MIDDLEBY Corp (MIDD) FY 2023 MD&A

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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Current Events

Inflation and Interest Rate Environment

The company has been negatively impacted by inflation in wages, logistics, energy, raw materials and component costs. Price increases and pricing strategies have been implemented to mitigate the impact of cost inflation on margins and the company continues to actively monitor costs. High inflation led to increased interest rates throughout 2022 and through the first six months of 2023, which combined with global macroeconomic uncertainty has and may continue to impact customer demand. Most notably in our residential segment, we have faced recent demand headwinds due to macroeconomic conditions. Even in light of such headwinds, we remain focused on delivering strong financial results and executing on our long-term strategy and profitability objectives.

Supply Chain, Labor and Logistics Constraints

The company continues to actively monitor global supply chain, labor and logistics constraints, which have had a negative impact on the company's ability to source parts and complete and ship units. While the company is seeing improvement on certain supply chain and logistics constraints, supply chains for certain key components remain distressed. The decreased availability of resources and inflationary costs have resulted in heightened inventory levels. To combat these pressures, the company has evaluated alternative sourcing, dual sourcing and collaborated across the organization, where appropriate, without materially presenting new risks or increasing current risks around quality and reliability. Our capital resources have been and the company expects they will continue to be sufficient to address these challenges.

NET SALES SUMMARY

(dollars in thousands)

(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:

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

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Fiscal Year Ended December 30, 2023 as Compared to December 31, 2022

NET SALES. Net sales in fiscal 2023 increased by $3.7 million, or 0.1%, to $4,036.6 million as compared to $4,032.9 million in fiscal 2022. Net sales increased by $121.3 million, or 3.0%, from the fiscal 2022 acquisitions of Kloppenberg, Proxaut, Icetro, CP Packaging, Colussi Ermes, Escher, Marco, and the fiscal 2023 acquisitions of Flavor Burst, Blue Sparq, Filtration Automation, Terry, and Trade-Wind. Excluding acquisitions, net sales decreased $117.6 million, or 2.9%, from the prior year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for fiscal 2023 increased net sales by approximately $12.3 million. Excluding the impact of foreign exchange and acquisitions, sales decreased 3.2% for the year, including a net sales increase of 2.7% at the Commercial Foodservice Equipment Group, a net sales increase of 10.7% at the Food Processing Equipment Group and a net sales decrease of 24.7% at the Residential Kitchen Equipment Group.

•Net sales of the Commercial Foodservice Equipment Group increased by $126.7 million, or 5.3%, to $2,521.5 million in fiscal 2023 as compared to $2,394.8 million in fiscal 2022. Net sales from the acquisitions of Kloppenberg, Icetro, Marco, Flavor Burst, Blue Sparq, and Terry, which were acquired on April 25, 2022, June 30, 2022, December 20, 2022, January 24, 2023, April 3, 2023 and July 5, 2023, respectively, accounted for an increase of $57.8 million during fiscal 2023. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group increased $68.9 million, or 2.9%, as compared to the prior year. Excluding the impact of foreign exchange and acquisitions, net sales increased $65.8 million, or 2.7% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $77.4 million, or 4.4%, to $1,828.4 million, as compared to $1,751.0 million in the prior year. This includes an increase of $24.9 million from recent acquisitions. Excluding acquisitions, the net increase in domestic sales was $52.5 million, or 3.0%. The increase in domestic sales is related to higher shipments, improved product mix and pricing increases. International sales increased $49.3 million, or 7.7%, to $693.1 million, as compared to $643.8 million in the prior year. This includes the increase of $32.9 million from recent acquisitions and an increase of $3.1 million related to the favorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales increase in international sales was $13.3 million, or 2.1%. The increase in international sales is related to improvements in market conditions, primarily in the Asia and Latin American markets.

•Net sales of the Food Processing Equipment Group increased by $130.6 million, or 22.1%, to $720.6 million in fiscal 2023, as compared to $590.0 million in fiscal 2022. Net sales from the acquisitions of CP Packaging, Colussi Ermes, Escher, and Filtration Automation, which were acquired on July 12, 2022, July 27, 2022, November 10, 2022, and June 13, 2023, respectively, accounted for an increase of $61.5 million during fiscal 2022. Excluding the impact of acquisitions, net sales of the Food processing Equipment Group increased $69.1 million, or 11.7%, as compared to the prior year. Excluding the impact of foreign exchange and acquisitions, net sales increased $63.4 million, or 10.7% at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $53.1 million, or 12.5%, to $479.3 million, as compared to $426.2 million in the prior year. This includes an increase of $23.7 million from recent acquisitions. Excluding acquisitions, the net increase in domestic sales was $29.4 million, or 6.9%. The increase in domestic sales reflects growth primarily driven by protein products. International sales increased $77.5 million, or 47.3%, to $241.3 million, as compared to $163.8 million in the prior year. This includes the increase of $37.8 million from recent acquisitions and an increase of $5.7 million related to the favorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales increase in international sales was $34.0 million, or 20.8%. The increase in international sales reflects growth primarily driven by bakery products.

•Net sales of the Residential Kitchen Equipment Group decreased by $253.6 million, or 24.2%, to $794.5 million in fiscal 2023, as compared to $1,048.1 million in fiscal 2022. Excluding the impact of the acquisition of Trade-Wind, acquired July 31, 2023, net sales decreased $255.6 million, or 24.4%, as compared to the prior year. Excluding the impact of foreign exchange and the acquisition, net sales decreased $259.1 million, or 24.7% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales decrease of $188.6 million, or 26.9%, to $513.3 million, as compared to $701.9 million in the prior year. Excluding the acquisition, the net decrease in domestic sales was $190.0 million, or 27.1%. International sales decreased $65.0 million, or 18.8% to $281.2 million, as compared to $346.2 million in the prior year. This includes an increase of $3.5 million related to the favorable impact of exchange rates. Excluding the acquisition and foreign exchange, the net sales decrease in international sales was $69.1 million, or 20.0%. The decrease in domestic and international sales was driven by challenging market conditions and higher inventory levels in various channels.

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GROSS PROFIT. Gross profit increased by $87.5 million to $1,534.1 million in fiscal 2023 from $1,446.6 million in fiscal 2022, primarily reflecting higher sales volumes at the Commercial Foodservice Equipment Group and Food Processing Equipment Group. The impact of foreign exchange rates increased gross profit by $3.9 million. The gross profit margin rate increased to 38.0% in 2023 as compared to 35.9% in 2022. The gross margin in fiscal 2022 was negatively impacted by inventory step-up charges associated with acquisitions. In addition, higher sales volumes and improved product mix have contributed to the expansion of the gross margin rate. The gross margin rate in fiscal 2023 excluding acquisitions and impact of foreign exchange was 38.1%.

•Gross profit at the Commercial Foodservice Equipment Group increased by $101.2 million, or 11.1%, to $1,010.6 million in fiscal 2023 as compared to $909.4 million in fiscal 2022. Gross profit from acquisitions increased gross profit by $20.8 million. Excluding acquisitions, gross profit increased by $80.4 million. The impact of foreign exchange rates increased gross profit by approximately $0.4 million. The gross profit margin rate increased to 40.1% in fiscal 2023 as compared to 38.0% in the prior year related to higher sales volumes and improved product mix. The gross profit margin rate in fiscal 2023 excluding acquisitions and the impact of foreign exchange was 40.2%.

•Gross profit at the Food Processing Equipment Group increased by $61.8 million, or 29.1%, to $274.4 million in fiscal 2023 as compared to $212.6 million in fiscal 2022. Gross profit from acquisitions increased gross profit by $23.1 million. Excluding acquisitions, gross profit increased by $38.7 million. The impact of foreign exchange rates increased gross profit by approximately $2.3 million. The gross profit margin rate increased to 38.1% in fiscal 2023 as compared to 36.0% in the prior year related to higher sales volumes, improved product mix and acquisition integration benefits. The gross profit margin rate in fiscal 2023 excluding the impact of foreign exchange was 38.1%.

•Gross profit at the Residential Kitchen Equipment Group decreased by $75.8 million, or 23.3%, to $250.0 million in fiscal 2023 as compared to $325.8 million in fiscal 2022. The impact of foreign exchange rates increased gross profit by approximately $1.2 million. The gross margin rate increased to 31.5% in fiscal 2023 as compared to 31.1% in the prior year. Gross profit margins in the prior year were negatively impacted by acquisitions, including $15.1 million of acquisition related inventory step-up charges. The gross profit margin rate in fiscal 2023 excluding the acquisition and the impact of foreign exchange was 31.4%.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Combined selling, general, and administrative expenses increased by $9.7 million to $806.9 million in fiscal 2023 from $797.2 million in 2022. As a percentage of net sales, selling, general and administrative expenses amounted to 20.0% in fiscal 2023 and 19.8% in fiscal 2022.

Selling, general and administrative expenses reflect increased costs of $33.6 million associated with acquisitions, including $5.6 million of non-cash intangible amortization expense. Selling, general and administrative expenses decreased from lower compensation costs, professional fees, and intangible amortization expense, partially offset by higher selling and marketing expenses. Foreign exchange rates had an unfavorable impact of $2.2 million.

RESTRUCTURING EXPENSES. Restructuring expenses increased $4.4 million to $14.1 million from $9.7 million in the prior year period. In fiscal 2023, restructuring expenses related primarily to headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group. During fiscal 2022, restructuring charges related primarily to non-cash restructuring valuation allowances on balances associated with activities in Russia and headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group.

IMPAIRMENTS. In fiscal 2023, the company recognized non-cash impairment of $78.1 million primarily associated with several trademarks in the Residential Kitchen Equipment Group in conjunction with diminution of values as we assessed recent market conditions and future business plans. See note 3 (f) to the Consolidated Financial Statements for further information on the annual impairment testing.

INCOME FROM OPERATIONS. Income from operations decreased $4.7 million to $634.9 million in fiscal 2023 from $639.6 million in fiscal 2022. Operating income as a percentage of net sales amounted to 15.7% in 2023 as compared to 15.9% in 2022. During fiscal 2023, operating income included the impairment of intangible assets. Excluding the impairment, the increase in operating income resulted from increased profitability driven by product mix and execution of strategic cost initiatives.

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Income from operations in 2023 included $254.5 million of non-cash expenses, including $50.4 million of depreciation expense, $75.0 million of intangible amortization related to acquisitions, $78.1 million of impairments of trademarks and $51.0 million of stock based compensation. This compares to $189.3 million of non-cash expenses in the prior year, including $44.6 million of depreciation expense, $86.3 million of intangible amortization related to acquisitions and $58.4 million of stock based compensation costs.

NON-OPERATING EXPENSES. Non-operating expenses increased $40.2 million to $115.4 million of expense in fiscal 2023 from $75.2 million of expense in fiscal 2022. Net interest expense and deferred financing increased $31.3 million to $120.3 million in fiscal 2023 from $89.0 million in fiscal 2022 reflecting the increase in interest rates under our current credit facility. Net periodic pension benefit (other than service costs and curtailment) decreased $33.6 million to $9.1 million in fiscal 2023 from $42.7 million in fiscal 2022 related to the increase in discount rate used to calculate the interest cost. Other expense was $4.2 million during fiscal 2023 as compared to other expense of $28.9 million during fiscal 2022, consisting mainly of foreign exchange losses and gains.

INCOME TAXES. A tax provision of $118.5 million, at an effective rate of 22.8%, was recorded for fiscal 2023 as compared to $127.8 million at an effective rate of 22.7%, in fiscal 2022. The fiscal 2023 tax provision includes a $7.0 million tax benefit for the finalization of the 2022 tax returns. The fiscal 2022 tax provision included a deferred tax benefit of approximately $13 million associated with legal entity restructuring the company undertook to integrate and simplify the company’s business operations.The effective rates in 2023 and 2022 were 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 December 31, 2022 as Compared to January 1, 2022

NET SALES. Net sales in fiscal 2022 increased by $782.1 million, or 24.1%, to $4,032.9 million as compared to $3,250.8 million in fiscal 2021. Net sales increased by $433.6 million, or 13.3%, from the fiscal 2021 acquisitions of Novy, Imperial, Newton CFV, Char-Griller, Kamado Joe and Masterbuilt and the fiscal 2022 acquisitions of Kloppenberg, Proxaut, Icetro, CP Packaging, Colussi, Escher, and Marco. Excluding acquisitions, net sales increased $348.5 million, or 10.7%, from the prior year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for fiscal 2022 decreased net sales by approximately $85.0 million. Excluding the impact of foreign exchange and acquisitions, sales increased 13.3% for the year, including a net sales increase of 16.7% at the Commercial Foodservice Equipment Group, a net sales increase of 13.2% at the Food Processing Equipment Group and a net sales increase of 4.3% at the Residential Kitchen Equipment Group.

•Net sales of the Commercial Foodservice Equipment Group increased by $380.4 million, or 18.9%, to $2,394.8 million in fiscal 2022 as compared to $2,014.4 million in fiscal 2021. Net sales from the acquisitions of Imperial, Newton CFV, Kloppenberg, Icetro, and Marco, which were acquired on September 24, 2021, November 16, 2021, April 25, 2022, June 30, 2022, and December 20, 2022, respectively, accounted for an increase of $84.6 million during fiscal 2022. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group increased $295.8 million, or 14.7%, as compared to the prior year. Excluding the impact of foreign exchange and acquisitions, net sales increased $336.1 million, or 16.7% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $333.4 million, or 23.5%, to $1,751.0 million, as compared to $1,417.6 million in the prior year. This includes an increase of $70.7 million from recent acquisitions. Excluding acquisitions, the net increase in domestic sales was $262.7 million, or 18.5%. The increase in domestic sales is related to improvements in market conditions, consumer demand, and pricing increases. International sales increased $47.0 million, or 7.9%, to $643.8 million, as compared to $596.8 million in the prior year. This includes the increase of $13.9 million from recent acquisitions and a decrease of $40.3 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales increase in international sales was $73.4 million, or 12.3%. The increase in international sales is related to improvements in market conditions, primarily in the European and Latin American markets.

•Net sales of the Food Processing Equipment Group increased by $90.9 million, or 18.2%, to $590.0 million in fiscal 2022, as compared to $499.1 million in fiscal 2021. Net sales from the acquisitions of Proxaut, CP Packaging, Colussi, and Escher, which were acquired on June 29, 2022, July 12, 2022, July 27, 2022, and November 10, 2022, respectively, accounted for an increase of $41.3 million during fiscal 2022. Excluding the impact of acquisitions, net sales of the Food processing Equipment Group increased $49.6 million, or 9.9%, as compared to the prior year. Excluding the impact of foreign exchange and acquisitions, net sales increased $65.8 million, or 13.2% at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $61.4 million, or 16.8%, to $426.2 million, as compared to $364.8 million in the prior year. This includes an increase of $11.3 million from recent acquisitions. Excluding acquisitions, the net increase in domestic sales was $50.1 million, or 13.7%. The increase in domestic sales reflects growth primarily driven by protein products. International sales increased $29.5 million, or 22.0%, to $163.8 million, as compared to $134.3 million in the prior year. This includes the increase of $30.0 million from recent acquisitions and a decrease of $16.2 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales increase in international sales was $15.7 million, or 11.7%. The increase in international sales reflects growth primarily driven by protein products.

•Net sales of the Residential Kitchen Equipment Group increased by $310.8 million, or 42.2%, to $1,048.1 million in fiscal 2022, as compared to $737.3 million in fiscal 2021. 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 $307.7 million during fiscal 2022. Excluding the impact of acquisitions, net sales of the Residential Kitchen Equipment Group increased $3.1 million, or 0.4%, as compared to the prior year. Excluding the impact of foreign exchange and acquisitions, net sales increased $31.6 million, or 4.3% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales increase of $247.5 million, or 54.5%, to $701.9 million, as compared to $454.4 million in the prior year. This includes an increase of $204.2 million from recent acquisitions. Excluding acquisitions, the net increase in domestic sales was $43.3 million, or 9.5%. The increase in domestic sales reflects the strong demand for our premium appliance brands. International sales increased $63.3 million, or 22.4% to $346.2 million, as compared to $282.9 million in the prior year. This includes an increase of $103.5 million from recent acquisitions and a decrease of $28.5 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales decrease in international sales was $11.7 million, or 4.1%. The decrease in international sales was primarily driven by challenging market conditions in the European market.

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GROSS PROFIT. Gross profit increased by $251.7 million to $1,446.6 million in fiscal 2022 from $1,194.9 million in fiscal 2021, primarily reflecting higher sales volumes related to improvements in market conditions and consumer demand, partially offset by the unfavorable impact of foreign exchange rates of $33.1 million. The gross profit margin rate decreased to 35.9% in 2022 as compared to 36.8% in 2021. The gross margin rate in fiscal 2022 excluding acquisitions and impact of foreign exchange was 37.5%. Gross profit margins have been negatively impacted by acquisitions, including $17.4 million of acquisition related inventory step-up charges, along with rising costs of many raw materials and inputs, higher labor rates, and logistics costs.

•Gross profit at the Commercial Foodservice Equipment Group increased by $164.1 million, or 22.0%, to $909.4 million in fiscal 2022 as compared to $745.3 million in fiscal 2021. Gross profit from acquisitions increased gross profit by $29.8 million. Excluding acquisitions, gross profit increased by $134.3 million related to higher sales volumes. The impact of foreign exchange rates decreased gross profit by approximately $15.2 million. The gross profit margin rate increased to 38.0% in fiscal 2022 as compared to 37.0% in the prior year. The gross profit margin rate in fiscal 2022 excluding acquisitions and the impact of foreign exchange was 38.1%.

•Gross profit at the Food Processing Equipment Group increased by $30.8 million, or 16.9%, to $212.6 million in fiscal 2022 as compared to $181.8 million in fiscal 2021. Gross profit from acquisitions increased gross profit by $12.2 million. Excluding acquisitions, gross profit increased by $18.6 million related to higher sales volumes. The impact of foreign exchange rates decreased gross profit by approximately $7.3 million. The gross profit margin rate decreased to 36.0% in fiscal 2022 as compared to 36.4% in the prior year. The gross profit margin rate in fiscal 2022 excluding the impact of foreign exchange was 36.8%.

•Gross profit at the Residential Kitchen Equipment Group increased by $57.2 million, or 21.3%, to $325.8 million in fiscal 2022 as compared to $268.6 million in fiscal 2021. Gross profit from acquisitions increased gross profit by $54.8 million. Excluding acquisitions, gross profit increased by $2.4 million. The impact of foreign exchange rates decreased gross profit by approximately $10.6 million. The gross margin rate decreased to 31.1% in fiscal 2022 as compared to 36.4% in the prior year. Gross profit margins have been negatively impacted by acquisitions, including $15.1 million of acquisition related inventory step-up charges. The gross profit margin rate in fiscal 2022 excluding acquisitions and the impact of foreign exchange was 36.6%.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Combined selling, general, and administrative expenses increased by $129.2 million to $797.2 million in fiscal 2022 from $668.0 million in 2021. As a percentage of net sales, selling, general and administrative expenses amounted to 19.8% in fiscal 2022 and 20.5% in fiscal 2021.

Selling, general and administrative expenses reflect increased costs of $88.1 million associated with acquisitions, including $22.7 million of non-cash intangible amortization expense. Selling, general and administrative expenses increased from compensation, selling and commissions expenses, partially offset by lower professional fees and intangible amortization expense. Foreign exchange rates had a favorable impact of $15.1 million.

RESTRUCTURING EXPENSES. Restructuring expenses increased $2.0 million to $9.7 million from $7.7 million in the prior year period. In fiscal 2022, restructuring expenses related primarily to headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group and non-cash restructuring valuation allowances on balances associated with activities in Russia. During fiscal 2021, restructuring charges related primarily to headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group.

INCOME FROM OPERATIONS. Income from operations increased $9.6 million to $639.6 million in fiscal 2022 from $630.0 million in fiscal 2021. Operating income as a percentage of net sales amounted to 15.9% in 2022 as compared to 19.4% in 2021. During fiscal 2021, the company received approximately $67.7 million in a termination fee, net of deal costs and taxes. The increase in operating income resulted from increased sales volumes driven by acquisitions and improved market conditions.

Income from operations in 2022 included $189.3 million of non-cash expenses, including $44.6 million of depreciation expense, $86.3 million of intangible amortization related to acquisitions and $58.4 million of stock based compensation. This compares to $160.8 million of non-cash expenses in the prior year, including $42.7 million of depreciation expense, $75.8 million of intangible amortization related to acquisitions and $42.3 million of stock based compensation costs.

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NON-OPERATING EXPENSES. Non-operating expenses increased $64.7 million to $75.2 million of expense in fiscal 2022 from $10.5 million of expense in fiscal 2021. Net interest expense and deferred financing increased $31.8 million to $89.0 million in fiscal 2022 from $57.2 million in fiscal 2021 reflecting the increase in interest rates and borrowing levels under our current credit facility. Net periodic pension benefit (other than service costs and curtailment) decreased $2.4 million to $42.7 million in fiscal 2022 from $45.1 million in fiscal 2021. Other expense was $28.9 million during fiscal 2022 as compared to other income of $1.6 million during fiscal 2021, consisting mainly of foreign exchange losses and gains.

INCOME TAXES. A tax provision of $127.8 million, at an effective rate of 22.7%, was recorded for fiscal 2022 as compared to $131.0 million at an effective rate of 21.1%, in fiscal 2021. The fiscal 2022 tax provision includes a deferred tax benefit of approximately $13 million associated with legal entity restructuring the company undertook to integrate and simplify the company’s business operations. The fiscal 2022 tax provision also reflects higher non-deductible stock compensation expense, where the prior year included favorable impacts from tax rate changes, tax refunds and adjustments for the finalization of 2020 tax returns. The effective rates in 2022 and 2021 were higher than the federal tax rate of 21% primarily due to state taxes and foreign tax rate differentials.

Termination of Welbilt Merger

As previously disclosed, on April 20, 2021, Middleby entered into a Merger Agreement with Welbilt, Inc. Following Welbilt's receipt of an alternative acquisition proposal, on July 13, 2021, Middleby announced that, under the terms of the Merger Agreement, it would not exercise its right to propose any modifications to the terms of the Merger Agreement and would allow the match period to expire. Accordingly, on July 14, 2021, Welbilt delivered to Middleby a written notice terminating the Merger Agreement and, concurrently with Middleby’s receipt of the termination fee of $110.0 million in cash from Welbilt, the Merger Agreement was terminated on July 14, 2021.

The termination fee received is reflected in the Condensed Consolidated Statements of Comprehensive Income as the "merger termination fee" and $19.7 million of deal costs associated with the transaction are reflected in selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income.

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Financial Condition and Liquidity

Total cash and cash equivalents increased by $85.5 million to $247.5 million at December 30, 2023 from $162.0 million at December 31, 2022. Total debt decreased to $2.4 billion at December 30, 2023 from $2.7 billion December 31, 2022, respectively.

OPERATING ACTIVITIES. Net cash provided by operating activities after changes in assets and liabilities amounted to $628.8 million as compared to $332.6 million in the prior year.

During fiscal 2023, working capital changes meaningfully impacted operating cash flows primarily driven by decreased inventory levels of $157.9 million, a decrease of $110.7 million in accrued expenses and other liabilities, including impacts from the timing of payments and status of over-time revenue contracts, various customer programs and incentive programs and a decrease in accounts payable of $49.4 million.

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 2023, net cash used for investing activities amounted to $155.7 million. Cash used to fund acquisitions and investments amounted to $68.8 million. Additionally, $85.2 million was expended, primarily for upgrades of production equipment and manufacturing facilities.

FINANCING ACTIVITIES. Net cash flows used for financing activities amounted to $390.9 million in 2023. The company’s borrowing activities during 2023 included $308.3 million of net repayments under its Credit Facility. Additionally, the company repurchased $74.6 million of Middleby common shares during 2023. This was comprised of $19.6 million to repurchase 126,704 shares of Middleby common stock that were surrendered to the company for withholding taxes related to restricted stock vestings and $55.0 million used to repurchase 397,738 shares of its common stock under a repurchase program.

At December 30, 2023, 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 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 1, 2023, 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.

As a result of the financial performance indicators for the Residential Kitchen reporting unit, the company deemed it necessary to complete a quantitative analysis. The fair value of the reporting unit exceeded its carrying value by more than 10%, thus no impairment of goodwill was recognized. The company believes the assumptions utilized within the quantitative analysis are reasonable and consistent with assumptions that would be used by other marketplace participants. Such assumptions are, however inherently uncertain, and different assumptions could lead to a different assessment for the reporting unit that could result in a material impairment that would adversely affect our results of operations.

As a result of the qualitative assessment for the other two reporting units, 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.

Based on the qualitative assessment as of October 1, 2023, the company identified several trademarks and trade names with indicators of potential risk for impairment and performed quantitative assessments. 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.

The gross value of all trademarks tested was approximately $246.2 million, including the impaired trademarks. As a result of the quantitative testing the company recognized $78.1 million of impairment charges primarily associated with the Kamado Joe, Masterbuilt and Char-Griller trademarks. For further details associated with the company's trademarks impairment testing, see Note 3 (f) to the Consolidated Financial Statements. The fair values of the trademarks tested with no impairment and exceeded their carrying values by 10% or more. The company believes the assumptions utilized within the quantitative analyses are reasonable and consistent with assumptions that would be used by other marketplace participants.

The company continues to monitor global and regional economic market conditions, channel inventory levels, and the underlying demand for its products to assess 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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