UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
Annual
Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For
the Fiscal Year Ended December 31, 2005
or
o
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
incorporation or organization)
|
(IRS
Employer Identification Number)
|
|
1400
Toastmaster Drive, Elgin,
Illinois
|
60120
|
|
(Address
of principal executive
offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: 847-741-3300
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Title
of each class
Common
stock,
par
value $0.01 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes x
No o.
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 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 o.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer
x Non-accelerated
filer
o
Indicate
by check mark whether the registrant is a shell
company (as defined in rule 12b-2 of the Exchange Act).
Yes
o No
x.
The
aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of July
1,
2005 was approximately $380,886,920.
The
number of shares outstanding of the Registrant’s class of common stock, as of
March 10, 2006, was 7,900,475 shares.
Documents
Incorporated by Reference
Part
III
of Form 10-K incorporates by reference the Registrant’s definitive proxy
statement to be filed pursuant to Regulation 14A in connection with the 2006
annual meeting of stockholders.
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
DECEMBER
31, 2005
FORM
10-K ANNUAL REPORT
TABLE
OF CONTENTS
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PART
I
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Page
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Item
1.
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Business
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1
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| Item 1A. | Risk Factors |
11
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| Item 1B. | Unresolved Staff Comments |
22
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Item
2.
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Properties
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23
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Item
3.
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Legal
Proceedings
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23
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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23
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity,Related Stockholder Matters and Issuer
Purchases of Equity Securities
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24
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Item
6.
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Selected
Financial Data
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26
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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27
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Item
7A.
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Quantitative
and Qualitative Disclosure about Market Risk
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40
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Item
8.
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Financial
Statements and Supplementary Data
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42
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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76
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Item
9A.
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Controls
and Procedures
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76
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Item
9B.
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Other
Information
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79
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PART
III
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Item
10.
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Directors
and Executive Officers of the Registrant
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80
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Item
11.
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Executive
Compensation
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80
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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80
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Item
13.
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Certain
Relationships and Related Transactions
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80
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Item
14.
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Principal
Accountant Fees and Services
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80
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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81
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PART
I
| Item 1. |
Business
|
General
The
Middleby Corporation (“Middleby” or the “company”), through its operating
subsidiary Middleby Marshall Inc. (“Middleby Marshall”) and its subsidiaries, is
a leader in the design, manufacture, marketing, distribution, and service of
a
broad line of cooking equipment and related products used in all types of
commercial restaurants, institutional kitchens, and food processing operations.
The company's products designed for commercial restaurants and institutional
kitchens include Middleby Marshall® and CTX® conveyor oven equipment, Blodgett®
convection ovens, conveyor ovens, deck oven equipment, Blodgett Combi® cooking
equipment, Blodgett Range® ranges, Nu-Vu® baking ovens and proofers, Pitco
Frialator® fryer equipment, Southbend® ranges, convection ovens and heavy-duty
cooking equipment, Toastmaster® toasters and counterline cooking and warming
equipment, and MagiKitch'n® charbroilers and catering equipment. Products
designed for the food processing industry include Alkar® batch ovens, conveyor
ovens and continuous processing cooking systems, and Rapidpak® packaging and
food safety equipment.
Founded
in 1888 as a manufacturer of baking ovens, Middleby Marshall Oven Company was
acquired in 1983 by TMC Industries Ltd., a publicly traded company that changed
its name in 1985 to The Middleby Corporation. Throughout its history, the
company had been a leading innovator in the baking equipment industry and in
the
early 1980s positioned itself as a leading foodservice equipment manufacturer
by
introducing the conveyor oven that revolutionized the pizza market. In 1989,
the
company became a broad line equipment manufacturer through the acquisition
of
the Foodservice Equipment Group of Hussmann Corporation, which included
Southbend, Toastmaster and CTX.
The
company identified the international markets as an area of growth. To capture
these markets, the company acquired a controlling interest in Asbury Associates,
Inc. in 1990, which was renamed Middleby Worldwide in 1999. Middleby's global
sales and service network enables it to offer equipment to be delivered
virtually anywhere in the world. The company believes that its global network
provides it with a competitive advantage that positions the company as a
preferred foodservice equipment supplier to major restaurant chains expanding
globally. Further expanding its international capabilities, the company
established Middleby Philippines Corporation (“MPC”) in 1991. The establishment
of MPC provided for a low cost and local base of manufacturing for the expanding
Asian markets.
In
2001,
Middleby acquired the commercial cooking subsidiary, Blodgett Holdings, Inc.
("Blodgett") from Maytag Corporation (“Maytag”) to expand its line up of
products in all the major cooking equipment segments. The acquisition resulted
in the addition of the Blodgett, Pitco and MagiKitch'n brand names into the
company's portfolio. The acquisition of Blodgett established Middleby as a
leading company in the commercial foodservice equipment segment and provided
for
a complete line of cooking equipment, which enabled the company to service
most
restaurant chain customers. In January 2005, the company acquired the assets
of
Nu-Vu Foodservice Systems, a leader in baking ovens and proofing equipment,
to
further expand its line of ovens and position the company to benefit from the
growing trend of on-premise baking.
1
In
December 2005, the company acquired Alkar Holdings Inc.("Alkar"), a leading
manufacturer of ovens and packaging machines for the food processing industry.
Alkar Holdings, Inc. designs, manufactures, and markets batch ovens, conveyor
ovens and continuous cooking systems under the Alkar brand, and related food
packaging and food safety equipment under the Rapidpak brand. This acquisition
enabled the company to expand its customer base to include food processing
companies.
The
company's annual reports on Form 10-K, including this Form 10-K, as well as
the
company's quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to such reports are available, free of charge, on the company's
internet website, www.middleby.com.
These
reports are available as soon as reasonably practicable after they are
electronically filed with or furnished to the Securities and Exchange
Commission.
Business
Divisions and Products
The
company conducts its business through three principal business divisions: the
commercial foodservice equipment group; the industrial foodservice equipment
group; and the international distribution division. See Note 11 to the
Consolidated Financial Statements for further information on the company's
business divisions.
Commercial
Foodservice Equipment Group
The
Commercial Foodservice Equipment Group develops, manufactures, markets,
distributes and services equipment used for cooking and food preparation in
commercial and institutional kitchens and restaurants throughout the world.
This
cooking and warming equipment is used across all types of foodservice
operations, including quick-service restaurants, full-service restaurants,
retail outlets, hotels and other institutions. The company offers a broad line
of cooking equipment marketed under a portfolio of ten brands, including ,
Blodgett®, Blodgett Combi®, Blodgett Range®, CTX®, MagiKitch'n®, Middleby
Marshall®, NuVu®, Pitco®, Southbend®, and Toastmaster®. These products are
manufactured at the company's facilities in Illinois, Michigan, New Hampshire,
North Carolina, Vermont and the Philippines.
The
division's principal product groups include:
| · |
Core
Cooking Equipment Product Group:
manufactures equipment that is central to most restaurant kitchens.
The
products offered by this group include ranges, convection ovens,
baking
ovens, proofers, broilers, fryers, combi-ovens, charbroilers and
steam
equipment. These products are marketed under the Blodgett®, Pitco
Frialator®, Southbend®, MagiKitch'n® and Nu-Vu® brands. Blodgett®, known
for its durability and craftsmanship, is the leading brand of convection
and combi ovens. In demand since the late 1800's, the Blodgett oven
has
stood the test of time and set the industry standard. Pitco Frialator®
offers a broad line of gas and electric equipment combining reliability
with efficiency in simple-to-operate professional frying equipment.
Since
1918, Pitco fryers have captured a major market share by offering
simple,
reliable equipment for cooking menu items such as french fries, onion
rings, chicken, donuts, and seafood. For over 100 years, Southbend® has
produced a broad array of heavy-duty, gas-fired equipment, include
ranges,
convection ovens, broilers, and steam cooking equipment. Southbend
has
dedicated significant resources to developing and introducing innovative
product features resulting in a premier cooking line. For more than
60
years, MagiKitch’n® has focused on manufacturing charbroiling products
that deliver quality construction, high performance and flexible
operation.
|
2
| · |
Conveyor
Oven Equipment Product Group: manufactures
ovens that are desirable for high volume applications, providing
for high
levels of production and efficiency while allowing a restaurant owner
to
retain flexibility in menu offerings. Conveyor oven equipment allows
for
simplification of the food preparation process, which in turn provides
for
labor savings opportunities and a greater consistency of the final
product. Conveyor oven equipment products are marketed under the
Middleby
Marshall®, Blodgett® and CTX® brands.
|
| · |
Counterline
Cooking Equipment Product Group:
manufactures
predominantly light and medium-duty electric equipment, including
pop-up
and conveyor toasters, hot food servers, foodwarmers and griddles
marketed
under the Toastmaster® brand name to commercial restaurants and
institutional kitchens.
|
| · |
International
Specialty Equipment Product Group:
provides reduced-cost manufacturing capabilities in the Philippines.
The
group is a leading supplier of specialty equipment in the Asian markets,
including fryers and counterline equipment, as well as component
parts for
the company's domestic operations.
|
Industrial
Foodservice Equipment Group
The
Industrial Foodservice Equipment Group develops, manufactures, markets,
distributes and services equipment used for cooking, chilling and packaging
in
food processing operations throughout the world. Customers include large
international food processing companies throughout the world. The company is
recognized as a market leader in the manufacturing of equipment for producing
pre-cooked meat products such as hot dogs, dinner sausages, poultry and
lunchmeats. The company's products include batch ovens, conveyor ovens, and
continuous cooking systems marketed under the Alkar brand, and packaging
machinery and food safety equipment marketed under the Rapidpak brand. Through
its broad line of products, the company is able deliver a wide array of cooking
solutions to service a variety of food processing requirements demanded by
its
customers. The Alkar and Rapidpak product lines are manufactured at the
company's facilities in Lodi, Wisconsin.
International
Distribution Division
The
International Distribution Division provides integrated export management and
distribution services. The division distributes the company's product lines
and
certain non-competing complementary product lines of other manufacturers
throughout the world. The company offers customers a complete package of kitchen
equipment, delivered and installed in over 100 countries. For a local country
distributor or dealer, the division provides centralized sourcing of a broad
line of equipment with complete export management services, including export
documentation, freight forwarding, equipment warehousing and consolidation,
installation, warranty service and parts support. The International Distribution
Division has regional export management companies in Asia, Europe and Latin
America complemented by sales and distribution offices located in Canada, China,
India, South Korea, Mexico, the Philippines, Spain, Taiwan and the United
Kingdom.
3
The
Customers and Market
Commercial
Foodservice Equipment Industry
The
company's end-user customers include: (i) fast food or quick-service
restaurants, (ii) full-service restaurants, including casual-theme restaurants,
(iii) retail outlets, such as convenience stores, supermarkets and department
stores and (iv) public and private institutions, such as hotels, resorts,
schools, hospitals, long-term care facilities, correctional facilities,
stadiums, airports, corporate cafeterias, military facilities and government
agencies. The company's domestic sales are primarily through independent dealers
and distributors and are marketed by the company's sales personnel and network
of independent manufacturers' representatives. Many of the dealers in the U.S.
belong to buying groups that negotiate sales terms with the company. Certain
large multi-national restaurant and hotel chain customers have purchasing
organizations that manage product procurement for their systems. Included in
these customers are several large restaurant chains, which account for a
significant portion of the company's business. The company’s international sales
are through a combined network of independent and company-owned distributors.
The company maintains sales and distribution offices in Canada, China, India,
South Korea, Mexico, the Philippines, Spain, Taiwan and the United Kingdom.
During
the past several decades, growth in the U.S. foodservice industry has been
driven primarily by population growth, economic growth and demographic changes,
including the emergence of families with multiple wage-earners and growth in
the
number of higher-income households. These factors have led to a demand for
convenience and speed in food preparation and consumption. As a result, U.S.
foodservice sales grew for the fourteenth consecutive year to approximately
$486
billion in 2005 as reported by The National Restaurant Association. Sales in
2006 are projected to increase to $511 billion, an increase of 5.1% over 2005,
according to The National Restaurant Association. The quick-service restaurant
segment within the foodservice industry has been the fastest growing segment
since the mid '80's. Total quick-service sales amounted to $136 billion in
2005
and are projected to increase 5.0% to $142 billion in 2006, as reported by
The
National Restaurant Association. The full-service restaurants represent the
largest portion of the foodservice industry and represented $165 billion in
sales in 2005 and are projected to increase 5.2% to $173 billion in 2006, as
reported by The National Restaurant Association. This segment has seen increased
chain concepts and penetration in recent years driven by the aging of the baby
boom generation.
Over
the
past several decades, the foodservice equipment industry has enjoyed steady
growth in the United States due to the development of new quick-service and
casual-theme restaurant chain concepts, the expansion into nontraditional
locations by quick-service restaurants and store equipment modernization. In
the
international markets, foodservice equipment manufacturers have been
experiencing stronger growth than the U.S. market due to rapidly expanding
international economies and increased opportunity for expansion by U.S. chains
into developing regions.
4
The
company believes that the worldwide commercial foodservice equipment market
has
sales in excess of $20 billion. The cooking and warming equipment segment of
this market is estimated by management to exceed $1.5 billion in North America
and $2.5 billion worldwide. The company believes that continuing growth in
demand for foodservice equipment will result from the development of new
restaurant concepts in the U.S. and the expansion of U.S. chains into
international markets, the replacement and upgrade of existing equipment and
new
equipment requirements resulting from menu changes.
Industrial
Foodservice Equipment Industry
The
company's customers include a diversified base of leading food processors,
including virtualy every leading global meat processor. A large portion of
the
company's revenues have been generated from producers of pre-cooked meat
products such as hot dogs, dinner susages, poultry, and lunchmeats, however,
the
company believes that it can leverage its expertise and product development
capabilities in thermal processing to organically grow into new end
markets.
Food
processing has quickly become a highly competitive landscape dominated by a
few
large conglomerates that possess a variety of food brands. The consolidation
of
food processing plants associated with industry consolidation drives a need
for
more flexible and efficient equipment that is capable of processing large
volumes in quicker cycle times. In recent years, food processors have had to
conform to the demands of “big-box” retailers, including, most importantly,
greater product consistency and exact package weights. Food processors are
beginning to realize that their old equipment is no longer capable of
efficiently producing adequate uniformity in the large product volumes required,
and they are turning to equipment manufacturers that offer product consistency,
innovative packaging designs and other solutions. To protect their own brands
and reputations, big-box retailers are also dictating food safety standards
that
are actually stricter than government regulations.
A
number
of factors, including rising raw material prices, labor and health care costs,
are driving food processors to focus on ways to improve their generally thin
profitability margins. In order to increase the profitability and efficiency
in
processing plants, food processors pay increasingly more attention to the
ergonomics of their machinery and the flexibility in the functionality of the
equipment. Meat processors are continuously looking for ways to make their
plants safer and reduce labor-intensive activities. Food processors have begun
to recognize the value of new technology as an important vehicle to drive
productivity and profitability in their plants. Due to pressure from big-box
retailers, food processors are expected to continue to demand new and innovative
equipment that addresses food safety, food quality, automation, and
flexibility.
Improving
living standards in developing countries is spurring increased worldwide demand
for pre-cooked and convenience food products. As industrializing countries
create more jobs, consumers in these countries will have the means to buy
pre-cooked food products. In industrialized regions, such as Western Europe
and
the U.S., consumers are demanding more pre-cooked and convenience food products,
such as deli tray variety packs, frozen food products and ready-to-eat varieties
of ethnic foods.
5
The
global food processing equipment industry is highly fragmented, large and
growing. The company estimates demand for food equipment is approximately $3
billion in the U.S and $20 billion worldwide. The cooking and baking segment
of
this market is estimated by management to exceed $0.5 billion in the U.S. and
$1.5 billion worldwide.
Backlog
The
company's backlog of orders was $44,977,000 at December 31, 2005, all of which
is expected to be filled during 2006. The acquired Alkar business accounted
for
$16,386,000 of backlog. The company's backlog, excluding orders for Nu-Vu and
Alkar equipment, was $27,665,000 at January 1, 2005. The backlog is not
necessarily indicative of the level of business expected for the year, as there
is generally a short time between order receipt and shipment for the majority
of
the company’s products.
Marketing
and Distribution
Commercial
Foodservice Equipment Group
Middleby's
products and services are marketed in the U.S. and in over 100 countries through
a combination of the company's sales personnel and international marketing
divisions and subsidiaries, together with an extensive network of independent
dealers, distributors, consultants, sales representatives and agents. The
company's relationships with major restaurant chains are primarily handled
through an integrated effort of top-level executive and sales management at
the
corporate and business division levels to best serve each customer's
needs.
In
the
United States, the company distributes its products to independent end-users
primarily through a network of non-exclusive dealers nationwide, who are
supported by manufacturers' marketing representatives. Sales are made direct
to
certain large restaurant chains that have established their own procurement
and
distribution organization for their franchise system.
International
sales are primarily made through the International Distribution Division network
to independent local country stocking and servicing distributors and dealers
and, at times, directly to major chains, hotels and other large
end-users.
6
Industrial
Foodservice Equipment Group
The
company maintains a direct sales force to market both the Alkar and Rapidpak
brands and maintains direct relationships with each of its customers. The
company also involves division management in the relationships with large global
accounts. In North America, the company employs ten regional sales managers,
each with responsibility for a group of customers and a particular region.
Internationally, the company maintains two global sales managers supported
by a
network of independent sales representatives.
The
company’s sale process is highly consultative due to the highly technical nature
of the equipment. During a typical sales process, a salesperson makes several
visits to the customer’s facility to conceptually discuss the production
requirements, footprint and configuration of the proposed equipment. The company
employs a technically proficient sales force, many of whom have previous
technical experience with the company as well as education backgrounds in food
science.
Services
and Product Warranty
The
company is an industry leader in equipment installation programs and after-sales
support and service. The company provides warranty on its products typically
for
a one year period and in certain instances greater periods up to ten years.
The
emphasis on global service increases the likelihood of repeat business and
enhances Middleby's image as a partner and provider of quality products and
services.
Commercial
Foodservice Equipment Group
The
company's domestic service network consists of over 100 authorized service
parts
distributors and 3,000 independent certified technicians who have been formally
trained and certified by the company through its factory training school and
on-site installation training programs. Technicians work through service parts
distributors, which are required to provide around-the-clock service via a
toll-free paging number. The company provides substantial technical support
to
the technicians in the field through factory-based technical service engineers.
The company has stringent parts stocking requirements for these agencies,
leading to a high first-call completion rate for service and warranty
repairs.
It
is
critical to major foodservice chains that equipment providers be capable of
supporting equipment on a worldwide basis. The company's international service
network covers over 100 countries with more than 1,000 service technicians
trained in the installation and service of the company's products and supported
by internationally-based service managers along with the factory-based technical
service engineers. As with its domestic service network, the company maintains
stringent parts stocking requirements for its international
distributors.
7
Industrial
Foodservice Equipment Group
The
company maintains a technical service group of employees that oversees and
performs installation and startup of equipment, and completes warranty and
repair work. This technical service group provides services for customers both
domestically and internationally. Service technicians are trained regularly
on
new equipment to ensure the customer receives a high level of customer service.
From time to time the company utilizes trained third party technicians
supervised by company employees to supplement company employees on large
projects.
Competition
The
cooking and warming segments of the commercial and industrial foodservice
equipment industries are highly competitive and fragmented. Within a given
product line, the industry remains fairly concentrated, with typically a small
number of competitors accounting for the bulk of the line's industry-wide sales.
Industry competition includes companies that manufacture a broad line of
products and those that specialize in a particular product line. Competition
is
based upon many factors, including brand recognition, product features and
design, quality, price, delivery lead times, serviceability and after-sale
service. The company believes that its ability to compete depends on strong
brand equity, exceptional product performance, short lead-times and timely
delivery, competitive pricing, and its superior customer service support.
In
the
international markets, the company competes with U.S. manufacturers and numerous
global and local competitors.
The
company believes that it is one of the largest multiple-line manufacturers
of
cooking and warming equipment in the U.S. and worldwide, although some of its
competitors are units of operations that are larger than the company and possess
greater financial and personnel resources. Among the company's major competitors
are Enodis plc; Vulcan-Hart Corporation, a subsidiary of Illinois Tool Works
Inc.; Wells Manufacturing Company, a subsidiary of United Technologies
Corporation; Zanussi, a subsidiary of Electrolux AB; and Ali Group.
8
Manufacturing
and Quality Control
The
company manufactures product in six domestic and one international production
facilities. In Elgin, Illinois, the company manufactures conveyor ovens and
counterline cooking equipment. In Burlington, Vermont the company manufactures
its combi oven, convection oven and deck oven product lines. In Fuquay-Varina,
North Carolina, the company manufactures ranges, steamers, combi ovens,
convection ovens and broiling equipment. In Bow, New Hampshire, the company
manufactures fryers, charbroilers and catering equipment products. In Menominee,
Michigan the company manufactures baking ovens and proofers. In Lodi, Wisconsin
the company engineers
and manufactures cooking and chilling systems and packaging equipment that
serves customers in the industrial foodservice industry. In
Laguna, the Philippines the company manufactures fryers, counterline equipment
and component parts for the U.S. manufacturing facilities. Metal fabrication,
finishing, sub-assembly and assembly operations are conducted at each
manufacturing facility. Equipment installed at individual manufacturing
facilities includes numerically controlled turret presses and machine centers,
shears, press brakes, welding equipment, polishing equipment, CAD/CAM systems
and product testing and quality assurance measurement devices. The company's
CAD/CAM systems enable virtual electronic prototypes to be created, reviewed
and
refined before the first physical prototype is built.
Detailed
manufacturing drawings are quickly and accurately derived from the model and
passed electronically to manufacturing for programming and optimal parts nesting
on various numerically controlled punching cells. The company believes that
this
integrated product development and manufacturing process is critical to assuring
product performance, customer service and competitive pricing.
The
company has established comprehensive programs to ensure the quality of
products, to analyze potential product failures and to certify vendors for
continuous improvement. Products manufactured by the company are tested prior
to
shipment to ensure compliance with company standards.
Sources
of Supply
The
company purchases its raw materials and component parts from a number of
suppliers. The majority of the company’s material purchases are standard
commodity-type materials, such as stainless steel, electrical components and
hardware. These materials and parts generally are available in adequate
quantities from numerous suppliers. Some component parts are obtained from
sole
sources of supply. In such instances, management believes it can substitute
other suppliers as required. The majority of fabrication is done internally
through the use of automated equipment. Certain equipment and accessories are
manufactured by other suppliers for sale by the company. The company believes
it
enjoys good relationships with its suppliers and considers the present sources
of supply to be adequate for its present and anticipated future
requirements.
9
Research
and Development
The
company believes its future success will depend in part on its ability to
develop new products and to improve existing products. Much of the company's
research and development efforts are directed to the development and improvement
of products designed to reduce cooking time, reduce energy consumption, minimize
labor costs or improve product yield, while maintaining consistency and quality
of cooking production. The company has identified these issues as key concerns
of most customers. The company often identifies product improvement
opportunities by working closely with customers on specific applications. Most
research and development activities are performed by the company's technical
service and engineering staff located at each manufacturing location. On
occasion, the company will contract outside engineering firms to assist with
the
development of certain technical concepts and applications. See
Note
4(n) to the Consolidated Financial Statements for further information on the
company's research and development activities.
Licenses,
Patents, and Trademarks
The
company owns numerous trademarks and trade names; among them, Alkarâ,
Blodgettâ,
Blodgett Combiâ,
Blodgett Rangeâ,
CTXâ,
MagiKitch’nâ,
Middleby Marshallâ,
Nu-Vuâ,
Pitco
Frialatorâ,
RapidPak â,
Southbendâ,
SteamMasterâ
and
Toastmasterâ
are
registered with the U.S. Patent and Trademark Office and in various foreign
countries.
The
company holds numerous patents covering technology and applications related
to
various products, equipment and systems. Management believes the expiration
of
any one of these patents would not have a material adverse effect on the overall
operations or profitability of the company.
Middleby
Marshall has an exclusive license from Enersyst Development Center LLC
(“Enersyst”) to manufacture, use and sell Jetsweep air impingement ovens in the
U.S. for commercial food service applications. This license covers numerous
existing patents and provides further exclusive and non-exclusive license rights
to existing and future developed technology. The Enersyst license expires upon
the later of the expiration of licensed patents or October 1, 2008. Certain
individual patents covered under the Enersyst license agreements expire at
various dates through 2019 or later. While the loss of the Enersyst license
or
could have an adverse effect on the company, management believes it is capable
of designing, manufacturing and selling similar equipment without
it.
10
Employees
As
of
December 31, 2005, the company employed 1,258 persons. Of this amount, 482
were
management, administrative, sales, engineering and supervisory personnel; 469
were hourly production non-union workers; and 307 were hourly production union
members. Included in these totals were 214 individuals employed outside of
the
United States, of which 160 were management, sales, administrative and
engineering personnel, and 54 were hourly production workers, who participate
in
an employee cooperative. At its Lodi, Wisconsin facility, the company has a
contract with the International Association of Bridge, Structural, Ornamental
and Reinforcing Ironworkers that expires on February 1, 2008. At its Elgin,
Illinois facility, the company has a union contract with the International
Brotherhood of Teamsters that expires on April 30, 2007. The company also has
a
union workforce at its manufacturing facility in the Philippines, under a
contract that extends through June 2006. Management believes that the
relationships between employees, union and management are good.
Seasonality
The
company’s revenues historically have been stronger in the second and third
quarters due to increased purchases from customers involved with the catering
business and institutional customers, particularly schools, during the summer
months.
| Item 1A. |
Risk
Factors
|
Certain
Risk Factors That May Affect Future Results
An
investment in shares of the company's common stock involves risks. The company
believes the risks and uncertainties described below and in "Special Note
Regarding Forward-Looking Statements" are the material risks it faces.
Additional risks and uncertainties not currently known to the company or
that it
currently deems immaterial may impair its business operations. If any of
the
following risks actually occurs, the company's business, results of operations
and financial condition could be materially adversely affected, and the trading
price of the company's common stock could decline.
The
company's level of indebtedness could adversely affect its business, results
of
operations and growth strategy.
The
company now has and may continue to have a significant amount of debt. At
December 31, 2005, the company had $121.6 million of borrowings and $8.5
million
in letters of credit outstanding. To the extent the company requires capital
resources, there can be no assurance that such funds will be available on
favorable terms, or at all. The unavailability of funds could have a material
adverse effect on the company's financial condition, results of operations
and
ability to expand the company's operations.
The
company's level of indebtedness could adversely affect it in a number of
ways,
including the following:
|
•
|
the
company may be unable to obtain additional financing for working
capital,
capital expenditures, acquisitions and other general corporate
purposes;
|
|
•
|
a
significant portion of the company's cash flow from operations
must be
dedicated to debt service, which reduces the amount of cash the
company
has available for other purposes;
|
|
•
|
the
company may be more vulnerable to a downturn in the company business
or
economic and industry conditions;
|
|
•
|
the
company may be disadvantaged as compared to its competitors, such
as in
the ability to adjust to changing market conditions, as a result
of the
significant amount of debt the company owes;
and
|
|
•
|
the
company may be restricted in its ability to make strategic acquisitions
and to pursue business opportunities.
|
11
The
company's current credit agreement limits its ability to conduct business,
which
could negatively affect the company's ability to finance future capital needs
and engage in other business activities.
The
covenants in the company's existing credit agreement contain a number of
significant limitations on its ability to, among other things:
| · |
pay
dividends;
|
| · |
incur
additional indebtedness;
|
| · |
create
liens on the company's assets;
|
| · |
engage
in new lines of business;
|
| · |
make
investments;
|
| · |
make
capital expenditures and enter into leases;
and
|
| · |
acquire
or dispose of assets.
|
These
restrictive covenants, among others, could negatively affect the company's
ability to finance its future capital needs, engage in other business activities
or withstand a future downturn in the company's business or the
economy.
Under
the
company's current credit agreement, the company is required to maintain certain
specified financial ratios and meet financial tests, including certain ratios
of
leverage and fixed charge coverage. The company's ability to comply with
these
requirements may be affected by matters beyond its control, and, as a result,
the company cannot assure you that it will be able to meet these ratios and
tests. A breach of any of these covenants would prevent the company from
being
able to draw under the company revolver and would result in a default under
the
company's credit agreement. In the event of a default under the company's
current credit agreement, the lenders could terminate their commitments and
declare all amounts borrowed, together with accrued interest and other fees,
to
be due and payable. Borrowings under other debt instruments that contain
cross-acceleration or cross-default provisions may also be accelerated and
become due and payable. The company may be unable to pay these debts in these
circumstances.
12
Competition
in the foodservice equipment industry is intense and could impact the company
results of operations and cash flows.
The
company operates in a highly competitive industry. In the company's business,
competition is based on product features and design, brand recognition,
reliability, durability, technology, energy efficiency, breadth of product
offerings, price, customer relationships, delivery lead times, serviceability
and after-sale service. The company has a number of competitors in each product
line that it offers. Many of the company's competitors are substantially
larger
and enjoy substantially greater financial, marketing, technological and
personnel resources. These factors may enable them to develop similar or
superior products, to provide lower cost products and to carry out their
business strategies more quickly and efficiently than the company can. In
addition, some competitors focus on particular product lines or geographical
regions or emphasize their local manufacturing presence or local market
knowledge. Some competitors have different pricing structures and may be
able to
deliver their products at lower prices. Although the company believes that
the
performance and price characteristics of its products will provide competitive
solutions for the company customers' needs, there can be no assurance that
the
company's customers will continue to choose its products over products offered
by the company competitors.
Further,
the market for the company's products is characterized by changing technology
and evolving industry standards. The company's ability to compete in the
past
has depended in part on the company's ability to develop innovative new products
and bring them to market more quickly than the company's competitors. The
company's ability to compete successfully will depend, in large part, on
its
ability to enhance and improve its existing products, to continue to bring
innovative products to market in a timely fashion, to adapt the company's
products to the needs and standards of the company customers and potential
customers and to continue to improve operating efficiencies and lower
manufacturing costs. Moreover, competitors may develop technologies or products
that render the company's products obsolete or less marketable. If the company's
products, markets and services are not competitive, the company's business,
financial condition and operating results will be materially
harmed.
The
company is subject to risks associated with developing products and
technologies, which could delay product introductions and result in significant
expenditures.
The
company continually seeks to refine and improve upon the performance, utility
and physical attributes of its existing products and to develop new products.
As
a result, the company's business is subject to risks associated with new
product
and technological development, including unanticipated technical or other
problems. The occurrence of any of these risks could cause a substantial
change
in the design, delay in the development, or abandonment of new technologies
and
products. Consequently, there can be no assurance that the company will develop
new technologies superior to the company's current technologies or successfully
bring new products to market.
13
Additionally,
there can be no assurance that new technologies or products, if developed,
will
meet the company's current price or performance objectives, be developed
on a
timely basis or prove to be as effective as products based on other
technologies. The inability to successfully complete the development of a
product, or a determination by the company, for financial, technical or other
reasons, not to complete development of a product, particularly in instances
in
which the company has made significant expenditures, could have a material
adverse effect on the company's financial condition and operating
results.
The
company's revenues and profits will be adversely affected if it is unable
to
expand its product offerings, retain its current customers, or attract new
customers.
The
success of the company's business depends, in part, on its ability to maintain
and expand the company's product offerings and the company's customer base.
The
company's success also depends on its ability to offer competitive prices
and
services in a price sensitive business. Many of the company's larger restaurant
chain customers have multiple sources of supply for their equipment purchases
and periodically approve new competitive equipment as an alternative to the
company's products for use within their restaurants. The company cannot assure
you that it will be able to continue to expand the company product lines,
or
that it will be able to retain the company's current customers or attract
new
customers. The company also cannot assure you that it will not lose customers
to
low-cost competitors with comparable or superior products and services. If
the
company fails to expand its product offerings, or lose a substantial number
of
the company's current customers or substantial business from current customers,
or are unable to attract new customers, the company's business, financial
condition and results of operations will be adversely affected.
The
company has depended, and will continue to depend, on key customers for a
material portion of its revenues. As a result, changes in the purchasing
patterns of such key customers could adversely impact the company's operating
results.
Many
of
the company's key customers are large restaurant chains. The number of new
store
openings by these chains can vary from quarter to quarter depending on internal
growth plans, construction, seasonality and other factors. If these chains
were
to conclude that the market for their type of restaurant has become saturated,
they could open fewer restaurants. In addition, during an economic downturn,
key
customers could both open fewer restaurants and defer purchases of new equipment
for existing restaurants. Either of these conditions could have a material
adverse effect on the company's financial condition and results of
operations.
14
Price
changes in some materials and sources of supply could affect the company's
profitability.
The
company uses large amounts of stainless steel, aluminized steel and other
commodities in the manufacture of its products. The price of steel increased
significantly during 2004 and has continued to increase in 2005. The significant
increase in the price of steel or any other commodity that the company is
not
able to pass on to its customers would adversely affect the company's operating
results. In addition, an interruption in or the cessation of an important
supply
by any third party and the company's inability to make alternative arrangements
in a timely manner, or at all, could have a material adverse effect on the
company's business, financial condition and operating results.
The
company's acquisition, investment and alliance strategy involves risks. If
the
company is unable to effectively manage these risks, its business will be
materially harmed.
To
achieve the company's strategic objectives, it may in the future seek to
acquire
or invest in other companies, businesses or technologies. Acquisitions entail
numerous risks, including the following:
• difficulties
in the assimilation of acquired businesses or technologies;
• diversion
of management's attention from other business concerns;
• potential
assumption of unknown material liabilities;
• failure
to achieve financial or operating objectives; and
• loss
of
customers or key employees.
The
company may not be able to successfully integrate any operations, personnel,
services or products that it has acquired or may acquire in the
future.
The
company may seek to expand or enhance some of its operations by forming joint
ventures or alliances with various strategic partners throughout the world.
Entering into joint ventures and alliances also entails risks, including
difficulties in developing and expanding the businesses of newly formed joint
ventures, exercising influence over the activities of joint ventures in which
the company does not have a controlling interest and potential conflicts
with
the company's joint venture or alliance partners.
15
Expansion
of the company's operations internationally involves special challenges that
it
may not be able to meet. The company's failure to meet these challenges could
adversely affect its business, financial condition and operating results.
The
company plans to continue to expand its operations internationally. The company
faces certain risks inherent in doing business in international markets.
These
risks include:
|
•
|
becoming
subject to extensive regulations and oversight, tariffs and other
trade
barriers;
|
• reduced
protection for intellectual property rights;
• difficulties
in staffing and managing foreign operations; and
• potentially
adverse tax consequences.
In
addition, the company will be required to comply with the laws and regulations
of foreign governmental and regulatory authorities of each country in which
the
company conducts business.
The
company cannot assure you that it will be able to succeed in marketing the
company products and services in international markets. The company may also
experience difficulty in managing the company's international operations
because
of, among other things, competitive conditions overseas, management of foreign
exchange risk, established domestic markets, language and cultural differences
and economic or political instability. Any of these factors could have a
material adverse effect on the success of the company's international operations
and, consequently, on the company's business, financial condition and operating
results.
16
The
company may not be able to adequately protect its intellectual property rights,
and this inability may materially harm its business.
The
company relies primarily on trade secret, copyright, service mark, trademark
and
patent law and contractual protections to protect the company proprietary
technology and other proprietary rights. The company has filed numerous patent
applications covering the company technology. Notwithstanding the precautions
the company takes to protect the company intellectual property rights, it
is
possible that third parties may copy or otherwise obtain and use the company's
proprietary technology without authorization or may otherwise infringe on
the
company's rights. In some cases, including a number of the company's most
important products, there may be no effective legal recourse against duplication
by competitors. The company is currently involved in a dispute associated
with
the development of cooking technology with Enersyst Development Center, LLC,
which was acquired by TurboChef Technologies, Inc. in 2004. The company has
instituted arbitration proceedings with respect to this dispute and intends
to
litigate the matter vigorously. In the future, the company may have to rely
on
litigation to enforce its intellectual property rights, protect its trade
secrets, determine the validity and scope of the proprietary rights of others
or
defend against claims of infringement or invalidity. Any such litigation,
whether successful or unsuccessful, could result in substantial costs to
the
company and diversions of the company's resources, either of which could
adversely affect the company's business.
Any
infringement by the company on patent rights of others could result in
litigation and adversely affect its ability to continue to provide, or could
increase the cost of providing, the company's products and services.
Patents
of third parties may have an important bearing on the company's ability to
offer
some of its products and services. The company's competitors, as well as
other
companies and individuals, may obtain, and may be expected to obtain in the
future, patents related to the types of products and service the company
offers
or plan to offer. The company cannot assure you that it is or will be aware
of
all patents containing claims that may pose a risk of infringement by the
company's products and services. In addition, some patent applications in
the
United States are confidential until a patent is issued and, therefore, the
company cannot evaluate the extent to which its products and services may
be
covered or asserted to be covered by claims contained in pending patent
applications. In general, if one or more of the company's products or services
were to infringe patents held by others, the company may be required to stop
developing or marketing the products or services, to obtain licenses from
the
holders of the patents to develop and market the services, or to redesign
the
products or services in such a way as to avoid infringing on the patent claims.
The company cannot assess the extent to which it may be required in the future
to obtain licenses with respect to patents held by others, whether such licenses
would be available or, if available, whether it would be able to obtain such
licenses on commercially reasonable terms. If the company were unable to
obtain
such licenses, it also may not be able to redesign the company's products
or
services to avoid infringement, which could materially adversely affect the
company's business, financial condition and operating results.
17
The
company may be the subject of product liability claims or product recalls,
and
it may be unable to obtain or maintain insurance adequate to cover potential
liabilities.
Product
liability is a significant commercial risk to the company. The company's
business exposes it to potential liability risks that arise from the
manufacture, marketing and sale of the company's products. In addition to
direct
expenditures for damages, settlement and defense costs, there is a possibility
of adverse publicity as a result of product liability claims. Some plaintiffs
in
some jurisdictions have received substantial damage awards against companies
based upon claims for injuries allegedly caused by the use of their products.
In
addition, it may be necessary for the company to recall products that do
not
meet approved specifications, which could result in adverse publicity as
well as
costs connected to the recall and loss of revenue.
The
company cannot be certain that a product liability claim or series of claims
brought against it would not have an adverse effect on the company's business,
financial condition or results of operations. If any claim is brought against
the company, regardless of the success or failure of the claim, the company
cannot assure you that it will be able to obtain or maintain product liability
insurance in the future on acceptable terms or with adequate coverage against
potential liabilities or the cost of a recall.
An
increase in warranty expenses could adversely affect the company's financial
performance.
The
company offers purchasers of its products warranties covering workmanship
and
materials typically for one year and, in certain circumstances, for periods
of
up to ten years, during which period the company or an authorized service
representative will make repairs and replace parts that have become defective
in
the course of normal use. The company estimates and records its future warranty
costs based upon past experience. These warranty expenses may increase in
the
future and may exceed the company's warranty reserves, which, in turn, could
adversely affect the company's financial performance.
The
company is subject to currency fluctuations and other risks from its operations
outside the United States.
The
company has manufacturing operations located in Asia and distribution operations
in Asia, Europe and Latin America. The company's operations are subject to
the
impact of economic downturns, political instability and foreign trade
restrictions, which may adversely affect the company's business, financial
condition and operating results. The company anticipates that international
sales will continue to account for a significant portion of consolidated
net
sales in the foreseeable future. Some sales by the company's foreign operations
are in local currency, and an increase in the relative value of the U.S.
dollar
against such currencies would lead to a reduction in consolidated sales and
earnings. Additionally, foreign currency exposures are not fully hedged,
and
there can be no assurances that the company's future results of operations
will
not be adversely affected by currency fluctuations.
18
The
company is subject to potential liability under environmental laws.
The
company's operations are regulated under a number of federal, state and local
environmental laws and regulations that govern, among other things, the
discharge of hazardous materials into the air and water as well as the handling,
storage and disposal of these materials. Compliance with these environmental
laws and regulations is a significant consideration for the company because
it
uses hazardous materials in the company manufacturing processes. In addition,
because the company is a generator of hazardous wastes, even if it fully
complies with applicable environmental laws, it may be subject to financial
exposure for costs associated with an investigation and remediation of sites
at
which it has arranged for the disposal of hazardous wastes if these sites
become
contaminated. In the event of a violation of environmental laws, the company
could be held liable for damages and for the costs of remedial actions.
Environmental laws could also become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violation, which could negatively affect the company's operating
results.
The
company's financial performance is subject to significant fluctuations.
The
company's financial performance is subject to quarterly and annual fluctuations
due to a number of factors, including:
• the
lengthy, unpredictable sales cycle for commercial foodservice
equipment;
• the
gain
or loss of significant customers;
• unexpected
delays in new product introductions;
|
•
|
the
level of market acceptance of new or enhanced versions of the company's
products;
|
• unexpected
changes in the levels of the company's operating expenses;
• competitive
product offerings and pricing actions; and
• general
economic conditions.
Each
of
these factors could result in a material and adverse change in the company's
business, financial condition and results of operations.
19
The
company may be unable to manage its growth.
The
company has recently experienced rapid growth in business. Continued growth
could place a strain on the company's management, operations and financial
resources. There also will be additional demands on the company's sales,
marketing and information systems and on the company's administrative
infrastructure as it develops and offers additional products and enters new
markets. The company cannot be certain that the company's operating and
financial control systems, administrative infrastructure, outsourced and
internal production capacity, facilities and personnel will be adequate to
support the company's future operations or to effectively adapt to future
growth. If the company cannot manage the company's growth effectively, the
company's business may be harmed.
The
company's business could suffer in the event of a work stoppage by its unionized
labor force.
Because
the company has a significant number of workers whose employment is subject
to
collective bargaining agreements and labor union representation, the company
is
vulnerable to possible organized work stoppages and similar actions. Unionized
employees accounted for approximately 24% of the company's workforce as of
December 31, 2005. At the company's Lodi, Wisconsin facility it has a union
contract with the International Association of Bridge, Structural, Ornamental
and Reinforcing Iron Workers that extends through January 2008. At the company's
Elgin, Illinois facility, it has a union contract with the International
Brotherhood of Teamsters that extends through April 2007. The company also
has a
union workforce at its manufacturing facility in the Philippines under a
contract that extends through June 2006. Although the company believes that
the
current relationships between employees, union and management are good, any
future strikes, employee slowdowns or similar actions by one or more unions,
in
connection with labor contract negotiations or otherwise, could have a material
adverse effect on the company's ability to operate the company's
business.
The
company depends significantly on its key personnel.
The
company depends significantly on certain of the company's executive officers
and
certain other key personnel, many of whom could be difficult to replace.
While
the company has employment agreements with certain key executives, the company
cannot be certain that it will succeed in retaining this personnel or their
services under existing agreements. The incapacity, inability or unwillingness
of certain of these people to perform their services may have a material
adverse
effect on the company. There is intense competition for qualified personnel
within the company's industry, and the company cannot assure you that it
will be
able to continue to attract, motivate and retain personnel with the skills
and
experience needed to successfully manage the company business and
operations.
20
The
impact of future transactions on the company's common stock is uncertain.
The
company periodically reviews potential transactions related to products or
product rights and businesses complementary to the company's business. Such
transactions could include mergers, acquisitions, joint ventures, alliances
or
licensing agreements. In the future, the company may choose to enter into
such
transactions at any time. The impact of transactions on the market price
of a
company's stock is often uncertain, but it may cause substantial fluctuations
to
the market price. Consequently, any announcement of any such transaction
could
have a material adverse effect upon the market price of the company's common
stock. Moreover, depending upon the nature of any transaction, the company
may
experience a charge to earnings, which could be material and could possibly
have
an adverse impact upon the market price of the company's common
stock.
Future
sales or issuances of equity or convertible securities could depress the
market
price of the company's common stock and be dilutive and affect the company's
ability to raise funds through equity issuances.
If
the
company's stockholders sell substantial amounts of the company's common stock
or
the company issues substantial additional amounts of the company's equity
securities, or there is a belief that such sales or issuances could occur,
the
market price of the company's common stock could fall. These factors could
also
make it more difficult for the company to raise funds through future offerings
of equity securities.
The
market price of the company's common stock may be subject to significant
volatility.
The
market price of the company's common stock may be highly volatile because
of a
number of factors, including the following:
• actual
or
anticipated fluctuations in the company's operating results;
|
•
|
changes
in expectations as to the company's future financial performance,
including financial estimates by securities analysts and
investors;
|
|
•
|
the
operating performance and stock price of other companies in the
company's
industry;
|
|
•
|
announcements
by the company or the company's competitors of new products or
significant
contracts, acquisitions, joint ventures or capital
commitments;
|
• changes
in interest rates;
• additions
or departures of key personnel; and
• future
sales or issuances of the company's common stock.
21
In
addition, the stock markets from time to time experience price and volume
fluctuations that may be unrelated or disproportionate to the operating
performance of particular companies. These broad fluctuations may adversely
affect the trading price of the company's common stock, regardless of the
company's operating performance.
| Item 1B. |
Unresolved
Staff Comments
|
Not
applicable.
22
| Item 2. |
Properties
|
The
company's principal executive offices are located in Elgin, Illinois. The
company operates six manufacturing facilities in the U.S. and one manufacturing
facility in the Philippines.
The
principal properties of the company utilized to conduct business operations
are
listed below:
|
Location
|
Principal
Function
|
Square
Footage
|
Owned/
Leased
|
|
Elgin,
IL
|
Manufacturing,
Warehousing and Offices
|
207,000
|
Owned
|
|
Menominee,
MI
|
Manufacturing,
Warehousing and Offices
|
46,000
|
Owned
|
|
Bow,
NH
|
Manufacturing,
Warehousing and Offices
|
102,000
34,000
|
Owned
Leased(1)
|
|
Fuquay-Varina,
NC
|
Manufacturing,
Warehousing and Offices
|
131,000
|
Owned
|
|
Burlington,
VT
|
Manufacturing,
Warehousing and Offices
|
140,000
|
Owned
|
|
Lodi,
WI
|
Manufacturing,
Warehousing and Offices
|
112,000
|
Owned
|
|
Laguna,
the Philippines
|
Manufacturing,
Warehousing and Offices
|
54,000
|
Owned
|
(1)
Lease expires December 2006.
At
various other locations the company leases small amounts of office space for
administrative and sales functions, and in certain instances limited short-term
inventory storage. These locations are in China, South Korea, Mexico, Spain,
Taiwan and the United Kingdom.
Management
believes that these facilities are adequate for the operation of the company's
business as presently conducted.
The
company also has a leased manufacturing facility in Quakertown, Pennsylvania,
which was exited as part of the company's manufacturing consolidation efforts.
This lease extends through December 2014. This facility is currently subleased.
| Item 3. |
Legal
Proceedings
|
The
company is routinely involved in litigation incidental to its business,
including product liability claims, which are partially covered by insurance
or
by indemnification from Maytag for claims related to Blodgett prior to the
December 2001 acquisition. Such routine claims are vigorously contested and
management does not believe that the outcome of any such pending litigation
will
have a material adverse effect upon the financial condition, results of
operations or cash flows of the company.
| Item 4. |
Submission
of Matters to a Vote of Security
Holders
|
No
matters were submitted to a vote of the security holders in the fourth quarter
of the year ended December 31, 2005.
23
PART
II
| Item 5. |
Market
for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity
Securities
|
Principal
Market
The
company's Common Stock trades on the Nasdaq Global Market under the symbol
"MIDD". The following table sets forth, for the periods indicated, the high
and
low closing sale prices per share of Common Stock, as reported by the Nasdaq
Global Market.
|
Closing
Share Price
|
||
|
High
|
Low
|
|
|
Fiscal
2005
|
||
|
First
quarter
|
55.69
|
45.82
|
|
Second
quarter
|
56.01
|
44.04
|
|
Third
quarter
|
72.50
|
52.10
|
|
Fourth
quarter
|
87.65
|
69.81
|
|
Fiscal
2004
|
||
|
First
quarter
|
47.05
|
37.80
|
|
Second
quarter
|
63.00
|
45.79
|
|
Third
quarter
|
56.40
|
49.20
|
|
Fourth
quarter
|
58.30
|
46.80
|
Shareholders
The
company estimates there were approximately 18,676 record holders of the
company's common stock as of March 10, 2006.
Dividends
In
July
2004, the company declared and paid a $0.40 per share special dividend to
shareholders of record of the company's common stock as of the close of business
on June 4, 2004 aggregating to $3.7 million.
Stock
Options
During
the fourth quarter of fiscal 2005, the company issued 14,625 shares to division
executives and 5,000 shares to directors and pursuant to the exercise of stock
options, for $223,627.75 and $37,500.00, respectively. Such options were granted
to division executives for 1,500 shares at an exercise price of $5.25 per share,
3,350 shares at an exercise price of $10.51, and 9,775 shares at an exercise
price of $18.47 per share. Such options were granted to directors for 5,000
shares at an exercise price of $7.50 per share. As certificates for the shares
were legended and stop transfer instructions were given to the transfer agent,
the issuance of such shares was exempt under the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof and the rules and regulations
thereunder, as transactions by an issuer not involving a public
offering.
24
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
|
|||||
|
October
2, 2005 to October 29, 2005
|
—
|
—
|
—
|
847,001
|
||||
|
October
30, 2005 to November 26, 2005
|
—
|
—
|
—
|
847,001
|
||||
|
November
27, 2005 to December 31, 2005
|
—
|
—
|
—
|
847,001
|
||||
|
Quarter
ended December 31, 2005
|
—
|
—
|
—
|
847,001
|
In
July
1998, the company's Board of Directors adopted a stock repurchase program and
subsequently authorized the purchase of up to 1,800,000 common shares in open
market purchases. As of December 31, 2005, 952,999 shares had been purchased
under the 1998 stock repurchase program.
In
October 2000, the company's Board of Directors approved a self tender offer
that
authorized the purchase of up to 1,500,000 common shares from existing
stockholders at a per share price of $7.00. On November 22, 2000, upon the
expiration date of this program, the company announced that 1,135,359 shares
were accepted for payment pursuant to the self tender offer for $7.9
million.
In
December 2004, the company's Board of Directors approved a stock repurchase
agreement in conjunction with the retirement of the Chairman of the Board.
In
connection with this agreement, the company repurchased 1,808,774 shares of
its
common stock into treasury at $42.00 per share for an aggregate price of
$75,968,508.
At
December 31, 2005 the company had a total of 3,856,344 shares in treasury
amounting to $89.7 million.
25
PART
II
| Item 6. |
Selected
Financial Data
|
(amounts
in thousands, except per share data)
Fiscal
Year Ended(1)
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||
|
Income
Statement Data:
|
||||||||||||||
|
Net
sales
|
$
|
316,668
|
$ |
271,115
|
$ |
242,200
|
$ |
235,147
|
$ |
103,642
|
||||
|
Cost
of sales
|
195,015
|
168,487
|
156,347
|
156,647
|
72,138
|
|||||||||
|
Gross
profit
|
121,653
|
102,628
|
85,853
|
78,500
|
31,504
|
|||||||||
|
Selling
and distribution expenses
|
33,772
|
30,496
|
29,609
|
28,213
|
13,180
|
|||||||||
|
General
and administrative expenses
|
29,909
|
23,113
|
21,228
|
20,556
|
10,390
|
|||||||||
|
Stock
repurchase transaction expenses
|
—
|
12,647
|
—
|
—
|
—
|
|||||||||
|
Acquisition
integration reserve adjustments
|
—
|
(1,887)
|
—
|
—
|
—
|
|||||||||
|
Income
from operations
|
57,972
|
38,259
|
35,016
|
29,731
|
7,934
|
|||||||||
|
Interest
expense and deferred financing amortization, net
|
6,437
|
3,004
|
5,891
|
11,180
|
740
|
|||||||||
|
Debt
extinguishment expenses
|
—
|
1,154
|
—
|
9,122
|
—
|
|||||||||
|
Gain
on acquisition financing derivatives
|
—
|
(265)
|
(62)
|
(286)
|
—
|
|||||||||
|
Other
expense, net
|
137
|
522
|
366
|
901
|
794
|
|||||||||
|
Earnings
before income taxes
|
51,398
|
33,844
|
28,821
|
8,814
|
6,400
|
|||||||||
|
Provision
for income taxes
|
19,220
|
10,256
|
10,123
|
2,712
|
4,764
|
|||||||||
|
Net
earnings
|
$ |
32,178
|
$ |
23,588
|
$ |
18,698
|
$ |
6,102
|
$ |
1,636
|
||||
|
Net
earnings per share:
|
||||||||||||||
|
Basic
|
$ |
4.28
|
$ |
2.56
|
$ |
2.06
|
$ |
0.68
|
$ |
0.18
|
||||
|
Diluted
|
$ |
3.98
|
$ |
2.38
|
$ |
1.99
|
$ |
0.67
|
$ |
0.18
|
||||
|
Weighted
average number of shares outstanding:
|
||||||||||||||
|
Basic
|
7,514
|
9,200
|
9,065
|
8,990
|
8,981
|
|||||||||
|
Diluted
|
8,093
|
9,931
|
9,392
|
9,132
|
8,997
|
|||||||||
|
Cash
dividends declared per
common share
|
$ |
—
|
$ |
0.40
|
$ |
0.25
|
$ |
—
|
$ |
—
|
||||
|
Balance
Sheet Data:
|
||||||||||||||
|
Working
capital
|
$ |
7,590
|
$ |
10,923
|
$ |
3,490
|
$ |
13,890
|
$ |
12,763
|
||||
|
Total
assets
|
263,918
|
209,675
|
194,620
|
207,962
|
211,397
|
|||||||||
|
Total
debt
|
121,595
|
123,723
|
56,500
|
87,962
|
96,199
|
|||||||||
|
Stockholders'
equity
|
48,500
|
7,215
|
62,090
|
44,632
|
39,409
|
|||||||||
|
(1)
|
The
company's fiscal year ends on the Saturday nearest to
December 31.
|
26
| Item 7. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Special
Note Regarding Forward-Looking Statements
This
report contains "forward-looking statements" subject to the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve known
and unknown risks, uncertainties and other factors, which could cause
the
company's actual results, performance or outcomes to differ materially from
those expressed or implied in the forward-looking statements. The following
are
some of the important factors that could cause the company's actual results,
performance or outcomes to differ materially from those discussed in the
forward-looking statements:
| · |
volatility
in earnings resulting from goodwill impairment losses, which may
occur
irregularly and in varying amounts;
|
| · |
variability
in financing costs;
|
| · |
quarterly
variations in operating results;
|
| · |
dependence
on key customers;
|
| · |
risks
associated with the company's foreign operations, including market
acceptance and demand for the company's products and the company's
ability
to manage the risk associated with the exposure to foreign currency
exchange rate fluctuations;
|
| · |
the
company's ability to protect its trademarks, copyrights and other
intellectual property;
|
| · |
changing
market conditions;
|
| · |
the
impact of competitive products and
pricing;
|
| · |
the
timely development and market acceptance of the company's products;
and
|
| · |
the
availability and cost of raw materials.
|
The
company cautions readers to carefully consider the statements set forth in
the
section entitled "Item 1A Risk Factors" of this filing and discussion of risks
included in the company's Securities and Exchange Commission
filings.
27
NET
SALES SUMMARY
(dollars
in thousands)
Fiscal
Year Ended(1)
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Sales
|
Percent
|
Sales
|
Percent
|
Sales
|
Percent
|
||||||||||||||
|
Business
Divisions:
|
|||||||||||||||||||
|
Commercial
Foodservice:
|
|||||||||||||||||||
|
Core
cooking equipment
|
$
|
222,216
|
70.2
|
$
|
185,520
|
68.4
|
$
|
162,366
|
67.0
|
||||||||||
|
Conveyor
oven equipment
|
55,270
|
17.5
|
54,183
|
20.0
|
49,236
|
20.3
|
|||||||||||||
|
Counterline
cooking equipment
|
12,298
|
3.9
|
10,262
|
3.8
|
10,096
|
4.2
|
|||||||||||||
|
International
specialty equipment
|
9,210
|
2.9
|
7,545
|
2.8
|
7,704
|
3.2
|
|||||||||||||
|
Commercial
Foodservice
|
298,994
|
94.5
|
257,510
|
95.0
|
229,402
|
94.7
|
|||||||||||||
|
Industrial
Foodservice
|
2,837
|
0.9
|
—
|
—
|
—
|
—
|
|||||||||||||
|
International
Distribution Division
(2)
|
53,989
|
17.0
|
46,146
|
17.0
|
42,698
|
17.6
|
|||||||||||||
|
Intercompany
sales (3)
|
(39,152
|
)
|
(12.4
|
)
|
(32,541
|
)
|
(12.0
|
)
|
(29,900
|
)
|
(12.3
|
)
|
|||||||
|
Total
|
$
|
316,668
|
100.0
|
%
|
$
|
271,115
|
100.0
|
%
|
$
|
242,200
|
100.0
|
%
|
|||||||
|
(1)
|
The
company's fiscal year ends on the Saturday nearest to December
31.
|
|
(2)
|
Consists
of sales of products manufactured by Middleby and products manufactured
by
third parties.
|
|
(3)
|
Represents
the elimination of sales amongst the Commercial Foodservice Equipment
Group and from the Commercial Foodservice Equipment Group to the
International Distribution
Division.
|
Results
of Operations
The
following table sets forth certain items in the consolidated statements of
earnings as a percentage of net sales for the periods presented:
|
Fiscal
Year Ended(1)
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Cost
of sales
|
61.6
|
62.1
|
64.6
|
|||||||
|
Gross
profit
|
38.4
|
37.9
|
35.4
|
|||||||
|
Selling,
general and administrative expenses
|
20.1
|
19.8
|
20.9
|
|||||||
|
Stock
repurchase transaction expenses
|
--
|
4.7
|
--
|
|||||||
|
Acquisition
integration reserve adjustments
|
--
|
(0.7
|
)
|
--
|
||||||
|
Income
from
operations
|
18.3
|
14.1
|
14.5
|
|||||||
|
Interest
expense and deferred financing amortization, net
|
2.0
|
1.1
|
2.4
|
|||||||
|
Debt
extinguishment expenses
|
--
|
0.4
|
--
|
|||||||
|
Gain
on acquisition financing derivatives
|
--
|
(0.1
|
)
|
--
|
||||||
|
Other
expense, net
|
--
|
0.2
|
0.2
|
|||||||
|
Earnings
before income taxes
|
16.3
|
12.5
|
11.9
|
|||||||
|
Provision
for income taxes
|
6.1
|
3.8
|
4.2
|
|||||||
|
Net
earnings
|
10.2
|
%
|
8.7
|
%
|
7.7
|
%
|
||||
|
(1)
|
The
company's fiscal year ends on the Saturday nearest to December
31.
|
28
Fiscal
Year Ended December 31, 2005 as Compared to January 1,
2005
Net
sales.
Net
sales in fiscal 2005 increased by $45.6 million or 16.8% to $316.7 million
in
fiscal 2005 from $271.1 million in fiscal 2004.
Net
sales
of the Commercial Foodservice Equipment Group increased by $41.5 million or
16.1% to $299.0 million in 2005 as compared to $257.5 million in the prior
year.
| · |
Core
cooking equipment increased by $36.7 million or 19.8% to $222.2 million
in
2005. The sales increase included $16.0 million of sales at Nu-Vu
Foodservice Systems which was acquired on January 7, 2005 representing
8.6% of the sales growth of the core cooking equipment product group.
The
remaining $20.7 million in sales for this group reflects continued
success
of recent product introductions including the Solstice series of
fryers,
the Southbend Platinum series of ranges and the Blodgett combi-oven
and
steam line.
|
| · |
Conveyor
oven equipment sales increased by approximately $1.1 million or 2.0%
to
$55.3 million. The increase in sales reflects sales of the new 500
series
product line of ovens, offset in part by reduced sales of certain
discontinued oven models during 2005.
|
| · |
Counterline
cooking equipment sales increased by approximately $2.0 million or
19.8%
as a result of increased sales of a new series of counterline equipment
introduced in 2004.
|
| · |
International
specialty equipment sales increased by $1.7 million or 22.1%. The
increase
in sales resulted from increased product and component parts produced
for
the company's U.S. manufacturing operations.
|
Net
sales
at the Industrial Foodservice Equipment Group were $2.8 million for the period
subsequent to the acquisition of Alkar on December 7, 2005.
Net
sales
of the International Distribution Division increased by $7.9 million or 17.1%
to
$54.0 million. Sales increased in all regions reflecting growth with the local
restaurant chains and expansion of U.S. restaurant concepts internationally.
Net
sales included an increase of $3.5 million in Asia, $2.8 million in Europe
and
the Middle East and $1.6 million in Latin America.
Intercompany
sales eliminations represent sales of product amongst the Commercial Foodservice
Equipment Group operations and from the Commercial Foodservice Equipment Group
operations to the International Distribution Division. The sales elimination
increased by $6.7 million to $39.2 million reflecting the increase in purchases
of equipment by the International Distribution Division from the Commercial
Foodservice Equipment Group due to increased sales volumes.
29
Gross
profit.
Gross
profit increased by $19.0 million to $121.7 million in fiscal 2005 from $102.6
million in 2004 as a result of increased sales volumes and improvements in
the
gross margin rate, which increased to 38.4% in 2005 from 37.9% in 2004. The
improvement in the gross margin rate resulted from several factors, including
the following:
| · |
Increased
sales volumes resulting in greater production efficiencies and absorption
of fixed overhead costs.
|
| · |
Increased
production efficiencies and lower warranty expenses associated with
new
product introductions resulting from standardization of product platforms
and improvements of product design for new generations of
equipment.
|
Selling,
general and administrative expenses.
Selling, general and administrative expenses decreased by $0.7 million to $63.7
million in 2005 from $64.4 million in 2004.
Selling
and distribution expenses increased to $33.8 million in 2005 from $30.5 million
in 2004. The increase included incremental selling and distribution expenses
of
$1.0 million associated with the operations of the acquisitions completed during
2005. The remaining increase in selling and distribution expense resulted
primarily from increased commission expense to the company's independent sales
representatives on higher sales and increased promotional and marketing
expenses. As a percentage of net sales, selling and distribution expenses
decreased to 10.7% in 2005 from 11.2% in 2004.
General
and administrative expenses increased to $29.9 million in 2005 from $23.1
million in 2004. The increase included incremental general and administrative
expenses of $1.1 million associated with the operations of the acquisitions
completed in 2005. The remaining increase in general and administrative expenses
includes $3.3 million of non-cash stock compensation expense and $2.1 million
increase in professional fees associated with acquisitions, Sarbanes-Oxley
compliance and other legal matters. As a percentage of net sales, general and
administrative expenses were 9.4% in 2005 compared to the prior year of 8.5%.
Stock
repurchase transaction expenses of $12.6 million were recorded in the fourth
quarter of 2004 associated with the repurchase of 1,808,774 shares of the
company's common stock and 271,000 stock options from the company's former
chairman, members of his family and trusts controlled by his family. Expenses
included $8.0 million of costs associated with the repurchase of the 271,000
stock options, $1.9 million related to a pension settlement with the former
chairman and $2.7 million of investment banking, legal, and various other costs
associated with the transaction.
Acquisition
reserve adjustments of $1.9 million were recorded during fiscal 2004, primarily
consisting of a gain resulting from an early lease termination that occurred
in
conjunction with the sale of a leased facility to an unrelated third party.
The
leased facility was originally exited in early 2002 subsequent to the
acquisition of Blodgett as a result of the company's manufacturing consolidation
efforts.
30
Income
from operations.
Income
from operations increased $19.7 million to $58.0 million in fiscal 2005 from
$38.3 million in fiscal 2004. The increase in operating income resulted from
the
increase in net sales and gross profit and the absence of the stock repurchase
transactions expenses that incurred in 2004.
Non-operating
expenses.
Non-operating expenses increased by $2.2 million to $6.6 million in 2005 from
$4.4 million in 2004. The net increase in non-operating expenses included:
| · |
A
$3.4 million increase in interest expense to $6.4 million in 2005
from
$3.0 million in 2004 resulting from higher average debt during the
year
due to the $84 million December 2004 stock repurchase transaction
and
higher rates of interest.
|
| · |
A
decrease of $1.2 million pertaining to the write-off in fiscal 2004
of
deferred financing costs related to the company's previous bank facility,
which was refinanced as a result of the stock repurchase transaction.
|
| · |
A
$0.3 million decrease in the gain on financing related
derivatives.
|
| · |
A
$0.4 million decrease in other expense, primarily due to lower foreign
exchange losses.
|
Income
taxes.
The
company recorded a net tax provision of $19.2 million in fiscal 2005 at an
effective rate of 37.4% as compared to a provision of $10.3 million at an
effective rate of 30.3% in the prior year. The 2004 tax provision included
a
$3.2 million tax benefit recorded during the third quarter associated with
an
adjustment to tax reserves for a closed tax year.
31
Fiscal
Year Ended January 1, 2005 as Compared to January 3,
2004
Net
sales.
Net
sales in fiscal 2004 increased by $28.9 million or 11.9% to $271.1 million
in
fiscal 2004 from $242.2 million in fiscal 2003.
Net
sales
at the Commercial Foodservice Equipment Group increased by $28.1 million or
12.2% to $257.5 million in 2004 as compared to $229.4 million in the prior
year.
| · |
Core
cooking equipment increased by $23.1 million or 14.2% to $185.5 million
in
2004. Fryer sales grew by approximately $6.7 million due in part
to
continued success of the Solstice fryer platform. Sales of convection
and
combi-ovens increased by approximately $6.2 million with increased
sales
to institutional customers due in part to improved market conditions
and
success of new product introductions. Range sales grew by approximately
$4.2 million with continued success of the new Platinum series of
products. Sales of steam equipment increased by approximately $2.5
million
due to the introduction of steam products under the Blodgett brand
name
and success of the newly introduced StratoSteam steamer under the
Southbend brand name.
|
| · |
Conveyor
oven equipment sales increased by approximately $4.9 million or 10.0%
to
$54.2 million. Increased sales reflect the success of the company's
new
generation of more energy efficient conveyor ovens. Improved sales
also
reflect greater sales with certain major restaurant chain accounts,
which
increased their purchases during the year. Parts sales also increased
reflecting higher prices of parts and increased sales volume resulting
from an aging base of equipment.
|
| · |
Counterline
cooking equipment sales increased by approximately $0.2 million or
1.6%
and included sales of a new series of counterline equipment introduced
in
2004.
|
| · |
International
specialty equipment sales decreased by $0.2 million or 2.1%. The
decrease
in sales resulted from lower component parts produced for the company's
U.S. manufacturing operations.
|
Net
sales
at the International Distribution Division increased by $3.4 million or 8.1%
to
$46.1 million. Sales increased in all regions reflecting growth with the local
restaurant chains in Latin America and Europe, and expansion of U.S. restaurant
concepts in Asia and Australia.
Intercompany
sales eliminations represent sales of product amongst the Commercial Foodservice
Equipment Group operations and from the Commercial Foodservice Equipment Group
operations to the International Distribution Division. The sales elimination
increased by $2.6 million to $32.5 million reflecting the increase in purchases
of equipment by the International Distribution Division from the Commercial
Foodservice Equipment Group due to increased sales volumes.
32
Gross
profit.
Gross
profit increased by $16.8 million to $102.6 million in fiscal 2004 from $85.9
million in 2003 as a result of increased sales volume and improvements in the
gross margin rate, which increased to 37.9% in 2004 from 35.4% in 2003. The
improvement in the gross margin rate resulted from several factors, including
the following:
| · |
Increased
sales volumes resulting in greater production efficiencies and absorption
of fixed overhead costs.
|
| · |
Material
cost savings resulting from supply chain initiatives instituted in
fiscal
2004.
|
| · |
Increased
production efficiencies and lower warranty expenses associated with
new
product introductions resulting from standardization of product platforms
and improvements of product design for new generations of
equipment.
|
Selling,
general and administrative expenses.
Selling, general and administrative expenses increased by $13.5 million to
$64.4
million in 2004 from $50.8 million in 2003. This increase included $12.6 million
of expense associated with the stock repurchase transaction and $1.9 of income
resulting from adjustments to acquisition integration reserves.
Selling
and distribution expenses increased to $30.5 million in 2004 from $29.6 million
in 2003. The increase in selling and distribution expense resulted from
increased commission expense to the company's independent sales representatives
on higher sales. As a percentage of net sales, selling and distribution expenses
decreased to 11.2% in 2004 from 12.2% in 2003.
General
and administrative expenses increased to $23.1 million in 2004 from $21.2
million in 2003. The increase in general and administrative expenses is
primarily due to increased incentive compensation expenses corresponding with
the improved financial performance of the company. The company also incurred
higher professional fees associated with Sarbanes-Oxley compliance. As a
percentage of net sales, general and administrative expenses were 8.5% in 2004
compared to the prior year of 8.8%.
Stock
repurchase transaction expenses of $12.6 million were recorded in the fourth
quarter of 2004 associated with the repurchase of 1,808,774 shares of the
company's common stock and 271,000 stock options from the company's former
chairman, members of his family and trusts controlled by his family. Expenses
included $8.0 million of costs associated with the repurchase of the 271,000
stock options, $1.9 million related to a pension settlement with the former
chairman and $2.7 million of investment banking, legal, and various other costs
associated with the transaction.
Acquisition
reserve adjustments of $1.9 million were recorded during fiscal 2004, primarily
consisting of a gain resulting from an early lease termination that occurred
in
conjunction with the sale of a leased facility to an unrelated third party.
The
leased facility was originally exited in early 2002 subsequent to the
acquisition of Blodgett as a result of the company's manufacturing consolidation
efforts.
33
Income
from operations.
Income
from operations increased $3.2 million to $38.3 million in fiscal 2004 from
$35.0 million in fiscal 2003. The increase in operating income resulted from
the
increase in net sales and gross profit offset by the stock repurchase
transaction expenses.
Non-operating
expenses.
Non-operating expenses decreased by $1.8 million to $4.4 million in 2004 from
$6.2 million in 2003. The net decrease in non-operating expenses included:
| · |
A
$2.9 million reduction in interest expense to $3.0 million in 2004
from
$5.9 million in 2003 resulting from lower average debt during the
year and
lower rates of interest assessed on outstanding balances due in part
to a
refinancing of the company's debt facility in May
2004.
|
| · |
An
increase of $1.2 million pertaining to the write-off of deferred
financing
costs related to the company's previous bank facility, which was
refinanced as a result of the stock repurchase transaction.
|
| · |
A
$0.2 million increase in the gain on financing related derivatives
to $0.3
million in 2004 from $0.1 million in 2003 with gains on interest
rate
swaps that occurred as interest rates rose in
2004.
|
Income
taxes.
The
company recorded a net tax provision of $10.3 million in fiscal 2004 at an
effective rate of 30.3% as compared to a provision of $10.1 million at an
effective rate of 35.1% in the prior year. The 2004 tax provision included
a
$3.2 million tax benefit recorded during the third quarter associated with
an
adjustment to tax reserves for a closed tax year.
34
Financial
Condition and Liquidity
Total
cash and cash equivalents increased by $0.1 million to $3.9 million at December
31, 2005 from $3.8 million at January 1, 2005. Net borrowings decreased to
$121.6 million at December 31, 2005 from $123.7 million at January 1, 2005.
Operating
activities.
Net
cash provided by operating activities amounted to $42.3 million as compared
to
$18.5 million in the prior year. Adjustments to reconcile 2005 net earnings
to
operating cash flows included $3.6 million of depreciation and amortization
and
$3.3 million of non-cash stock compensation expense. The net change in deferred
taxes resulted in a $0.8 decrease in cash. Accounts receivable increased $3.6
and inventories increased $1.3 million due to increased sales volumes. Prepaid
expenses and other assets decreased $7.2 million to the utilization of tax
overpayments from 2004. Accounts payable decreased $0.5 million due to normal
operating variations resulting from the timing of vendor purchases and payments.
Accrued expenses and other liabilities increased $0.4 million due to increases
in rebate and warranty obligations on higher sales, offset by lower pension
obligations due to the pension settlement with the former chairman.
Investing
activities.
During
2005 net cash used for investing activities amounted to $ 41.0 million. This
included $1.4 million of property additions primarily associated with the
replacement and upgrade of production equipment and $11.5 million associated
with the acquisition of Nu-Vu and $28.2 million associated with the acquisition
of Alkar.
Financing
activities.
Net
cash used in financing activities amounted to $1.2 million in 2005. This
included repayments of $10.0 million of scheduled payments on the senior term
loan and $0.3 million of scheduled repayments under a note obligation, net
of
borrowings of $5.0 million under the company's revolving credit facility and
$3.2 million under a foreign bank loan. The company also received $1.0 million
of proceeds associated with the exercise of stock options.
In
2006,
the company has scheduled debt repayments of $12.5 million in connection with
its senior bank term loan.
The
company believes that cash flows from operations and borrowing availability
under the revolving credit facility will be sufficient to satisfy debt
obligations, capital expenditures and working capital requirements for the
foreseeable future. At December 31, 2005 the company was in compliance with
all
covenants pursuant to its borrowing agreements.
35
Contractual
Obligations
The
company's contractual cash payment obligations are set forth below (dollars
in
thousands):
|
Long-term Debt |
Operating
Leases |
Idle
Facility |
Total Contractual |
||||||||
|
Less
than 1 year
|
$ |
13,780
|
$ |
908
|
$ |
303
|
$ |
14,991
|
|||
|
1-3
years
|
32,560
|
681
|
667
|
33,908
|
|||||||
|
4-5
years
|
75,255
|
360
|
778
|
76,393
|
|||||||
|
After
5 years
|
—
|
111
|
2,019
|
2,130
|
|||||||
| $ |
121,595
|
$ |
2,060
|
$ |
3,767
|
$ |
127,422
|
Idle
facility lease consists of an obligation for a manufacturing location that
was
exited in conjunction with the company's manufacturing consolidation efforts.
This lease obligation continues through December 2014. This facility has been
subleased. The obligation presented above does not reflect any anticipated
sublease income from the facilities.
As
indicated in Note 13 to the consolidated financial statements, the projected
benefit obligation of the defined benefit plans exceeded the plans’ assets by
$2.4 million at the end of 2005 as compared to $5.0 million at the end of 2004.
The unfunded benefit obligations were comprised of a $1.0 million under funding
of the company's union plan and $1.4 million of under funding of the company's
director plans. The decrease in the unfunded benefit obligations resulted from
the pension settlement with the company's former chairman of its board of
directors. Payments aggregating to $7.8 million were made to settle this
obligation in 2005. The company made contributions of $3.8 million in 2005
and
$1.6 million in 2004 to the company's director plans. The company does not
expect to contribute to the director plans in 2006. The company made minimum
contributions required by the Employee Retirement Income Security Act of 1974
(“ERISA”) of $0.3 million in 2005 and $0.2 million in 2004 to the company's
union plan. The company expects to continue to make minimum contributions to
the
union plan as required by ERISA.
The
company places purchase orders with its suppliers in the ordinary course of
business. These purchase orders are generally to fulfill short-term
manufacturing requirements of less than 90 days and most are cancelable with
a
restocking penalty. The company has no long-term purchase contracts or minimum
purchase obligations with any supplier.
The
company has contractual obligations under its various debt agreements to make
interest payments. These amounts are subject to the level of borrowings in
future periods and the interest rate for the applicable periods, and therefore
the amounts of these payments is not determinable.
The
company has no activities, obligations or exposures associated with off-balance
sheet arrangements.
36
Related
Party Transactions
On
March
1, 2001, the company made a loan to its Chief Executive Officer, in the amount
of $300,000. The loan was repayable with interest of 6.0% on February 24, 2004.
This loan was established in conjunction with the company's commitment to
transfer 50,000 shares of common stock from treasury to the officer at $6.00
per
share. The market price at the close of business on March 1, 2001 was $5.94
per
share. In accordance with a special incentive agreement with the officer, the
loan and the related interest were to be forgiven by the company if certain
targets of Earnings Before Taxes for fiscal years 2001, 2002, and 2003 were
achieved. As of January 3, 2004, the entire loan had been forgiven as the
financial targets established by the special incentive agreement had been
achieved. One-third of the principal loan amount had been forgiven for the
achievement of the defined targets in fiscal 2002 and the remaining two-thirds
were forgiven in fiscal 2003. Amounts forgiven were recorded in general and
administrative expense.
On
December 23, 2004 the company repurchased 1,808,774 shares of its common stock
and 271,000 options from William F. Whitman, Jr., the former chairman of the
company’s board of directors, members of his family and trusts controlled by his
family (collectively, the “Whitmans”) in a private transaction for a total
aggregate purchase price of $83,974,578 in cash. The repurchased shares
represented 19.6% of the company's outstanding shares and were repurchased
for
$75,968,508 at $42.00 per share which represented a 12.8% discount to the
closing market price of $48.19 of the company’s common stock on December 23,
2004 and a 21.7% discount from the $53.64 average closing price over the thirty
trading days prior to the repurchase. The company incurred $1.2 million of
transaction costs associated with the repurchase of these shares. The 271,000
stock options were purchased for $8,006,070, which represented the difference
between $42.00 and the exercise price of the option. In conjunction with the
stock repurchase, the Whitmans resigned as directors of the
company.
The
company financed the share repurchase with borrowings under its senior bank
facility that was established in connection with this transaction.
In
February 2005, the company settled all pension obligations associated with
William F. Whitman, Jr., the former chairman of the company's board of directors
for $7.5 million in cash. In conjunction with this transaction, the company
recorded $1.9 million in settlement costs representing the difference between
the settlement amount and the accrued pension liability at the time of the
transaction.
37
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 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.
Property
and equipment.
Property
and equipment are depreciated or amortized on a straight-line basis over their
useful lives based on management's estimates of the period over which the assets
will be utilized to benefit the operations of the company. The useful lives
are
estimated based on historical experience with similar assets, taking into
account anticipated technological or other changes. The company
periodically reviews these lives relative to physical factors, economic factors
and industry trends. If there are changes in the planned use of property and
equipment or if technological changes were to occur more rapidly than
anticipated, the useful lives assigned to these assets may need to be shortened,
resulting in the recognition of increased depreciation and amortization expense
in future periods.
Long-lived
assets.
Long-lived assets (including goodwill and other intangibles) are reviewed for
impairment annually and whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In assessing the
recoverability of the company's long-lived assets, the company considers changes
in economic conditions and makes assumptions regarding estimated future cash
flows and other factors. Estimates of future cash flows are judgments
based on the company's experience and knowledge of operations. These
estimates can be significantly impacted by many factors including changes in
global and local business and economic conditions, operating costs, inflation,
competition, and consumer and demographic trends. If the company's
estimates or the underlying assumptions change in the future, the company may
be
required to record impairment charges.
Warranty.
In the
normal course of business the company issues product warranties for specific
product lines and provides for the estimated future warranty cost in the period
in which the sale is recorded. The estimate of warranty cost is based on
contract terms and historical warranty loss experience that is periodically
adjusted for recent actual experience. Because warranty estimates are forecasts
that are based on the best available information, claims costs may differ from
amounts provided. Adjustments to initial obligations for warranties are made
as
changes in the obligations become reasonably estimable.
38
Litigation.
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 reserve requirements 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 or
results of operations.
Income
taxes.
The
company operates in numerous foreign and domestic taxing jurisdictions where
it
is subject to various types of tax, including sales tax and income tax.
The company's tax filings are subject to audits and adjustments. Because of
the
nature of the company’s operations, the nature of the audit items can be
complex, and the objectives of the government auditors can result in a tax
on
the same transaction or income in more than one state or country. As part
of the company's calculation of the provision for taxes, the company establishes
reserves for the amount that it expects to incur as a result of audits. The
reserves may change in the future due to new developments related to the various
tax matters.
New
Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of
ARB No. 43, Chapter 4". This statement amends the guidance in ARB No. 43,
Chapter 4 to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. This statement requires
that these items be recognized as current period costs and also requires that
allocation of fixed production overheads to the costs of conversion be based
on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The company will apply this guidance prospectively.
The
company is in the process of determining what impact the application of this
guidance will have on the company's financial position, results of operations
or
cash flows.
In
December 2004, FASB issued a revision to SFAS No. 123 "Accounting for Stock
Based Compensation". SFAS No. 123(R) "Share-Based Payment" requires all new,
modified, and unvested share-based payments to employees to be recogonized
in
the financial statements as compensation cost over the service period based
upon
their fair value on the date of grant. This statement eliminates the alternative
of accounting for share-based compensation under Accounting Principles Board
Opinion No. 25. The statement is effective as of the beginning of the first
interim or annual reporting period that begins after June 5, 2005. The company
will adopt SFAS No. 123(R) on January 1, 2006 under the modified retrospective
application transition method. As such, the prior year comparative results
will
be adjusted to recognize the compensation cost currently reported in the stock
based compensation pro forma footnote disclosure (see Note 4(o)) in the
consolidated financial statements issued after January 1, 2006. Accordingly,
the
adoption of SFAS No. 123 will result in a reduction to net earnings by $683,000,
or $0.09 per share for 2005 and $442,000 or $0.05 per share for 2004 in the
consolidated financial statements issued after January 1, 2006.
39
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections
-
a replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement
replaces ABP Opinion No. 20, Accounting Changes and FASB Statement No. 3,
Reporting Changes in Interim Financial Statements and changes the requirements
for the accounting for and reporting of a change in accounting principles.
This
statement applies to all voluntary changes in accounting principles. This
statement is effective for accounting changes and corrections of errors made
in
fiscal years beginning after December 15, 2005. The company will apply this
guidance prospectively.
Certain
Risk Factors That May Affect Future Results
An
investment in shares of the company's common stock involves risks. The company
believes the risks and uncertainties described in "Item 1A Risk Factors"
and in "Special Note Regarding Forward-Looking Statements" are the material
risks it faces. Additional risks and uncertainties not currently known to
the
company or that it currently deems immaterial may impair its business
operations. If any of the risks identified in "Item 1A Risk Factors" actually
occurs, the company's business, results of operations and financial condition
could be materially adversely affected, and the trading price of the company's
common stock could decline.
| Item 7A. |
Quantitative
and Qualitative Disclosure 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:
|
Fixed
Rate Debt
|
Variable
Rate Debt
|
|||||
|
(dollars
in thousands)
|
||||||
|
2006
|
$ |
—
|
$ |
13,780
|
||
|
2007
|
—
|
|
16,280
|
|||
|
2008
|
—
|
16,280
|
||||
|
2009
|
—
|
75,255
|
||||
| $ |
—
|
$ |
121,595
|
|||
During
the fourth quarter of 2005 the company amended its senior secured credit
facility. Terms of the senior credit agreement provide for $60.0 million of
term
loans and $130.0 million of availability under a revolving credit line. As
of
December 31, 2005, the company had $116.3 million of borrowings outstanding
under this facility, including $56.3 million of borrowings under the revolving
credit line. The company also has $8.5 million in outstanding letters of credit,
which reduces the borrowing availability under the revolving credit
line.
Borrowings
under the senior secured credit facility are assessed at an interest rate at
1.25% above LIBOR for long-term borrowings or at the higher of the Prime rate
and the Federal Funds Rate. At December 31, 2005 the average interest rate
on
the senior debt amounted to 5.7%. The interest rates on borrowings under the
senior bank facility may be adjusted quarterly based on the company’s defined
indebtedness ratio on a rolling four-quarter basis. Additionally, a commitment
fee, based upon the indebtedness ratio is charged on the unused portion of
the
revolving credit line. This variable commitment fee amounted to 0.25% as of
December 31, 2005.
In
December 2005, the company entered into a $3.2 million U.S. dollar secured
term
loan at its subsidiary in Spain. This term loan amortizes in equal monthly
installments over a four-year period ending December 2009. Borrowings under
this
facility are assessed at an interest rate of 0.45% above LIBOR. At December
31,
2005, the interest rate on this loan was 4.83%
In
November 2004, the company entered into a promissory note in conjunction with
the release and early termination of obligations under a lease agreement
relative to a manufacturing facility in Shelburne, Vermont. The remaining note
of $2.1 million is assessed interest at 4.0% above LIBOR with an interest rate
cap of 9.0%. At year-end the interest rate on the note was approximately 8.3%.
The note amortizes monthly and matures in December 2009.
40
The
company has historically entered into interest rate swap agreements to
effectively fix the interest rate on its outstanding debt. In January 2002,
the
company had entered into an interest rate swap agreement for a notional amount
of $20.0 million. This agreement swapped one-month LIBOR for a fixed rate of
4.03% and was in effect through December 2004. In February 2003, the company
entered into an interest rate swap agreement for a notional amount of $10.0
million. This agreement swapped one-month LIBOR for a fixed rate of 2.36% and
was in effect through December 2005. In January 2005, the company entered into
an interest rate swap agreement for a notional amount of $70.0 million. This
agreement swaps one-month LIBOR for a fixed rate of 3.78%. The notional amount
amortizes consistent with the repayment schedule of the company's term loan
maturing November 2009. The unamortized amount of this swap was $60.0 million
at
December 31, 2005. In January 2006, subsequent to the fiscal 2005 year end,
the
company entered into an interest rate swap agreement for a notional amount
of
$10.0 million maturing on December 21, 2009. This agreement swaps one-month
LIBOR for a fixed rate of 5.03%.
The
terms
of the senior secured credit facility limit the paying of dividends, capital
expenditures and leases, and require, among other things, certain ratios of
indebtedness and fixed charge coverage. The credit agreement also provides
that
if a material adverse change in the company’s business operations or conditions
occurs, the lender could declare an event of default. Under terms of the
agreement a material adverse effect is defined as (a) a material adverse change
in, or a material adverse effect upon, the operations, business properties,
condition (financial and otherwise) or prospects of the company and its
subsidiaries taken as a whole; (b) a material impairment of the ability of
the
company to perform under the loan agreements and to avoid any event of default;
or (c) a material adverse effect upon the legality, validity, binding effect
or
enforceability against the company of any loan document. A material adverse
effect is determined on a subjective basis by the company's creditors. At
December 31, 2005, the company was in compliance with all covenants pursuant
to
its borrowing agreements.
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
company accounts for its derivative financial instruments in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which was adopted in the first quarter of 2001. In accordance with SFAS No.133,
as amended, these instruments are recognized on the balance sheet as either
an
asset or a liability measured at fair value. Changes in the market value and
the
related foreign exchange gains and losses are recorded in the statement of
earnings.
41
Item
8. Financial Statements and Supplementary Data
|
Page
|
|||
|
Report
of Independent Public Accountants
|
43
|
||
|
Consolidated
Balance Sheets
|
44
|
||
|
Consolidated
Statements of Earnings
|
45
|
||
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
46
|
||
|
Consolidated
Statements of Cash Flows
|
47
|
||
|
Notes
to Consolidated Financial Statements
|
48
|
||
|
The
following consolidated financial statement schedule is included
in
response to Item 15
|
|
||
|
Schedule
II - Valuation and Qualifying Accounts and Reserves
|
75
|
All
other
schedules for which provision is made to applicable regulation of the Securities
and Exchange Commission are not required under the related instruction or are
inapplicable and, therefore, have been omitted.
42
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of The Middleby Corporation:
We have audited the accompanying consolidated balance sheets of The
Middleby Corporation and subsidiaries (the “Company”) as of December 31, 2005
and January 1 2005, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2005. Our audits also included the financial statement
schedules listed in the Index at Item 8. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the Company as
of
December 31, 2005 and January 1, 2005, and the results of their operations
and
their cash flows for each of the three years in the period ended December 31,
2005, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the effectiveness
of
the Company's internal control over financial reporting as of December 31,
2005,
based on the criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated March 15, 2006 expressed in an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
DELOITTE
& TOUCHE LLP
Chicago,
Illinois
March
15,
2006
43
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2005 AND JANUARY 1, 2005
(amounts
in thousands, except share data)
|
ASSETS
|
2005
|
2004
|
|||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
3,908
|
$
|
3,803
|
|||
|
Accounts
receivable, net
|
38,552
|
26,612
|
|||||
|
Inventories,
net
|
40,989
|
32,772
|
|||||
|
Prepaid
expenses and other
|
4,513
|
2,008
|
|||||
|
Prepaid
taxes
|
3,354
|
9,952
|
|||||
|
Current
deferred taxes
|
10,319
|
8,865
|
|||||
|
Total
current assets
|
101,635
|
84,012
|
|||||
|
Property,
plant and equipment, net
|
25,331
|
22,980
|
|||||
|
Goodwill
|
98,757
|
74,761
|
|||||
|
Other
intangibles
|
35,498
|
26,300
|
|||||
|
Other
assets
|
2,697
|
1,622
|
|||||
|
Total
assets
|
$
|
263,918
|
$
|
209,675
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
maturities of long-term debt
|
$
|
13,780
|
$
|
10,480
|
|||
|
Accounts
payable
|
17,576
|
11,298
|
|||||
|
Accrued
expenses
|
62,689
|
51,311
|
|||||
|
Total
current liabilities
|
94,045
|
73,089
|
|||||
|
Long-term
debt
|
107,815
|
113,243
|
|||||
|
Long-term
deferred tax liability
|
8,207
|
11,434
|
|||||
|
Other
non-current liabilities
|
5,351
|
4,694
|
|||||
|
Stockholders'
equity:
|
|||||||
|
Preferred
stock, $.01 par value; none issued
|
— |
—
|
|||||
|
Common
stock, $.01 par value, 11,751,219 and 11,402,044 shares
issued in 2005 and 2004, respectively
|
117
|
114
|
|||||
|
Restricted
stock
|
(14,204
|
)
|
(4,700 | ) | |||
|
Paid-in
capital
|
79,291
|
60,446
|
|||||
|
Treasury
stock at cost; 3,856,344 and 3,856,344 shares
in 2005 and 2004, respectively
|
(89,650
|
)
|
(89,650 | ) | |||
|
Retained Retained
earnings
|
73,540
|
41,362
|
|||||
|
Accumulated
other comprehensive loss
|
(594
|
)
|
(357 | ) | |||
|
Total
stockholders' equity
|
48,500
|
7,215
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
263,918
|
$
|
209,675
|
|||
The
accompanying Notes to Consolidated Financial Statements
are
an
integral part of these consolidated financial statements.
44
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EARNINGS
FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2005, JANUARY 1, 2005
AND
JANUARY
3, 2004
(amounts
in thousands, except per share data)
|
2005
|
2004
|
2003
|
|||||||
|
Net
sales
|
$ |
316,668
|
$ |
271,115
|
$ |
242,200
|
|||
|
Cost
of sales
|
195,015
|
168,487
|
156,347
|
||||||
|
Gross
profit
|
121,653
|
102,628
|
85,853
|
||||||
|
Selling
and distribution expenses
|
33,772
|
30,496
|
29,609
|
||||||
|
General
and administrative expenses
|
29,909
|
23,113
|
21,228
|
||||||
|
Stock
repurchase transaction expenses
|
—
|
12,647
|
—
|
||||||
|
Acquisition
integration reserve adjustments
|
—
|
(1,887)
|
—
|
||||||
|
Income
from operations
|
57,972
|
38,259
|
35,016
|
||||||
|
Interest
expense and deferred financing amortization, net
|
6,437
|
3,004
|
5,891
|
||||||
|
Debt
extinguishment expenses
|
—
|
1,154
|
—
|
||||||
|
Gain
on acquisition financing derivatives
|
—
|
(265)
|
(62)
|
||||||
|
Other
expense, net
|
137
|
522
|
366
|
||||||
|
Earnings
before income taxes
|
51,398
|
33,844
|
28,821
|
||||||
|
Provision
for income taxes
|
19,220
|
10,256
|
10,123
|
||||||
|
Net
earnings
|
$ |
32,178
|
$ |
23,588
|
$ |
18,698
|
|||
|
Net
earnings per share:
|
|
||||||||
|
Basic
|
$ |
4.28
|
$ |
2.56
|
$ |
2.06
|
|||
|
Diluted
|
$ |
3.98
|
$ |
2.38
|
$ |
1.99
|
|||
|
Weighted
average number of shares
|
|||||||||
|
Basic
|
7,514
|
9,200
|
9,065
|
||||||
|
Dilutive
stock options
|
579
|
731
|
327
|
||||||
|
Diluted
|
8,093
|
|
9,931
|
9,392
|
|||||
The
accompanying Notes to Consolidated Financial Statements
are
an
integral part of these consolidated financial statements.
45
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2005, JANUARY 1, 2005
AND
JANUARY
3, 2004
(amounts
in thousands)
|
Common
Stock
|
Shareholder
Receivable
|
Restricted
Stock
|
Paid-in
Capital
|
Treasury
Stock
|
(Accumulated
Deficit)
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Total
Stockholders'
Equity
|
|||||||||||||||||
|
Balance,
December 28, 2002
|
$ |
110
|
$ |
(200)
|
$ |
-
|
$ |
53,837
|
$ |
(11,635)
|
$ |
5,073
|
$ |
(2,553)
|
$ |
44,632
|
||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
earnings
|
-
|
-
|
-
|
-
|
-
|
18,698
|
-
|
18,698
|
||||||||||||||||
|
Currency
translation adjustments
|
-
|
-
|
-
|
-
|
-
|
-
|
468
|
468
|
||||||||||||||||
|
Increase
in minimum pension liability, net of tax of $380
|
-
|
-
|
-
|
-
|
-
|
-
|
(621)
|
(621)
|
||||||||||||||||
|
Unrealized
gain on interest rate swap, net of tax of $118
|
-
|
-
|
-
|
-
|
-
|
-
|
397
|
397
|
||||||||||||||||
|
Net
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
18,698
|
244
|
18,942
|
||||||||||||||||
|
Exercise
of stock options
|
3
|
-
|
-
|
1,442
|
(828)
|
-
|
-
|
617
|
||||||||||||||||
|
Loan
forgiveness
|
-
|
200
|
-
|
-
|
-
|
-
|
-
|
200
|
||||||||||||||||
|
Dividend
payment
|
-
|
-
|
-
|
-
|
-
|
(2,301)
|
-
|
(2,301)
|
||||||||||||||||
|
Balance,
January 3, 2004
|
$ |
113
|
$ |
-
|
$ |
-
|
$ |
55,279
|
$ |
(12,463)
|
$ |
21,470
|
$ |
(2,309)
|
$ |
62,090
|
||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
earnings
|
-
|
-
|
-
|
-
|
-
|
23,588
|
-
|
23,588
|
||||||||||||||||
|
Currency
translation adjustments
|
-
|
-
|
-
|
-
|
-
|
-
|
674
|
674
|
||||||||||||||||
|
Decrease
in minimum pension liability, net of tax of $290
|
-
|
-
|
-
|
-
|
-
|
-
|
1,077
|
1,077
|
||||||||||||||||
|
Unrealized
gain on interest rate swap, net of tax of $143
|
-
|
-
|
-
|
-
|
-
|
-
|
201
|
201
|
||||||||||||||||
|
Net
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
23,588
|
1,952
|
25,540
|
||||||||||||||||
|
Exercise
of stock options
|
-
|
-
|
-
|
349
|
-
|
-
|
-
|
349
|
||||||||||||||||
|
Purchase
of treasury stock
|
-
|
-
|
-
|
-
|
(77,187)
|
-
|
-
|
(77,187)
|
||||||||||||||||
|
Restricted
stock issuance
|
1
|
-
|
(4,819)
|
4,818
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Stock
compensation
|
-
|
-
|
119
|
-
|
-
|
-
|
-
|
119
|
||||||||||||||||
|
Dividend
payment
|
-
|
-
|
-
|
-
|
-
|
(3,696)
|
-
|
(3,696)
|
||||||||||||||||
|
Balance,
January 1, 2005
|
$ |
114
|
$ |
-
|
$ |
$
(4,700)
|
$ |
60,446
|
$ |
(89,650)
|
$ |
41,362
|
$ |
(357)
|
$ |
7,215
|
||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
earnings
|
-
|
-
|
-
|
-
|
-
|
32,178
|
-
|
32,178
|
||||||||||||||||
|
Currency
translation adjustments
|
-
|
-
|
-
|
-
|
-
|
-
|
(687)
|
(687)
|
||||||||||||||||
|
Increase
in minimum pension liability, net of tax of $(169)
|
-
|
-
|
-
|
-
|
-
|
-
|
(255)
|
(255)
|
||||||||||||||||
|
Unrealized
gain on interest rate swap, net of tax of $522
|
-
|
-
|
-
|
-
|
-
|
-
|
705
|
705
|
||||||||||||||||
|
Net
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
32,178
|
(237)
|
31,941
|
||||||||||||||||
|
Exercise
of stock options
|
-
|
-
|
-
|
977
|
-
|
-
|
-
|
977
|
||||||||||||||||
|
Restricted
stock issuance
|
3
|
-
|
(12,814)
|
12,811
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Stock
compensation
|
-
|
-
|
3,310
|
-
|
-
|
-
|
-
|
3,310
|
||||||||||||||||
|
Tax
benefit on stock compensation
|
-
|
-
|
-
|
5,057
|
-
|
-
|
-
|
5,057
|
||||||||||||||||
|
Balance,
January 1, 2005
|
$ |
117
|
$ |
-
|
$ |
(14,204)
|
$ |
79,291
|
$ |
(89,650)
|
73,540
|
$ |
(594)
|
$ |
48,500
|
|||||||||
The
accompanying Notes to Consolidated Financial Statements
are
an
integral part of these consolidated financial statements.
46
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2005, JANUARY 1, 2005
AND
JANUARY
3, 2004
(amounts
in thousands)
|
2005
|
2004
|
2003
|
||||||||
|
Cash
flows from operating activities--
|
||||||||||
|
Net
earnings
|
$
|
32,178
|
$
|
23,588
|
$
|
18,698
|
||||
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities--
|
||||||||||
|
Depreciation
and amortization
|
3,554
|
3,612
|
3,990
|
|||||||
|
Debt
extinguishment
|
--
|
1,154
|
--
|
|||||||
|
Deferred
taxes
|
807
|
7,574
|
1,386
|
|||||||
|
Non-cash
adjustments to acquisition integration reserves
|
--
|
(1,887
|
)
|
--
|
||||||
|
Unrealized
gain on derivative financial instruments
|
--
|
(265
|
)
|
(62
|
)
|
|||||
|
Non-cash
equity compensation
|
3,310
|
119
|
--
|
|||||||
|
Unpaid
interest on seller notes
|
--
|
--
|
567
|
|||||||
|
Changes
in assets and liabilities, net of acquisitions
|
||||||||||
|
Accounts
receivable, net
|
(3,608
|
)
|
(2,980
|
)
|
4,792
|
|||||
|
Inventories,
net
|
(1,323
|
)
|
(7,004
|
)
|
2,136
|
|||||
|
Prepaid
expenses and other assets
|
7,222
|
(10,193
|
)
|
(1,176
|
)
|
|||||
|
Accounts
payable
|
536
|
(682
|
)
|
(1,587
|
)
|
|||||
|
Accrued
expenses and other liabilities
|
(417
|
)
|
5,486
|
1,046
|
||||||
|
Net
cash provided by operating activities
|
42,259
|
18,522
|
29,790
|
|||||||
|
Cash
flows from investing activities--
|
||||||||||
|
Additions
to property and equipment
|
(1,376
|
)
|
(1,199
|
)
|
(1,003
|
)
|
||||
|
Acquisition
of Blodgett
|
--
|
(2,000
|
)
|
(19,129
|
)
|
|||||
|
Acquisition
of Nu-Vu
|
(11,450
|
)
|
--
|
--
|
||||||
|
Acquisition
of Alkar
|
(28,195
|
)
|
--
|
--
|
||||||
|
Net
cash (used in) investing activities
|
(41,021
|
)
|
(3,199
|
)
|
(20,132
|
)
|
||||
|
Cash
flows from financing activities--
|
||||||||||
|
Net
(repayments) proceeds under previous revolving credit
facilities
|
--
|
(1,500
|
)
|
1,500
|
||||||
|
Net
(repayments) proceeds under previous senior secured bank notes
|
--
|
(53,000
|
)
|
(12,000
|
)
|
|||||
|
Proceeds
under current revolving credit facilities
|
4,985
|
51,265
|
--
|
|||||||
|
Proceeds
(repayments) under current senior secured bank notes
|
(10,000
|
)
|
70,000
|
--
|
||||||
|
Proceeds
(repayments) under foreign bank loan
|
3,200
|
--
|
(2,400
|
)
|
||||||
|
Repayments
under note agreement
|
(313
|
)
|
--
|
--
|
||||||
|
Debt
issuance costs
|
--
|
(1,509
|
)
|
--
|
||||||
|
Repurchase
of treasury stock
|
--
|
(77,187
|
)
|
--
|
||||||
|
Payment
of special dividend
|
--
|
(3,696
|
)
|
(2,301
|
)
|
|||||
|
Net
proceeds from stock issuances
|
977
|
349
|
617
|
|||||||
|
Shareholder
loan
|
--
|
--
|
200
|
|||||||
|
Net
cash (used in) financing activities
|
(1,151
|
)
|
(15,278
|
)
|
(14,384
|
)
|
||||
|
Effect
of exchange rates on cash and cash equivalents
|
(51
|
)
|
106
|
--
|
||||||
|
Cash
acquired in acquisition
|
69
|
--
|
--
|
|||||||
|
Changes
in cash and cash equivalents--
|
||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
105
|
151
|
(4,726
|
)
|
||||||
|
Cash
and cash equivalents at beginning of year
|
3,803
|
3,652
|
8,378
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
3,908
|
$
|
3,803
|
$
|
3,652
|
||||
The
accompanying Notes to Consolidated Financial Statements
are
an
integral part of these consolidated financial statements.
47
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| (1) |
NATURE
OF OPERATIONS
|
The
Middleby Corporation (the "company") is engaged in the design, manufacture
and
sale of commercial and industrial foodservice equipment. The company
manufactures and assembles this equipment at six factories in the United States
and one factory in the Philippines. The
company operates in three business segments: 1) the commercial foodservice
equipment group, 2) the industrial foodservice equipment group and 3) the
international distribution division.
The
commercial foodservice equipment group manufactures conveyor ovens, convection
ovens, fryers, ranges, toasters, combi ovens, steamers, broilers, deck ovens,
baking ovens, proofers and counter-top cooking and warming equipment. End-user
customers include: (i) fast food or quick-service restaurants,
(ii) full-service restaurants, including casual-theme restaurants,
(iii) retail outlets, such as convenience stores, supermarkets and
department stores and (iv) public and private institutions, such as hotels,
resorts, schools, hospitals, long-term care facilities, correctional facilities,
stadiums, airports, corporate cafeterias, military facilities and government
agencies. Included in these customers are several large multi-national
restaurant chains, which account for a significant portion of the company's
business, although no single customer accounts for more than 10% of net sales.
The company's domestic sales are primarily through independent dealers and
distributors and are marketed by the company's sales personnel and network
of
independent manufacturers' representatives.
The
industrial foodservice equipment group manufactures batch ovens, conveyor ovens,
continuous cooking systems and food packaging equipment. Customers include
food
processing companies. Included in these companies are several large
international food processing companies, which account for a significant portion
of the revenues of this business segment. The sales of the business are made
through its direct sales force.
The
international distribution division provides sales, technical service and
distribution services for the commercial foodservice industry. This division
sells and support the products manufactured by the company's commercial
foodservice equipment business.
This
business operates through a combined network of independent and company-owned
distributors. The company maintains regional sales offices in Asia, Europe
and
Latin America complemented by sales and distribution offices in Canada, China,
India, South Korea, Mexico, the Philippines, Spain, Taiwan and the United
Kingdom.
The
company purchases raw materials and component parts, the majority of which
are
standard commodity type materials, from a number of suppliers. Although certain
component parts are procured from a sole source, the company can purchase such
parts from alternate vendors.
48
The
company has numerous licenses and patents to manufacture, use and sell its
products and equipment. Management believes the loss of any one of these
licenses or patents would not have a material adverse effect on the financial
and operating results of the company.
| (2) |
PURCHASE
ACCOUNTING
|
Nu-Vu
On
January 7, 2005, Middleby Marshall Holdings, LLC, a wholly-owned subsidiary
of
the company, completed its acquisition of the assets of Nu-Vu Foodservice
Systems ("Nu-Vu"), a leading manufacturer of baking ovens, from Win-Holt
Equipment Corporation ("Win-Holt") for $12.0 million in cash. In September
2005,
the company reached final settlement with Win-Holt on post-closing adjustments
pertaining to the acquisition of Nu-Vu. As a result, the final purchase price
was reduced by $550,000.
The
company has accounted for this business combination using the purchase method
to
record a new cost basis for the assets acquired and liabilities assumed. The
difference between the purchase price and the fair value of the assets acquired
and liabilities assumed has been recorded as goodwill in the December 31, 2005
financial statements.
The
allocation of cash paid for the Nu-Vu acquisition as of December 31, 2005 is
summarized as follows (in thousands):
|
Jan.
7, 2005
|
Adjustments
|
Dec.
31, 2005
|
|||||||
|
Current
assets
|
$ |
2,556
|
$ |
242
|
$ |
2,798
|
|||
|
Property,
plant and equipment
|
1,178
|
—
|
1,178
|
||||||
|
Deferred
taxes
|
3,637
|
(336)
|
3,301
|
||||||
|
Goodwill
|
4,566
|
252
|
4,818
|
||||||
|
Other
intangibles
|
2,188
|
(875)
|
1,313
|
||||||
|
Current
liabilities
|
(2,125)
|
167
|
(1,958)
|
||||||
|
Total
cash paid
|
$ |
12,000
|
$ |
(550)
|
$ |
11,450
|
|||
The
goodwill and other intangible assets associated with the Nu-Vu acquisition,
which are comprised of the tradename, are subject to the non-amortization
provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," and are allocable to the company's
Commercial Foodservice Equipment Group for purposes of segment reporting (see
footnote 12 for further discussion). Goodwill and other intangible assets
associated with this transaction are anticipated to be deductible for income
taxes.
49
Alkar
On
December 7, 2005 the company acquired the stock of Alkar Holdings, Inc.
("Alkar") for $26.7 million in cash. Cash paid at closing amounted to $28.2
million and included $1.5 million of estimated working capital adjustments
determined at closing. The purchase price is subject to final settlement of
the
post-close working capital adjustments, which the company estimates will result
in an additional payment of $1.5 million to be paid in fiscal 2006.
The
company has accounted for this business combination using the purchase method
to
record a new cost basis for the assets acquired and liabilities assumed. The
difference between the purchase price and the fair value of the assets acquired
and liabilities assumed has been recorded as goodwill in the December 31, 2005
financial statements. The allocation of the purchase price to the assets,
liabilities and intangible assets is under review and is subject to change
based
upon the results of further evaluation.
The
allocation of cash paid for the Alkar acquisition as of December 31, 2005 is
summarized as follows (in thousands):
|
December
7, 2005
|
||||
|
Current
assets
|
$
|
17,160
|
||
|
Property,
plant and equipment
|
3,032
|
|||
|
Goodwill
|
19,177
|
|||
|
Other
intangibles
|
7,960
|
|||
|
Current
liabilities
|
(16,003
|
)
|
||
|
Long-term
deferred tax liability
|
(3,131
|
)
|
||
|
Total
cash paid
|
$
|
28,195
|
||
The
goodwill and $5.0 million of trademarks included in other intangibles are
subject to the nonamortization provisions of SFAS No. 142 from the date of
acquisition. Other intangibles also includes $2.1 million allocated to customer
relationships, $0.6 million allocated to backlog, and $0.3 million allocated
to
developed technology which are amortized over periods of 10 years, 7 months,
and
14 years respectively. Goodwill and other intangibles of Alkar are allocated
to
the Industrial Foodservice Equipment Group for segment reporting purposes.
These
assets are not deductible for tax purposes.
50
| (3) |
STOCK
REPURCHASE TRANSACTION
|
On
December 23, 2004 the company repurchased 1,808,774 shares of its common stock
and 271,000 options from William F. Whitman, Jr., the former chairman of the
company’s board of directors, members of his family and trusts controlled by his
family (collectively, the “Whitmans”) in a private transaction for a total
aggregate purchase price of $83,974,578 in cash. The repurchased shares
represented 19.6% of the company's outstanding shares and were repurchased
for
$75,968,508 at $42.00 per share which represented a 12.8% discount to the
closing market price of $48.19 of the company’s common stock on December 23,
2004 and a 21.7% discount from the $53.64 average closing price over the thirty
trading days prior to the repurchase. The company incurred $1.2 million of
transaction costs associated with the repurchase of these shares. The 271,000
stock options were purchased for $8,006,070, which represented the difference
between $42.00 and the exercise price of the option. In conjunction with the
stock repurchase, the Whitmans resigned as directors of the
company.
The
company financed the share repurchase with borrowings under its senior bank
facility that was established in connection with this transaction.
In
conjunction with the transaction the company recorded $13.8 million of expenses,
which were comprised of the following items (dollars in thousands):
|
Compensation
related expense
|
$
|
8,225
|
||
|
Pension
settlement
|
1,947
|
|||
|
Financial
advisor fees
|
1,899
|
|||
|
Other
professional fees
|
576
|
|||
|
|
||||
|
Subtotal
|
12,647
|
|||
|
|
||||
|
Debt
extinguishment costs
|
1,154
|
|||
|
Total
|
$
|
13,801
|
The
$8.2
million in compensation expense includes the value of the 271,000 repurchased
stock options along with the employer portion of related payroll
taxes.
In
February 2005, the company settled all pension obligations associated with
William F. Whitman, Jr., the former chairman of the company's board of directors
for $7.5 million in cash. In conjunction with this transaction, the company
recorded $1.9 million in settlement costs representing the difference between
the settlement amount and the accrued pension liability at the time of the
transaction.
Debt
extinguishment costs of $1.2 million represent the write-off of deferred
financing costs pertaining to the company's prior financing agreements which
were paid prior to the maturity of the agreement utilizing funds under the
company's new senior debt agreement completed in order to finance the stock
repurchase transaction.
51
| (4) |
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
| (a) |
Basis
of Presentation
|
The
consolidated financial statements include the accounts of the company and its
wholly-owned subsidiaries. All intercompany accounts and transactions have
been
eliminated in consolidation. The
company's consolidated financial statements 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 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.
The
company's fiscal year ends on the Saturday nearest December 31. Fiscal
years 2005, 2004 and 2003 ended on December 31, 2005, January 1, 2005 and
January 3, 2004, respectively, and each included 52, 52 and 53 weeks,
respectively.
| (b) |
Cash
and Cash Equivalents
|
The
company considers all short-term investments with original maturities of three
months or less when acquired to be cash equivalents. The company’s policy is to
invest its excess cash in U.S. Government securities, interest-bearing deposits
with major banks, municipal notes and bonds and commercial paper of companies
with strong credit ratings that are subject to minimal credit and market
risk.
| (c) |
Accounts
Receivable
|
Accounts
receivable, as shown in the consolidated balance sheets, are net of allowances
for doubtful accounts of $3,081,000 and $3,382,000 at December 31, 2005 and
January 1, 2005, respectively.
52
| (d) |
Inventories
|
Inventories
are composed of material, labor and overhead and are stated at the lower of
cost
or market. Costs for inventories at two of the company's manufacturing
facilities have been determined using the last-in, first-out ("LIFO") method.
These inventories under the LIFO method amounted to $15.4 million in 2005 and
$14.4 million in 2004 and represented approximately 38% and 44% of the total
inventory in each respective year. Costs for all other inventory have been
determined using the first-in, first-out ("FIFO") method. The company estimates
reserves for inventory obsolescence and shrinkage based on its judgment of
future realization. Inventories at December 31, 2005 and January 1, 2005 are
as
follows:
|
2005
|
2004
|
||||||
|
(dollars
in thousands)
|
|||||||
|
Raw
materials and parts
|
$
|
11,311
|
$
|
7,091
|
|||
|
Work
in process
|
6,792
|
5,492
|
|||||
|
Finished
goods
|
22,654
|
19,971
|
|||||
|
40,757
|
32,554
|
||||||
|
LIFO
reserve
|
232
|
218
|
|||||
|
|
$
|
40,989
|
$
|
32,772
|
|||
(e) Property,
Plant and Equipment
Property,
plant and equipment are carried at cost as follows:
|
2005
|
2004
|
||||||
|
(dollars
in thousands)
|
|||||||
|
Land
|
$
|
5,047
|
$
|
4,925
|
|||
|
Building
and improvements
|
20,365
|
18,277
|
|||||
|
Furniture
and fixtures
|
9,234
|
8,765
|
|||||
|
Machinery
and equipment
|
24,746
|
22,204
|
|||||
|
59,392
|
54,171
|
||||||
|
Less
accumulated depreciation
|
(34,061
|
)
|
(31,191
|
)
|
|||
|
$
|
25,331
|
$
|
22,980
|
||||
Property
and equipment are depreciated or amortized on a straight-line basis over their
useful lives based on management's estimates of the period over which the assets
will be utilized to benefit the operations of the company. The useful lives
are
estimated based on historical experience with similar assets, taking into
account anticipated technological or other changes. The company
periodically reviews these lives relative to physical factors, economic factors
and industry trends. If there are changes in the planned use of property and
equipment or if technological changes were to occur more rapidly than
anticipated, the useful lives assigned to these assets may need to be shortened,
resulting in the recognition of increased depreciation and amortization expense
in future periods.
53
Following
is a summary of the estimated useful lives:
|
Description
|
Life
|
|
Building
and improvements
|
20
to 40 years
|
|
Furniture
and fixtures
|
5
to 7 years
|
|
Machinery
and equipment
|
3
to 10 years
|
Depreciation
expense is provided for using the straight-line method and amounted to
$3,235,000, $3,150,000 and $3,583,000 in fiscal 2005, 2004 and 2003,
respectively.
Expenditures
which significantly extend useful lives are capitalized. Maintenance and repairs
are charged to expense as incurred. Asset impairments are recorded whenever
events or changes in circumstances indicate that the recorded value of an asset
is less than the sum of its expected future undiscounted cash
flows.
| (f) |
Goodwill
and Other Intangibles
|
Goodwill
and other intangibles are reviewed for impairment annually or whenever events
or
circumstances indicate that the carrying value of an asset may not be
recoverable. For long-lived assets held for use, an impairment loss is
recognized when the estimated undiscounted cash flows produced by an asset
are
less than the asset's carrying value. Estimates
of future cash flows are judgments based on the company's experience and
knowledge of operations. These estimates can be significantly impacted by
many factors including changes in global and local business and economic
conditions, operating costs, inflation, competition, and consumer and
demographic trends. If the company's estimates or the underlying
assumptions change in the future, the company may be required to record
impairment charges.
Intangible
assets consist of the following (in
thousands):
|
December
31, 2005
|
January
1, 2005
|
||||||||||||||||||
|
Amortized
intangible assets:
|
Estimated
Life
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Estimated
Life
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
|||||||||||||
| Customer lists |
10
yrs
|
$ |
2,100
|
$ |
(12)
|
—
|
$ |
—
|
$ |
—
|
|||||||||
| Backlog |
7
mos
|
600
|
(60)
|
—
|
—
|
—
|
|||||||||||||
|
Developed
technology
|
7
yrs
|
260
|
(2)
|
—
|
—
|
—
|
|||||||||||||
| $ |
2,960
|
$ |
(74)
|
$ |
—
|
$ |
—
|
||||||||||||
| Unamortized intangible assets: | |||||||||||||||||||
| Trademarks and tradenames | $ |
32,612
|
$ |
26,300
|
|||||||||||||||
|
|
$ |
32,612
|
$ |
26,300
|
|||||||||||||||
The
aggregate intangible amortization expense was $0.1 million in 2005. There was
no
intangible amortization expense in 2004 and 2003. The estimated future
amortization expense of intangible assets is as follows (in
thousands):
|
2006
|
$ | 787 | ||
| 2007 | 247 | |||
| 2008 | 247 | |||
| 2009 | 247 | |||
| 2010 | 247 | |||
| Thereafter | 1,111 | |||
| $ | 2,886 |
| (g) |
Accrued
Expenses
|
Accrued
expenses consist of the following at December 31, 2005 and January 1, 2005,
respectively:
|
2005
|
2004
|
||||||
|
(dollars
in thousands)
|
|||||||
|
Accrued
payroll and related expenses
|
$
|
15,577
|
$
|
12,493
|
|||
|
Accrued
warranty
|
11,286
|
10,563
|
|||||
|
Accrued
customer rebates
|
10,740
|
9,350
|
|||||
|
Advanced
customer deposits
|
6,204
|
335
|
|||||
|
Accrued
pension settlement
|
—
|
3,637
|
|||||
|
Accrued
product liability and workers comp
|
2,418
|
1,828
|
|||||
|
Other
accrued expenses
|
16,464
|
13,105
|
|||||
|
$
|
62,689
|
$
|
51,311
|
||||
54
| (h) |
Litigation
Matters
|
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 such
matter will have a material adverse effect on its financial condition, results
of operations or cash flows of the company.
| (i) |
Other
Comprehensive Income
|
The
following table summarizes the components of accumulated other comprehensive
loss as reported in the consolidated balance sheets:
|
2005
|
2004
|
||||||
|
(dollars
in thousands)
|
|||||||
|
Minimum
pension liability, net of tax
|
$
|
(1,259
|
)
|
$
|
(1,004
|
)
|
|
|
Unrealized
gain on interest rate swap, net of tax
|
743
|
38
|
|||||
|
Currency
translation adjustments
|
(78
|
)
|
609
|
||||
|
$
|
(594
|
)
|
$
|
(357
|
)
|
||
| (j) |
Fair
Value of Financial Instruments
|
Due
to
their short-term nature, the carrying value of the company's cash and cash
equivalents and receivables approximate fair value. The value of long-term
debt,
which is disclosed in Note 5, approximates fair value. The company's derivative
instruments are based on market prices when available or are derived from
financial valuation methodologies.
| (k) |
Foreign
Currency
|
Foreign
currency transactions are accounted for in accordance with SFAS No. 52 “Foreign
Currency Translation.” Assets and liabilities of the company’s foreign
operations are translated at exchange rates at the balance sheet date. These
translation adjustments are not included in determining net income for the
period but are disclosed and accumulated in a separate component of
stockholders’ equity. Exchange gains and losses on foreign currency transactions
are included in determining net income for the period in which they occur.
These
transactions amounted to a gain of $0.7 million in fiscal 2005 and a loss of
$0.6 million in fiscal 2004 and 2003.
55
| (l) |
Revenue
Recognition
|
The
company recognizes revenue on the sale of its products when risk of loss has
passed to the customer, which occurs at the time of shipment, and collectibility
is reasonably assured. The sale prices of the products sold are fixed and
determinable at the time of shipment. Sales are reported net of sales returns,
sales incentives and cash discounts based on prior experience and other
quantitative and qualitative factors.
At
the
industrial foodservice equipment group, the company enters into long-term sales
contracts for certain products. Revenue under these long-term sales contracts
is
recognized using the percentage of completion method prescribed by Statement
of
Position No. 81-1 due to the length of time to fully manufacture and assemble
the equipment. The company measures revenue recognized based on the ratio of
actual labor hours incurred in relation to the total estimated labor hours
to be
incurred related to the contract. The percentage of completion method of
accounting for these contracts most accurately reflects the status of these
uncompleted contracts in the company's financial statements and most accurately
measures the matching of revenues with expenses. At the time a loss on a
contract becomes known, the amount of the estimated loss is recognized in the
consolidated financial statements.
| (m) |
Warranty
Costs
|
In
the
normal course of business the company issues product warranties for specific
product lines and provides for the estimated future warranty cost in the period
in which the sale is recorded. The estimate of warranty cost is based on
contract terms and historical warranty loss experience that is periodically
adjusted for recent actual experience. Because warranty estimates are forecasts
that are based on the best available information, claims costs may differ from
amounts provided. Adjustments to initial obligations for warranties are made
as
changes in the obligations become reasonably estimable.
A
rollforward of the warranty reserve is as follows:
|
2005
|
2004
|
||||||
|
(dollars
in thousands)
|
|||||||
|
Beginning
balance
|
$
|
10,563
|
$
|
11,563
|
|||
|
Warranty
expense
|
8,916
|
8,417
|
|||||
|
Warranty
claims
|
(8,193
|
)
|
(9,417
|
)
|
|||
|
Ending
balance
|
$
|
11,286
|
$
|
10,563
|
|||
| (n) |
Research
and Development Costs
|
Research
and development costs, included in cost of sales in the consolidated statements
of earnings, are charged to expense when incurred. These costs were $2,767,000,
$2,537,000 and $2,390,000 in fiscal 2005, 2004 and 2003,
respectively.
56
|
(o)
|
Stock
Based Compensation
|
The
company maintains various stock based employee compensation plans, which are
more fully described in Note 6. The company has issued restricted stock grants
and stock options under these plans to certain key employees and members of
its
Board of Directors. As permitted under SFAS No 123: " Accounting for Stock
Based
Compensation", the company has elected to follow APB Opinion No. 25: "Accounting
for Stock Issued to Employees" in accounting for stock-based awards to employees
and directors.
In
accordance with APB No. 25, the company establishes the value of restricted
stock grants based upon the market value of the stock at the time of issuance.
The value of the restricted stock grants is reflected as a separate component
reducing shareholders' equity with an offsetting increase to Paid-in Capital.
The value of the stock grant is amortized and recorded as compensation expense
over the applicable vesting period. The company issued restricted stock grants
amounting to $12.8 million in 2005 and $4.8 million in 2004. The compensation
expense of $3.3 million and $0.1 million has been recorded related to the
amortization of these stock grants in 2005 and 2004, respectively.
In
accordance with APB No. 25, the company has not recorded compensation expense
related to issued stock options in the financial statements for all periods
presented because the exercise price of the stock options is equal to or greater
than the market price of the underlying stock on the date of grant. Pro forma
information regarding net earnings and earnings per share is required by SFAS
No. 123. This information is required to be determined as if the company had
accounted for its employee and director stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. The weighted
average estimated fair value of stock options granted in fiscal 2005 was $19.11
per share and in fiscal 2003 was $8.35 per share. The fair value of options
issued in 2005 has been estimated at the rate of grant using a bi-nomial
valuation model with the following general assumptions: risk-free interest
rate
of 3.94%; an expected life of 4.5 years; an expected volatility of 40%; and
no
expected dividend yield. There were no options issued in 2004. The fair value
of
options issued in 2003 has been estimated at the date of grant using a
Black-Scholes option pricing model with the following general assumptions:
risk-free interest rate of 2.7% to 2.9%; expected lives of 4
to 6
years, expected volatility of 55% to 65% and no expected dividend
yield.
Option
valuation models require the input of highly subjective assumptions. Because
the
company’s options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the
fair
value of its options.
57
For
purposes of pro forma disclosures, the estimated fair value of the options
is
amortized to expense over the options’ vesting period. The stock-based employee
compensation expense, net of taxes, for fiscal year 2003 previously disclosed
as
$583,000 has been corrected to reflect the portion of a 2003 grant that vested
immediately in 2003. The company’s pro forma net earnings and per share data
utilizing a fair value based method is as follows:
|
2005
|
2004
|
2003
|
||||||||
|
Net
income - as reported
|
$
|
32,178
|
$
|
23,588
|
$
|
18,698
|
||||
|
Less:
Stock-based employee compensation expense, net of taxes
|
683
|
442
|
3,574
|
|||||||
|
|
|
|||||||||
|
Net
income - pro forma
|
$
|
31,495
|
$
|
23,146
|
$
|
15,124
|
||||
|
|
||||||||||
|
Earnings
per share - as reported:
|
|
|||||||||
|
Basic
|
$
|
4.28
|
$
|
2.56
|
$
|
2.06
|
||||
|
Diluted
|
$
|
3.98
|
2.38
|
1.99
|
||||||
|
|
||||||||||
|
Earnings
per share - pro forma:
|
|
|
||||||||
|
Basic
|
$
|
4.19
|
$
|
2.52
|
$
|
1.67
|
||||
|
Diluted
|
$
|
3.89
|
2.33
|
1.61
|
||||||
| (p) |
Earnings
Per Share
|
In
accordance with SFAS No. 128 “Earnings Per Share”, “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
dilutive securities.
The
company’s potentially dilutive securities consist of shares issuable on exercise
of outstanding options computed using the treasury method and amounted to
579,000, 731,000 and 327,000 for fiscal 2005, 2004 and 2003, respectively.
| (q) |
Consolidated
Statements of Cash Flows
|
Cash
paid
for interest was $6,006,000, $2,627,000 and $4,532,000 in fiscal 2005, 2004
and
2003, respectively. Cash payments totaling $16,328,000, $16,890,000 and
$8,349,000 were made for income taxes during fiscal 2005, 2004 and 2003,
respectively.
In
2005
net income included $3,310,000 of non cash pretax expense related to restricted
stock grants (see note 6). In 2004, net income included in the cash flows from
operations had a non-cash expense of $1,154,000 pretax related to the early
extinguishment of debt (see Note 3), $118,000 pretax related to a restricted
stock grant (see Note 6) and $1,887,000 related to acquisition integration
reserve adjustments (see Note 10). In 2003, net income included in the cash
flows from operations had a non-cash expense $567,000 pretax related to an
increase in the principal balance of debt associated with interest paid in
kind.
These non-cash items have been added back as adjustments to reconcile net
earnings to net cash provided by operating activities.
58
| (r) |
New
Accounting Pronouncements
|
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of
ARB No. 43, Chapter 4". This statement amends the guidance in ARB No. 43,
Chapter 4 to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. This statement requires
that these items be recognized as current period costs and also requires that
allocation of fixed production overheads to the costs of conversion be based
on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The company will apply this guidance prospectively. The company is in the
process of determining what impact the application of this guidance will have
on
the company's financial position, results of operations or cash
flows.
In
December 2004, FASB issued a revision to SFAS No. 123 "Accounting for Stock
Based Compensation". SFAS No. 123(R) "Share-Based Payment" requires all new,
modified, and unvested share-based payments to employees to be recogonized
in
the financial statements as compensation cost over the service period based
upon
their fair value on the date of grant. This statement eliminates the alternative
of accounting for share-based compensation under Accounting Principles Board
Opinion No. 25. The statement is effective as of the beginning of the first
interim or annual reporting period that begins after June 5, 2005. The company
will adopt SFAS No. 123(R) on January 1, 2006 under the modified retrospective
application transition method. As such, the prior year comparative results
will
be adjusted to recognize the compensation cost currently reported in the
stock
based compensation pro forma footnote disclosure (see Note 4(o)) in the
consolidated financial statements issued after January 1, 2006. Accordingly,
the
adoption of SFAS No. 123 will result in a reduction to net earnings by $683,000,
or $0.09 per share for 2005 and $442,000 or $0.05 per share for 2004 in the
consolidated financial statements issued after January 1, 2006.
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections
-
a replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement
replaces ABP Opinion No. 20, Accounting Changes and FASB Statement No. 3,
Reporting Changes in Interim Financial Statements and changes the requirements
for the accounting for and reporting of a change in accounting principles.
This
statement applies to all voluntary changes in accounting principles. This
statement is effective for accounting changes and corrections of errors made
in
fiscal years beginning after December 15, 2005. The company will apply this
guidance prospectively.
59
| (5) |
FINANCING
ARRANGEMENTS
|
The
following is a summary of long-term debt at December 31, 2005 and January 1,
2005:
|
2005
|
2004
|
||||||
|
(dollars
in thousands)
|
|||||||
|
Senior
secured revolving credit line
|
$
|
56,250
|
$
|
51,265
|
|||
|
Senior
secured bank term loans
|
60,000
|
70,000
|
|||||
|
Foreign
Loan
|
3,200
|
—
|
|||||
|
Other
note
|
2,145
|
2,458
|
|||||
|
Total
debt
|
$
|
121,595
|
$
|
123,723
|
|||
|
|
|
||||||
|
Less
current maturities of long-term debt
|
13,780
|
10,480
|
|||||
|
Long-term
debt
|
$
|
107,815
|
$
|
113,243
|
|||
During
the fourth quarter of 2005, the company amended its senior secured credit
facility. Terms of the agreement provide for $60.0 million of term loans and
$130.0 million of availability under a revolving credit line. As of December
31,
2005, the company had $116.3 million outstanding under this facility, including
$56.3 million of borrowings under the revolving credit line. The company also
had $8.5 million in outstanding letters of credit, which reduced the borrowing
availability under the revolving credit line.
Borrowings
under the senior secured credit facility are assessed at an interest rate of
1.25% above LIBOR for long-term borrowings or at the higher of the Prime rate
and the Federal Funds Rate for short term borrowings. At December 31, 2005
the
average interest rate on the senior debt amounted to 5.7%. The interest rates
on
borrowings under the senior bank facility may be adjusted quarterly based on
the
company’s defined indebtedness ratio on a rolling four-quarter basis.
Additionally, a commitment fee, based upon the indebtedness ratio is charged
on
the unused portion of the revolving credit line. This variable commitment fee
amounted to 0.25% as of December 31, 2005.
In
December 2005, the company entered into a $3.2 million U.S. Dollar secured
term
loan at its subsidiary in Spain. This loan amortizes in equal monthly
installments over a four year period ending December 31, 2009. Borrowings under
this facility are assessed at an interest rate of 0.45% above LIBOR. At December
31, 2005 the interest rate on this loan was 4.83%.
In
November 2004, the company entered into a promissory note in conjunction with
the release and early termination of obligations under a lease agreement
relative to a manufacturing facility in Shelburne, Vermont. The remaining note
of $2.1 million is assessed interest at 4.0% above LIBOR with an interest rate
cap of 9.0%. At year-end the interest rate on the note was approximately 8.29%.
The note amortizes monthly and matures in December 2009.
60
The
company has historically entered into interest rate swap agreements to
effectively fix the interest rate on its outstanding debt. In January 2002,
the
company had entered into an interest rate swap agreement for a notional amount
of $20.0 million. This agreement swapped one-month LIBOR for a fixed rate of
4.03% and was in effect through December 2004. In February 2003, the company
entered into an interest rate swap agreement for a notional amount of $10.0
million. This agreement swapped one-month LIBOR for a fixed rate of 2.36% and
was in effect through December 2005. In January 2005, the company entered into
an interest rate swap agreement for a notional amount of $70.0 million. This
agreement swaps one-month LIBOR for a fixed rate of 3.78%. The notional amount
amortizes consistent with the repayment schedule of the company's term loan
maturing November 2009. The unamortized amount of this swap was $60.0 million
at
December 31, 2005. In January 2006, subsequent to the fiscal 2005 year end,
the
company entered into an interest rate swap agreement for a notional amount
of
$10.0 million maturing on December 21, 2009. This agreement swaps one-month
LIBOR for a fixed rate of 5.03%.
The
terms
of the senior secured credit facility limit the paying of dividends, capital
expenditures and leases, and require, among other things, certain ratios of
indebtedness and fixed charge coverage. The credit agreement also provides
that
if a material adverse change in the company’s business operations or conditions
occurs, the lender could declare an event of default. Under terms of the
agreement a material adverse effect is defined as (a) a material adverse change
in, or a material adverse effect upon, the operations, business properties,
condition (financial and otherwise) or prospects of the company and its
subsidiaries taken as a whole; (b) a material impairment of the ability of
the
company to perform under the loan agreements and to avoid any event of default;
or (c) a material adverse effect upon the legality, validity, binding effect
or
enforceability against the company of any loan document. A material adverse
effect is determined on a subjective basis by the company's creditors. At
December 31, 2005, the company was in compliance with all covenants pursuant
to
its borrowing agreements.
The
aggregate amount of debt payable during each of the next five years is as
follows:
|
(dollars
in thousands)
|
||||
|
2006
|
$
|
13,780
|
||
|
2007
|
16,280
|
|||
|
2008
|
16,280
|
|||
|
2009
|
75,255
|
|||
|
$
|
121,595
|
|||
As
of
January 1, 2005, the company had $121.3 million outstanding under this facility,
including $51.3 million of borrowings under the revolving credit line. The
company also had $3.9 million in outstanding letters of credit at January 1,
2005. At January 1, 2005 the average interest rate on the senior debt amounted
to 5.14 %.
As
of
January 1, 2005 the company had $2.5 million in notes outstanding in conjunction
with the release and early termination of obligations under a lease agreement.
At January 1, 2005 the interest rate on the note was approximately
6.4%.
61
|
(6)
|
COMMON
AND PREFERRED STOCK
|
|
(a)
|
Shares
Authorized and Issued
|
At
December 31, 2005 and January 1, 2005, the company had 20,000,000 shares of
common stock and 2,000,000 shares of Non-voting Preferred Stock authorized.
At
December 31, 2005, there were 7,894,875 common stock shares
outstanding.
|
(b)
|
Treasury
Stock
|
In
July
1998, the company's Board of Directors adopted a stock repurchase program and
during 1998 authorized the purchase of up to 1,800,000 common shares in open
market purchases. As of December 31, 2005, 952,999 shares had been purchased
under the 1998 stock repurchase program.
In
October 2000, the company's Board of Directors approved a self tender offer
that
authorized the purchase of up to 1,500,000 common shares from existing
stockholders at a per share price of $7.00. On November 22, 2000 the company
announced that 1,135,359 shares were accepted for payment pursuant to the tender
offer for $7.9 million.
On
December 23, 2004, the company repurchased 1,808,774 shares at a $42.00 per
share of its common stock from the chairman of the company's board of directors,
members of his family and trusts controlled by his family upon his retirement
from the company. The aggregate cost of the stock repurchase including
transaction related costs was $77.2 million.
At
December 31, 2005, the company had a total of 3,856,344 shares in treasury
amounting to $89.7 million.
|
(c)
|
Stock
Options and Grants
|
The
company maintains a 1998 Stock Incentive Plan (the "Plan"), as amended on
December 15, 2003, under which the company's Board of Directors issues stock
options and stock grants to key employees. A maximum amount of 1,750,000 shares
can be issued under the Plan. Stock options issued under the plan provide key
employees with rights to purchase shares of common stock at specified exercise
prices. Options may be exercised upon certain vesting requirements being met,
but expire to the extent unexercised within a maximum of ten years from the
date
of grant. Stock grants are issued to employees are transferable upon certain
vesting requirements being met. As of December 31, 2005, a total of 1,231,160
stock options have been issued under the plan of which 495,135 have been
exercised and 736,025 remain outstanding. As of December 31, 2005, a total
of
350,000 restricted stock grants have been issued of which all are unvested.
In
addition to shares under the 1998 Stock Incentive Plan, certain directors of
the
company have outstanding stock options. As of December 31, 2005, there were
6,000 shares outstanding, all of which are vested.
62
A
summary
of stock option activity is presented below:
| Stock Option Activity |
Employees
|
Directors
|
Option
Price Per Share
|
|||||||
|
Outstanding
at
|
||||||||||
|
December
28, 2002:
|
558,125
|
81,000
|
||||||||
|
Granted
|
665,100
|
31,500
|
$
|
10.51
to $18.47
|
||||||
|
Exercised
|
(213,625
|
)
|
(15,000
|
)
|
$
|
4.50
to $10.51
|
||||
|
Forfeited
|
(14,100
|
)
|
—
|
$
|
5.90
to $10.51
|
|||||
|
Outstanding
at
|
|
|||||||||
|
January
3, 2004:
|
995,500
|
97,500
|
||||||||
|
Granted
|
—
|
—
|
||||||||
|
Exercised
|
(32,023
|
)
|
(13,000
|
)
|
$
|
4.50
to $18.47
|
||||
|
Forfeited
|
(15,277
|
)
|
(7,500
|
)
|
$
|
4.50
to $18.47
|
||||
|
Repurchased
|
(250,000
|
)
|
(21,000
|
)
|
$
|
5.90
to $10.51
|
||||
|
Outstanding
at
|
|
|||||||||
|
January
1, 2005:
|
698,200
|
56,000
|
||||||||
|
Granted
|
100,000
|
—
|
||||||||
|
Exercised
|
(49,175
|
)
|
(50,000
|
)
|
$
|
5.25
to $18.47
|
||||
|
|
||||||||||
|
Forfeited
|
(13,000
|
)
|
—
|
$
|
5.90
to $18.47
|
|||||
|
Outstanding
at
|
||||||||||
|
December
31, 2005:
|
736,025
|
6,000
|
||||||||
|
Weighted
average price
|
$
|
19.25
|
$
|
10.51
|
||||||
|
Exercisable
at
|
||||||||||
|
December
31, 2005:
|
515,245
|
6,000
|
||||||||
|
Weighted
average price
|
$
|
15.23
|
$
|
10.51
|
||||||
In
fiscal
2005, the weighted average price of shares exercised and forfeited under the
employee stock plan was $9.78 and $10.22, respectively. In fiscal 2005, the
weighted average price of shares exercised under the director stock plan was
$7.86.
63
The
following summarizes the options outstanding and exercisable for the employee
stock plan by exercise price, at December 31, 2005:
|
Weighted
|
Weighted
|
|||||||
|
Average
|
Average
|
|||||||
|
Exercise
|
Options
|
Remaining
|
Options
|
Remaining
|
||||
|
Price
|
Outstanding
|
Life
|
Exercisable
|
Life
|
||||
|
Employee
plan
|
||||||||
|
$5.90
|
192,000
|
6.16
|
115,200
|
6.16
|
||||
|
$10.51
|
73,300
|
7.18
|
29,320
|
7.18
|
||||
|
$18.47
|
370,725
|
7.82
|
370,725
|
7.82
|
||||
|
$53.93
|
100,000
|
9.17
|
—
|
9.17
|
||||
|
|
|
|||||||
|
736,025
|
|
7.50
|
515,245
|
7.43
|
||||
|
Director
plan
|
|
|||||||
|
$10.51
|
6,000
|
|
2.18
|
6,000
|
2.18
|
|||
|
6,000
|
2.18
|
6,000
|
2.18
|
| (7) |
INCOME
TAXES
|
Earnings
before taxes is summarized as follows:
|
2005
|
2004
|
2003
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
Domestic
|
$
|
45,603
|
$
|
31,712
|
$
|
26,928
|
||||
|
Foreign
|
5,795
|
2,132
|
1,893
|
|||||||
|
Total
|
$
|
51,398
|
$
|
33,844
|
$
|
28,821
|
||||
The
provision (benefit) for income taxes is summarized as follows:
|
2005
|
2004
|
2003
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
Federal
|
$
|
14,470
|
$
|
7,126
|
$
|
7,661
|
||||
|
State
and local
|
3,663
|
2,467
|
2,282
|
|||||||
|
Foreign
|
1,087
|
663
|
180
|
|||||||
|
Total
|
$
|
19,220
|
$
|
10,256
|
$
|
10,123
|
||||
|
|
|
|
||||||||
|
Current
|
$
|
18,413
|
$
|
2,682
|
$
|
11,011
|
||||
|
Deferred
|
807
|
7,574
|
(888
|
)
|
||||||
|
Total
|
$
|
19,220
|
$
|
10,256
|
$
|
10,123
|
||||
64
Reconciliation
of the differences between income taxes computed at the federal statutory rate
to the effective rate are as follows:
|
2005
|
2004
|
2003
|
||||||||
|
U.S.
federal statutory tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
Permanent
book vs. tax differences
|
(1.3
|
)
|
(0.9
|
)
|
—
|
|||||
|
State
taxes, net of federal benefit
|
4.9
|
5.9
|
4.9
|
|||||||
|
U.S.
taxes on foreign earnings and
|
|
|
||||||||
|
foreign
tax rate differentials
|
1.8
|
(0.2
|
)
|
(1.7
|
)
|
|||||
|
Reserve
adjustments and other
|
(3.0
|
)
|
(9.5
|
)
|
(3.1
|
)
|
||||
|
Consolidated
effective tax
|
37.4
|
%
|
30.3
|
%
|
35.1
|
%
|
||||
At
December 31, 2005 and January 1, 2005, the company had recorded the following
deferred tax assets and liabilities, which were comprised of the
following:
|
2005
|
2004
|
||||||
|
(dollars
in thousands)
|
|||||||
|
Deferred
tax assets:
|
|||||||
|
Stock
compensation
|
$
|
5,057
|
$
|
--
|
|||
|
Warranty
reserves
|
4,329
|
3,959
|
|||||
|
Inventory
reserves
|
2,244
|
2,110
|
|||||
|
Accrued
retirement benefits
|
1,526
|
1,110
|
|||||
|
Receivable
related reserves
|
1,340
|
1,189
|
|||||
|
Accrued
plant closure
|
1,177
|
1,128
|
|||||
|
Product
liability reserves
|
665
|
490
|
|||||
|
Unicap
|
346
|
259
|
|||||
|
Other
|
659
|
816
|
|||||
|
Gross
deferred tax assets
|
17,343
|
11,061
|
|||||
|
Valuation
allowance
|
—
|
—
|
|||||
|
Deferred
tax assets
|
$
|
17,343
|
$
|
11,061
|
|||
|
Deferred
tax liabilities:
|
|||||||
|
Intangible
assets
|
$
|
(10,595
|
)
|
$
|
(10,651
|
)
|
|
|
Depreciation
|
(3,364
|
)
|
(2,973
|
)
|
|||
|
Foreign
tax earnings repatriation
|
(776
|
)
|
—
|
||||
|
Interest
rate swap
|
(496
|
)
|
—
|
||||
|
LIFO
reserves
|
—
|
(6
|
)
|
||||
|
Deferred
tax liabilities
|
$
|
(15,231
|
)
|
$
|
(13,630
|
)
|
|
The
company's financial statements include amounts recorded for contingent tax
liabilities with respect to loss contingencies that are deemed probable of
occurrence. As those contingencies are resolved, whether by audit or the closing
of a tax year, the company adjusts tax expense to reflect the expected
resolution. The tax provision includes a benefit of $1.3 and $3.2 million in
2005 and 2004 related to the release of tax reserves for closed tax
years.
65
Pursuant
to The American Jobs Creation Act of 2004 (The Act) enacted on October 22,
2004,
the company evaluated provisions relating the repatriation of certain foreign
earnings and their impact on the company. The Act provides for a special
one-time tax deduction of 85 percent of certain foreign earnings that are
repatriated, as defined in the Act. The company elected to apply this provision
in 2005 and repatriated $4.7 million in earnings from its subsidiaries in Spain
and Mexico. Additionally, the company has assessed the liability for unremitted
foreign earnings anticipated to be remitted in future periods. On December
21,
2004, FASB Staff Position FAS 109-2, "Accounting and Disclosure Guidance for
the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act
of
2004", was issued. In accordance with FAS 109-2, the company recorded provisions
for taxes on foreign earnings in its 2005 financial statements in the amount
of
$1.2 million
| (8) |
FINANCIAL
INSTRUMENTS
|
In
June
1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”. SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments. The statement requires an entity
to recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. Derivatives that do not qualify as a hedge must
be
adjusted to fair value in earnings. If the derivative does qualify as a hedge
under SFAS No. 133, changes in the fair value will either be offset against
the
change in fair value of the hedged assets, liabilities or firm commitments
or
recognized in other accumulated comprehensive income until the hedged item
is
recognized in earnings. The ineffective portion of a hedge’s change in fair
value will be immediately recognized in earnings.
| (a) |
Foreign
exchange
|
The
company has entered into derivative instruments, principally forward contracts
to reduce exposures pertaining to fluctuations in foreign exchange rates. The
fair value of these forward contracts was approximately $(0.2) million at the
end of the year.
| (b) |
Interest
rate swap
|
In
January 2002, the company entered into an interest rate swap agreement with
a
notional amount of $20.0 million to fix the interest rate applicable to certain
of its variable rate debt. The agreement swapped one-month LIBOR for a fixed
rate of 4.03% and was in effect through December 2004.
In
February 2003, the company entered into an interest rate swap agreement with
a
notational amount of $10.0 million to fix the interest rate applicable to
certain of its variable rate debt. The agreement swaps one month LIBOR for
a
fixed rate of 2.36% and is in effect through December 2005. The interest rate
swap has been designated as a hedge, and in accordance with SFAS No. 133 the
changes in the fair value are recorded as a component of accumulated
comprehensive income. The change in the fair value of the swap during 2005
was
less than $0.1 million.
66
In
January 2005, the company entered into an interest rate swap agreement with
a
notional amount of $70.0 million. The agreement swaps one month LIBOR for a
fixed rate of 3.78%. The notional amount of the swap amortizes consistent with
the repayment schedule of the company's senior term loan maturing in November
2009. The interest rate swap has been designated as a hedge, and in accordance
with SFAS No. 133 the changes in the fair value are recorded as a component
of
accumulated comprehensive income. The change in the fair value of the swap
during 2005 was a gain of $0.7 million.
In
January 2006, subsequent to the fiscal 2005 year end, the company entered into
an interest rate swap agreement for a notional amount of $10.0 million maturing
on December 21, 2009. This agreement swaps one-month LIBOR for a fixed rate
of
5.03%.
| (9) |
LEASE
COMMITMENTS
|
The
company leases warehouse space, office facilities and equipment under operating
leases, which expire in fiscal 2006 and thereafter. The company also has a
lease
obligation for a manufacturing facility that was exited in conjunction with
manufacturing consolidation efforts related to the acquisition of Blodgett.
Future payment obligations under these leases are as follows:
|
Idle
|
||||||||||
|
Operating
|
Facility
|
Total
Lease
|
||||||||
|
Leases
|
Leases
|
Commitments
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
2006
|
$
|
908
|
$
|
303
|
$
|
1,211
|
||||
|
2007
|
377
|
331
|
708
|
|||||||
|
2008.
|
303
|
336
|
639
|
|||||||
|
2009
|
191
|
356
|
547
|
|||||||
|
2010
and thereafter
|
281
|
2,441
|
2,722
|
|||||||
|
|
|
|||||||||
|
$
|
2,060
|
$
|
3,767
|
$
|
5,827
|
|||||
Rental
expense pertaining to the operating leases was $0.8 million, $0.7 million,
and
$0.6 million in fiscal 2005, 2004, and 2003, respectively. Reserves of $2.6
million have been established for the idle facility leases, net of anticipated
sublease income (see Note 10 for further discussion).
67
| (10) |
ACQUISITION
INTEGRATION COSTS
|
In
fiscal
2001, the company established reserves through purchase accounting associated
with $3.9 million in severance related obligations and $6.9 million in facility
exit costs related to the business operations that were acquired from Maytag
Corporation on December 21, 2001 of Blodgett.
The
company established reserves of $6.9 million associated with the facility
closure and lease obligations for manufacturing facilities in Pennsylvania
and
Vermont that were exited in 2001 and 2002. These reserves were subsequently
increased in 2002 by $3.4 million through purchase accounting due to changes
in
the assumptions related to the timing and amount of sublease income expected
to
be realized, resulting in an increase in goodwill. The facility in Quakertown,
Pennsylvania was exited in 2001 prior to the acquisition of Blodgett. The lease
extends on this facility through December 2014. The company is recovering a
portion of the lease cost on a sublease that ends in April 2006. Two other
facilities in Williston, Vermont and Shelburne, Vermont were exited during
the
second quarter of 2002 in conjunction with the company's consolidation
initiatives following the Blodgett acquisition. Lease obligations on these
properties extended through June 2005 and December 2014, respectively. The
company completed an early buyout for the Williston, Vermont property during
the
first quarter of 2004. During the fourth quarter of 2004, the company entered
into an agreement with Pizzagalli Properties, LLC, to terminate the company’s
lease obligations related to the facility in Shelburne, Vermont. This
transaction occurred simultaneously with a sale of the property in Shelburne,
Vermont from Pizzagalli Properties, LLC to an unrelated third party. Under
terms
of the lease termination agreement, the company paid to the lessor $600,000
in
cash and entered into an interest bearing note in the amount of $2,513,884.
See
Note 5 for further discussion of the note arrangement.
During
2004 the company recorded adjustments to reduce the reserves for acquisition
related costs by $1.9 million. The reserve adjustments reflect a reduction
in
obligations associated with the Shelburne facility resulting from the sale
of
that property which allowed the company to negotiate an early exit from the
lease. The remaining reserve of $2.6 million represents estimated costs
associated with the Quakertown, Pennsylvania lease net of anticipated sublease
income. Management believes the remaining reserve balance is adequate to cover
costs associated with the lease obligation. However, the forecast of sublease
income could differ from actual amounts, which are subject to the occupancy
by a
subtenant and a negotiated sublease rental rate. If the company's estimates
or
underlying assumptions change in the future, the company would be required
to
adjust the reserve amount accordingly.
68
A
summary
of the reserve balance activity is as follows (in thousands):
|
Severance
Obligations
|
Facility
Closure andLease
Obligations
|
Total
|
||||||||
|
Balance
December 29, 2001
|
$
|
3,947
|
$
|
6,928
|
$
|
10,875
|
||||
|
Reserve
adjustments
|
(92
|
)
|
3,377
|
3,285
|
||||||
|
Payments
|
(3,584
|
)
|
(812
|
)
|
(4,396
|
)
|
||||
|
Balance
December 28, 2002
|
271
|
9,493
|
9,764
|
|||||||
|
Reserve
adjustments
|
(134
|
)
|
176
|
42
|
||||||
|
Payments
|
(122
|
)
|
(1,020
|
)
|
(1,142
|
)
|
||||
|
Balance
January 3, 2004
|
15
|
8,649
|
8,664
|
|||||||
|
Reserve
adjustments
|
(11
|
)
|
(1,875
|
)
|
(1,886
|
)
|
||||
|
Payments
|
(4
|
)
|
(3,986
|
)
|
(3,990
|
)
|
||||
|
Balance
January 1, 2005
|
—
|
2,788
|
2,788
|
|||||||
|
Payments
|
—
|
(190
|
)
|
(190
|
)
|
|||||
|
Balance
December 31, 2005
|
$
|
—
|
$
|
2,598
|
$
|
2,598
|
||||
| (11) |
SEGMENT
INFORMATION
|
The
company operates in three reportable operating segments defined by management
reporting structure and operating activities.
The
commercial foodservice equipment business group manufactures cooking equipment
for the restaurant and institutional kitchen industry. This business division
has manufacturing facilities in Illinois, Michigan, New Hampshire, North
Carolina, Vermont and the Philippines. This division supports four major product
groups, including conveyor oven equipment, core cooking equipment, counterline
cooking equipment, and international specialty equipment. Principal product
lines of the conveyor oven product group include Middleby Marshall ovens,
Blodgett ovens and CTX ovens. Principal product lines of the core cooking
equipment product group include the Southbend product line of ranges, steamers,
convection ovens, broilers and steam cooking equipment, the Blodgett product
line of ranges, convection ovens and combi ovens, MagiKitch'n charbroilers
and
catering equipment and the Pitco Frialator product line of fryers. The
counterline cooking and warming equipment product group includes toasters,
hot
food servers, foodwarmers and griddles distributed under the Toastmaster brand
name. The international specialty equipment product group is primarily comprised
of food preparation tables, undercounter refrigeration systems, ventilation
systems and component parts for the U.S. manufacturing operations.
The
industrial foodservice equipment business group manufactures cooking and
packaging equipment for the food processing industry. This business division
has
manufacturing in Lodi, Wisconsin. Its principal products include batch ovens,
conveyorized ovens and continuous process ovens sold under the Alkar brand
name
and food packaging machinery sold under the RapidPak brandname.
69
The
International Distribution Division provides integrated design, export
management, distribution and installation services through its operations in
China, India, South Korea, Mexico, the Philippines, Spain, Taiwan and the United
Kingdom. The division sells the company’s product lines and certain
non-competing complementary product lines throughout the world. For a local
country distributor or dealer, the company is able to provide a centralized
source of foodservice equipment with complete export management and product
support services.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The chief decision maker evaluates
individual segment performance based on operating income. Management believes
that intersegment sales are made at established arms length transfer
prices.
The
following table summarizes the results of operations for the company’s business
segments1
(dollars
in thousands):
|
Commercial
Foodservice
|
Industrial
Foodservice
|
International
Distribution
|
Corporate
and
Other(2)
|
Eliminations(3)
|
Total
|
||||||||||||||
|
2005
|
|||||||||||||||||||
|
Net
sales
|
$
|
298,994
|
$
|
2,837
|
$
|
53,989
|
$
|
—
|
$
|
(39,152
|
)
|
$
|
316,668
|
||||||
|
Operating
income
|
69,710
|
134
|
3,460
|
(15,367
|
)
|
35
|
57,972
|
||||||||||||
|
Depreciation
expense
|
2,992
|
49
|
178
|
16
|
—
|
3,235
|
|||||||||||||
|
Net
capital expenditures
|
1,006
|
—
|
275
|
95
|
—
|
1,376
|
|||||||||||||
|
Total
assets
|
192,207
|
43,410
|
25,869
|
8,338
|
(5,906
|
)
|
263,918
|
||||||||||||
|
Long-lived
assets(4)
|
129,958
|
26,922
|
400
|
5,003
|
--
|
162,283
|
|||||||||||||
|
2004
|
|||||||||||||||||||
|
Net
sales
|
$
|
257,510
|
$
|
—
|
$
|
46,146
|
$
|
—
|
$
|
(32,541
|
)
|
$
|
271,115
|
||||||
|
Operating
income
|
54,990
|
—
|
1,908
|
(19,751
|
)
|
(775
|
)
|
36,372
|
|||||||||||
|
Depreciation
expense
|
3,267
|
—
|
156
|
(273
|
)
|
—
|
3,150
|
||||||||||||
|
Net
capital expenditures
|
888
|
—
|
197
|
114
|
—
|
1,199
|
|||||||||||||
|
Total
assets
|
177,271
|
—
|
24,439
|
14,485
|
(6,520
|
)
|
209,675
|
||||||||||||
|
Long-lived
assets(4)
|
121,529
|
—
|
412
|
3,722
|
—
|
125,663
|
|||||||||||||
|
2003
|
|||||||||||||||||||
|
Net
sales
|
$
|
229,402
|
$
|
—
|
$
|
42,698
|
$
|
—
|
$
|
(29,900
|
)
|
$
|
242,200
|
||||||
|
Operating
income
|
40,968
|
—
|
2,182
|
(6,491
|
)
|
(1,643
|
)
|
35,016
|
|||||||||||
|
Depreciation
expense
|
3,698
|
—
|
148
|
(263
|
)
|
—
|
3,583
|
||||||||||||
|
Net
capital expenditures
|
869
|
—
|
36
|
98
|
—
|
1,003
|
|||||||||||||
|
Total
assets
|
170,233
|
—
|
20,690
|
6,854
|
(3,157
|
)
|
194,620
|
||||||||||||
|
Long-lived
assets(4)
|
123,910
|
—
|
509
|
3,234
|
—
|
127,653
|
|||||||||||||
|
(1)
|
Non-operating
expenses are not allocated to the operating segments. Non-operating
expenses consist of interest expense and deferred financing amortization,
gains and losses on acquisition financing derivatives, and other
income
and expenses items outside of income from
operations.
|
|
(2)
|
Includes
corporate and other general company assets and
operations.
|
|
(3)
|
Includes
elimination of intercompany sales, profit in inventory, and intercompany
receivables. Intercompany sale transactions are predominantly from
the
Commercial Foodservice Equipment Group to the International Distribution
Division.
|
|
(4)
|
Long-lived
assets of the Commercial Foodservice Equipment Group includes assets
located in the Philippines which amounted to $2,095, $2,184 and $2,379
in
2005, 2004 and 2003,
respectively.
|
70
Net
sales
by each major geographic region are as follows:
|
2005
|
2004
|
2003
|
||||||||
|
(dollars
in thousands)
|
||||||||||
|
United
States and Canada
|
$
|
256,790
|
$
|
219,377
|
$
|
193,610
|
||||
|
Asia
|
23,399
|
20,846
|
20,319
|
|||||||
|
Europe
and Middle East
|
26,568
|
22,808
|
21,842
|
|||||||
|
Latin
America
|
9,911
|
8,084
|
6,429
|
|||||||
|
Total
international
|
59,878
|
51,738
|
48,590
|
|||||||
|
$
|
316,668
|
$
|
271,115
|
$
|
242,200
|
|||||
| (12) |
RELATED
PARTY TRANSACTIONS
|
On
March
1, 2001, the company made a loan to its Chief Executive Officer, in the amount
of $300,000. The loan was repayable with interest of 6.0% on February 24, 2004.
This loan was established in conjunction with the company's commitment to
transfer 50,000 shares of common stock from treasury to the officer at $6.00
per
share. The market price at the close of business on March 1, 2001 was $5.94
per
share. In accordance with a special incentive agreement with the officer, the
loan and the related interest were to be forgiven by the company if certain
targets of Earnings Before Taxes for fiscal years 2001, 2002, and 2003 were
achieved. As of January 3, 2004, the entire loan had been forgiven as the
financial targets established by the special incentive agreement had been
achieved. One-third of the principal loan amount had been forgiven in fiscal
2002 and the remaining two-thirds was forgiven in fiscal 2003. Amounts forgiven
were recorded in general and administrative expense.
| (13) |
EMPLOYEE
RETIREMENT PLANS
|
| (a) |
Pension
Plans
|
The
company maintains a non-contributory defined benefit plan for its union
employees at the Elgin, Illinois facility. Benefits are determined based upon
retirement age and years of service with the company. This defined benefit
plan
was frozen on April 30, 2002 and no further benefits accrue to the participants
beyond this date. Plan participants will receive or continue to receive payments
for benefits earned on or prior to April 30, 2002 upon reaching retirement
age.
The employees participating in the defined benefit plan were enrolled in a
newly
established 401K savings plan on July 1, 2002, further described below.
The
company also maintains a retirement benefit agreement with its Chairman. The
retirement benefits are based upon a percentage of the Chairman’s final base
salary. Additionally, the company maintains a retirement plan for non-employee
directors. The plan provides for an annual benefit upon a change in control
of
the company or retirement from the Board of Directors at age 70, equal to 100%
of the director’s last annual retainer, payable for a number of years equal to
the director’s years of service up to a maximum of 10 years.
71
A
summary
of the plans’ benefit obligations, funded status, and net balance sheet position
is as follows:
|
(dollars
in thousands)
|
|||||||||||||
|
2005
|
2005
|
2004
|
2004
|
||||||||||
|
Union
|
Director
|
Union
|
Director
|
||||||||||
|
Plan
|
Plans
|
Plan
|
Plans
|
||||||||||
|
Change
in Benefit Obligation:
|
|||||||||||||
|
Benefit
obligation - beginning of year
|
$
|
4,161
|
$
|
8,281
|
$
|
4,034
|
$
|
5,809
|
|||||
|
Service
cost
|
--
|
846
|
--
|
341
|
|||||||||
|
Interest
on benefit obligations
|
242
|
82
|
243
|
375
|
|||||||||
|
Return
on assets
|
(190
|
)
|
--
|
(215
|
)
|
--
|
|||||||
|
Net
amortization and deferral
|
139
|
--
|
132
|
648
|
|||||||||
|
Pension
settlement
|
--
|
16
|
--
|
1,947
|
|||||||||
|
Net
pension expense
|
191
|
944
|
160
|
3,311
|
|||||||||
|
Net
benefit payments
|
(206
|
)
|
(7,778
|
)
|
(190
|
)
|
(7
|
)
|
|||||
|
Actuarial
(gain) loss
|
549
|
--
|
157
|
(832
|
)
|
||||||||
|
Benefit
obligation - end of year
|
$
|
4,695
|
$
|
1,447
|
$
|
4,161
|
$
|
8,281
|
|||||
|
Change
in Plan Assets:
|
|||||||||||||
|
Plan
assets at fair value - beginning of year
|
$
|
3,483
|
$
|
3,965
|
$
|
3,346
|
$
|
2,420
|
|||||
|
Company
contributions
|
336
|
3,813
|
216
|
1,580
|
|||||||||
|
Investment
gain
|
125
|
--
|
111
|
71
|
|||||||||
|
Benefit
payments and plan expenses
|
(206
|
)
|
(7,778
|
)
|
(190
|
)
|
(106
|
)
|
|||||
|
Plan
assets at fair value - end of year
|
$
|
3,738
|
$
|
--
|
$
|
3,483
|
$
|
3,965
|
|||||
|
Funded
Status:
|
|||||||||||||
|
Unfunded
benefit obligation
|
$
|
(957
|
)
|
$
|
(1,447
|
)
|
$
|
(678
|
)
|
$
|
(4,316
|
)
|
|
|
Unrecognized
net loss
|
2,098
|
--
|
1,674
|
--
|
|||||||||
|
Net
amount recognized in the balance heet
at year-end
|
$
|
1,141
|
$
|
(1,447
|
)
|
$
|
996
|
$
|
(4,316
|
)
|
|||
|
Amount
recognized in balance sheet:
|
|||||||||||||
|
Current
liabilities
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
(3,637
|
)
|
||||
|
Non-current
liabilities
|
(957
|
)
|
(1,447
|
)
|
(678
|
)
|
(679
|
)
|
|||||
|
Accumulated
other
comprehensive
income
|
2,098
|
--
|
1,674
|
--
|
|||||||||
|
Net
amount recognized
|
$
|
1,141
|
$
|
(1,447
|
)
|
$
|
996
|
$
|
(4,316
|
)
|
|||
|
Salary
growth rate
|
n/a
|
7.50
|
%
|
n/a
|
3.50
|
%
|
|||||||
|
Assumed
discount rate
|
5.75
|
%
|
6.00
|
%
|
6.00
|
%
|
6.25
|
%
|
|||||
|
Expected
return on assets
|
5.50
|
%
|
n/a
|
6.50
|
%
|
n/a
|
|||||||
The
company has engaged a non-affiliated third party professional investment advisor
to assist the company develop investment policy and establish asset allocations.
The company's overall investment objective is to provide a return, that along
with company contributions, is expected to meet future benefit payments.
Investment policy is established in consideration of anticipated future timing
of benefit payments under the plans. The anticipated duration of the investment
and the potential for investment losses during that period are carefully weighed
against the potential for appreciation when making investment decisions. The
company routinely monitors the performance of investments made under the plans
and reviews investment policy in consideration of changes made to the plans
or
expected changes in the timing of future benefit payments.
72
The
assets of the union plan were invested in the following classes of securities
(none of which were securities of the company):
|
2005
Union
Plan
|
2004
Union
Plan
|
||||||
|
Equity
|
24
|
%
|
28
|
%
|
|||
|
Fixed
income
|
50
|
59
|
|||||
|
Real
estate
|
26
|
13
|
|||||
|
100
|
%
|
100
|
%
|
||||
The
expected return on assets is developed in consideration of the anticipated
duration of investment period for assets held by the plan, the allocation of
assets in the plan, and the historical returns for plan assets.
Estimated
future benefit payments under the plan is as follows (dollars in
thousands):
|
Union
Plan
|
Director
Plans
|
||||||
|
2006
|
$
|
294
|
$
|
—
|
|||
|
2007
|
299
|
32
|
|||||
|
2008
|
298
|
32
|
|||||
|
2009
|
286
|
32
|
|||||
|
2010
|
291
|
32
|
|||||
|
2011
thru 2015
|
1,545
|
2,215
|
|||||
In
conjunction with the retirement of the former chairman of the board in December
2004, the company entered into an agreement to settle obligations relating
to
the former chairman's pension. As part of this settlement, the company made
payments aggregating to $7.8 million, which were funded in part by existing
plan
assets, in the first quarter of 2005 to fully settle all pension obligations
due
to the former chairman. Contributions to the directors' plan are based upon
actual retirement benefits for directors as they retire.
Contributions
under the union plan are funded in accordance with provisions of The Employee
Retirement Income Security Act of 1974. Expected contributions to be made in
2006 are $0.2 million.
| (b) |
401K
Savings Plans
|
The
company maintains four separate defined contribution 401K savings plans covering
all employees in the United States. These four plans separately cover (1) the
union employees at the Elgin, Illinois facility, (2) the union employees at
the
Lodi, Wisconsin facility, (3) the non-union employees at the Lodi, Wisconsin
facility, and (4) all other remaining non-union employees in the United States
not covered by one of the previous mentioned plans. The company makes profit
sharing contributions to the various plans in accordance with the requirements
of the plan. Profit sharing contributions for certain of these 401K savings
plans are at the discretion of the company.
73
In
conjunction with the freeze on future benefits under the defined benefit plan
for union employees at the Elgin, Illinois facility, the company established
a
401K savings plan for this group of employees. The company makes contributions
to this plan in accordance with its agreement with the union. These
contributions amounted to $219,600 for 2005, $221,400 for 2004 and $157,400
for
2003.
The
401K
savings plans for both the union and non-union employees at the Lodi, Wisconsin
facility are related to the business operations of Alkar Holdings, Inc. which
was acquired on December 7, 2005. Contributions made to the plan for 2005 were
$168,800. There were no contributions for the non-union employee plan for
2005.
The
company made discretionary contributions to the 401K savings plan covering
all
non-union employees other than those at the Lodi, Wisconsin facility relating
to
the plan year ended 2003 in the amount of $750,000. There was no discretionary
profit sharing contribution relating to the plan for the years ended 2004 or
2005.
| (14) |
QUARTERLY
DATA (UNAUDITED)
|
|
1st
|
2nd
|
3rd
|
4th
|
Total
Year
|
||||||||||||
|
|
(dollars
in thousands, except per share data)
|
|||||||||||||||
|
2005
|
||||||||||||||||
|
Net
sales
|
$
|
74,889
|
$
|
83,912
|
$
|
80,937
|
$
|
76,930
|
$
|
316,668
|
||||||
|
Gross
profit
|
27,072
|
32,586
|
32,476
|
29,519
|
121,653
|
|||||||||||
|
Income
(loss) from operations
|
12,003
|
16,337
|
16,284
|
13,348
|
57,972
|
|||||||||||
|
Net
earnings (loss)
|
$
|
6,348
|
$
|
8,969
|
$
|
9,628
|
$
|
7,233
|
$
|
32,178
|
||||||
|
|
|
|
|
|
||||||||||||
|
Basic
earnings (loss) per share (1)
|
$
|
.85
|
$
|
1.19
|
$
|
1.28
|
$
|
0.96
|
$
|
4.28
|
||||||
|
|
|
|
||||||||||||||
|
Diluted
earnings (loss) per share (1)
|
$
|
.79
|
$
|
1.11
|
$
|
1.19
|
$
|
0.88
|
$
|
3.98
|
||||||
|
|
|
|
||||||||||||||
|
2004
|
|
|
|
|||||||||||||
|
Net
sales
|
$
|
62,463
|
$
|
72,913
|
$
|
70,620
|
$
|
65,119
|
$
|
271,115
|
||||||
|
Gross
profit
|
23,176
|
28,793
|
26,394
|
24,265
|
102,628
|
|||||||||||
|
Income
(loss) from operations
|
10,104
|
14,653
|
12,582
|
920
|
38,259
|
|||||||||||
|
Net
earnings (loss)
|
$
|
5,591
|
$
|
8,289
|
$
|
10,368
|
$
|
(660
|
)
|
$
|
23,588
|
|||||
|
|
|
|
|
|||||||||||||
|
Basic
earnings (loss) per share (1)
|
$
|
0.61
|
$
|
0.90
|
$
|
1.12
|
$
|
(0.07
|
)
|
$
|
2.56
|
|||||
|
|
|
|
||||||||||||||
|
Diluted
earnings (loss) per share (1)
|
$
|
0.56
|
$
|
0.82
|
$
|
1.03
|
$
|
(0.07
|
)
|
$
|
2.38
|
|||||
| (1) |
Sum
of quarters may not equal the total for the year due to changes in
the
number of shares outstanding during the
year.
|
| (15) |
SUBSEQUENT
EVENT
|
In
January 2006, subsequent to the fiscal 2005 year end, the company entered into
an interest rate swap agreement for a notional amount of $10.0 million maturing
on December 21, 2009. This agreement swaps one-month LIBOR for a fixed rate
of
5.03%.
74
THE
MIDDLEBY CORPORATION AND SUBSIDIARIES
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FISCAL
YEARS ENDED DECEMBER 31, 2005, JANUARY 1, 2005
AND
JANUARY 3, 2004
|
Balance
|
Additions
|
Write-Offs
|
Balance
|
||||||||||||||||
|
Beginning
|
Charged
|
During
the
|
At
End
|
||||||||||||||||
|
Of
Period
|
Expense
|
the
Period
|
Acquisition
|
Of
Period
|
|||||||||||||||
|
Allowance
for doubtful accounts; deducted from
accounts
receivable on the
balance
sheets-
|
|||||||||||||||||||
|
|
|||||||||||||||||||
|
2005
|
$
|
3,382,000
|
$
|
512,000
|
$
|
(1,125,000
|
)
|
$
|
321,000
|
$
|
3,081,000
|
||||||||
|
2004
|
$
|
3,146,000
|
$
|
514,000
|
$
|
(278,000
|
)
|
--
|
$
|
3,382,000
|
|||||||||
|
2003
|
$
|
3,494,000
|
$
|
615,000
|
$
|
(963,000
|
)
|
--
|
$
|
3,146,000
|
|||||||||
75
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item
9A. 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
December 31, 2005, 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
design and operation of the company's disclosure controls and procedures. Based
on the foregoing, the company's Chief Executive Officer and Chief Financial
Officer concluded that the company's disclosure controls and procedures were
effective as of the end of this period.
During
the quarter ended December 31, 2005 there have been no changes in the company's
internal controls over financial reporting that have materially affected, or
are
reasonably likely to materially affect, the company's internal control over
financial reporting.
76
Management's
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting a defined in Rules 13a-15(f) and 15d -15(f)
under the Securities Exchange Act of 1934. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those
policies and procedures that:
| (i) |
pertain
to the maintenance of records that in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of our
assets.
|
| (ii) |
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
company
are being made only in accordance with authorizations of our management
and directors; and
|
| (iii) |
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could
have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Our
assessment of the internal control structure excluded Nu-Vu Foodservice Systems
which was acquired on January 7, 2005 and Alkar Holdings, Inc. which was
acquired on December 7, 2005. Nu-Vu Foodservice Systems and Alkar Holdings,
Inc.
had combined net sales of $18.8 million and total assets of $56.0 million,
which
are included in the consolidated financial statements of the company as of
and
for the year ended December 31, 2005. Under guidelines established by the
Securities Exchange Commission, companies are allowed to exclude
acquisitions from their assessment of internal control over financial
reporting during the first year of an acquistion while integrating the acquired
company.
Based
on
our evaluation under the framework in Internal
Control - Integrated Framework,
our
management concluded that our internal control over financial reporting was
effective as of December 31, 2005. Our management's assessment of the
effectiveness of our internal control over financial reporting as of December
31, 2005 has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report which is included
herein.
The
Middleby Corporation
March
15, 2006
77
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of The Middleby Corporation:
We have audited management's assessment, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting,
that The Middleby Corporation and subsidiaries (the “Company”)] maintained
effective internal control over financial reporting as of December 31, 2005,
based on the criteria
established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in
all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in
the
circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive
and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1)
pertain to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of
any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005,
is
fairly stated, in all material respects, based on the criteria established
in
Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on
the
criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
financial statements and financial statement schedules as of and for the year
ended December 31, 2005 of the Company and our report dated March 15, 2006
expressed an unqualified opinion on those financial statements and financial
statement schedules.
DELOITTE
& TOUCHE LLP
Chicago,
Illinois
March
15,
2006
78
Item
9B. Other
Information
None.
79
PART
III
Pursuant
to General Instruction G (3), the information called for by Part III (Item
10
(Directors and Executive Officers of the Registrant), Item 11 (Executive
Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters), Item 13 (Certain Relationships
and
Related Transactions) and Item 14 (Principal Accountant Fees and Services),
is
incorporated herein by reference from the registrant’s definitive proxy
statement filed with the Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this Form 10-K.
80
PART
IV
| Item 15. |
Exhibits,
Financial Statement Schedules
|
| (a) | 1. |
Financial
statements.
|
The
financial statements listed on Page 37 are filed as part of this Form
10-K.
| 3. |
Exhibits.
|
| 2.1 |
Stock
Purchase Agreement, dated August 30, 2001, between The Middleby
Corporation and Maytag Corporation, incorporated by reference
to the
company's Form 10-Q Exhibit 2.1, for the fiscal period ended
September 29,
2001, filed on November 13,
2001.
|
| 2.2 |
Amendment
No. 1 to Stock Purchase Agreement, dated December 21, 2001, between
The
Middleby Corporation and Maytag Corporation, incorporated by reference
to
the company's Form 8-K Exhibit 2.2 dated December 21, 2001, filed
on
January 7, 2002.
|
| 2.3 |
Amendment
No. 2 to Stock Purchase Agreement, dated December 23, 2002 between
The
Middleby Corporation and Maytag Corporation, incorporated by reference
to
the company's Form 8-K Exhibit 2.1 dated December 23, 2002, filed
on
January 7, 2003.
|
| 2.4 |
Stock
Purchase Agreement, dated December 6, 2005, by and among Middleby
Marshall, Inc., Alkar Holdings, Inc. and the other signatories thereto,
incorporated by reference to the company's Form 8-K Exhibit 10.1,
dated
December 6, 2005, filed on December 12,
2005.
|
81
|
3.1
|
Restated
Certificate of Incorporation of The Middleby Corporation (effective
as of
May 13, 2005, incorporated by reference to the company's Form 8-K,
Exhibit
3.1, dated April 29, 2005, filed on May 17,
2005.
|
|
3.2
|
Amended
and Restated Bylaws of The Middleby Corporation (effective as of
May 13,
2005, incorporated by reference to the company's Form 8-K, Exhibit
3.2,
dated April 29, 2005, filed on May 17,
2005.
|
| 4.1 |
Certificate
of Designations dated October 30, 1987, and specimen stock certificate
relating to the company
Preferred Stock, incorporated by reference from the company’s Form 10-K,
Exhibit (4), for the fiscal year ended December 31, 1988, filed
on March
15, 1989.
|
| 4.2 |
Subordinated
Promissory Note Agreement, dated December 21, 2001, between The
Middleby
Corporation and Maytag Corporation incorporated by reference to
the
company's Form 8-K, Exhibit 4.1 filed on January 7,
2002.
|
| 4.3 |
Subordinated
Promissory Note Agreement, dated December 21, 2001, between The
Middleby
Corporation and Maytag Corporation incorporated by reference
to the
company's Form 8-K, Exhibit 4.2 filed on January 7,
2002.
|
| 4.4 |
Deed
of Charge and Memorandum of Deposit, dated December 21, 2001,
between G.S.
Blodgett Corporation and Bank of America incorporated by reference
to the
company's Form 8-K, Exhibit 4.4 filed on January 7,
2002.
|
| 4.5 |
Subsidiary
Guaranty, dated December 21, 2001, between The Middleby Corporation,
Middleby Marshall Inc. and Bank of America incorporated by reference
to
the company's Form 8-K, Exhibit 4.5 filed on January 7,
2002.
|
| 4.6 |
Security
Agreement, dated December 21, 2001, between The Middleby Corporation,
Middleby Marshall Inc. and its subsidiaries and Bank of America
incorporated by reference to the company's Form 8-K, Exhibit
4.6 filed on
January 7, 2002.
|
82
| 4.7 |
U.S.
Pledge Agreement, dated December 21, 2001, between The Middleby
Corporation, Middleby Marshall Inc. and its subsidiaries and
Bank of
America incorporated by reference to the company's Form 8-K,
Exhibit 4.7
filed on January 7, 2002.
|
| 4.8 |
Consent
and Waiver to Subordinated Promissory Note, dated December 23, 2002,
between The Middleby Corporation and Maytag Corporation, incorporated
by
reference to the company's Form 8-K Exhibit 2.1 dated December 23,
2002,
filed on January 7, 2003.
|
| 4.9 |
Restated
and Substituted Promissory Note, dated October 23, 2003, between
The
Middleby Corporation and Maytag Corporation, incorporated by reference
to
the company’s Form 10-Q, Exhibit 4.2, for the fiscal period ended
September 27, 2003, filed on November 7,
2003.
|
| 4.10 |
Second
Amended and Restated Credit Agreement, dated May 19, 2004, between
The
Middleby Corporation, Middleby Marshall, Inc., LaSalle Bank National
Association, Wells Fargo Bank, Inc., Bank of America N.A. and Banc
of
America Securities, LLC, incorporated by reference to the company's
Form
8-K Exhibit 4.1, dated May 19, 2004, filed on May 21,
2004.
|
| 4.11 |
Commercial
Promissory Note between The Middleby Corporation and Pizzagalli
Properties, LLC, dated November 10, 2004, incorporated by reference
to the
company's Form 10-K Exhibit 4.18, for the fiscal year ended January
1,
2005, filed on March 17, 2005.
|
| 4.12 |
Third
Amended and Restated Credit Agreement, dated December 23, 2004, between
The Middleby Corporation, Middleby Marshall, Inc., LaSalle Bank National
Association, Wells Fargo Bank, Inc. and Bank of America N.A., incorporated
by reference to the company's Form 8-K Exhibit 10.2, dated December
23,
2004, filed on December 28, 2004.
|
| 4.13 |
First
Amendment to the Third Amended and Restated Agreement, dated December
7,
2005, between The Middleby Corporation, Middleby Marshall, Inc.,
LaSalle
Bank National Association, Wells Fargo Bank, Inc. and Bank of America
N.A., incorporated by reference to the company's Form 8-K Exhibit
10.1,
dated December 7, 2005, filed on December 12,
2005.
|
| 10.1* |
Amended
and Restated Employment Agreement of William
F. Whitman, Jr., dated January 1, 1995, incorporated by reference
to the
company’s Form 10-Q, Exhibit (10) (iii) (a), for the fiscal quarter ended
April 1, 1995;
|
83
| 10.2* |
Amendment
No. 1 to Amended and Restated Employment Agreement of William
F. Whitman,
Jr., incorporated by reference to the company's Form 8-K, Exhibit
10(a),
filed on August 21,
1998.
|
|
10.3*
|
Amended
and Restated Employment Agreement of David P.
Riley, dated January 1, 1995, incorporated by reference to the
company’s
10-Q, Exhibit (10) (iii) (b) for the fiscal quarter ended April
1,
1995;
|
| 10.4* |
Amendment
No. 1 to Amended and Restated Employment Agreement of David P.
Riley
incorporated by reference to the company's Form 8-K, Exhibit
10(b), filed
on August 21, 1998.
|
| 10.5* |
Retirement
Plan for Independent Directors adopted as of January 1, 1995,
incorporated
by reference to the company’s Form 10-Q, Exhibit (10) (iii) (c), for the
fiscal quarter ended April 1, 1995;
|
| 10.6* |
Description
of Supplemental Retirement Program, incorporated by reference
to Amendment
No. 1 to the company’s Form 10-Q, Exhibit 10 (c), for the fiscal quarter
ended July 3, 1993, filed on August 25,
1993;
|
| 10.7* |
The
Middleby Corporation Stock Ownership Plan, incorporated by reference
to
the company’s Form 10-K, Exhibit (10) (iii) (m), for the fiscal year ended
January 1, 1994, filed on March 31,
1994;
|
| 10.8* |
Amendment
to The Middleby Corporation Stock Ownership Plan dated as of
January 1,
1994, incorporated by reference to the company’s Form 10-K, Exhibit (10)
(iii) (n), for the fiscal year ended December 31,1994, filed
on March 31,
1995;
|
| 10.9 |
Grantor
trust agreement dated as of April 1, 1999 among the company and
Wachovia
Bank, N.A, incorporated by reference to the company's Form 10-K,
Exhibit
10.15, for the fiscal year ended January 1, 2000 filed on March
31,
2000.
|
| 10.10* |
Amendment
No. 2 to Amended and Restated Employment Agreement of David P.
Riley,
dated December 1, 2000, incorporated by reference to the company's
Form
10-K, Exhibit 10(C), for the fiscal year ended December 30, 2000
filed on
March 30, 2001.
|
84
| 10.11* |
Amendment
No. 2 to Amended and Restated Employment Agreement of William
F. Whitman,
dated January 1, 2001, incorporated by reference to the company's
Form
10-K, Exhibit 10(D), for the fiscal year ended December 30, 2000
filed on
March 30, 2001.
|
| 10.12* |
Amendment
No. 3 to Amended and Restated Employment Agreement of David P.
Riley,
dated June 20, 2001, incorporated by reference to the company's
Form 10-K,
Exhibit 10-16, for the fiscal year ended December 29, 2001 filed
on March
29, 2002.
|
| 10.13* |
Amendment
No. 3 to Amended and Restated Employment Agreement of William
F. Whitman,
dated April 16, 2002, incorporated by reference to the company's
Form
10-Q, Exhibit 10(A), for the fiscal period ended June 29, 2002
filed on
August 19, 2002.
|
| 10.14* |
Employment
Agreement of Selim A. Bassoul, dated May 16, 2002, incorporated
by
reference to the company's Form 10-Q, Exhibit 10(C), for the
fiscal period
ended June 29, 2002, filed on August 19,
2002.
|
| 10.15* |
Amendment
No. 4 to Amended and Restated Employment Agreement of William
F. Whitman,
Jr., dated January 2, 2003, incorporated by reference to the
company's
Form 10-Q, Exhibit 10(A), for the fiscal period ended June 28,
2003, filed
on August 8, 2003.
|
| 10.16* |
Amendment
No. 1 to Employment Agreement of Selim A. Bassoul, dated July
3, 2003,
incorporated by reference to the company’s form 10-Q, Exhibit 10(B) for
the fiscal period ended June 28, 2003, filed on August 8,
2003.
|
| 10.17* |
Amendment
No. 5 to Amended and Restated Employment Agreement of William
F. Whitman,
Jr., dated December 15, 2003, incorporated by reference to the
company’s
Form 10-K, Exhibit 10.18, for the fiscal year ended January 3,
2004, filed
on April 2, 2004.
|
85
| 10.18* |
Amendment
No. 2 to Employment Agreement of Selim A. Bassoul, dated December
15,
2003, incorporated by reference to the company’s Form 10-K, Exhibit 10.19,
for the fiscal year ended January 3, 2004, filed on April 2,
2004.
|
| 10.19* |
Severance
agreement of David B. Baker, dated March 1, 2004, incorporated
by
reference to the company’s Form 10-K, Exhibit 10.20, for the fiscal year
ended January 3, 2004, filed on April 2,
2004.
|
| 10.20* |
Severance
agreement of Timothy J. FitzGerald, dated March 1, 2004, incorporated
by
reference to the company’s Form 10-K, Exhibit 10.21, for the fiscal year
ended January 3, 2004, filed on April 2,
2004.
|
| 10.21* |
Amended
1998 Stock Incentive Plan, dated December 15, 2003, incorporated
by
reference to the company’s Form 10-K, Exhibit 10.21, for the fiscal year
ended January 3, 2004, filed on April 2,
2004.
|
| 10.22* |
Amendment
No. 3 to Employment Agreement of Selim A. Bassoul, dated May
7, 2004,
incorporated by reference to the company's Form 10-Q Exhibit
10(A), for
the firscal period ended July 3, 2004, filed on August 17,
2004.
|
| 10.23* |
Amendment
No. 6 to Employment Agreement of William F. Whitman, dated September
13,
2004, incorporated by reference to the company's Form 8-K Exhibit
10,
dated September 13, 2004, filed on September 17,
2004.
|
| 10.24* |
Retention
Agreement of Timothy J. FitzGerald, dated July 22, 2004, incorporated
by
reference to the company's Form 10-Q Exhibit 10.2, for the fiscal
period
ended October 2, 2004, filed on November 16,
2004.
|
| 10.25 |
Lease
Termination Agreement between Cloverleaf Properties, Inc., Blodgett
Holdings, Inc., The Middleby Corporation and Pizzagalli Properties,
LLC,
dated November 10, 2004, incorporated by reference to the company's
Form
10-K Exhibit 10.26, for the fiscal year ended January 1, 2005,
filed on
March 17, 2005.
|
| 10.26 |
Certificate
of Lease Termination by Pizzagalli Properties, LLC and Cloverleaf
Properties, Inc., dated November 10, 2004, incorporated by reference
to
the company's Form 10-K Exhibit 10.27, for the fiscal year ended
January
1, 2005, filed on March 17,
2005.
|
86
| 10.27 |
Stock
Purchase Agreement between The Middleby Corporation, William
F. Whitman
Jr., Barbara K. Whitman, W. Fifield Whitman III, Laura B. Whitman
and
Barbara K. Whitman Irrevocable Trust, dated December 23, 2004,
incorporated by reference to the company's Form 8-K Exhibit 10.1,
dated
December 23, 2004, filed on December 28,
2004.
|
| 10.28* |
Employment
Agreement of Selim A. Bassoul dated December 23, 2004, incorporated
by
reference to the company's Form 8-K Exhibit 10.1, dated December
23, 2004,
filed on December 28, 2004.
|
| 10.29* |
Letter
Agreement by and between The Middleby Corporation and William
F. Whitman,
incorporated by reference to the company's Form 8-K Exhibit 10.1,
dated
February 15, 2005, filed on February 18,
2005.
|
| 10.30* |
Amended
and Restated Management Incentive Compensation Plan, incorporated
by
reference to the company's Form 8-K Exhibit 10.1, dated February
25, 2005,
filed on March 3, 2005.
|
| 10.31* |
Employment
Agreement by and between The Middleby Corporation and Timothy
J.
FitzGerald, incorporated by reference to the company's Form 8-K
Exhibit
10.1, dated March 7, 2005, filed on March 8,
2005.
|
| 10.32* |
Restricted
Stock Agreement by and between The Middleby Corporation, incorporated
by
reference to the company's Form 8-K Exhibit 10.2, dated March
7, 2005,
filed on March 8, 2005.
|
| 10.33* |
Form
of The Middleby Corporation 1998 Stock Incentive Plan Non-Qualified
Stock
Option Agreement, incorporated by reference to the company's
Form 8-K
Exhibit 10.1, dated April 29, 2005, filed on May 5,
2005.
|
| 10.34* |
Form
of Confidentiality and Non-Competition Agreement incorporated
by reference
to the company's Form 8-K Exhibit 10.2, dated April 29, 2005,
filed on May
5, 2005.
|
87
| 10.35* |
The
Middleby Corporation Amended and Restated Management Incentive
Compensation Plan, effective as of January 1, 2005, incorporated
by
reference to the company's Form 8-K Exhibit 10.1, dated April
29, 2005,
filed on May 17, 2005.
|
| 10.36* |
Amendment
to The Middleby Corporation 1998 Stock Incentive Plan, effective
as of
January 1, 2005, incorporated by reference to the company's Form
8-K
Exhibit 10.2, dated April 29, 2005, filed on May 17,
2005.
|
| 21 |
List
of subsidiaries; 32.2 Certification
of Principal Financial Officer Pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
| 31.1 |
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a)
of the Securities Exchange Act, as
amended.
|
| 31.2 |
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a)
of the Securities Exchange Act, as
amended.
|
| 32.1 |
Certification
of Principal Executive Officer pursuant to 18 U.S.C. 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
| 32.2 |
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
*
|
Designates
management contract or compensation
plan.
|
| (c) |
See
the financial statement schedule included under Item
8.
|
88
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) 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, on the 16th of March
2006.
THE
MIDDLEBY CORPORATION
| |
|
|
| By: | /s/ Timothy J. FitzGerald | |
|
Timothy J. FitzGerald
Vice President,
|
||
| Chief Financial Officer | ||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on March 16, 2006.
|
Signatures
|
Title | |
|
PRINCIPAL
EXECUTIVE OFFICER
|
||
|
/s/
Selim A. Bassoul___________
Selim
A. Bassoul
|
Chairman of the Board, President, Chief Executive Officer and Director | |
|
PRINCIPAL
FINANCIAL AND
ACCOUNTING
OFFICER
|
||
|
/s/
Timothy J. FitzGerald_ _______
Timothy
J. FitzGerald
|
Vice President, Chief Financial Officer | |
|
DIRECTORS
|
||
|
/s/
Robert Lamb
Robert
Lamb
|
Director | |
|
/s/
John R. Miller, III____________
John
R. Miller, III
|
Director | |
|
/s/
Gordon
O'Brien
Gordon
O'Brien
|
Director | |
|
/s/
Philip G. Putnam_____________
Philip
G. Putnam
|
Director | |
|
/s/
Sabin C. Streeter_____________
Sabin
C. Streeter
|
Director | |
|
/s/
Robert L. Yohe______________
Robert
L. Yohe
|
Director |
89
Exhibit
21
Subsidiaries
of The Middleby Corporation
|
Name
of Subsidiary
|
State/Country
of
Incorporation/Organization
|
|
Alkar
Holdings, Inc.
|
Wisconsin
|
|
Alkar-RapidPak,
Inc.
|
Wisconsin
|
|
Alkar-RapidPak
Brasil, LLC
|
Wisconsin
|
|
Blodgett
Holdings, Inc.
|
Delaware
|
|
Cloverleaf
Properties, Inc.
|
Vermont
|
|
Fab-Asia
Inc.
|
Philippines
|
|
Frialator
International Limited (UK)
|
United
Kingdom
|
|
G.S.
Blodgett Corporation
|
Vermont
|
|
G.S.
Blodgett International, LTD
|
Barbados
|
|
MagiKitch'n
Inc.
|
Pennsylvania
|
|
Middleby
China Corporation
|
Peoples
Republic of China
|
|
Middleby
Espana SL
|
Spain
|
|
Middleby
Marshall Holdings, LLC
|
Delaware
|
|
Middleby
Marshall, Inc.
|
Delaware
|
|
Middleby
Mexico SA de CV
|
Mexico
|
|
Middleby
Philippines Corporation
|
Philippines
|
|
Middleby
Worldwide, Inc.
|
Florida
|
|
Middleby
Worldwide Korea Co., LTD
|
Korea
|
|
Middleby
Worldwide Philippines
|
Philippines
|
|
Middleby
Worldwide (Taiwan) Co., LTD
|
Republic
of China
|
|
Pitco
Frialator, Inc.
|
New
Hampshire
|
EXHIBIT
31.1
CERTIFICATIONS
I,
Selim
A. Bassoul, Chairman, President and Chief Executive Officer, certify
that:
| 1. |
I
have reviewed this report on Form 10-K of The Middleby
Corporation;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
|
| (a) |
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
| (b) |
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
| (c) |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
| (d) |
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent
function):
|
| (a) |
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
| (b) |
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal
controls over financial reporting.
|
Date:
March
16,
2006
| /s/ Selim A. Bassoul | |||
|
|
|||
| Selim
A.
Bassoul Chairman, President and Chief Executive Officer of The Middleby Corporation |
EXHIBIT
31.2
CERTIFICATIONS
I,
Timothy J. Fitzgerald, Chief Financial Officer, certify that:
|
1.
|
I
have reviewed this report on Form 10-K of The Middleby
Corporation;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
|
| (a) |
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
| (b) |
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
| (c) |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
| (d) |
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent
function):
|
| (a) |
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
| (b) |
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal
controls over financial reporting.
|
Date:
March
16,
2006
| /s/ Timothy J. FitzGerald | |||
|
|
|||
| Timothy
J.
FitzGerald Chief Financial Officer of The Middleby Corporation |
Exhibit
32.1
CERTIFICATION
BY THE PRINCIPAL EXECUTIVE OFFICER OF
THE
MIDDLEBY CORPORATION
PURSUANT
TO RULE 13A-14(b) UNDER THE EXCHANGE ACT AND
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
This
certification is being furnished pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and 18 U.S.C. 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
I,
Selim
A. Bassoul, Chairman, President and Chief Executive Officer (principal executive
officer) of The Middleby Corporation (the “Registrant”), certify, to the best of
my knowledge, based upon a review of the Annual Report on Form 10-K for the
fiscal year ended December 31, 2005 of the Registrant (the “Report”),
that:
|
(1)
|
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of
the Exchange Act; and
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
aspects, the financial `condition and results of operations of the
Registrant.
|
| Date: March 16, 2006 | ||
| |
|
|
| By: | /s/ Selim A. Bassoul | |
|
Selim A. Bassoul |
||
Exhibit
32.2
CERTIFICATION
BY THE PRINCIPAL FINANCIAL OFFICER OF
THE
MIDDLEBY CORPORATION
PURSUANT
TO RULE 13A-14(b) UNDER THE EXCHANGE ACT AND
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
This
certification is being furnished pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and 18 U.S.C. 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
I,
Timothy J. FutzGerald, Vice President and Chief Financial Officer (principal
financial officer) of The Middleby Corporation (the “Registrant”), certify, to
the best of my knowledge, based upon a review of the Annual Report on Form
10-K
for the fiscal year ended December 31, 2005 of the Registrant (the “Report”),
that:
|
(1)
|
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of
the Exchange Act; and
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
aspects, the financial condition and results of operations of the
Registrant.
|
| Date: March 16, 2006 | ||
| |
|
|
| By: | /s/ Timothy J. FitzGerald | |
|
Timothy J. FitzGerald |
||