Image: Middleby.
The strong dollar has been the nemesis of many companies lately, and food-service equipment manufacturer Middleby (MIDD +3.35%) is just the latest business to feel the impact of weak foreign currencies on revenue and net income. Coming into Wednesday night's first-quarter financial report, Middleby investors had high hopes for continued growth in a favorable environment for the industry. Even though Middleby's results didn't entirely live up to expectations, they nevertheless showed considerable promise, and once the dollar stops rising so dramatically, it appears likely that shareholders will more clearly see the progress that the company has made lately. Let's look more closely at Middleby and what it said about its start to 2015.
Measuring Middleby's dollar hit
Middleby's first-quarter results included solid gains on most key measures. Overall, revenue climbed 9.2% to $406.6 million, but that was actually disappointingly slow compared to the 11% growth rate that investors had hoped to see. On the bottom line, net income of $38.2 million equates to $0.67 per share, which fell short of the consensus figure of $0.71 per share.
Yet much of the shortfall came from the strong dollar. Middleby said that currency impacts cost the company more than three percentage points of sales growth and $0.13 per share of earnings, and so making appropriate adjustments would have left investors satisfied with the company's overall results.
Digging into Middleby's major segments, the company saw mixed performance. The key Commercial Foodservice Equipment Group posted sales gains of 12%, with about a third of that growth coming from acquisitions during the year and the remainder coming from organic growth in its continuing business. The Residential Kitchen Equipment Group also posted solid gains of 19%, but all of that gain came from the acquisition of U-Line, without which the segments would have lost 6% of its revenue. The Food Processing Equipment Group was the only one to see outright declines, with sales falling almost 8% despite an acquisition during the year.
Middleby also saw some other factors affect its financials. Gross margins rose slightly, as the company enjoyed some synergies from integrating its recent acquisitions that offset extra costs elsewhere. Overhead expenses rose roughly in line with sales, but selling and distribution expenses remained under tighter control, helping to push operating income higher.
Source: Middleby.
CEO Selim Bassoul had exciting things to say about all of Middleby's segments. He noted the importance of recent acquisitions in the Commercial and Residential segments, with particular interest in the opportunity for global expansion in commercial food-service and the new lineup of Viking refrigeration equipment. Bassoul said, "We remain excited about the new product introductions and continue to make our investments in marketing and product displays at showrooms of our dealer partners as we introduce these products to the market."
Can Middleby overcome dollar-produced declines?
Clearly, Middleby isn't the only company that has had to deal with the strong dollar. Yet in many ways, having the problem is a good thing, as it reflects the increasing importance of international business for the company. As Middleby attracts more interest from overseas buyers, it will have a greater chance to tap into favorable markets elsewhere and also gain some benefits from the diversification of having exposure to economies in different phases of their respective business cycles.
The question is whether Middleby can sustain the growth pace that investors want to see. Right now, shareholders expect double-digit percentage growth in sales both this year and next, with earnings growing at nearly a 20% average annual clip. That'll be a lot easier for the company to accomplish if Middleby stops having to fight a soaring dollar.
Middleby's stock didn't move in after-hours trading following the announcement, suggesting that investors were generally unsurprised by the manufacturer's results. In the long run, Middleby simply needs to demonstrate that it can keep executing on its general strategy and come up with innovative, exciting new products that its customers want. If it succeeds, then Middleby should be able to add to its recent gains and keep growing well into the future.
