Economic conditions have been a mixed bag for kitchen equipment provider Middleby (NASDAQ:MIDD) lately. On one hand, consumers have been economically strong, and the housing market has rebounded sharply from the financial crisis nearly a decade ago. Yet restaurants and other buyers of commercial food equipment have seen greater struggles, and the timing hasn't worked out as well as Middleby would have hoped when it implemented an acquisition strategy geared toward expansion in multiple directions.

Coming into Tuesday's third-quarter financial report, Middleby investors had expected modest gains in both revenue and profit. The company was only able to deliver on half of that proposition, and the decline in earnings was a cause for concern among many investors. Let's look more closely at Middleby to see why some aren't happy about its latest news.

Large Middleby Marshall commercial oven equipment.

Image source: Middleby.

Middleby restores sales growth

Middleby's third-quarter results at least showed that the company could bounce back from a revenue decline last quarter. Sales of $593 million were up 3% compared to the prior year's third quarter, and the figure was slightly higher than most investors had expected to see. Yet net income sagged 2% to $74.7 million, and the $1.31 per share in earnings that Middleby posted was significantly less than the consensus forecast among those following the stock for $1.43 on the bottom line.

Middleby's sales growth once again came entirely from the acquisitions that it has made recently. Organic sales were down 2.1%, with newly acquired businesses adding $28.6 million to Middleby's top line compared to 2016's third quarter. Foreign exchange impacts actually helped Middleby's revenue numbers for the first time in a while.

The various segments under Middleby's corporate umbrella had disparate performance. Commercial food service equipment saw the biggest sales gains at 7%, although the acquisitions of Sveba Dahlen and QualServ were responsible for all but about a single percentage point of that gain. For the food processing equipment group, sales gains of 6% came entirely from the purchases of Burford and CVP Systems, without which organic sales fell 4.4%. The residential kitchen equipment group once again led the pack lower, posting segment revenue declines of nearly 6%.

Margin figures also suffered during the period. Gross margin fell almost 2 percentage points to 38.5% due to lower-margin products from recent acquisitions as well as a less favorable mix of product sales overall. Restructuring expenses weighed on operating profit as well, although cost-cutting measures helped reduce overhead costs significantly.

Can Middleby bounce back?

CEO Selim Bassoul explained some of the headwinds that Middleby faced. "At the Commercial Foodservice Equipment Group," Bassoul said in the earnings release, "sales grew at a slower rate due to the timing of purchases from our major restaurant chain customers." He also pointed to delays in anticipated larger orders for food processing equipment and integration challenges in the residential kitchen unit.

Yet Middleby is still optimistic about the business. Bassoul pointed to opportunities with current and new restaurant customers to build and expand relationships, and new brands and strong reviews of equipment are lifting the company's reputation across its business units. In particular, new products at Viking are getting a good reception in the marketplace, hopefully reversing some of the damage that Middleby inherited from the prior owners of the product line.

Middleby is also putting its money where its mouth is. The company bought back 1.7 million shares of stock during the third quarter, paying about $200 million. Net debt has risen on Middleby's balance sheet because of acquisitions and this spending of cash, but the company doesn't seem concerned about the move.

Middleby investors weren't happy with the earnings hit that the company took, and the stock dropped 6% on Wednesday following the Tuesday evening release. Investors want to see more dramatic financial gains for Middleby in order to be entirely confident that the kitchen equipment specialist is on track for a full recovery in the long run.