Companies that want to grow can choose from two options: growing their internal operations or purchasing other companies to expand their scope. Middleby (MIDD -1.85%) has relied on acquisitions recently to try to expand in the kitchen equipment industry, and although growth hasn't come without some bumps in the road, the company has made a lot of progress in its efforts to gain market share and reach its full potential.
Coming into Wednesday's third-quarter financial report, Middleby investors expected nice gains in its top- and bottom-line figures due largely to acquisition activity. Middleby didn't disappoint, and although the company faces some challenges, it's confident that it can get through them and stay on an upward trajectory into the future.
The latest from Middleby
Middleby's third-quarter results showed accelerating growth. Sales of $713.3 million were up more than 20% from the third quarter of 2017, which matched expectations among those following the stock. Net income eased lower by 2% to $72.9 million, but after accounting for extraordinary items, adjusted earnings of $1.56 per share were up considerably from last year's $1.29-per-share figure, despite missing the consensus forecast among investors by $0.01 per share.
As we've seen in recent quarters, Middleby got nearly all of its sales growth from acquisitions. The company reported $118 million in acquisition-related revenue, and even after accounting for some currency headwinds, Middleby's organic sales growth amounted to just 0.8% for the period.
Middleby's segment performance was fairly lackluster. Commercial foodservice equipment got the lion's share of acquisition activity, and as a result, sales for the segment jumped 33%. However, the increase would only have been 3% without taking acquisitions into account. Sales in the residential kitchen equipment unit were higher by 1.5% from year-ago levels, with the segment's core businesses seeing even stronger growth. However, in food processing equipment, sales would have dropped 12% without taking acquisitions into account, and even including the purchased businesses, segment revenue was only higher by 1.6%.
Margin levels came under pressure at Middleby again as well. Gross margin overall dropped nearly 2 percentage points to 36.6%, and rising restructuring charges hit operating margin levels as well. Only lower tax rates helped to cushion the bottom line.
Can Middleby grow faster?
CEO Selim Bassoul noted how the company's latest acquisitions have gone. "During the third quarter," Bassoul said, "we also focused on the integration of our acquisition of Taylor. The efforts are well under way and we are pleased with the progress of initiatives to improve profitability." In particular, the CEO believes that Taylor's exposure to beverages and frozen desserts could help it expand its overall scope.
Across the business, Middleby hopes for improving conditions. In commercial food service, a healthier pipeline of sales to restaurant chains and other customers helped performance, and the company believes that relatively soft international markets will improve in 2019. Residential kitchen equipment sales climbed in part due to a new lineup of Viking products, which Middleby hopes will avoid the high-profile challenges that past Viking offerings suffered. Weak conditions in the meat processing arena held back Middleby's sales of food processing equipment, but the company expects better conditions next year to help build the business back up.
Middleby investors seemed comfortable with the results, and the stock climbed 2.5% at midday following the announcement. As long as a stable, growing economy continues to support purchases of kitchen equipment, Middleby's optimistic that it can keep a slow but steady pace of expansion for the foreseeable future.