A top-of-the-line Viking outdoor cooking station. Source: Middleby.
For the third quarter of 2014, revenue growth at The Middleby Corporation (MIDD -2.18%) was a little undercooked, but earnings remained piping hot for the kitchen equipment manufacturer. Middleby came up shy of the analysts' consensus revenue estimate of $411 million, but handily beat on the earnings-per-share figure of $0.86:
|
Metric |
Q3 2014 |
YOY Variance |
|---|---|---|
|
Sales |
$404.3 million |
12.3% |
|
Net income |
$59.7 million |
45.8% |
|
EPS |
$1.05 |
43.8% |
Source: Middleby's Q3 2014 press release.
It's important to note that earnings per share would have been $0.94 if we exclude the effect of a one-time legal settlement of $6.5 million. Still a beat, nonetheless.
The company's progress on increasing profitability, and its optimistic outlook, sent shares more than 5% higher in Thursday's afternoon trading. Overall, Middleby continued to build on last quarter's momentum. With CEO Selim Bassoul at the helm, this company's tossing in all the right ingredients for long-term success.
The main course
During the past decade, Middleby's proven particularly adept at acquiring companies, scaling their products, and boosting their profitability over time. As investors, we like to see that this strategy's continuing to pay off for the company. This was the case for Middleby in the latest quarter.
Gross margin as a percent of revenue stepped up to 40.2% from 39.3% in the third quarter of last year. Middleby attributed this increase to "improved margins at Food Processing Equipment Group resulting from the benefit of acquisition integration initiatives." As it's done in the past, Middleby's finding ways to use its operational expertise to cut down on product costs and thereby enhance its return on the initial acquisition-related investment.
Digging a little deeper, here's how sales growth looked for Middleby's three business segments:
|
Revenue by Segment |
Q3 2014 |
YOY |
3-Yr. Average |
|---|---|---|---|
|
Commercial Foodservice |
$262.8 |
13.9% |
13.6% |
|
Food Processing |
$75.2 |
5.6% |
44.3% |
|
Residential |
$66.3 |
14.3% |
N/A |
Source: Middleby's Q3 earnings release, 10-K filings, and author's calculations. Amounts in millions.
Revenue growth, as mentioned before, proved lukewarm compared to recent quarters. Within the food processing segment, this was partly due to the "timing for large projects," according to management.
On the conference call, Bassoul outlined why growth -- and particularly investment -- in the restaurant market remains sluggish. Some restaurant outlets are struggling due to fickle and increasingly health-conscious customers, and this has made executives cautious about making large outlays for things like Middleby's "Kitchen of the Future" concept.
Bassoul admitted the sales challenge with this completely new approach to running a restaurant kitchen is not so much the product but the fact that it's an all-or-nothing proposition for most chains. In other words, a 2,000-restaurant chain isn't going to convert a mere 100 kitchens to the "Kitchen of the Future" concept -- it's going to do all of them at once, and train its employees accordingly.
Still, on the whole, Middleby seems optimistic since smaller chains have embraced the "Kitchen of the Future." In the press release, Bassoul noted, "[W]e continue to remain confident about the outlook for this business as we anticipate increased adoption of technologies in emerging markets as food processors look to enhance the efficiency of their operations and adopt new standards of food safety."
The side dishes and dessert
Meanwhile, Bassoul tacked on two strong kitchen brands -- U-Line and Concordia -- in the third quarter. These two units already produce healthy margins that should fall in line with Middleby's targeted 38% to 40% gross margins, and 20% to 23% EBITDA (earnings before interest, taxes, depreciation, and amortization) margins in the near future.
So far this year, EBITDA margins for the Viking residential line have not quite hit management's target of 20%, but they believe there's still a good chance they'll reach that hurdle in the fourth quarter.
There's definitely lumpiness in the restaurant industry, and this quarter revealed some of that at Middleby. Nonetheless, the company's performing well in spite of the long gestation periods associated with its premium "Kitchen of the Future" concept. A boost in sales contracts for this product, and further streamlining within Viking, should help Middleby cook up a savory report for the fourth quarter.
