People need to eat, and by making the equipment that many people rely on in order to prepare meals, Middleby (MIDD 0.63%) can count on regular demand from a wide variety of customers. Yet the food equipment business is still cyclical, and over the past three years, Middleby has had to work hard to endure some difficult conditions that its buyers have struggled through for their own businesses.
Coming into its fourth-quarter financial report, Middleby investors were hoping that solid sales growth would produce modest gains on the bottom line. The company wasn't able to make its revenue rise as much as some had hoped, and fears about a slowdown that could push into the first half of 2018 also made investors nervous. Let's take a closer look at Middleby and what's ahead for the kitchen equipment specialist.
Image source: Middleby.
How Middleby finished 2017
Middleby's fourth-quarter results were poor in investors' eyes. Revenue of $632.9 million climbed 6% from the year-ago quarter, although those following the stock had hoped to see closer to $645 million on the top line. But net income was down 7% to $75.2 million, and even after accounting for one-time items, adjusted earnings of $1.48 per share weren't quite as good as the $1.50-per-share consensus forecast among investors.
Tax reform was a net positive for Middleby on the bottom line. The company said that revaluing deferred taxes at the lower corporate income rate was only partially offset by the deemed repatriation tax in the U.S. shift to a territorial tax system. That helped to turn a $36.1 million tax liability in the year-ago quarter into a $14 million net benefit this year.
Organic sales figures, though, were downright ugly for Middleby during the quarter. Both acquisitions and foreign exchange impacts helped to boost Middleby's revenue figures, with purchased businesses helping to boost sales by 10%. That left organic sales down 5.7% for the quarter, pulling down the full-year figure to a 3.6% loss.
The only segment to show higher sales was commercial foodservice, and that came solely from multiple acquisitions. Segment organic revenue dropped 0.7% when you take out the impact of the purchases of Sveba Dahlen, QualServ, L2F, and Globe. Meanwhile, the food processing equipment group posted a 1.8% drop in segment revenue, with a huge organic sales drop of more than 13% when you take out the impacts from Burford, CVP Systems, and Scanico. The residential kitchen equipment group posted a 5% dip in segment revenue.
Continued internal weakness also persisted. Gross margin was down more than 2 percentage points to 37.9%, because the companies that Middleby has bought recently have lower margins than its legacy business does. Moreover, impairment charges of $58 million tied to Viking showed the damage that has been done to that brand after recalls that Middleby essentially inherited after acquiring the product line.
What's next for Middleby?
CEO Selim Bassoul pointed to a number of factors that drove the poor results. In commercial foodservice, major restaurant chains remain under pressure as they look at other potential kitchen solutions to cut expenses. Residential kitchen sales are still suffering from fallout from the Viking recalls in past years, and food processing equipment saw what the CEO sees as temporary declines related to the timing of large projects.
Still, Middleby thinks things can get better. Bassoul said in the conference call following the report that positive trends are starting to emerge in the commercial foodservice business as 2018 begins, and people who follow the stock note that a large pipeline of orders in its legacy business combined with substantial new acquisitions should help power growth forward from a relatively weak 2017. That could make the coming year look explosively strong by comparison, especially if bets in the international business pan out.
Middleby investors weren't ready to be that patient, however, and the stock plunged 10% following the report. Until the company shows more concrete results from its efforts to improve itself, Middleby probably won't see the buy-in among shareholders that it wants.
