# MIDDLEBY Corp (MIDD) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MIDDLEBY Corp's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/769520/000076952022000005/midd-20220101.htm
Accession: 0000769520-22-000005
Filing date: 2022-03-02
Report date: 2022-01-01
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MIDD/
All MD&A years: /company/MIDD/mda/
Next year: /company/MIDD/mda/fy2022/ (FY 2022)

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:

•changing market conditions;

•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;

•the impact of competitive products and pricing;

•the impact of announced management and organizational changes;

•the state of the residential construction, housing and home improvement markets;

•the state of the credit markets, including mortgages, home equity loans and consumer credit;

•intense competition in the company's business segments including the impact of both new and established global competitors;

•unfavorable tax law changes and tax authority rulings;

•cybersecurity attacks and other breaches in security;

•the continued ability to realize profitable growth through the sourcing and completion of strategic acquisitions;

•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 SEC filings.

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NET SALES SUMMARY

(dollars in thousands)

[[GREPCENT_TABLE]]
[["Fiscal Year Ended(1)"],["","2021","","2020","","2019"],["","Sales","","Percent","","Sales","","Percent","","Sales","","Percent"],["Business Segments:"],["Commercial Foodservice","$","2,032,761","","","62.5","%","","$","1,510,279","","","60.1","%","","$","1,984,345","","","67.1","%"],["Food Processing","480,746","","","14.8","","","437,272","","","17.4","","","400,951","","","13.5"],["Residential Kitchen","737,285","","","22.7","","","565,706","","","22.5","","","574,150","","","19.4"],["Total","$","3,250,792","","","100.0","%","","$","2,513,257","","","100.0","%","","$","2,959,446","","","100.0","%"]]
[[/GREPCENT_TABLE]]

(1)The company's fiscal year ends on the Saturday nearest to December 31.

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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:

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended(1)"],["","2021","","2020","","2019"],["Net sales","100.0","%","","100.0","%","","100.0","%"],["Cost of sales","63.2","","","64.9","","","62.7"],["Gross profit","36.8","","","35.1","","","37.3"],["Selling, general and administrative expenses","20.5","","","21.2","","","20.1"],["Restructuring","0.3","","","0.5","","","0.3"],["Merger termination fee","(3.4)","","","\u2014","","","\u2014"],["Gain on litigation settlement","\u2014","","","\u2014","","","(0.5)"],["Gain on sale of plant","\u2014","","","(0.1)","","","\u2014"],["Impairments","\u2014","","","0.6","","","\u2014"],["Income from operations","19.4","","","12.9","","","17.4"],["Interest expense and deferred financing amortization, net","1.8","","","3.1","","","2.9"],["Net periodic pension benefit (other than service cost & curtailment)","(1.4)","","","(1.6)","","","(1.0)"],["Curtailment loss","\u2014","","","0.6","","","\u2014"],["Other expense (income), net","\u2014","","","0.1","","","(0.1)"],["Earnings before income taxes","19.0","","","10.7","","","15.6"],["Provision for income taxes","4.0","","","2.4","","","3.7"],["Net earnings","15.0","%","","8.3","%","","11.9","%"]]
[[/GREPCENT_TABLE]]

(1)The company's fiscal year ends on the Saturday nearest to December 31.

30

Fiscal Year Ended January 1, 2022 as Compared to January 2, 2021

NET SALES. Net sales in fiscal 2021 increased by $737.5 million, or 29.3%, to $3,250.8 million as compared to $2,513.3 million in fiscal 2020. Net sales increased by $124.8 million, or 5.0%, from the fiscal 2020 acquisitions of Deutsche, Wild Goose, United Foodservice Equipment Zhuhai and the fiscal 2021 acquisitions of Novy, Newton CFV, Imperial, Char-Griller, and Kamado Joe and Masterbuilt. Excluding acquisitions and a disposition, net sales increased $631.8 million, or 25.3%, from the prior year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for fiscal 2021 increased net sales by approximately $39.5 million. Excluding the impact of foreign exchange, acquisitions and the disposition, sales increased 23.7% for the year, including a net sales increase of 28.2% at the Commercial Foodservice Equipment Group, a net sales increase of 9.1% at the Food Processing Equipment Group and a net sales increase of 23.2% at the Residential Kitchen Equipment Group.

•Net sales of the Commercial Foodservice Equipment Group increased by $522.5 million, or 34.6%, to $2,032.8 million in fiscal 2021 as compared to $1,510.3 million in fiscal 2020. Net sales from the acquisitions of Deutsche, Wild Goose, United Foodservice Equipment Zhuhai, Newton CFV, and Imperial which were acquired on March 2, 2020, December 7, 2020, December 18, 2020, November 16, 2021 and September 24, 2021, respectively, accounted for an increase of $77.4 million during fiscal 2021. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group increased $445.1 million, or 29.5%, as compared to the prior year. Excluding the impact of foreign exchange and acquisitions, net sales increased $426.1 million, or 28.2% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $367.2 million, or 34.4%, to $1,435.1 million, as compared to $1,067.9 million in the prior year. This includes an increase of $61.3 million from recent acquisitions. Excluding acquisitions, the net increase in domestic sales was $305.9 million, or 28.6%. The increase in domestic sales is related to improvements in market conditions and consumer demand. International sales increased $155.3 million, or 35.1%, to $597.7 million, as compared to $442.4 million in the prior year. This includes the increase of $16.1 million from recent acquisitions and an increase of $19.0 million related to the favorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales increase in international sales was $120.2 million, or 27.2%. The increase in international sales is related to improvements in market conditions, primarily in the European and Asian markets.

•Net sales of the Food Processing Equipment Group increased by $43.4 million, or 9.9%, to $480.7 million in fiscal 2021, as compared to $437.3 million in fiscal 2020. Excluding the impact of foreign exchange, net sales increased $39.6 million, or 9.1% at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $36.2 million, or 11.6%, to $347.3 million, as compared to $311.1 million in the prior year. The increase in domestic sales reflects growth driven by both protein and bakery products. International sales increased $7.2 million, or 5.7%, to $133.4 million, as compared to $126.2 million in the prior year. This includes an increase of $3.8 million related to the favorable impact of exchange rates. Excluding foreign exchange, the net sales increase in international sales was $3.4 million, or 2.7%. The increase in international revenues is primarily driven by protein projects.

•Net sales of the Residential Kitchen Equipment Group increased by $171.6 million, or 30.3%, to $737.3 million in fiscal 2021, as compared to $565.7 million in fiscal 2020. Net sales from the acquisitions of Novy, Char-Griller, and Kamado Joe and Masterbuilt, which were acquired on July 12, 2021, December 27, 2021, and December 27, 2021, respectively, accounted for an increase of $47.4 million during fiscal 2021. Excluding the impact of acquisitions and the disposition, net sales of the Residential Kitchen Equipment Group increased $143.3 million, or 26.2%, as compared to the prior year. Excluding the impact of foreign exchange, acquisitions, and the disposition, net sales increased $126.6 million, or 23.2% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales increase of $80.5 million, or 21.5%, to $454.4 million, as compared to $373.9 million in the prior year. This includes an increase of $3.5 million from recent acquisitions. Excluding acquisitions, the net increase in domestic sales was $77.0 million, or 20.6%. International sales increased $91.1 million, or 47.5% to $282.9 million, as compared to $191.8 million in the prior year. This includes an increase of $43.9 million from recent acquisitions and an increase of $16.7 million related to the favorable impact of exchange rates. Excluding acquisitions, the disposition, and foreign exchange, the net sales increase in international sales was $49.6 million, or 28.7%. The increase in domestic and international sales reflects the strong demand for our premium appliance brands and strength in the European market.

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GROSS PROFIT. Gross profit increased by $312.9 million to $1,194.9 million in fiscal 2021 from $882.0 million in fiscal 2020, primarily reflecting higher sales volumes related to improvements in market conditions and consumer demand and the favorable impact of foreign exchange rates of $14.0 million. The gross margin rate increased to 36.8% in 2021 as compared to 35.1% in 2020. The gross margin rate in fiscal 2021 excluding acquisitions and impact of foreign exchange was 37.0%.

•Gross profit at the Commercial Foodservice Equipment Group increased by $230.7 million, or 44.2%, to $752.9 million in fiscal 2021 as compared to $522.2 million in fiscal 2020. Gross profit from acquisitions increased gross profit by $27.1 million. Excluding acquisitions, the gross profit increased by approximately $203.6 million related to higher sales volumes. The impact of foreign exchange rates increased gross profit by approximately $6.7 million. The gross profit margin rate increased to 37.0% in fiscal 2021 as compared to 34.6% in the prior year. The gross margin rate in fiscal 2021 excluding acquisitions and the impact of foreign exchange was 37.1%.

•Gross profit at the Food Processing Equipment Group increased by $17.1 million, or 10.9%, to $174.2 million in fiscal 2021 as compared to $157.1 million in fiscal 2020. The impact of foreign exchange rates increased gross profit by approximately $2.0 million. The gross profit margin rate increased to 36.2% in fiscal 2021 as compared to 35.9% in the prior year. The gross margin rate in fiscal 2021 excluding the impact of foreign exchange was 36.1%.

•Gross profit at the Residential Kitchen Equipment Group increased by $64.3 million, or 31.5%, to $268.6 million in fiscal 2021 as compared to $204.3 million in fiscal 2020. Gross profit from acquisitions increased gross profit by $11.0 million. Excluding acquisitions, the gross profit increased by approximately $53.3 million related to higher sales volumes. The impact of foreign exchange rates increased gross profit by approximately $5.3 million. The gross margin rate increased to 36.4% in fiscal 2021 as compared to 36.1% in the prior year. The gross margin rate in fiscal 2021 excluding acquisitions and the impact of foreign exchange was 37.5%.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Combined selling, general, and administrative expenses increased by $136.1 million to $668.0 million in fiscal 2021 from $531.9 million in 2020. As a percentage of net sales, selling, general and administrative expenses amounted to 20.5% in fiscal 2021 and 21.2% in fiscal 2020.

Selling, general and administrative expenses reflect increased costs of $33.0 million associated with acquisitions, including $11.8 million of non-cash intangible amortization expense. Selling, general and administrative expenses increased approximately $90.0 million related to compensation costs, professional fees, and commission expense. Increases in professional fees were driven by the costs associated with our proposed and subsequently terminated acquisition of Welbilt, as well as overall increased deal activity. Foreign exchange rates had a favorable impact of $6.7 million.

RESTRUCTURING EXPENSES. Restructuring expenses decreased $4.7 million to $7.7 million from $12.4 million in the prior year period. In fiscal 2021, restructuring expenses related primarily to headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group. During fiscal 2020, restructuring charges related primarily to headcount reductions and cost reduction initiatives related to facility consolidations at the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group.

IMPAIRMENTS. In fiscal 2020, the company recognized impairment of $11.6 million associated with several trade names in conjunction with the diminution of value as we assessed current market conditions and future business plans. See Note 3 (f) to the Consolidated Financial Statements for further information on the annual impairment testing. In addition the company recorded an impairment charge of approximately $2.9 million to reflect the fair market value of assets held for sale for a non-core business within the Residential Kitchen Equipment Group. See Note 13, Restructuring and Acquisition Integration Initiatives, in the Notes to the Consolidated Financial Statements for further information on restructuring initiatives. In fiscal 2021, there were no impairments recognized in the Consolidated Financial Statements.

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INCOME FROM OPERATIONS. Income from operations increased $305.6 million to $630.0 million in fiscal 2021 from $324.4 million in fiscal 2020. Operating income as a percentage of net sales amounted to 19.4% in 2021 as compared to 12.9% in 2020. The increase in operating income resulted from improved market conditions and increased sales volumes. In addition, during fiscal 2021, the company received approximately $67.7 million in a termination fee, net of deal costs and taxes. Operating income in fiscal 2020 included impairment charges related to intangible assets, fixed assets, and assets held for sale.

Income from operations in 2021 included $160.8 million of non-cash expenses, including $42.7 million of depreciation expense, $75.8 million of intangible amortization related to acquisitions and $42.3 million of stock based compensation. This compares to $127.7 million of non-cash expenses in the prior year, including $39.1 million of depreciation expense, $69.0 million of intangible amortization related to acquisitions and $19.6 million of stock based compensation costs.

NON-OPERATING EXPENSES. Non-operating expenses decreased $45.9 million to $10.5 million of expense in fiscal 2021 from $56.4 million of expense in fiscal 2020. Net interest expense and deferred financing decreased $21.5 million to $57.2 million in fiscal 2021 from $78.6 million in fiscal 2020 reflecting a reduction in borrowing levels and lower borrowing costs on our current debt structure. Net periodic pension benefit (other than service costs and curtailment) increased $5.1 million to $45.1 million in fiscal 2021 from $40.0 million in fiscal 2020, related to the decrease in discount rate used to calculate the interest cost. During fiscal 2020 a curtailment cost of approximately $14.7 million was recognized as a result of closing the AGA Group Pension Scheme to future pension accruals.

INCOME TAXES. A tax provision of $131.0 million, at an effective rate of 21.1%, was recorded for fiscal 2021 as compared to $60.8 million at an effective rate of 22.7%, in fiscal 2020. In comparison to the prior year, the tax provision reflects favorable tax adjustments for deferred tax rate changes, tax refunds and adjustments for the finalization of 2020 tax returns. The effective rates in 2021 and 2020 are higher than the federal tax rate of 21% primarily due to state taxes and foreign tax rate differentials.

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Fiscal Year Ended January 2, 2021 as Compared to December 28, 2019

NET SALES. Net sales in fiscal 2020 decreased by $446.1 million, or 15.1%, to $2,513.3 million as compared to $2,959.4 million in fiscal 2019. Net sales increased by $72.3 million, or 2.4%, from the fiscal 2019 acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Pacproinc, Brava, and Synesso and the fiscal 2020 acquisitions of RAM, Deutsche, Wild Goose, and United Foodservice Equipment Zhuhai. Excluding acquisitions, net sales decreased $518.4 million, or 17.5%, from the prior year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for fiscal 2020 increased net sales by approximately $0.2 million. Excluding the impact of foreign exchange and acquisitions, sales decreased 17.5% for the year, including a net sales decrease of 26.5% at the Commercial Foodservice Equipment Group, a net sales increase of 5.9% at the Food Processing Equipment Group and a net sales decrease of 2.9% at the Residential Kitchen Equipment Group.

•Net sales of the Commercial Foodservice Equipment Group decreased by $474.0 million, or 23.9%, to $1,510.3 million in fiscal 2020 as compared to $1,984.3 million in fiscal 2019. Net sales from the acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Synesso, RAM, Deutsche, Wild Goose, and United Foodservice Equipment Zhuhai, which were acquired on April 1, 2019, April 1, 2019, June 15, 2019, November 27, 2019, January 13, 2020, March 2, 2020, December 7, 2020, and December 18, 2020, respectively, accounted for an increase of $53.1 million during fiscal 2020. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group decreased $527.1 million, or 26.6%, as compared to the prior year. Excluding the impact of foreign exchange and acquisitions, net sales decreased $525.6 million, or 26.5% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales decrease of $266.9 million, or 20.0%, to $1,067.9 million, as compared to $1,334.8 million in the prior year. This includes an increase of $43.0 million from recent acquisitions. Excluding acquisitions, the net decrease in domestic sales was $309.9 million, or 23.2%. International sales decreased $207.1 million, or 31.9%, to $442.4 million, as compared to $649.5 million in the prior year. This includes the increase of $10.1 million from recent acquisitions and a decrease of $1.5 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales decrease in international sales was $215.7 million, or 33.2%. The decline in both domestic and international sales reflects the impacts of COVID-19. This was most prevalent in the second quarter of 2020 and despite the decline over the prior year, gradually recovered in the second half of the year.

•Net sales of the Food Processing Equipment Group increased by $36.3 million, or 9.1%, to $437.3 million in fiscal 2020, as compared to $401.0 million in fiscal 2019. Excluding the impact of foreign exchange and the acquisition of Pacproinc, acquired July 16, 2019, net sales increased $23.8 million, or 5.9% at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $64.5 million, or 26.2%, to $311.1 million, as compared to $246.6 million in the prior year. Excluding the acquisition, net sales increased $51.8 million, or 21.0%. The increase in domestic sales reflects growth in protein equipment sales. International sales decreased $28.2 million, or 18.3%, to $126.2 million, as compared to $154.4 million in the prior year. This includes a decrease of $1.1 million related to the unfavorable impact of exchange rates. Excluding the acquisition and foreign exchange, the net sales decrease in international sales was $28.0 million, or 18.1%. The decrease in international revenues reflects declines in sales primarily due to the disruptive impact of COVID-19 on our customers' operations.

•Net sales of the Residential Kitchen Equipment Group decreased by $8.4 million, or 1.5%, to $565.7 million in fiscal 2020, as compared to $574.1 million in fiscal 2019. Excluding the impact of foreign exchange, the acquisition of Brava, acquired November, 19, 2019, net sales decreased $16.8 million, or 2.9% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales increase of $11.2 million, or 3.1%, to $373.9 million, as compared to $362.7 million in the prior year. Excluding the acquisition, net sales increased $5.6 million, or 1.5%. The increase in domestic sales is primarily related to strong consumer demand in the last six months of the year, offset by the impacts of COVID-19 in the first half of the year. International sales decreased $19.6 million, or 9.3% to $191.8 million, as compared to $211.4 million in the prior year. This includes an increase of $2.8 million related to the favorable impact of exchange rates. Excluding foreign exchange, the net sales decrease in international sales was $22.4 million, or 10.6%, primarily in the European market, reflecting the impacts of Brexit and the outbreak of COVID-19 partially offset by strong consumer demand in the last six months of the year.

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GROSS PROFIT. Gross profit decreased by $221.5 million to $882.0 million in fiscal 2020 from $1,103.5 million in fiscal 2019, primarily reflecting the lower sales volumes related to COVID-19 and lower margins at recent acquisitions, offset by the favorable impact of foreign exchange rates of $1.7 million. The gross margin rate decreased from 37.3% in 2019 to 35.1% in 2020. The gross margin rate in fiscal 2020 excluding acquisitions and impact of foreign exchange was 35.3%.

•Gross profit at the Commercial Foodservice Equipment Group decreased by $224.4 million, or 30.1%, to $522.2 million in fiscal 2020 as compared to $746.6 million in fiscal 2019. Gross profit from the acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Synesso, RAM, Deutsche, Wild Goose, and United Foodservice Equipment Zhuhai, accounted for an approximately $13.0 million increase in gross profit during fiscal 2020. Excluding acquisitions, the gross profit decreased by approximately $237.4 million largely due to lower sales volumes. The impact of foreign exchange rates increased gross profit by approximately $0.1 million. The gross profit margin rate decreased to 34.6% as compared to 37.6% in the prior year, primarily due to lower margins at recent acquisitions. The gross margin rate in fiscal 2020 excluding acquisitions and the impact of foreign exchange was 34.9%.

•Gross profit at the Food Processing Equipment Group increased by $14.9 million, or 10.5%, to $157.1 million in fiscal 2020 as compared to $142.2 million in fiscal 2019. Excluding the acquisition, gross profit increased by approximately $10.6 million. The impact of foreign exchange rates increased gross profit by approximately $0.4 million. The gross profit margin rate increased to 35.9% in fiscal 2020 as compared to 35.5% in the prior year. The gross margin rate in fiscal 2020 excluding the acquisition and the impact of foreign exchange was 35.9%.

•Gross profit at the Residential Kitchen Equipment Group decreased by $12.5 million, or 5.8%, to $204.3 million in fiscal 2020 as compared to $216.8 million in fiscal 2019. The impact of foreign exchange rates increased gross profit by approximately $1.2 million. The gross margin rate decreased to 36.1% in fiscal 2020 as compared to 37.8% in the prior year, primarily related to lower sales volumes and the impact of facility consolidations.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Combined selling, general, and administrative expenses decreased by $61.9 million to $531.9 million in fiscal 2020 from $593.8 million in 2019. As a percentage of net sales, selling, general and administrative expenses amounted to 21.2% in fiscal 2020 and 20.1% in fiscal 2019.

Selling, general and administrative expenses reflect increased costs of $30.2 million associated with acquisitions, including $7.2 million of non-cash intangible amortization expense. Selling, general and administrative expenses decreased by $35.7 million related to compensation costs and commissions and $59.2 million due to controllable cost reductions primarily within professional fees, travel and entertainment, convention costs, and advertising. Foreign exchange rates had a favorable impact of $0.5 million. The decreases were partially offset by a $11.5 million increase related to higher non-cash share-based compensation and $5.8 million related to increased allowances for doubtful accounts given the current market conditions. The prior year expenses also included $10.1 million related to transition costs with the former Chairman and CEO upon his retirement in February 2019.

RESTRUCTURING EXPENSES. Restructuring expenses increased $1.9 million to $12.4 million from $10.5 million in the prior year period. In fiscal 2020, restructuring expenses related primarily to headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group. During fiscal 2019, restructuring charges related primarily to headcount reductions and cost reduction initiatives related to facility consolidations at the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group.

GAIN ON LITIGATION SETTLEMENT. In fiscal 2019, the company reached a settlement with respect to a lawsuit filed by the company arising from a prior acquisition included in the Residential Kitchen Equipment Group. The gain associated with this settlement, which is net of the release of funds in escrow, is reflected in the consolidated statement of earnings.

IMPAIRMENTS. In fiscal 2020, the company recognized impairment of $11.6 million associated with several trade names in conjunction with the diminution of value as we assessed current market conditions and future business plans. See Note 3 (f) to the Consolidated Financial Statements for further information on the annual impairment testing. In addition the company recorded an impairment charge of approximately $2.9 million to reflect the fair market value of assets held for sale for a non-core business within the Residential Kitchen Equipment Group. See Note 13, Restructuring and Acquisition Integration Initiatives, in the Notes to the Consolidated Financial Statements for further information on restructuring initiatives.

35

INCOME FROM OPERATIONS. Income from operations decreased $189.6 million to $324.4 million in fiscal 2020 from $514.0 million in fiscal 2019. Operating income as a percentage of net sales amounted to 12.9% in 2020 as compared to 17.4% in 2019. The decrease in operating income resulted from the impacts of COVID-19. Operating income in fiscal 2019 included the gain on litigation settlement, offset by the transition costs related to the former Chairman and CEO. Operating income in fiscal 2020 included impairment charges related to intangible assets, fixed assets, and assets held for sale.

Income from operations in 2020 included $127.7 million of non-cash expenses, including $39.1 million of depreciation expense, $69.0 million of intangible amortization related to acquisitions and $19.6 million of stock based compensation. This compares to $110.0 million of non-cash expenses in the prior year, including $37.9 million of depreciation expense, $64.0 million of intangible amortization related to acquisitions and $8.1 million of stock based compensation costs.

NON-OPERATING EXPENSES. Non-operating expenses increased $5.0 million to $56.4 million of expense in fiscal 2020 from $51.4 million of income in fiscal 2019. Net interest expense and deferred financing decreased $4.0 million to $78.6 million in fiscal 2020 from $82.6 million in fiscal 2019 reflecting the reduction in the average interest rates under the Credit Facility and benefit from the Convertible Notes, offset by higher non-cash interest from the lower interest rate on Convertible Notes. Net periodic pension benefit (other than service costs and curtailment) increased $10.3 million to $40.0 million in fiscal 2020 from $29.7 million in fiscal 2019, related to the increase in discount rate used to calculate the interest cost and lower expected returns on assets driven by lower asset values for fiscal 2019. During fiscal 2020, a curtailment cost of approximately $14.7 million was recognized as a result of closing the AGA Group Pension Scheme to future pension accruals.

INCOME TAXES. A tax provision of $60.8 million, at an effective rate of 22.7%, was recorded for fiscal 2020 as compared to $110.4 million at an effective rate of 23.9%, in fiscal 2019. In comparison to the prior year, the tax provision reflects favorable tax adjustments for deferred tax rate changes and adjustments for the finalization of 2019 tax returns. The effective rates in 2020 and 2019 are higher than the federal tax rate of 21% primarily due to state taxes and foreign tax rate differentials.

36

Financial Condition and Liquidity

Total cash and cash equivalents decreased by $87.7 million to $180.4 million at January 1, 2022 from $268.1 million at January 2, 2021. Total debt increased to $2.4 billion at January 1, 2022 from $1.7 billion at January 2, 2021 related to the funding of acquisitions discussed below and the adoption of ASU 2020-06 as discussed in Note 3(r), Recently Issued Accounting Standards, in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

OPERATING ACTIVITIES. Net cash provided by operating activities after changes in assets and liabilities amounted to $423.4 million as compared to $524.8 million in the prior year. During fiscal 2021, the company received approximately $67.7 million in a termination fee, net of deal costs and taxes.

During fiscal 2020, we realized significant benefits from improvements in working capital as a result of COVID-19 pandemic-related market conditions on our business. During fiscal 2021, working capital changes meaningfully impacted operating cash flows. This included an increase in accounts receivable of $99.9 million due to improved market conditions and increased sales volumes. Also, inventory increased $204.2 million and accounts payable increased $61.3 million to support increased demand and to manage challenges present in our supply chain.

In connection with the company’s acquisition activities, the company added assets and liabilities from the opening balance sheets of the acquired businesses in its consolidated balance sheets and accordingly these amounts are not reflected in the net changes in working capital.

INVESTING ACTIVITIES. During 2021, net cash used for investing activities amounted to $1.0 billion. Cash used to fund acquisitions and investments amounted to $963.6 million primarily for the acquisitions of Novy, Imperial, Kamado Joe and Masterbuilt and Char-Griller. Additionally, $46.6 million was expended, primarily for upgrades of production equipment, manufacturing facilities and residential and commercial showrooms. We received $6.3 million in proceeds on the sale of properties following facility consolidations actions.

FINANCING ACTIVITIES. Net cash flows used for financing activities amounted to $502.8 million in 2021. The company’s borrowing activities during 2021 included $604.0 million of net proceeds under its Credit Facility. On October 21, 2021, the company entered into an amended and restated five-year, $4.5 billion multi-currency senior secured credit agreement (the "Credit Facility"). The company incurred approximately $9.2 million of debt issuance costs for the amendment to the Credit Facility. In December 2021, the company then entered into privately negotiated capped call transactions (the "Capped Call Transactions") in an aggregate amount of $54.6 million.

Additionally, the company repurchased $29.3 million of Middleby common shares during 2021. This was comprised of $2.7 million to repurchase 15,480 shares of Middleby common stock that were surrendered to the company for withholding taxes related to restricted stock vestings and $26.6 million used to repurchase 141,500 shares of its common stock under a repurchase program.

At January 1, 2022, the company was in compliance with all covenants pursuant to its borrowing agreements. The company believes that its current capital resources, including cash and cash equivalents, cash expected to be generated from operations, funds available from its current lenders and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and expenditures for the foreseeable future.

Material Cash Requirements

The company's material cash requirements from contractual obligations primarily consist of long-term debt obligations, operating lease obligations, tax obligations and continent contingent purchase price payments to the sellers that were deferred in conjunction with various acquisitions. See Notes 3, 5 and 7 to the Consolidated Financial Statements for further information.

Related Party Transactions

From January 3, 2021 through the date hereof, there were no transactions between the company, its directors and executive officers that are required to be disclosed pursuant to Item 404 of Regulation S-K, promulgated under the Securities and Exchange Act of 1934, as amended.

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Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations are based upon the company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions and any such differences could be material to our consolidated financial statements. 

Revenue Recognition

Revenue is recognized when the control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and represents the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The company’s contracts can have multiple performance obligations or just a single performance obligation. For contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation using the company’s best estimate of the standalone selling price of each distinct good or service in the contract.

Within the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups, the estimated standalone selling price of equipment is based on observable prices. Within the Food Processing Equipment Group, the company estimates the standalone selling price based on expected cost to manufacture the good or complete the service plus an appropriate profit margin.

Control may pass to the customer over time or at a point in time. In general, the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups recognize revenue at the point in time control transfers to their customers based on contractual shipping terms. Revenue from equipment sold under our long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. Installation services provided in connection with the delivery of the equipment are also generally recognized as those services are rendered. Over time transfer of control is measured using an appropriate input measure (e.g., costs incurred or direct labor hours incurred in relation to total estimate). These measures include forecasts based on the best information available and therefore reflect the company's judgment to faithfully depict the transfer of the goods.

Inventories

Inventories are stated at the lower of cost or net realizable value using the first-in, first-out method for the majority of the company’s inventories. The company evaluates the need to record valuation adjustments for inventory on a regular basis. The company’s policy is to evaluate all inventories including raw material, work-in-process, finished goods, and spare parts. Inventory in excess of estimated usage requirements is written down to its estimated net realizable value. Inherent in the estimates of net realizable value are estimates related to our future manufacturing schedules, customer demand, possible alternative uses, and ultimate realization of potentially excess inventory.

Goodwill and Indefinite-Life Intangibles

The company’s business acquisitions result in the recognition of goodwill and other intangible assets, which are a significant portion of the company’s total assets. Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. Identifiable intangible assets are recognized separately from goodwill and include trademarks and trade names, technology, customer relationships and other specifically identifiable assets. Trademarks and trade names are deemed to be indefinite-lived. Goodwill and indefinite-lived intangible assets are not amortized, but are subject to impairment testing.

On an annual basis on the first day of the fourth quarter, or more frequently if triggering events occur, the company performs an impairment assessment for goodwill and indefinite-lived intangible assets. The company considers qualitative factors to assess if it is more likely than not that the fair value of goodwill and indefinite-lived intangible assets is below the carrying value.

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In conducting a qualitative assessment, the company analyzes a variety of events or factors that may influence the fair value of the reporting unit including, but not limited to: the results of prior quantitative assessments performed; changes in the carrying amount of the reporting unit; actual and projected revenue and operating margin; relevant market data for both the company and its peer companies; industry outlooks; macroeconomic conditions; liquidity; changes in key personnel; and the company's competitive position. Significant judgment is used to evaluate the totality of these events and factors to make the determination of whether it is more likely than not that the fair value of the reporting unit or indefinite-life intangible is less than its carrying value.

Goodwill Valuations

The reporting units at which we test goodwill for impairment are our operating segments. These consist of the Commercial Foodservice Equipment Group, the Food Processing Equipment Group and the Residential Kitchen Equipment Group. If the fair value is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of goodwill.

In performing a quantitative assessment, if required, the company estimates each reporting unit's fair value under an income approach using a discounted cash flow model. The income approach uses each reporting unit's projection of estimated operating results and cash flows that are discounted using a market participant discount rate based on a weighted-average cost of capital. The financial projections reflect management's best estimate of economic and market conditions over the projected period including forecasted revenue growth, operating margins, tax rate, capital expenditures, depreciation, amortization and changes in working capital requirements. Other assumptions include discount rate and terminal growth rate. The estimated fair value of each reporting unit is compared to their respective carrying values. Additionally, the company validates the estimates of fair value under the income approach by comparing the fair value estimate using a market approach. A market approach estimates fair value by applying cash flow multiples to the reporting unit's operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting units. The company considers the implied control premium and conclude whether it is reasonable based on other recent market transactions.

The company performed a qualitative assessment as of October 3, 2021 over all three reporting units and as a result of the qualitative assessments, the company determined it is more likely than not that the fair value of our reporting units are greater than the carrying amounts.

In estimating the fair value of its reporting units, management relies on a number of factors, including operating results, business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and management’s judgment in applying them in the impairment tests of goodwill. If actual results are not consistent with management's estimate and assumptions, a material impairment could have an adverse effect on the company's financial condition and results of operations.

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Indefinite-Life Intangible Valuations

In performing a quantitative assessment of indefinite-life intangible assets other than goodwill, primarily trademarks and trade names, we analyze the variety of events or factors that may impact the fair value of the indefinite-life intangible, including, but not limited to: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant factors. We estimate the fair value of these intangible assets using the relief-from-royalty method which requires assumptions related to projected revenues from our long-range plans; assumed royalty rates that could be payable if we did not own the trademark; and a discount rate using a market based weighted-average cost of capital. If the estimated fair value of the indefinite-life intangible asset is less than its carrying value, we would recognize an impairment loss.

In performing the quantitative analysis on these trademark assets, significant assumptions used in our relief-from-royalty model included revenue growth rates, assumed royalty rates and the discount rate, which are discussed further below.

•Revenue growth rates relate to projected revenues from our long-range plans and vary from brand to brand. Adverse changes in the operating environment or our inability to grow revenues at the forecasted rates may result in a material impairment charge.

•In determining royalty rates for the valuation of our trademarks, we considered factors that affect the assumed royalty rates that would hypothetically be paid for the use of the trademarks. The most significant factors in determining the assumed royalty rates include the overall role and importance of the trademarks in the particular industry, the profitability of the products utilizing the trademarks, and the position of the trademarked products in the given market segment.

•In developing discount rates for the valuation of our trademarks, we used the market based weighted average cost of capital, adjusted for higher relative level of risks associated with doing business in other countries, as applicable, as well as the higher relative levels of risks associated with intangible assets.

Based on the qualitative assessment as of October 3, 2021, the company determined it is more likely than not that the fair value of its other indefinite-life intangible assets are greater than the carrying amounts and no quantitative analyses were required.

As of September 27, 2020, the company identified several trademarks and trade names with indicators of potential risk for impairment and performed quantitative assessment. As a result of quantitative testing the company recognized $11.6 million of impairment charges associated with several trademarks, none of which were individually material. There were no other impairments in fiscal 2020 or 2021.

The company continues to monitor the global impacts of the COVID-19 pandemic to assess the outlook for demand of its products and the impact on its business and financial performance. If actual results are not consistent with management's estimate and assumptions, a material impairment charge of our trademarks and trade names could occur, which could have an adverse effect on the company's financial condition and results of operations.

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Convertible Debt

The company issued convertible debt with debt and equity components. The company evaluated the different components and features of the hybrid instrument and determined whether certain elements were embedded derivative instruments which require bifurcation. Components of convertible debt instruments that upon conversion may be settled fully in cash or partly in cash based on a net-share settlement basis are accounted for separately as long-term debt and equity when the conversion feature of the convertible bonds constitute an embedded equity instrument. When an equity instrument is identified, proceeds from issuance are allocated between debt and equity by measuring first the liability component and then determining the equity component as a residual amount. Prior to January 3, 2021, the liability component was measured as the fair value of a similar nonconvertible debt, which results in the recognition of a debt discount. The debt discount amortizes to interest expense, net within the Consolidated Statements of Earnings, using the effective interest method based on the expected maturity of the debt. The equity component is reported in additional paid-in capital within the Consolidated Statement of Changes in Stockholders' Equity and is not remeasured as long as it continues to meet the conditions for equity classification.

The company allocated transaction costs related to the issuance of convertible debt using the same proportions as the proceeds from the convertible debt. Transaction costs attributable to the liability component are recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheets and are amortized to interest expense, net within the Consolidated Statements of Earnings over the term of the convertible debt using the effective interest rate method. Transaction costs attributable to the equity component are netted within additional paid-in capital within the Consolidated Statement of Stockholders' Equity.

Effective January 3, 2021, the company early adopted ASU 2020-06 using the modified retrospective approach. The convertible debt is now accounted for as a single liability and therefore the company no longer recognized any amortization of debt discounts as non-cash interest expense.

For additional information regarding the company's convertible debt, see Note 5, Financing Arrangements, in the Notes to the Consolidated Financial Statements.

Pension Benefits

The company sponsors pension benefits to certain employees. The accounting for these plans depends on assumptions made by management, which are used by actuaries the company engages to calculate the projected and accumulated obligations and the annual expense recognized for these plans. These assumptions include expected long-term rate of return on plan assets and discount rates.

The amount of unrecognized actuarial gains and losses recognized in the current year’s operations is based on amortizing the unrecognized gains or losses for each plan that exceed the larger of 10% of the projected benefit obligation or the fair value of plan assets, also known as the corridor. The amount of unrecognized gain or loss that exceeds the corridor is amortized over the average future service of the plan participants or the average life expectancy of inactive plan participants for plans where all or almost all of the plan participants are inactive. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension obligations and our future expense.

Income taxes

The company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The company’s deferred and other tax balances are based on management’s interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Income tax expense and liabilities recognized by the company also reflect its best estimates and assumptions regarding, among other things, the level of future taxable income, the effect of the company’s various tax planning strategies and uncertain tax positions. Future tax authority rulings and changes in tax laws, changes in projected levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the company. The company follows the provisions under ASC 740-10-25 that provides a recognition threshold and measurement criteria for the financial statement recognition of a tax benefit taken or expected to be taken in a tax return. Tax benefits are recognized only when it is more likely than not, based on the technical merits, that the benefits will be sustained on examination. Tax benefits that meet the more-likely-than-not recognition threshold are measured using a probability weighting of the largest amount of tax benefit that has greater than 50% likelihood of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a particular tax benefit is a matter of judgment based on the individual facts and circumstances evaluated in light of all available evidence as of the balance sheet date.

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New Accounting Pronouncements

See Note 3(r) to the Consolidated Financial Statements for further information on the new accounting pronouncements.

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.

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