Companies are only as strong as the customers they serve, and the residential and commercial customers of  kitchen-equipment provider Middleby (NASDAQ:MIDD) have been experiencing a combination of issues lately that have made them less likely to order its products. Middleby has therefore been seeing weaker sales, even as it has made acquisitions to expand its business and serve a wider range of potential buyers.

Coming into its second-quarter financial report, Middleby investors were looking for modest gains in revenue that would translate into healthier earnings. Instead, sales performance was more sluggish than anticipated, and some investors seemed to want more assurance that Middleby would act more forcefully to get its existing operations moving in the right direction. Let's take a closer look at what the kitchen equipment company's latest report says about its future.

Middleby commercial oven.

Image source: Middleby.

Middleby cools down

The challenges Middleby faces were reflected in the company's Q2 results. Revenue was down 0.2% to $579.3 million, which fell short of the consensus forecast among analysts following the stock for a modest gain on the top line. Net income climbed 6% to $77.6 million, and after accounting for some extraordinary items, adjusted earnings of $1.39 per share were $0.01 per share better than what most analysts were expecting.

Taking a closer look at the numbers, Middleby continued to rely on purchasing new businesses to produce sales growth. Organic revenue fell 3.4%, with foreign currency headwinds having a two percentage point downward impact on sales, while acquisitions added five percentage points of top-line growth.

The company's segment results showed the variety of challenges it faces. On the commercial food service equipment side of the business, revenue was up 4%, but without its acquisition of Follett, segment revenue would have been down more than 4%. The residential kitchen equipment group saw sales slide even further, suffering a 13% drop in net revenue. Only the food processing equipment group managed to post net improvement during the quarter, with a nearly 11% rise in revenue and roughly 8% organic sales growth net of acquisitions.

CEO Selim Bassoul tried to highlight the positives in the report. "We continue to expand our industry leading profit margins at all three business segments," he said, and "through our continued focus on product innovation, pricing discipline, and operational excellence, we realized record EBITDA margins despite short-term revenue declines." The CEO also pointed to the company's work to integrate its newly acquired businesses, produce synergies, and boost financial results.

What's next for Middleby?

Along those lines, Middleby has kept on adding new business exposure through strategic purchases. During the quarter, the company bought three companies. Burford is a maker of equipment for the industrial baking industry that includes seeding, topping, and slicing baked goods. CVP Systems has developed high-speed modified-atmosphere packaging systems, which can help Middleby both in bakery and in meat processing. Finally, Sveba Dahlen makes mixing equipment and ovens for the baking and food service industry. Overall, these acquisitions should help it expand in both of its commercial-facing segments.

Yet Middleby still has a lot of work to do with its existing businesses. The company referred to restructuring initiatives at its AGA group, on which it continues to take special charges to its earnings. And while it's excited about new products that it hopes to roll out to restaurant chains, food processing facilities, and homeowners, if it expects to get more sales, it will also have to overcome lingering concerns about product recalls and other issues that plagued its Viking unit prior to the point when Middleby bought it.

Middleby investors weren't all that pleased with the company's financial results; the stock fell 5% on Thursday after they were announced before bouncing back slightly on Friday. For the company to get moving in the right direction again, it will need to redouble its efforts to be more efficient with internal operations, while also waiting patiently for its customer base get on a firmer economic footing.

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