FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
FOR THE PERIOD ENDED OCTOBER 3, 1998
or
Transition Report Pursuant to Section 13 or 15(d) of the
----- Securities Exchange Act of 1934
Commission File No. 1-9973
THE MIDDLEBY CORPORATION
-----------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-3352497
- - ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2850 W. GOLF ROAD, SUITE 405, ROLLING MEADOWS, ILLINOIS 60008
- - ------------------------------------------------------- --------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone No., including Area Code (847) 758-3880
------------------------------
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 10, 1998, there were 10,447,221 shares of the Registrant's common
stock outstanding.
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
QUARTER ENDED OCTOBER 3, 1998
INDEX
DESCRIPTION PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
BALANCE SHEETS 1
October 3, 1998 and January 3, 1998
STATEMENTS OF EARNINGS 2
October 3, 1998 and September 27, 1997
STATEMENTS OF CASH FLOWS 3
October 3, 1998 and September 27, 1997
NOTES TO FINANCIAL STATEMENTS 4
Item 2. Management's Discussion and Analysis 7
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
PART II. OTHER INFORMATION 15
PART I. FINANCIAL INFORMATION
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
OCT. 3, 1998 JAN. 3, 1998
------------ ------------
ASSETS
Cash and cash equivalents............. $ 3,035 $12,321
Accounts receivable, net.............. 25,354 22,251
Inventories, net...................... 26,616 24,072
Prepaid expenses and other............ 1,813 1,248
Current deferred taxes................ 2,521 3,000
----- -----
Total current assets............. 59,340 62,892
Property, plant and equipment, net of
accumulated depreciation of
$14,989 and $13,534................. 22,043 21,790
Excess purchase price over net assets
acquired, net of accumulated
amortization of $5,021 and
$4,673.............................. 13,632 12,882
Deferred taxes........................ 3,835 3,779
Other assets.......................... 2,539 2,135
----- -----
Total assets.............. $101,389 $103,478
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt.. $ 4,606 $ 3,595
Accounts payable...................... 9,450 11,600
Accrued expenses...................... 9,643 9,255
----- -----
Total current liabilities........ 23,699 24,450
Long-term debt........................ 24,463 24,318
Other non-current liabilities......... 2,027 2,109
Shareholders' equity:
Preferred stock, $.01 par value;
nonvoting; 2,000,000 shares
authorized; none issued........... - -
Common stock, $.01 par value;
20,000,000 shares authorized;
10,496,000 and 10,895,000 issued
and outstanding in 1998 and
1997, respectively................ 106 109
Paid-in capital..................... 54,588 53,984
Treasury stock, at cost (486,000
shares in 1998)................... (1,948) -
Cumulative translation adjustment... (1,650) (1,173)
Accumulated earnings (deficit)...... 104 (319)
--- ----
Total shareholders' equity....... 51,200 52,601
------ ------
Total liabilities and
shareholders' equity.... $101,389 $103,478
======== ========
See accompanying notes
- 1 -
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
OCT. 3, SEPT. 27, OCT. 3, SEPT. 27,
1998 1997 1998 1997
------- --------- -------- ---------
Net sales.......................................... $ 33,891 $ 35,850 $ 98,633 $110,630
Cost of sales...................................... 24,471 24,848 69,103 76,340
------- --------- -------- ---------
Gross profit................................ 9,420 11,002 29,530 34,290
Selling and distribution expenses.................. 5,016 5,450 15,534 16,166
General and administrative expenses................ 2,992 2,665 8,901 8,384
Non-recurring charges.............................. 1,525 - 1,525 -
------- --------- -------- ---------
(Loss)income from operations................ (113) 2,887 3,570 9,740
Interest expense and deferred
financing amortization........................... 665 1,030 2,161 3,368
Other expense(income), net......................... 160 7 413 (13)
------- --------- -------- ---------
(Loss)earnings before income taxes.......... (938) 1,850 996 6,385
Provision for income taxes......................... (50) 619 573 2,181
------- --------- -------- ---------
(Loss)earnings from continuing
operations........................... (888) 1,231 423 4,204
------- --------- -------- ---------
Loss from discontinued operations,
net of tax.................................. - - - (564)
------- --------- -------- ---------
Net (loss)earnings.......................... $ (888) $ 1,231 $ 423 $3,640
======= ========= ======== =========
Basic (loss)earnings per share:
Continuing operations....................... $ (0.08) $ 0.14 $ 0.04 $ 0.48
Discontinued operations..................... 0.00 0.00 0.00 (0.06)
------- --------- -------- ---------
Net (loss)earnings per share................ $ (0.08) $ 0.14 $ 0.04 $ 0.42
======= ========= ======== =========
Weighted average number of shares........... 10,824 8,792 11,053 8,742
Diluted earnings(loss) per share:
Continuing operations....................... $ (0.08) $ 0.14 $ 0.04 $ 0.48
Discontinued operations..................... 0.00 0.00 0.00 (0.06)
------- --------- -------- ---------
Net (loss)earnings per share................ $ (0.08) $ 0.14 $ 0.04 $ 0.42
======= ========= ======== =========
Weighted average number of shares........... 10,864 8,800 11,211 8,769
See accompanying notes
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THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-------------------------------
OCT. 3, 1998 SEPT 27, 1997
------------ -------------
Cash flows from operating activities-
Net earnings.......................................... $ 423 $ 3,640
Adjustments to reconcile net earnings
to cash provided by continuing
operating activities-
Depreciation and amortization...................... 1,997 2,150
Utilization of NOL's............................... 513 1,991
Non-cash portion of non-recurring charges.......... 1,405 -
Changes in assets and liabilities-
Accounts receivable.............................. (3,103) (4,188)
Inventories...................................... (2,543) (4,855)
Prepaid expenses and other assets................ (1,150) (1,829)
Accounts payable and other
liabilities.................................... (2,364) 1,787
----- -----
Net cash used in continuing
operating activities............................... (4,822) (1,304)
Net cash used in
discontinued operations............................ - (2,399)
----- -----
Net cash used in operating activities................ (4,822) (3,703)
----- -----
Cash flows from investing activities-
Purchase of subsidiary minority
interest........................................... (1,134) -
Proceeds from sale of discontinued
operations......................................... - 6,281
Additions to property and equipment.................. (2,425) (2,458)
----- -----
Net cash (used in) provided by
investing activities............................... (3,559) 3,823
----- -----
Cash flows from financing activities-
Treasury stock....................................... (1,948) -
Increase in revolving credit lines, net.............. 1,361 3,360
Reduction in term loans.............................. - (3,195)
Reduction in capital expenditure loan................ - (75)
Reduction in intellectual property lease............. (204) -
Other financing activities, net...................... (114) 178
-------- -----
Net cash (used in) provided by
financing activities............................... ( 905) 268
----- -----
Changes in cash and cash equivalents-
Net decrease in cash
and cash equivalents............................... (9,286) 388
Cash and cash equivalents at
beginning of year.................................. 12,321 1,410
------ -----
Cash and cash equivalents at end
of quarter......................................... $ 3,035 $ 1,798
======= =======
Interest paid.......................................... $ 2,061 $ 2,777
======= =======
Income taxes paid...................................... $ 623 $ 245
======= =======
See accompanying notes
- 3 -
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998
(UNAUDITED)
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The financial statements have been prepared by The Middleby
Corporation (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information not misleading. These financial
statements should be read in conjunction with the financial statements
and related notes contained in the Company's 1997 Annual Report. Other
than as indicated herein, there have been no significant changes from
the data presented in said Report.
In the opinion of management, the financial statements contain all
adjustments necessary to present fairly the financial position of the
Company as of October 3, 1998 and January 3, 1998, and the results of
operations for the three and nine months ended October 3, 1998 and
September 27, 1997 and cash flows for the nine months ended October 3,
1998 and September 27, 1997.
B. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", which requires companies to report all changes in equity
during a period, except those resulting from investment by and
distribution to shareholders, in a financial statement for the period
in which they are recognized.
Components of comprehensive income were as follows:
NINE MONTHS ENDED
---------------------------
OCT. 3, 1998 SEPT 27, 1997
------------ -------------
(IN THOUSANDS)
Net earnings .................... $ 423 $ 3,640
Cumulative translation
adjustment ................. (477) (382)
----- -------
Comprehensive Income $ (54) $ 3,258
===== =======
- 4 -
2) INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
The Company has recorded an income tax provision of $573,000 for the fiscal
nine months ended October 3, 1998. The Company has significant tax loss
carry-forwards, and although a tax provision is recorded, the Company makes
no payment of federal tax other than AMT amounts.
3) EARNINGS PER SHARE
During the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share",
which specifies modifications to the calculation of earnings per share from
that historically used by the Company. Under SFAS 128, "basic earnings per
share" is calculated based upon the weighted average number of common
shares actually outstanding, and "diluted earnings per share" is calculated
based upon the weighted average number of common shares outstanding,
warrants and other potential common shares, if they are dilutive. The
Company's common share equivalents consist of shares issuable on exercise
of outstanding options computed using the treasury method and amounted to
40,000 and 8,000 for the three-month period and 158,000 and 27,000 for the
nine-month period ended October 3, 1998 and September 27, 1997,
respectively. All prior periods have been restated to present all earnings
per share data on a consistent basis.
4) INVENTORIES
Inventories are valued using the first-in, first-out method.
Inventories consist of the following:
OCT. 3, 1998 JAN. 3, 1998
------------ ------------
(In thousands)
Raw materials and parts .............. $ 6,522 $ 6,073
Work-in-process ...................... 5,432 6,804
Finished goods ....................... 14,662 11,195
------ ------
$26,616 $24,072
======= =======
- 5 -
5) ACCRUED EXPENSES
Accrued expenses consist of the following:
OCT 3, 1998 JAN. 3, 1998
----------- ------------
(In thousands)
Accrued payroll and
related expenses ........................ $2,969 $3,601
Accrued commissions ....................... 1,634 1,510
Accrued warranty .......................... 1,543 1,172
Other accrued expenses .................... 3,497 2,972
------ ------
$9,643 $9,255
====== ======
6) ACQUISITION OF SUBSIDIARY MINORITY INTEREST
During the first quarter of 1998, the Company acquired the remaining
minority interest in Asbury Associates, Inc. and the Middleby Philippines
Corporation, from the founder and president of Asbury Associates, Inc. The
remaining interest was acquired for $500,000 in cash, 50,000 shares of
common stock with a market value of $387,000 at the date of issuance, and
forgiveness of certain minority interest liabilities owed by the minority
shareholder. This transaction increased the Company's ownership interest in
these subsidiaries to 100%. The excess purchase price over the value of
assets acquired of $1.1 million was allocated to goodwill, and is to be
amortized over a period of 15 years.
7) NON-RECURRING CHARGES
During the third quarter of 1998, the Company decided to discontinue the
implementation and fully abandon an enterprise-wide resource planning
system at its international distribution organization. This decision
resulted from the failure of the system to meet certain performance
specifications. The total charge resulting from this decision amounted to
$1,255,000 and was recorded in accordance with SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed
of." This charge reflects the complete write-off of costs associated with
the system, including capitalized software, program development and
implementation costs.
Additionally, during the third quarter of 1998, the Company recorded
charges of $270,000 for restructuring actions related to its international
distribution organization and initiatives to reduce operating costs. These
actions included the disposal of assets resulting from the relocation from
certain leased facilities and severance benefits associated with terminated
employees. These actions have been substantially completed and will be
fully concluded by year-end.
8. CAPITAL STRUCTURE AND FINANCING ARRANGEMENTS
In March 1998, the Company entered into the $20 million unsecured
multi-currency revolving credit line with a major international bank.
This multi-currency revolving line of credit expires on February 28,
2001, or earlier at the Company's option. Concurrently with the
initiation of the unsecured revolving line of credit, the $15 million
senior secured note became unsecured. The note's maturity and interest
rate remain unchanged.
In July 1998, the Company's Board of Directors adopted a stock repurchase
program and authorized the purchase of up to 300,000 common shares from
time to time in open market purchases. The Board subsequently authorized
the repurchase of 500,000 shares in August and 1,000,000 shares in
November. As of October 3, 1998, 486,000 shares had been purchased under
the program for $1,948,000.
As of October 3, 1998, the Company was not in compliance with certain
covenants under its revolving credit line and senior note. Failure to
comply with these covenants resulted from the treasury stock purchase
and non-recurring charges recorded during the quarter. Management
discussed these matters with its lenders. The Company's lenders have
indicated they will provide waivers for the related covenants.
- 6 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED).
INFORMATIONAL NOTE
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 statements are highly dependent upon a variety of
important factors which could cause such results or events to differ materially
from such statements. 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; the successful and timely implementation of the
Company's Year 2000 compliance program; foreign exchange and political risks
affecting international sales, including the current economic crisis in certain
Asian countries; and other risks detailed herein and from time-to-time in the
Company's Securities and Exchange Commission filings, including those discussed
under the heading "Risk Factors" in the Company's Registration Statement on Form
S-2 (No. 333-35397) filed with the Securities and Exchange Commission.
NET SALES SUMMARY
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
OCTOBER 3, 1998 SEPTEMBER 27, 1997 OCTOBER 3, 1998 SEPTEMBER 27, 1997
------------------- --------------------- -------------------- --------------------
Sales Percent Sales Percent Sales Percent Sales Percent
------- --------- ------- --------- ------- --------- ------- ---------
BUSINESS DIVISIONS
Conveyor oven
equipment.............. $11,462 33.8% $11,473 32.0% $33,604 34.1% $40,911 37.0%
Counterline cooking
equipment and
specialty products..... 4,495 13.3% 4,649 13.0% 12,889 13.0% 13,460 12.2%
Core cooking
equipment.............. 10,517 31.0% 9,230 25.7% 30,166 30.6% 25,236 22.8%
------ ----- ----- ----- ------ ----- ------ -----
TOTAL COOKING AND
WARMING EQUIPMENT
DIVISIONS........... 26,474 78.1% 25,352 70.7% 76,659 77.7% 79,607 72.0%
International specialty
equipment.............. 1,700 5.0% 2,154 6.0% 4,312 4.4% 5,893 5.3%
International
distribution (1)....... 9,409 27.8% 11,456 32.0% 28,273 28.7% 34,477 31.2%
----- ----- ------ ----- ------ ----- ------ -----
TOTAL INTERNATIONAL
DIVISIONS........... 11,109 32.8% 13,610 38.0% 32,585 33.1% 40,370 36.5%
Intercompany sales (2)... (3,792) (11.2%) (3,728) (10.4%) (11,443) (11.6%) (11,578) (10.5%)
Other (3)................ 100 0.3% 616 1.7% 832 0.8% 2,231 2.0%
------ ----- ----- ----- ------ ----- ------ -----
TOTAL................. $33,891 100.0% $35,850 100.0% $98,633 100.0% $110,630 100.0%
======= ====== ======= ====== ======= ====== ======== ======
(1) Consists of sales of products manufactured by Middleby and products
manufactured by third parties.
(2) Consists of sales to the Company's international distribution division from
the Company's other business divisions.
(3) Consists primarily of sales from non-core product lines that have been
discontinued.
- 7 -
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
earnings items as a percentage of net sales for the periods presented.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
OCT. 3, 1998 SEPT. 27, 1997 OCT. 3, 1998 SEPT. 27, 1997
------------ -------------- ------------ --------------
Net Sales ......................................... 100.0% 100.0% 100.0% 100.0%
Cost of Sales ..................................... 72.2% 69.3% 70.1% 69.0%
Gross Profit. ................................... 27.8% 30.7% 29.9% 31.0%
Selling, general and administrative expenses....... 28.1% 22.6% 26.3% 22.2%
----- ----- ----- -----
(Loss)income from operations..................... (0.3%) 8.1% 3.6% 8.8%
Interest expense and deferred financing
amortization, net................................ 2.0% 2.9% 2.2% 3.0%
Other (income) expense, net........................ 0.5% 0.0% 0.4% (0.0%)
---- ---- ---- ----
(Loss)earnings before income taxes............... (2.8%) 5.2% 1.0% 5.8%
Provision (benefit) for income taxes............... (0.1%) 1.7% 0.6% 2.0%
---- ---- ---- ----
(Loss)net earnings from continuing operations.... (2.7%) 3.5% 0.4% 3.8%
==== ==== ==== ====
THREE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 27,
1997
NET SALES. Net sales in the three-month period ended October 3, 1998 decreased
$2.0 million or 5% to $33.9 million as compared to $35.9 million in the
three-month period ended September 27, 1997, primarily due to lower sales into
many international regions as a result of unstable economic conditions and a
continued low level of orders from certain major restaurant chains.
Sales of the Company's cooking and warming equipment divisions increased 4% for
the three-month period ended October 3, 1998 compared to the prior year
three-month period. Sales of the core cooking equipment division increased 14%
from continued market penetration, primarily in the U.S., and the introduction
of new products. Sales of the conveyor oven equipment division and the
counterline cooking equipment and specialty products division decreased slightly
due mainly to lower sales to international distribution.
Sales of the international divisions represented 33% of total sales in the
three-month period ended October 3, 1998 compared to 38% in the prior year
period, and decreased 18% as compared to the prior year. Sales of the Company's
international specialty equipment division decreased 21%, primarily due to
deferred new store openings by a major chain customer as a result of the ongoing
currency and economic crisis in Asia. Sales of the Company's international
distribution division decreased 18% due to lower sales in certain Asian and
Middle Eastern markets. Sales to certain other international markets, such as
Latin America, were higher as compared to the prior year period.
- 8 -
GROSS PROFIT. Gross profit decreased $1.6 million, or 14%, in the three-month
period to $9.4 million as compared to $11.0 million in the prior year period. As
a percentage of net sales, gross profit margin decreased 2.9% to 27.8% from
30.7%. The decrease in gross profit and gross profit margin percentage was
attributable to lower sales volume, an unfavorable sales mix, production
inefficiencies due to erratic demand, higher product warranty costs and the
impact of fluctuating currencies on pricing in international markets.
OPERATING EXPENSES. Operating expenses increased $1.4 million, or 17%, in the
three-month period to $9.5 million as compared to $8.1 million in the prior
year's third quarter. The net increase is attributable to $1.5 million of
non-recurring charges recorded during the quarter. These charges included $.3
million related to cost reduction initiatives, primarily in the international
distribution business, and $1.2 million related to the write-down of system
related assets associated with the abandonment of an enterprise-wide resource
planning system which failed to meet performance specifications. The Company is
currently considering its legal rights with respect to the planned abandonment.
As a percentage of sales, selling, general and administrative expenses increased
to 28.1% from 22.6%. The non-recurring charges accounted for 4.5% of this
increase.
INCOME FROM OPERATIONS. Income from operations decreased $3.0 million to a loss
of $0.1 million for the three-month period ended October 3, 1998 as compared to
net income of $2.9 million in the prior year's third quarter. Lower sales
volume, lower gross profit margin and the non-recurring charges accounted for
the decrease in the income from operations.
INTEREST EXPENSE AND DEFERRED FINANCING AMORTIZATION. Interest expense and
deferred financing amortization for the three months ended October 3, 1998 was
$0.7 million as compared to $1.0 million in the prior year's third quarter. The
decrease was due to lower outstanding debt balances resulting from the public
offering in the fourth quarter of fiscal 1997.
INCOME TAXES. The Company recorded a net tax benefit of $50,000 for the
three-month period ended October 3, 1998 as compared to a net tax provision of
$0.6 million in the prior year's third quarter. The tax benefit was due to the
reported loss before taxes for U.S. operations. Tax benefits were not recognized
on certain foreign losses.
NET EARNINGS. As a result of the above factors, for the three-month period ended
October 3, 1998, the Company recorded a net loss of $0.9 million as compared to
net earnings of $1.2 million in the prior year's third quarter. The
non-recurring charges accounted for $0.9 million of the loss on an after-tax
basis.
- 9 -
NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 27, 1997
NET SALES. Net sales in the nine-month period ended October 3, 1998 decreased
$12.0 million, or 11%, to $98.6 million as compared to $110.6 million in the
nine-month period ended September 27, 1997, reflecting lower unit volume in the
Company's cooking and warming equipment divisions and international divisions.
The net sales decline is principally due to unstable economic conditions
resulting from currency crises in Asia and other regions, slowed purchases by
two major customers and a non-recurring equipment upgrade program by a major
chain during the fiscal second quarter of 1997.
Sales of the Company's cooking and warming equipment divisions decreased 4% for
the nine-month period ended October 3,1998. Sales of the core cooking equipment
division increased 20% as a result of increased market penetration in the U.S.
and the introduction of new products. These gains were offset by an 18% decrease
in sales of the conveyor oven equipment division as one major chain customer
slowed purchases during the first two months of the year to reduce inventory in
its system and another major chain embarked on a store restructuring program in
early 1998. Additionally, the 1997 results included conveyor oven service and
equipment upgrade billings, mostly in the fiscal second quarter, for a major
chain customer that was not repeated in 1998. Sales of the counterline cooking
equipment and specialty products division decreased 2% due mainly to lower sales
to international distribution channels.
Sales of the international divisions represented 33% of total sales in the
nine-month period and decreased 22% as compared to the prior year period. Sales
of the Company's international specialty equipment division decreased 27% due
mainly to lower new store openings in Asia by a major chain customer. Sales of
the Company's international distribution division decreased 21% primarily due to
lower sales in Asia and other regions impacted by the currency crisis. Sales to
certain other international markets, such as Latin America and Western Europe,
were higher as compared to the prior year.
GROSS PROFIT. Gross profit decreased $4.8 million, or 14%, in the nine-month
period to $29.5 million as compared to $34.3 million in the prior year period.
As a percentage of net sales, gross profit margin decreased 1.1% to 29.9% from
31.0%. Gross margin percentage has been unfavorably impacted by lower volume, an
unfavorable sales mix, production inefficiencies resulting from erratic and
difficult-to-forecast demand, higher product warranty costs, and the effect of
currency fluctuations on international pricing.
OPERATING EXPENSES. Operating expenses increased $1.5 million, or 6%, in the
nine-month period to $26.0 million as compared to $24.5 million for the prior
year period. Lower variable selling expenses were offset by increases due to
expansion of the Company's international sales and service capabilities,
including the establishment of sales and distribution offices in Japan, Korea
and Mexico during the second quarter of 1997. Further, the fiscal third quarter
included non-recurring charges of $1.5 million.
- 10 -
As a percentage of sales, selling, general and administrative expenses increased
to 26.3% from 22.2% primarily as a result of a higher expense base to support
the expanded international infrastructure being spread over lower sales. The
non-recurring charges accounted for 1.5% of this increase. The Company has taken
several actions to reduce expenses in international markets affected by the
currency crisis.
INCOME FROM OPERATIONS. Income from operations decreased $6.1 million or 63% to
$3.6 million for the nine-month period ended October 3, 1998 from $9.7 million
in the prior year period. The lower sales volume and increased expense base
resulted in the lower income from operations.
INTEREST EXPENSE AND DEFERRED FINANCING AMORTIZATION. Interest expense and
deferred financing amortization for the nine months ended October 3, 1998 was
$2.2 million as compared to $3.4 million in the prior year period. The decrease
was due to a lower average outstanding debt balance as a result of the Company's
public stock offering completed during the fourth quarter of 1997.
INCOME TAXES. The Company recorded a net tax provision of $0.6 million for the
nine-month period ended October 3, 1998 as compared to a net tax provision of
$2.2 million in the prior year period. The increase in the effective tax rate is
a result of foreign operating losses reported in the current year for which no
tax benefit has been recognized.
NET EARNINGS. As a result of the above factors, for the nine-month period ended
October 3, 1998, the Company recorded net earnings from continuing operations of
$0.4 million as compared to $4.2 million in the prior year period.
FINANCIAL CONDITION AND LIQUIDITY
Total cash and cash equivalents decreased by $9.3 million to $3.0 million at
October 3, 1998 from $12.3 million at January 3, 1998. In addition, net
borrowings increased by $1.2 million during the first nine months of the current
year. This overall use of liquidity was primarily to fund the working capital
needs of $4.8 million, investing activities of $3.6 million, and a $1.9 million
treasury stock purchase, further discussed below.
Operating Activities
For the nine months ended October 3, 1998, net cash provided by operating
activities before changes in assets and liabilities was $4.2 million as compared
to $7.8 million for the nine months ended September 27, 1997. This decline is
due to the lower net earnings. Net cash used by continuing operating activities
after changes in assets and liabilities was $4.8 million as compared to net cash
used of $ 1.3 million in the prior year nine-month period. Accounts receivables
have increased $3.1 million due to longer average collection periods in
international markets, as well as the timing of shipments and collections as
compared to the end of the prior
- 11 -
fiscal year. Inventories increased $2.5 million, primarily at the international
distribution division, largely due to difficulties in forecasting demand in
Asian markets. Accounts payable and other liabilities have decreased $2.2
million due to timing of payments as compared to the prior fiscal year-end.
Investing Activities
During the first quarter of 1998, the Company acquired the remaining interest in
Asbury Associates, Inc. and the Middleby Philippines Corporation, for $1.1
million. This transaction increased the Company's ownership interest in these
subsidiaries to 100%. During the first nine months of 1998 the Company had
capital expenditures of $2.4 million primarily to enhance manufacturing
capabilities and to install new computer systems and equipment.
Financing Activities
In July 1998, the Company's Board of Directors adopted a stock repurchase
program and authorized the purchase of up to 300,000 common shares from time to
time in open market purchases. The Board subsequently authorized the repurchase
of 500,000 shares in August and 1,000,000 shares in November. As of October 3,
1998, 486,000 shares had been purchased under the program for $1.9 million.
During the first nine months of 1998, outstanding debt increased by $1.2
million. The Company increased its net borrowings under its revolving credit
facilities by $1.4 million and reduced the amount outstanding under its
intellectual property lease by $0.2 million. To date, the Company has entered
into $3.3 million of foreign currency-denominated loans at certain foreign
subsidiaries, under its unsecured multi-currency revolving credit line.
The Company entered into the $20.0 million unsecured multi-currency revolving
credit line with a major international bank in March 1998. This credit
facility enhances the Company's ability to manage its financing activities
related to its international operations. Concurrently with the initiation of
the unsecured revolving line of credit, the $15.0 million senior secured note
became unsecured. The note's maturity and interest rate remain unchanged. As
of October 3, 1998, the Company was not in compliance with certain covenants
under its revolving credit line and senior note. Failure to comply with these
covenants resulted from the treasury stock purchase and non-recurring charges
recorded during the quarter. Management has discussed these matters with its
lenders. The Company's lenders have indicated they will provide waivers for
the related covenants. 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.
YEAR 2000 COMPLIANCE
The Company has assessed and continues to assess the impact of the Year 2000
issue on its reporting systems and operations. The Year 2000 issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. As the century date occurs, date sensitive systems
may recognize the year 2000 as 1900 or not at all. This inability to recognize
or properly treat the year 2000 may cause our systems to process critical
financial and operational information incorrectly.
- 12 -
The Company has undertaken a review of its information technology ("IT")
systems. The Company is in the process of executing a strategy to implement new
IT systems at its International Distribution Division to enhance its current
transaction processing and information reporting capabilities. These systems are
year 2000 compliant. In addition, the Company has completed, or is in process of
completing, upgrades to existing IT systems at all other business units, to make
these systems year 2000 compliant. These systems projects are currently on
schedule for completion prior to July 30, 1999. If these systems projects are
not successful, the Company will develop contingency plans. Nevertheless,
failure to complete these systems projects in a timely manner could result in a
significant disruption of the Company's ability to transact business with its
major customers and suppliers.
The Company has also undertaken a review of its critical non-IT systems, such as
production machinery and phone systems. The Company is in the process of
contacting equipment vendors and service providers to assess the potential risk
associated with these systems. Non-compliant systems will be replaced or
modified. Based upon internal evaluations and assurances provided by equipment
and service vendors, the Company does not believe significant modification to or
replacement of existing non-IT systems will be required. However, the Company
cannot verify the assurances it has been provided from third parties.
Additionally, a review of key suppliers and customers is in process to ensure
that the flow of products and services will not be disrupted as a result of
failure of the supplier or customer to become year 2000 compliant. While the
Company is receiving assurances that no such interruption will occur, the
Company cannot ensure that third parties will become compliant. Any significant
or prolonged interruption in the supply of essential services or products would
adversely effect the Company's operations and ability to conduct business. In
the event that the Company identifies problems with a service provider or other
vendor, it will attempt to obtain services and products from other available
sources. Similarly, problems with a significant portion of the Company's
customers in processing and paying invoices could materially impact the
Company's cash flows or liquidity. The Company is unable to anticipate whether a
significant portion of its customers will have difficulty in processing and
paying invoices.
Expenses associated with the Year 2000 issue relate primarily to the
modification of existing IT systems. The Company anticipates that remaining
costs to fully address these matters will amount to approximately $0.5 million.
The Company does not anticipate that future costs to address the Year 2000 issue
will have a material effect on its financial condition.
Foregoing is a Year 2000 readiness disclosure entitled to protection as provided
in the Year 2000 Information and Readiness Disclosure Act.
- 13 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to change in interest rates. At
October 3, 1998, the Company had approximately $3.3 million of debt outstanding
on a revolving credit facility with a floating interest rate. If this rate were
to increase 10 percent, the increase in interest payments would not have a
material impact on the Company's net income or cash flows. In addition, the
Company has fixed rate-financing arrangements under its senior note and lease
obligations in the amount of $25.8 million. A 10 percent change in interest
rates would not have a material impact on the fair market value of this debt.
- 14 -
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 three months ended October 3, 1998,
except as follows:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits - The following Exhibits are filed herewith:
Exhibit (27) - Financial Data Schedule (EDGAR only)
- 15 -
SIGNATURES
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.
THE MIDDLEBY CORPORATION
(Registrant)
Date: November 16, 1998 By: /s/ John J. Hastings
----------------------------- ---------------------
John J. Hastings, Executive
Vice President, Chief
Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
- 16 -
5
1,000
9-MOS
JAN-02-1999
JAN-04-1998
OCT-03-1998
3,035
0
25,354
0
26,616
59,340
37,032
14,989
101,389
23,699
24,463
0
0
106
51,094
101,389
98,633
98,633
69,103
69,103
25,960
0
2,161
996
573
423
0
0
0
423
0.04
0.04
