6.8 million, or 3.8%, to $173.2 million in the three months period ended September 28, 2024, as compared to $180.0 million in the prior year period. Excluding the impact of the acquisition of Trade-Wind, acquired August 1, 2023, net sales decreased $7.0 million, or 3.9%. Excluding the impact of foreign exchange and acquisition, net sales decreased $8.1 million, or 4.5% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales decrease of $3.6 million, or 3.1%, to $112.9 million, as compared to $116.5 million in the prior year period. Excluding the acquisition, the net decrease in domestic sales was $3.8 million, or 3.3%. International sales decreased $3.2 million, or 5.0%, to $60.3 million, as compared to $63.5 million in the prior year period. Excluding the impact of foreign exchange, the net sales decrease in international sales was $4.3 million, or 6.8%. The decrease in net sales is primarily driven by challenging market conditions domestically and in the European markets.
25
GROSS PROFIT. Gross profit decreased to $355.4 million in the three months period ended September 28, 2024, as compared to $375.3 million in the prior year period, primarily driven by lower sales volumes. The impact of foreign exchange rates increased gross profit by approximately $0.8 million. The gross margin rate was 37.7% in the three months period ended September 28, 2024, as compared to 38.3% in the prior year period.
•Gross profit at the Commercial Foodservice Equipment Group decreased by $18.5 million, or 7.2%, to $236.8 million in the three months period ended September 28, 2024, as compared to $255.3 million in the prior year period. The impact of foreign exchange rates increased gross profit by approximately $0.1 million. The gross margin rate decreased to 39.5%, as compared to 40.3% in the prior year period related to lower sales volumes. The gross margin rate, excluding the impact of foreign exchange was 39.4%.
•Gross profit at the Food Processing Equipment Group decreased by $0.2 million, or 0.3%, to $66.2 million in the three months period ended September 28, 2024, as compared to $66.4 million in the prior year period. Gross profit from the acquisitions of GBT GmbH Bakery and MaxMac increased gross profit by $0.4 million. The impact of foreign exchange rates increased gross profit by approximately $0.3 million. Excluding the acquisitions, gross profit decreased by $0.6 million. The gross profit margin rate decreased to 39.1%, as compared to 39.8% in the prior year period, primarily related to product mix. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 39.0%.
•Gross profit at the Residential Kitchen Equipment Group decreased by $1.7 million, or 3.1%, to $52.8 million in the three months period ended September 28, 2024, as compared to $54.5 million in the prior year period. The impact of foreign exchange rates increased gross profit by approximately $0.4 million. Excluding the acquisition, gross profit decreased by $1.8 million related to lower sales volume. The gross margin rate increased to 30.5%, as compared to 30.3% in the prior year period. The gross margin rate excluding the acquisition and the impact of foreign exchange was 30.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses decreased to $179.5 million in the three months period ended September 28, 2024, as compared to $196.4 million in the three months period ended September 30, 2023. As a percentage of net sales, selling, general, and administrative expenses were 19.0% in the three months period ended September 28, 2024 as compared to 20.0% in the three months period ended September 30, 2023.
Selling, general and administrative expenses reflect increased costs of $0.9 million associated with acquisitions, including less than $0.1 million of intangible amortization expense. Selling, general and administrative expenses decreased $9.1 million related to reduced compensation costs including commissions, $5.4 million related to professional fees, and $3.9 million related to intangible amortization expense. Foreign exchange rates had an unfavorable impact of $0.1 million.
RESTRUCTURING EXPENSES.Restructuring expenses decreased $1.9 million to $2.5 million for the three months period ended September 28, 2024, as compared to $4.4 million for the three months period ended September 30, 2023. Restructuring expenses in the three months period ended September 28, 2024 related primarily to headcount reductions and facility consolidations within all three segments. Restructuring expenses in the three months period ended September 30, 2023 related primarily to headcount reductions and facility consolidations within the Residential Kitchen Equipment Group and Commercial Foodservice Group.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were $21.4 million in the three months period ended September 28, 2024, as compared to $31.1 million in the prior year period, primarily reflecting the decrease in net debt levels. Net periodic pension benefit (other than service costs) increased $1.8 million to $3.9 million in the three months period ended September 28, 2024, as compared to $2.1 million in the prior year period related to the slight decrease in discount rate used to calculate the interest cost and increase in expected return on assets as a result of the higher asset value. Other expense was $1.2 million in the three months period ended September 28, 2024, as compared to other expense of $1.1 million in the prior year period and consists mainly of foreign exchange gains and losses.
INCOME TAXES. A tax provision of $40.5 million, at an effective rate of 26.2%, was recorded during the three months period ended September 28, 2024, as compared to $35.7 million at an effective rate of 24.8%, in the prior year period. The effective tax rate for the three months period ended September 28, 2024 is higher than the U.S. statutory tax rate of 21% primarily due to state taxes and foreign tax rate differentials.
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Nine Months Ended September 28, 2024 as compared to Nine Months Ended September 30, 2023
NET SALES. Net sales for the nine months period ended September 28, 2024 decreased by $166.7 million, or 5.5%, to $2,861.3 million as compared to $3,028.0 million in the nine months period ended September 30, 2023. Net sales increased by $8.8 million, or 0.3%, from the fiscal 2023 acquisitions of Flavor Burst, Blue Sparq, Filtration Automation, Terry, and Trade-Wind and the fiscal 2024 acquisitions of GBT GmbH Bakery and MaxMac. Excluding acquisitions, net sales decreased $175.5 million, or 5.8%, from the prior year period. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the nine months period ended September 28, 2024 increased net sales by approximately $2.7 million. Excluding the impact of foreign exchange and acquisitions, sales decreased 5.9% for the nine months period ended September 28, 2024 as compared to the prior year period, including a net sales decrease of 4.5% at the Commercial Foodservice Equipment Group, a net sales decrease of 4.3% at the Food Processing Equipment Group and a net sales decrease of 11.7% at the Residential Kitchen Equipment Group.
•Net sales of the Commercial Foodservice Equipment Group decreased by $83.8 million, or 4.4%, to $1,809.8 million in the nine months period ended September 28, 2024, as compared to $1,893.6 million in the prior year period. Net sales from the acquisitions of Flavor Burst, Blue Sparq, and Terry which were acquired on January 24, 2023, April 3, 2023 and July 5, 2023, respectively, accounted for an increase of $1.5 million during the nine months period ended September 28, 2024. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group decreased $85.3 million, or 4.5%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales decreased $84.6 million, or 4.5%, at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales decrease of $97.5 million, or 7.0%, to $1,288.4 million, as compared to $1,385.9 million in the prior year period. This includes an increase of $1.4 million from recent acquisitions. Excluding acquisitions, the net decrease in domestic sales was $98.9 million, or 7.1%, as compared to the prior year period. The decrease in domestic sales is related to slow market conditions. International sales increased $13.7 million, or 2.7%, to $521.4 million, as compared to $507.7 million in the prior year period. This includes an increase of $0.1 million from the recent acquisitions, offset by a decrease of $0.7 million related to the unfavorable impact of foreign exchange rates. Excluding the impact of foreign exchange and acquisitions, the net sales increase in international sales was $14.3 million, or 2.8%. The increase in international revenues is related to improvements in market conditions, primarily in the European and Latin American markets.
•Net sales of the Food Processing Equipment Group decreased by $17.3 million, or 3.3%, to $511.6 million in the nine months period ended September 28, 2024, as compared to $528.9 million in the prior year period. Net sales from the acquisitions of Filtration Automation, GBT GmbH Bakery, and MaxMac acquired June 13, 2023, February 7, 2024, and April 19, 2024, respectively, accounted for an increase of $5.1 million during the nine months period ended September 28, 2024. Excluding the impact of acquisitions, net sales of the Food Processing Equipment Group decreased $22.4 million, or 4.2%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales decreased $22.9 million, or 4.3%, at the Food Processing Equipment Group. Domestically, the company realized a sales decrease of $39.8 million, or 11.2%, to $315.1 million, as compared to $354.9 million in the prior year period. This includes an increase of $2.6 million from recent acquisitions. Excluding acquisitions, the net decrease in domestic sales was $42.4 million, or 11.9%, as compared to the prior year period. The decrease in domestic sales is driven primarily by protein products. International sales increased $22.5 million, or 12.9%, to $196.5 million, as compared to $174.0 million in the prior year period. This includes an increase of $2.5 million from the recent acquisitions and an increase of $0.5 million related to the favorable impact of foreign exchange rates. Excluding the impact of foreign exchange and acquisitions, the net sales increase in international sales was $19.5 million, or 11.2%. The increase in international sales reflects growth driven primarily by bakery and protein products in the European markets.
•Net sales of the Residential Kitchen Equipment Group decreased by $65.6 million, or 10.8%, to $539.9 million in the nine months period ended September 28, 2024, as compared to $605.5 million in the prior year period. Excluding the impact of the acquisition of Trade-Wind, net sales decreased $67.8 million, or 11.2%. Excluding the impact of foreign exchange and acquisition, net sales decreased $70.7 million, or 11.7%, at the Residential Kitchen Equipment Group. Domestically, the company realized a sales decrease of $50.5 million, or 12.8%, to $344.7 million, as compared to $395.2 million in the prior year period. Excluding the acquisition, the net sales of the Residential Kitchen Equipment Group decreased $52.7 million, or 13.3%, as compared to the prior year period. International sales decreased $15.1 million, or 7.2%, to $195.2 million, as compared to $210.3 million in the prior year period. This includes an increase of $2.9 million related to the favorable impact of foreign exchange rates. Excluding the impact of foreign exchange, the net sales decrease in international sales was $18.0 million, or 8.6%. The decrease in net sales was primarily driven by challenging market conditions domestically and in the European markets.
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GROSS PROFIT. Gross profit decreased to $1,081.4 million in the nine months period ended September 28, 2024 as compared to $1,147.3 million in the prior year period, primarily driven by lower sales volumes at the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group. The impact of foreign exchange rates increased gross profit by approximately $1.2 million. The gross margin rate was 37.8% in the nine months period ended September 28, 2024 as compared to 37.9% in the nine months period ended September 30, 2023.
•Gross profit at the Commercial Foodservice Equipment Group decreased by $37.4 million, or 4.9%, to $719.3 million in the nine months period ended September 28, 2024, as compared to $756.7 million in the prior year period. Gross profit from the acquisitions of Flavor Burst, Blue Sparq, and Terry increased gross profit by $0.8 million. Excluding acquisitions, gross profit decreased by $38.2 million related to lower sales volume. The impact of foreign exchange rates decreased gross profit by approximately $0.2 million. The gross margin rate decreased to 39.7%, as compared to 40.0% in the prior year period. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 39.7%.
•Gross profit at the Food Processing Equipment Group increased by $3.0 million, or 1.5%, to $199.8 million in the nine months period ended September 28, 2024, as compared to $196.8 million in the prior year period. Gross profit from the acquisitions of Filtration Automation, GBT GmbH Bakery, and MaxMac increased gross profit by $2.4 million. Excluding acquisitions, gross profit increased by $0.6 million. The impact of foreign exchange rates increased gross profit by approximately $0.4 million. The gross profit margin rate increased to 39.1%, as compared to 37.2% in the prior year period, primarily related to improved product mix. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 38.9%.
•Gross profit at the Residential Kitchen Equipment Group decreased by $33.4 million, or 17.2%, to $161.0 million in the nine months period ended September 28, 2024, as compared to $194.4 million in the prior year period. The impact of foreign exchange rates increased gross profit by approximately $1.0 million. Excluding the acquisition, gross profit decreased by $34.5 million related to lower sales volume. The gross margin rate decreased to 29.8%, as compared to 32.1% in the prior year period. The gross margin rate, excluding the acquisitions and the impact of foreign exchange, was 29.7%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses decreased to $584.1 million in the nine months period ended September 28, 2024, as compared to $615.4 million in the nine months period ended September 30, 2023. As a percentage of net sales, selling, general, and administrative expenses were 20.4% in the nine months period ended September 28, 2024, as compared to 20.3% in the nine months period ended September 30, 2023.
Selling, general and administrative expenses reflect increased costs of $4.4 million associated with acquisitions, including $0.5 million of intangible amortization expense. Selling, general and administrative expenses decreased $14.9 million related to reduced compensation costs including commissions, $9.5 million related to professional fees, $8.5 million related to intangible amortization expense and $4.6 million for contingent consideration, offset by a $1.3 million increase in marketing and advertising costs. Foreign exchange rates had an unfavorable impact of $0.6 million.
RESTRUCTURING EXPENSES.Restructuring expenses decreased $0.7 million to $11.0 million in the nine months period ended September 28, 2024 from $11.7 million in the nine months period ended September 30, 2023. Restructuring expenses in the nine months period ended September 28, 2024 related primarily to headcount reductions and facility consolidations within all three segments. Restructuring expenses in the nine months period ended September 30, 2023 related primarily to headcount reductions and facility consolidations within the Residential Kitchen Equipment Group and Commercial Foodservice Equipment Group.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were $72.2 million in the nine months period ended September 28, 2024, as compared to $92.1 million in the prior year period, reflecting the decrease in net debt levels. Net periodic pension benefit (other than service costs) increased $4.3 million to $11.2 million in the nine months period ended September 28, 2024, as compared to $6.9 million in the prior year period related to the decrease in discount rate used to calculate the interest cost and increase in expected return on assets as a result of the higher asset value. Other expense was $1.0 million in the nine months period ended September 28, 2024, as compared to other expense of $2.6 million in the prior year period and consists mainly of foreign exchange gains and losses.
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INCOME TAXES. A tax provision of $108.2 million, at an effective rate of 25.5%, was recorded during the nine months period ended September 28, 2024, as compared to $107.9 million at an effective rate of 24.9%, in the prior year period. The effective tax rate for the nine months period ended September 28, 2024 is higher than the U.S. statutory tax rate of 21% primarily due to state taxes and foreign tax rate differentials.
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Financial Condition and Liquidity
Total cash and cash equivalents increased by $358.5 million to $606.0 million at September 28, 2024 from $247.5 million at December 30, 2023. Total debt amounted to $2.4 billion at September 28, 2024 and December 30, 2023.
OPERATING ACTIVITIES. Net cash provided by operating activities after changes in assets and liabilities amounted to $447.1 million as compared to $373.1 million in the prior year.
During the nine months period ended September 28, 2024, working capital changes meaningfully impacted operating cash flows primarily driven by a decrease in accounts receivable of $31.4 million due to lower sales levels, decreased inventory levels of $33.1 million. These were offset by a $41.7 million decrease in accrued expenses and other liabilities related to impacts from the timing of payments of various customer and incentive programs.
INVESTING ACTIVITIES. During the nine months period ended September 28, 2024, net cash used for investing activities amounted to $44.0 million. Cash used to fund acquisitions amounted to $7.8 million. Additionally, $36.2 million was expended, primarily for upgrades of production equipment and manufacturing facilities.
FINANCING ACTIVITIES. Net cash flows used for financing activities amounted to $45.8 million during the nine months period ended September 28, 2024. The company’s borrowing activities during 2024 included $21.9 million of net repayments under its Credit Facility. Additionally, during 2024, the company used $18.3 million to repurchase 118,026 shares of Middleby common stock that were surrendered to the company for withholding taxes related to restricted stock vestings.
At September 28, 2024, the company was in compliance with all covenants pursuant to its borrowing agreements. The company believes that its current capital resources, including cash and cash equivalents, cash expected to be generated from operations, funds available from its current lenders and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and expenditures for the foreseeable future.
Recently Issued Accounting Standards
See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 4 - Recently Issued Accounting Standards, of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations are based upon the company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions and any such differences could be material to the company's consolidated financial statements. There have been no changes in the company's critical accounting policies, which include revenue recognition, inventories, goodwill and indefinite-life intangibles, convertible debt, pensions benefits, and income taxes, as discussed in the company's Annual Report on Form 10-K for the year ended December 30, 2023 (the “2023 Annual Report on Form 10-K”).
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
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:
Twelve Month Period coinciding with the end of the company's Fiscal Third Quarter
Variable Rate Debt
2025
$
44,289
2026
788,146
2027
1,567,261
2028
737
2029 and thereafter
4,877
$
2,405,310
The company is exposed to interest rate risk on its floating-rate debt. The company has entered into interest rate swaps to fix the interest rate applicable to certain of its variable-rate debt. The agreements swapped one-month LIBOR for fixed rates. In February 2022, the company entered into an additional floating-to-fixed interest rate swap agreement that uses a daily SOFR in lieu of LIBOR. In April 2023, all outstanding LIBOR swap agreements were amended to one month term SOFR. The company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income. As of September 28, 2024, the fair value of these instruments was an asset of $25.6 million. The change in fair value of these swap agreements in the first nine months of 2024 was a loss of $12.2 million, net of taxes. The potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted interest rates would not have a material impact on the company's financial position, results of operations and cash flows.
The company has Convertible Notes that were issued in August 2020, which carry a fixed annual interest rate of 1.00%. As such, the company does not have economic interest rate exposure on the Convertible Notes. The fair value of the Convertible Notes is subject to interest rate risk, market risk and other factors due to its conversion feature. The fair value of the Convertible Notes is also affected by the price and volatility of the company’s common stock and will generally increase or decrease as the market price of our common stock changes. The interest and market value changes affect the fair value of the Convertible Notes but do not impact the company’s financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, the company carries the Convertible Notes at face value, less any unamortized discount on the balance sheet and presents the fair value for disclosure purposes only.
Foreign Exchange Derivative Financial Instruments
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 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 potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted foreign exchange rates would not have a material impact on the company's financial position, results of operations and cash flows. The fair value of the forward and option contracts was a gain of $0.1 million at the end of the third quarter of 2024.
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Item 4. Controls and Procedures
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.
As of September 28, 2024, 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 Chief Financial Officer, of the effectiveness 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 as of the end of this period.
During the quarter ended September 28, 2024, there has been no change in the company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
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PART II. OTHER INFORMATION
The company was not required to report the information pursuant to Items 1 through 6 of Part II of Form 10-Q for the nine months ended September 28, 2024, except as follows:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
c) Issuer Purchases of Equity Securities
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
Maximum
Number of
Shares that May
Yet be
Purchased
Under the Plan
or Program (1)
June 30, 2024 to July 27, 2024
—
$
—
—
4,383,636
July 28, 2024 to August 24, 2024
—
—
—
4,383,636
August 25, 2024 to September 28, 2024
—
—
—
4,383,636
Quarter ended September 28, 2024
—
$
—
—
4,383,636
(1) On November 7, 2017, the company's Board of Directors resolved to terminate the company's existing share repurchase program, effective as of such date, which was originally adopted in 1998, and approved a new stock repurchase program. This program authorizes the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock. In May 2022 and July 2024, the company's Board of Directors approved the repurchase of an additional 2,500,000 shares of its outstanding common stock under the current program. As of September 28, 2024, the total number of shares authorized for repurchase under the program is 7,500,000 shares. As of September 28, 2024, 3,116,364 shares had been purchased under the stock repurchase program and 4,383,636 shares remained authorized for repurchase.
In the consolidated financial statements, the company also treats shares withheld for tax purposes on behalf of employees in connection with the vesting of restricted share grants as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. These withheld shares are not considered common stock repurchases under the authorized common stock repurchase plan and accordingly are not included in the common stock repurchase totals in the preceding table.
Financial statements on Form 10-Q for the quarter ended September 28, 2024, filed on November 7, 2024, formatted in Inline Extensive Business Reporting Language (iXBRL); (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of earnings, (iii) condensed statements of cash flows, (iv) notes to the condensed consolidated financial statements.
Exhibit 104 –
Cover Page Interactive Data File (formatted as Inline Extensive Business Reporting Language (iXBRL) and contained in Exhibit 101).
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SIGNATURE
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.