the middleby corporation initiation (midd)

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Initiation

The Middleby Corporation (MIDD) 07/30/19

Price Target Share price $134.91 Target share price $86.14 - $99.70

Downside 26.1% - 36.1% Company Data Country/Exchange US/NASDAQ

Sector Industrials

52 Week Range $96.65 - $142.98

Avg. Daily Volume (mln) $45.9

Short Interest (% of float) 5.7%

Dividend Yield 0.0% Financial Metrics Market Cap. (mln) $7,684.4

Net Debt (mln) $1,811.1

Enterprise Value (mln) $9,495.5

FY 18 Revenue/% Change $2,722.9 /16.6%

FY 18 Gross Margin/% Change 36.9%/(220 bps)

FY 18 Adj. EBITDA/% Change $569.0/8.8%

FY 18 Adj. EBIT Margin/% Change 16.4%/(180 bps)

FY 18 Adj. Earnings/% Change $6.36/0.6%

NTM P/E 20.8x

EV/EBITDA 13.7x

1 @trifinadvisors trifinadvisors.com

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About TriFin Advisors TriFin Advisors is an investment research firm grounded in a “bottoms-up” approach focused on cash conversion and earnings quality. We use investigative fundamental research and forensic accounting due diligence to identify mispriced assets. Ultimately, we aim to provide unique insights, differentiated opinions, and investigative research to challenge consensus and manage risk. Disclosure This report expresses our research opinions. As of the date of this publication, it should be assumed TriFin Advisors and/or its principals, members, affiliates, associates, and employees (collectively, “TriFin”) has either a long or short position through equity, option, and/or other derivative positions in the securities of companies discussed in this report and therefore stand to realize gains in the event of a share price movement toward our price target. Following publication, TriFin may transact in the securities of the companies covered herein. All expressions of opinion are subject to change without notice and TriFin does not undertake to update this report or any information therein. Please read our full legal disclaimer at the end of this report.

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Table of Contents

Executive Summary ............................................................................................................ 3

Company Background ......................................................................................................... 5

M&A Quality Deteriorated .................................................................................................. 8

Customer Capex/Demand Expected to Decline Sharply ..................................................... 12

Revenue Expectations Overly Optimistic; Organic Growth Under Pressure ........................ 14

Margin Expansion Difficult, Lack of Non-GAAP Disclosures Troubling ................................. 15

Earnings Disclosure Inconsistencies ................................................................................... 18

Commercial Foodservice Growth May Slow Considerably .................................................. 19

Residential Kitchen Revenue Plateaued; Margin Contribution Subdued ............................. 23

Food Processing Large Orders Remained Elusive, Mix Shifts Negative ................................ 27

Inventory Levels & DSI Spike to Decade High ..................................................................... 30

Negative Adjusted Free Cash Flow Suggests Poor Earnings Quality .................................... 32

Compensation Plan Incentivizes Growth Irrespective of Quality ........................................ 35

Executives Unload as Shares Peak, Insider Ownership at Record Lows ............................... 38

Valuation: Shares Could Fall More Than 25.0% .................................................................. 40

Appendix .......................................................................................................................... 44




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Executive Summary We are concerned The Middleby Corporation (“Middleby” or “the Company”) is significantly overvalued; we believe shares could fall more than 25.0%. Middleby primarily provides cooking and warming equipment used in commercial kitchen and foodservice operations in addition to cold-side and beverage dispensing equipment. Customers include quick-service (i.e. fast food) restaurants, full-service restaurants, convenience stores, retail outlets, and hotels, among others. The Company also manufactures, sells, and distributes kitchen equipment for the residential market and provides food processing equipment and packing technology systems for protein and bakery production for retail and food service applications. Middleby’s story starts with former CEO Mr. Selim Bassoul. Mr. Bassoul joined Middleby in the mid-1990’s and helped turnaround one of the Company’s floundering core divisions. In 2001, Mr. Bassoul was promoted to CEO; Middleby had a market capitalization of $40.0 million. Over the next two decades, Mr. Bassoul was instrumental to Middleby’s continued turnaround and meteoric share price appreciation driven by M&A. Today, Middleby’s market capitalization is ~$7.5 billion. In the last ten years, Middleby acquired over 50 companies for an aggregate of $3.2 billion. Beginning in late FY 13/early FY 14, we started to notice a concerning trend; acquisitions were getting progressively larger and more expensive but had slower revenue growth and were less profitable. This coincided with several other red flags: (1) organic revenue growth started to diverge significantly from reported growth, (2) adjusted free cash flow went negative and got progressively worse, (3) executive compensation targets were changed from return on equity (ROE) and share price metrics to absolute EBITDA and earnings growth, and (4) insiders (including Mr. Bassoul) meaningfully divested shares and beneficial ownership reached decade lows. Despite these red flags, shares continued to rise and are near all-time highs as the Company has been able to show “strong” reported revenue and “consistent” free cash flow growth. However, we believe FY 19 is shaping up to be one of the most challenging years yet. Specifically:

• “Premier” customer capex peaked last year and is now expected to decline at the fastest rate in over a decade followed by further declines in FY 20 and FY 21.

• Capital goods new orders and restaurant sales data have continued to decelerate rapidly, exacerbating demand headwinds.

• Middleby annualized its largest and most expensive acquisition to date in Q2 19 (Taylor was acquired for $1.0 billion and 3.2x price/sales in Q2 18) and will lap one of the most difficult base rate/comp sets over the next four quarters.

• The Company’s leverage ratio is near all-time highs which may limit additional material M&A.

• M&A gross margin profile continued to decline and reached the lowest level since FY 11.

• Organic and pro forma growth over the last two years have been low-single-digits at best.

• Newly added GAAP-to-non-GAAP reconciliations are inconsistent with Earnings Release commentary and potentially obfuscate weaker adjusted earnings growth.

• Record inventory levels and DSI in Q1 19 provided an unsustainable benefit to margins and will be a headwind as inventory normalizes.




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• Long-tenured CEO Mr. Bassoul abruptly resigned effective immediately in February 2019, only one year after signing a new three-year contract.

Consequently, we are concerned FY 19 consensus expectations for low-double-digit revenue growth and reacceleration of EBITDA margin expansion to near peak levels is overly optimistic. Based on Middleby’s current valuation, FY 19 P/E of 20.8x and EV/EBITDA of 13.7x, we believe there is significant downside risk. Using conservative estimates that assume revenue will grow mid-single-digits and EBITDA margin will expand with slight multiple contraction to be in-line with peers (but still above market averages), we believe shares could fall more than 25.0%.




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Company Background Commercial Foodservice accounts for ~two-thirds of revenue/gross profit and nearly three-fourths of EBITDA Middleby operates its business in three segments. Commercial Foodservice is the largest segment and accounts for over 60.0% of revenue and gross profit and over 70.0% of EBITDA. Residential Kitchen is the second largest segment and accounts for approximately 20.0% of revenue and gross profit and 15.0% of EBITDA. Food Processing is the smallest segment and accounts for less than 15.0% of revenue, gross profit, and EBITDA.1

FY 18 Revenue FY 18 Gross Profit FY 18 Non-GAAP EBITDA

Source: Company filings

Commercial Foodservice The Commercial Foodservice segment provides cooking and warming equipment used in commercial kitchen and foodservice operations, as well as cold-side and beverage dispensing equipment.

• Customers: quick-service restaurants, full-service restaurants, convenience stores, retail outlets, and hotels, among others.

• Brands: TurboChef, Blodgett, Pitco, Taylor, CookTek, Lincat, Middleby Marshall, Desmon, Doyon, Frifri, and Follett, among others.

• Products: ovens, ranges, fryers, steam cooking equipment, food warming equipment, catering equipment, heated cabinets, charbroilers, ventless cooking systems, kitchen ventilation, induction cooking equipment, countertop cooking equipment, charcoal grills, professional mixers, professional refrigerators, coldrooms, ice machines, freezers, and soft serve, ice cream, coffee, and beverage dispensing equipment, among others.

Residential Kitchen The Residential Kitchen segment manufactures, sells, and distributes kitchen equipment for the residential market.

• Customers: residential consumers.

• Brands: AGA, Brigade, Fired Earth, Heartland, La Cornue, Leisure Sinks, Lynx, Marvel, Mercury, Rangemaster, Rayburn, Redfyre, Sedona, Stanley, TurboChef, U-Line and Viking.

• Products: ranges, cookers, stoves, ovens, refrigerators, dishwashers, microwaves, cooktops, wine coolers, ice machines, ventilation equipment, and outdoor equipment.

1 Middleby’s fiscal year ends on the Saturday nearest to December 31.

Commercial Foodservice

63.5%

Food Processing 14.3%

Residential Kitchen 22.2% Commercial

Foodservice 65.2%

Food Processing 13.2%

Residential Kitchen 21.5%

Commercial Foodservice

72.2% Food Processing

12.1%

Residential Kitchen 15.7%




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Food Processing The Food Processing segment provides food processing and packaging technology systems for protein and bakery production for retail and food service applications.

• Customers: producers of pre-cooked meats (e.g. hot dogs, dinner sausages, poultry, and lunchmeats) and baked goods (e.g. muffins, cookies, and bread).

• Brands: Alkar, Maurer-Atmos, Armor Inox, Cozzini, Danfotech, Drake, MP Equipment, Spooner Vicars, and Stewart Systems, among others.

• Products: ovens, frying systems and automated thermal processing systems in addition to food preparation equipment such as grinders, slicers, reduction and emulsion systems, mixers, blenders, battering/breading/seeding equipment, water cutting systems, food presses, food suspension equipment, filling and depositing solutions and forming equipment, food safety, food handling, freezing, defrosting, and packaging equipment.

Segment & Product Overview

Source: June 2019 Investor Presentation, 06/05/192

US/Canada/Europe accounts for ~90.0% of revenue The majority of the Company’s revenue is generated in developed markets (i.e. US, Canada, Europe). Over the last three years, revenue from the US & Canada (Asia, Europe & Middle East, Latin America) was relatively stable at ~67.0% (~33.0%).

2 Middleby’s Investor Relations website listed the presentation as “Investor Presentation – June 2019,” however the first slide in the actual

document is labeled “May 2019.” We will refer to this presentation as the “June 2019 Investor Presentation” throughout the report.



https://middlebycorporation.gcs-web.com/static-files/de3fa034-0098-45c6-8925-9190a6ffa42c


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Revenue by Geography

(% of FY 18 revenue)

Source: Company FY 18 10K

Middleby has made more than 50 acquisitions since FY 09 Since the early 2000’s, shortly after Mr. Selim Bassoul was instituted as CEO, Middleby pursued an acquisition heavy strategy to expand its portfolio of brands and technologies. Typically, acquisitions were made to add complementary products and/or services. Over the last six years, the strategy became increasingly more aggressive in both the size and quantity of acquisitions.3

M&A Background

($ in millions)

Source: Company 10Ks

Majority of M&A financed through debt; leverage ratio near peak levels at just under 3.0x Since FY 04, Middleby’s leverage ratio ranged from ~1.0x to 3.0x. Currently, the leverage ratio sits just under 3.0x. In its Q1 19 10Q, the Company indicated the terms of its Credit Facility allowed a maximum leverage ratio of 3.5x, which may be adjusted up to 4.0x in connection with a qualified acquisition.

3 See Appendix for complete list of acquisitions since FY 09.

US and Canada 66.3%

Asia 8.2%

Europe and Middle East 22.1%

Latin America 3.3%

0

1

2

3

4

5

6

7

8

9

10

$0.0

$200.0

$400.0

$600.0

$800.0

$1,000.0

$1,200.0

$1,400.0

FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

Cash paid for acquisitions Number of acquisitions



https://www.sec.gov/Archives/edgar/data/769520/000076952019000003/midd-2018122918x10kq4.htm#s2FE2C742421F565C807D7C732ACD30BC

https://www.sec.gov/Archives/edgar/data/769520/000076952019000008/middleby10-qq12019.htm


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The terms of the Credit Facility…requires, among other things, the company to satisfy certain financial covenants: (i) a minimum Interest Coverage Ratio (as defined in the Credit Facility) of 3.00 to 1.00 and (ii) a maximum Leverage Ratio of Funded Debt less Unrestricted Cash to Pro Forma EBIDTA (each as defined in the Credit Facility) of 3.50 to 1.00, which may be adjusted to 4.00 to 1.00 for a four consecutive fiscal quarter period in connection with certain qualified acquisitions, subject to the terms and conditions contained in the Credit Facility. (Q1 19 10Q)

Leverage Ratio Near Peak Highs


M&A Quality Deteriorated Since the early 2000’s, M&A has been an integral part of Middleby’s growth strategy. For context, the Company acquired over 50 companies in the last ten years for an aggregate of $3.2 billion; Middleby’s market capitalization is ~$7.5 billion. Beginning in late FY 13/early FY 14, we started to notice a somewhat concerning trend; acquisitions were getting progressively larger and more expensive but had slower revenue growth and were less profitable. We believe this trend not only extends the time required to achieve similar returns on investment to historical M&A, but also increases the risk of overpayment and/or acquisition underperformance relative to initial expectations. In addition, the largest and most expensive acquisition (the Taylor Company was acquired in Q2 18 from United Technologies) appeared to diverge from Middleby’s historical strategy of acquiring private businesses from founders and/or generational owners. We believe this shift in strategy creates an even more challenging environment to execute sustainable margin expansion opportunities and realize a comparable return on investment relative to prior acquisitions. Commercial Foodservice accounted for over 60.0% of M&A; Residential Kitchen for over 25.0% Since FY 09, Middleby acquired over 50 companies for an aggregate of $3.2 billion. Commercial Foodservice accounted for $2.1 billion (over 60.0%) of the M&A, Residential Kitchen accounted for $0.9 billion (over 25.0%), and Food Processing accounted for $0.3 billion (less than 10.0%).



https://www.sec.gov/Archives/edgar/data/769520/000076952019000008/middleby10-qq12019.htm



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M&A Spend by Segment

($ in millions)


Most large acquisitions acquired at higher sales multiples; recent M&A multiples well above averages Since FY 09, 22 targets were acquired for more than $25.0 million. In aggregate, these 22 acquisitions accounted for $2.8 billion and were acquired at an average price/sales multiple of 1.6x. In FY 18, Middleby made five acquisitions over $25.0 million with price/sales multiples ranging from 1.7x to 3.2x, well above the historical average. Moreover, the Taylor Company (Taylor) was acquired at 3.2x price/sales, making it the largest and most expensive acquisition to date.

Company Acquired Segment Date Purchase

Price Annual

Revenue Price/ Sales

($ in millions)

TurboChef Technologies, Inc. (Jan 2009) Commercial Foodservice Q1 09 $160.3 $85.0 1.9x

Lincat Group PLC (May 2011) Commercial Foodservice Q2 11 $82.1 $50.0 1.6x

Danfotech + Maurer-Atmos + Auto-Bake Food Processing Q3 11 $33.4 $45.0 0.7x

Armor Inox, S.A. (Dec 2011) Food Processing Q4 11 $28.7 $25.0 1.1x

Stewart Systems Global, LLC (Sep 2012) Food Processing Q3 12 $27.8 $30.0 0.9x

Viking Range Corporation (Jan 2013) Residential Kitchen Q1 13 $361.7 $200.0 1.8x

Automatic Bar Controls, Inc. (Dec 2013) Commercial Foodservice Q4 13 $74.1 $30.0 2.5x

U-Line Corporation (Nov 2014) Residential Kitchen Q4 14 $142.0 $60.0 2.4x

J. Goldstein & Co. Pty. Ltd. (Jan 2015) Commercial Foodservice Q1 15 $27.4 $25.0 1.1x

AGA Rangemaster Group plc (Sep 2015) Residential Kitchen Q3 15 $201.0 $400.0 0.5x

Lynx Grills, Inc. (Dec 2015) Residential Kitchen Q4 15 $83.8 $50.0 1.7x

Follett Corporation (May 2016) Commercial Foodservice Q2 16 $207.7 $140.0 1.5x

Sveba Dahlen Group (Jun 2017) Commercial Foodservice Q2 17 $81.4 $60.0 1.4x

CVP Systems (Jun 2017) Food Processing Q2 17 $29.8 $20.0 1.5x

QualServ Solutions (Aug 2017) Commercial Foodservice Q3 17 $39.9 $100.0 0.4x

Globe Food Equipment (Oct 2017) Commercial Foodservice Q4 17 $105.0 $50.0 2.1x

Scanico A/S (Dec 2017) Food Processing Q4 17 $34.5 $30.0 1.2x

Hinds-Bock (Feb 2018) Food Processing Q1 18 $25.4 $15.0 1.7x

Firex S.r.l (Apr 2018) Commercial Foodservice Q2 18 $53.7 $20.0 2.7x

Josper S.A. (May 2018) Commercial Foodservice Q2 18 $39.3 $20.0 2.0x

Taylor Company (Jun 2018) Commercial Foodservice Q2 18 $1,000.0 $315.0 3.2x

Crown Food Service Equipment (Dec 2018) Commercial Foodservice Q4 18 $42.0 $20.0 2.1x


100.0%

17.6%

53.2%

38.5%

18.1% 8.8%

16.1%

99.5%

74.7%

95.4%

63.8%

82.4%

46.8%

61.5%

6.8% 3.6%

0.5%

25.3%

4.6%

9.6%

81.9% 84.4% 80.4%

26.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 Cumulative

$0.0

$200.0

$400.0

$600.0

$800.0

$1,000.0

$1,200.0

$1,400.0

Commercial Foodservice Food Processing Residential Kitchen M&A spend




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Weak pro forma revenue growth suggests soft growth rates from recently acquired targets The Company’s pro forma results assume acquisitions made in the current and prior year were all completed on the first day of the prior fiscal year. For example, pro forma results for FY 18 assumed the 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen, QualServ, L2F, Globe, and Scanico and the 2018 acquisitions of Hinds-Bock, Ve.Ma.C, Josper, Firex, Taylor, M-TEK, and Crown were all completed on January 1, 2017 (the first day of FY 17).

In accordance with ASC 805 Business Combinations, the following unaudited pro forma results of operations for the twelve months ended December 29, 2018 and December 30, 2017, assumes the 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen, QualServ, L2F, Globe and Scanico and the 2018 acquisitions of Hinds-Bock, Ve.Ma.C, Josper, Firex, Taylor, M-TEK and Crown were completed on January 1, 2017 (first day of fiscal year 2017). (FY 18 10K)

Historically, Middleby provided limited information/commentary about post-acquisition revenue growth rates at individual companies. However, given pro forma growth over the last three years tracked relatively in-line with organic growth (discussed herein), we believe revenue growth rates at recent acquisitions were flat-to-down at best and definitively lower than acquisitions before FY 15.

Pro Forma Results Imply Minimal Revenue Growth from Recent M&A

Source: Company 10Ks, 10Qs

M&A gross margin profile deteriorated significantly since FY 14, while sales multiples increased Beginning in FY 11, the Company disclosed aggregate revenue and gross profit from M&A on a consolidated basis and by segment in its 10K filings. Accordingly, we were able to calculate consolidated and segment M&A gross margin. Consolidated M&A gross margin peaked in FY 14 at 37.6% but subsequently trended lower to 28.1% in FY 18. Commercial Foodservice (the largest segment + the most M&A activity) M&A gross margin peaked in FY 13 at 41.6% but declined every year since to 26.4% in FY 18. In addition, as consolidated and Commercial Foodservice M&A gross margin declined, weighted average price/sales multiples trended higher.4

4 Weighted average price/sales multiple = (acquisition purchase price / aggregate YTD M&A spend) * acquisition price/sales multiple. Sum of weighted average price/sales multiples = annual weighted average price/sales multiple.

8.1% 7.3% 8.3% 8.9%

15.8%

1.3%

(4.1%)

0.1% 0.1%

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%

FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 Q1 19

Pro forma revenue growth



https://www.sec.gov/Archives/edgar/data/769520/000076952019000003/midd-2018122918x10kq4.htm


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M&A Profitability Meaningfully Deteriorated as Purchase Multiples Went Up

Source: Company 10K & 10Q filings, TriFin calculations

Taylor acquisition appeared to be acquired from UTX via unsolicited bid; UTX sold because it was a “good price point” In its Press Release on 05/18/18, Middleby announced it would acquire the Taylor Company from UTC Climate, Controls, & Security, a unit of United Technologies Corporation (UTX) for $1.0 billion. Taylor provides beverage solutions, soft serve and ice cream dispensing equipment, frozen drink machines, and automated double-sided grills. Middleby highlighted the acquisition was “highly strategic” and would bolster Middleby’s overall position as an industry leader in commercial foodservice.

The acquisition of Taylor is highly strategic for Middleby and bolsters Middleby’s overall position as an industry leader in commercial foodservice. Taylor is a unique and premium brand in the commercial foodservice industry with leading positions in beverage, frozen dessert and grilling that are highly complementary to our existing offerings. Taylor products are well represented across the top restaurant chains and have significant presence across all foodservice segments including quick serve, casual dining, retail, convenience stores, and institutional foodservice establishments. (Press Release, 05/18/18)

At its Investor and Analyst meeting on 03/16/18, United Technologies indicated it would begin a strategic review of its portfolio during the summer (after the Rockwell Collins acquisition closed) to decide whether to spin into three companies; standalone Otis, standalone Climate, Controls, and Security (CCS), and an aerospace business. However, at the Electrical Products Group Conference on 05/22/18, United Technologies highlighted the Taylor divestiture was not the portfolio optimization it had previously been thinking about, but it was a “good price point” to sell.

CEO Mr. Gregory J. Hayes: After the first quarter call, we said we're not going to really talk about this because our focus for the intermediate term, of course, is closing Rockwell, right? So while we are doing work in the background on portfolio and looking at that, the real focus of the company is today, and will be for the next several months, getting Rockwell closed and getting the integration underway. Having said that, we will undertake with the board a thorough investigation of the overall portfolio. Now I think some of you may have seen over the weekend, we closed on a deal to sell our Taylor equipment business to Middleby for $1 billion. That was not the portfolio optimization we were thinking about, but... JP Morgan Chase Analyst: It’s an optimal price point. CEO Mr. Gregory J. Hayes: Exactly, yes, good price point though. (Electrical Products Group Conference, 05/22/18) [emphasis added]

32.8%33.5%

30.7%

37.6%

32.6%33.3%

29.0%28.1%

36.2%36.8%

41.6%

36.9% 36.4%

34.8%

27.1%26.4%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

25.0%

27.0%

29.0%

31.0%

33.0%

35.0%

37.0%

39.0%

41.0%

43.0%

FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

Weighted average Price/Sales multiple of M&A Gross margin of M&A

Gross margin of Commercial Foodservice M&A



https://middlebycorporation.gcs-web.com/news-releases/news-release-details/middleby-corporation-acquire-taylor-company-0

https://middlebycorporation.gcs-web.com/news-releases/news-release-details/middleby-corporation-acquire-taylor-company-0

https://ir.utc.com/events-and-presentations




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Consequently, we believe Middleby may have made an unsolicited bid to acquire Taylor. This is somewhat of a departure from Middleby’s historical M&A strategy. For the most part, Middleby has acquired privately held businesses. We believe this shift in strategy is significant for a few reasons. First, United Technologies has publicly discussed portfolio optimization in addition to receiving pressure from large activist investors. Based on our research and commentary from United Technologies, we believe it did not intend to divest Taylor. So, United Technologies had no reason to sell unless the price point was ideal; which we believe to be the case given United Technologies’ commentary. Second, in our experience, there are typically more margin expansion opportunities by acquiring privately held businesses from founders and/or generational owners than from public companies (and/or private equity). The level of scrutiny on public company performance, whether it be from the Board of Directors, analysts, shareholders, activist investors, etc. is significantly higher than that of a privately held company. We are concerned both these factors coupled with Taylor being the largest and most expensive acquisition to date significantly increases the risk of acquisition overpayment and/or ability to generate sustainable margin expansion.

Customer Capex/Demand Expected to Decline Sharply Middleby does not disclose revenue by customer given its customer base is relatively large with minimal concentration. However, in its Investor Presentations the Company regularly includes a slide with its “Premier” Commercial Foodservice (the largest segment) customers of which many are publicly traded companies. Aggregate public “Premier” customer capex ebbed and flowed over the last decade; since FY 15 capex consistently trended upward reaching peak levels in FY 18. Currently, consensus estimates anticipate a severe drop in FY 19 capex followed by two more years of declines in FY 20 and FY 21. In fact, the FY 19 rate of change decline is the largest in over a decade. In addition, capital goods new orders and restaurant sales data from the US Census Bureau continued to rapidly decelerate over the last year. We believe these dynamics put Middleby and overall demand in a precarious situation that isn’t currently accounted for in revenue expectations. “Premier” customer capex expected to decline sharply over the next three years In its Investor Presentations, Middleby regularly included a slide with its “Premier” Commercial Foodservice customers; which included a number of publicly listed US companies.5 Accordingly, we aggregated historical and future (based on consensus estimates) capital expenditures (capex) for this subset of Middleby’s “Premier” customers. In FY 18, aggregate “Premier” customer capex increased 32.2% year-over-year to ~$6,380.0 million, the highest level and fastest growth rate since at least FY 09. However, current consensus estimates expect “Premier” customer capex to decline in each of the next three years. More importantly, the expected FY 19 decline of 9.3% would result in the fastest rate of change decline in over ten years (32.2% increase + 9.3% decline = 41.5% rate of change).

5 “Premier” customers sourced from Middleby’s June 2019 Investor Presentation and include The Cheesecake Factory Incorporated (CAKE), Cracker Barrel Old Country Store, Inc. (CBRL), Denny’s Corporation (DENN), Dunkin’ Brands Group, Inc. (DNKN), Domino’s Pizza, Inc. (DPZ), Darden Restaurants, Inc. (DRI), Hormel Foods Corporation (HRL), McDonald’s Corporation (MCD), Papa John’s International, Inc. (PZZA), Starbucks Corporation (SBUX), The Wendy’s Company (WEN), Yum! Brands, Inc. (YUM).





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Aggregate “Premier” Customer Capex Expected to Decline for the Next Three Years

($ in millions)

Source: Thomson Reuters estimates, company filings

Slowing capital goods new orders growth corroborates softer capex According to the US Census Bureau, manufacturers’ new orders of nondefense capital goods (excluding aircraft) began to slow at the end of 2017. The deceleration accelerated in the second half of 2018 and the most recent reading of 2.0% (June 2019) is one of the slowest growth rates since 2016. While manufacturers’ new orders are composed of more than just commercial foodservice equipment, we believe it is a useful data point to gauge overall purchases (i.e. capex) from manufacturers and corroborates weaker capex from “Premier” customers discussed heretofore.

Capital Goods (excluding Aircraft) New Orders Continued to Decelerate

Source: US Census Bureau

Rapidly decelerating restaurant sales may exacerbate slowing capex budgets In July 2018, retail sales for food services and drinking places (i.e. restaurants) increased 9.6% year-over-year, the third highest reading since 1994. Subsequently, restaurant sales growth decelerated rapidly which may persist as sales continue to lap peak growth rates over the next several months. A trend that may not bode well for restaurant capex budgets.

(21.0%)

8.7%

17.9% 19.3%

(0.6%)

(11.9%)(14.5%)

4.0% 0.6%

32.2%

(9.3%)

(2.0%)

(8.5%)

(30.0%)

(20.0%)

(10.0%)

0.0%

10.0%

20.0%

30.0%

40.0%

$0.0

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

$7,000.0

FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19E FY 20E FY 21E

Aggregate large customer capital expenditures Year-over-year



https://fred.stlouisfed.org/series/NEWORDER#0


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Restaurant Sales Continued to Decelerate

Source: US Census Bureau

Revenue Expectations Overly Optimistic; Organic Growth Under Pressure

Middleby’s acquisitive nature regularly resulted in large differences between reported and organic growth. While inorganic growth is not inherently worrisome, divergent trends between the two can be indicative of weak underlying performance and/or acquisitions underperforming post-integration. In either scenario, M&A may be required to maintain reported growth rates. Prior to FY 14, Middleby’s reported and organic growth rate trends were less concerning as organic revenue growth accelerated in conjunction with reported growth. However, there has been a noticeable divergence over the last four years. Interestingly, in FY 16, Middleby guided for organic revenue growth to accelerate over the next three years; FY 16 organic revenue growth was 3.9%. We believe this guidance was significant for two reasons: (1) the Company historically provided little to no guidance, so (2) the Company must have had relatively high conviction the guidance was achievable. However, FY 17 organic growth was negative 3.8% and FY 18 was negative 0.8%, a far cry from the anticipated acceleration from 3.9%. In addition, over the last three years pro forma revenue growth rates were flat-to-down suggesting aggregate growth at recent acquisitions was minimal. Reported growth paints a different picture. M&A allowed the Company to show double-digit average growth rates over the same period and consensus expects double-digit growth to continue in FY 19 followed by mid-single-digit growth in FY 20. Notwithstanding organic growth over the last two years being substantially below guidance, we believe FY 19 and FY 20 consensus revenue expectations are overly optimistic as (1) the overall demand environment may be more challenging, (2) base period growth rates will become significantly more difficult as the Company’s largest acquisition annualized in Q2 19, (3) pro forma growth has been minimal, and (4) additional growth via M&A may be somewhat subdued given a near peak high leverage ratio. Three-year guidance provided in FY 16 called for organic growth acceleration Middleby does not provide regular quarterly or annual guidance. However, on its Q1 16 Earnings Call on 05/12/16, the Company guided for organic growth to accelerate over the next three years.

We have never given guidance on a quarter to quarter, year to year; but if you look at what is going to happen in the next three years, we see an acceleration in organic growth and expansion in profit margin.



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https://seekingalpha.com/article/3974694-middlebys-midd-ceo-selim-bassoul-q1-2016-results-earnings-call-transcript?part=single


TriFin Advisors

And we really also see our EBITDA margin, which has historically has hovered at about 20% should increase to a higher plateau over same period of three years. (CEO Mr. Selim Bassoul, Q1 16 Earnings Call, 05/12/16) [emphasis added]

Huge divergence between reported and organic growth; expectations may be unrealistic absent large M&A Over the last ten years, there has consistently been differences between reported and organic revenue growth; primarily driven by the Company’s M&A strategy. From FY 10 to FY 14, we believe the difference was less concerning given organic growth accelerated in concert with reported growth. However, since FY 14, organic growth trends deteriorated significantly while the Company continued to report average revenue growth in the mid-teens. Moreover, the Company’s guidance provided in FY 16 for organic growth to accelerate over the next three years was not achieved; organic growth declined. Although consensus expects reported revenue growth to decelerate over the next two years, we believe high-single-digit average growth is too optimistic (absent large M&A) given recent organic growth trends and a weaker demand environment as “Premier” customer capex budgets decline.

Large Divergence Between Reported & Organic Growth

($ in millions)

Source: Company 10Ks, Thomson Reuters estimates

Margin Expansion Difficult, Lack of Non-GAAP Disclosures Troubling The Company has been upfront that its preferred profitability metric is EBITDA vs. EBIT due to acquisition amortization. The premise is simple: intangible asset amortization from acquisitions negatively impacts EBIT and can vary widely based on the timing and frequency of M&A, thus EBITDA is a more appropriate metric. We opine on that premise when M&A is a discrete event but when M&A is integral to a Company’s growth strategy and occurs with regular frequency we believe the expenses (including intangible amortization) are more in-line with ordinary (or even necessary) business expenses and therefore should be scrutinized in the assessment of profitability. In M&A transactions, acquirors often exclude certain charges/costs associated with making acquisitions the acquiror would have otherwise had to incur to achieve the same end result. For example, if Middleby had to build a business similar to Taylor or Viking (or any of its other acquisitions) from scratch instead of acquiring it, Middleby would have needed to hire additional employees, allocate appropriate resources for research development/new products, and create the infrastructure, among other items. All of which would be incurred as ordinary operating expenses.

11.2%

19.0% 21.3%

37.6%

14.5% 11.6%

24.2%

3.0%

16.6%

12.0%

5.7% 5.4% 7.0% 7.2%

10.4% 8.4%

0.4% 3.9%

(3.6%)(0.8%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19E FY 20E

$0.0

$500.0

$1,000.0

$1,500.0

$2,000.0

$2,500.0

$3,000.0

$3,500.0

Revenue year-over-year Revenue year-over-year (organic) Revenue





TriFin Advisors

Typically, when companies use a non-GAAP or adjusted metric to discuss performance, a reconciliation is provided to assist in the assessment of said metric. Indeed, in most cases the SEC requires a GAAP to non-GAAP reconciliation. As a result, we find it concerning Middleby only started to provide a GAAP to non-GAAP EBITDA reconciliation three quarters ago (i.e. Q3 18) despite (1) regularly discussing non-GAAP EBITDA in its Investor Presentations for years, (2) providing historical guidance based on non-GAAP EBITDA, (3) the rationale for certain M&A was predicated on non-GAAP EBITDA expansion, and (4) executive compensation is based on non-GAAP EBITDA. In FY 18, non-GAAP EBITDA margin plummeted to a ten-year low, but consensus expects profitability to expand sharply in FY 19 and FY 20 to record levels. We believe these estimates are too aggressive and the Company will miss and/or analysts will need to revise estimates lower over the next several quarters. Company prefers EBITDA as key profitability metric; FY 16 guidance called for margin expansion over the next three years On its Q1 16 Earnings Call, the Company indicated it is more focused on EBITDA than EBIT given the amortization from acquisitions can vary from segment to segment depending on the timing of M&A.

We really focus on EBITDA more than EBIT, just kind of given the amortization from acquisitions and vary significantly from segment to segment just depending on, timing of acquisitions when they roll in. (CFO Mr. Timothy FitzGerald, Q1 16 Earnings Call, 05/12/16)

In addition, the Company guided for profit margin to expand over the next three years and EBITDA margin to increase to a “higher plateau” over the same time period.

We have never given guidance on a quarter to quarter, year to year; but if you look at what is going to happen in the next three years, we see an acceleration in organic growth and expansion in profit margin. And we really also see our EBITDA margin, which has historically has hovered at about 20% should increase to a higher plateau over same period of three years. (CEO Mr. Selim Bassoul, Q1 16 Earnings Call, 05/12/16) [emphasis added]

On its Q2 17 Earnings Call on 08/10/17, the Company clarified its prior margin guidance and guided for FY 20 EBITDA margin of 27.0%.

We have record consolidated EBITDA margin of 24.8% and 23.8% year-to-date. So that brings us to basically midterm toward my only guidance I've ever done in my tenure at Middleby, I've given one-time guidance, which was a 27% EBITDA margin goal, which I said will happen by 2020. (CEO Mr. Selim Bassoul, Q2 17 Earnings Call, 08/10/17) [emphasis added]

On its Q4 17 Earnings Call on 02/28/18, the Company raised its FY 20 EBITDA margin guidance to 30.0%.

The only guidance I gave was I think a year ago when I spoke about moving from 23% to 27% on the EBITDA to sales ratio and I said it will happen within 3 years. Right now I think 2017 we ended up 25.7% and now that's taking away the new acquisition that we've done. So at this moment, I would say that to reach our target of 27% faster than -- will most probably will be released sometime this year. So ahead by 2 years, and I know I'm giving you another guidance is now I'm upping my guidance on EBITDA to sales, which has been always a driver of our company to say by 2020 we'll be 30%...Taking away newly acquired company, I'm talking organically we'll see a 30% EBITDA to sales ratio by the end of 2020. (CEO Mr. Selim Bassoul, Q4 17 Earnings Call, 02/28/18) [emphasis added]

EBITDA consistently increased each year for over a decade, but margin expansion has been mixed; expectations for reacceleration in FY 19 and record EBITDA margin in FY 20 may be too optimistic Although Middleby does not disclose organic EBITDA, we believe a large portion of recent EBITDA growth was inorganic due to elevated M&A activity. In FY 18, non-GAAP EBITDA margin declined in all three segments and








https://seekingalpha.com/article/4152072-middleby-corporations-midd-ceo-selim-bassoul-q4-2017-results-earnings-call-transcript?part=single

https://seekingalpha.com/article/4152072-middleby-corporations-midd-ceo-selim-bassoul-q4-2017-results-earnings-call-transcript?part=single


TriFin Advisors

reached a ten-year low. Current consensus estimates anticipate a fast reacceleration of margin expansion over the next two years with FY 20 non-GAAP EBITDA margin reaching peak levels. We believe these estimates are too aggressive and the Company will miss and/or analysts will need to revise estimates lower over the next several quarters as:

• Commercial Foodservice non-GAAP EBITDA margin continued to decline in Q1 19 and remained well-below long-term guidance. In addition, we believe profitability from recent M&A and/or legacy business may be underperforming.

• Residential Kitchen margin growth may be challenged over the next three quarters as the segment will begin to lap more normal base periods and revenue growth over the remainder of FY 19 may not be as strong as Q1 19 due to market pressure for Viking and potentially lower growth rates for AGA Rangemaster.

• Record inventory levels and DSI negatively may negatively impact margin. Individual segment profitability and inventory concerns are discussed in more detail herein.

Non-GAAP EBITDA Margin

($ in millions)

Source: June 2017 Investor Presentation, Thomson Reuters estimates

Lack of historical non-GAAP EBITDA reconciliation is inconsistent with SEC reporting requirements In its Investor Presentations, the Company regularly provided historical adjusted EBITDA (i.e. non-GAAP) performance, however, Q3 18 was the first period in which it provided a GAAP to non-GAAP reconciliation (albeit only segment level EBITDA, not consolidated EBITDA). The lack of disclosure is not only uncommon relative to industry standards, but potentially inconsistent with SEC reporting requirements. Item 10(e)(1)(i) of SEC Regulation S-K indicates a registrant must include a reconciliation of the differences between the non-GAAP financial measure disclosed with the most directly comparable financial measure calculated and presented in accordance with GAAP.6 Irrespective of potential SEC reporting requirement violations, we find the lack of disclosure worrisome for several reasons:

• Guidance based on adjusted EBITDA: The Company does not provide regular quarterly or annual guidance, but when future expectations are discussed the Company typically references adjusted EBITDA or adjusted EBITDA margin targets.

6 https://www.ecfr.gov/cgi-bin/text-idx?amp;node=17:3.0.1.1.11&rgn=div5#se17.3.229_110

21.4%

21.8%

21.6% 21.3%

22.5%

22.0%

22.7%

22.4%

20.9%

22.5%

23.3%

19.5%

20.0%

20.5%

21.0%

21.5%

22.0%

22.5%

23.0%

23.5%

FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19E FY 20E

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$800.0

Non-GAAP EBITDA Non-GAAP EBITDA margin



https://middlebycorporation.gcs-web.com/static-files/7f144d16-3d29-43f3-903e-98ed39f1abd8

https://www.ecfr.gov/cgi-bin/text-idx?amp;node=17:3.0.1.1.11&rgn=div5#se17.3.229_110


TriFin Advisors

• M&A rationale typically anchored on ability to expand target’s adjusted EBITDA margin: The Company regularly references its ability to expand adjusted EBITDA margin as part of the rationale for M&A.

• Executive compensation based on adjusted EBITDA: Management’s compensation, including annual cash incentives and other bonuses, is based on adjusted EBITDA metrics.

Given adjusted EBITDA is integral to how the Company discusses its financial performance and compensates its executives (discussed herein), we believe the lack of a reconciliation between GAAP and non-GAAP results inhibited the ability to appropriately analyze the quality of the Company’s historical adjusted EBITDA performance.

Earnings Disclosure Inconsistencies As discussed above, Middleby only recently started to disclose a GAAP to non-GAAP EBITDA reconciliation. In addition, the Company provided a GAAP to non-GAAP earnings reconciliation in its June 2019 Investor Presentation, but in two instances (Q3 18 and Q4 18) non-GAAP earnings in the reconciliation were different than what the Company had highlighted in its quarterly Earnings Releases. Its Earnings Releases, which we believe are more widely distributed to analysts and financial media, showed higher adjusted earnings growth than the more detailed reconciliation in the Investor Presentation. Inconsistencies in adjusted earnings raise more questions about proper non-GAAP disclosure In the first paragraph of its Q3 18 Earnings Release on 11/07/18, the Company indicated Q3 18 adjusted earnings increased 14.7% year-over-year to $1.56 (from $1.36 in Q3 17).

Net earnings for the third quarter were $72.9 million or $1.31 diluted earnings per share on net sales of $713.3 million as compared to the prior year third quarter net earnings of $74.7 million or $1.31 diluted earnings per share on net sales of $593.0 million. Excluding the impact of restructuring expenses and the dilutive impact of the Taylor acquisition, adjusted earnings per share was $1.56 for the third quarter ended September 29, 2018. Excluding the impact of restructuring expenses, adjusted earnings per share was $1.36 in the prior year third quarter. (Q3 18 Earnings Release, 11/07/18) [emphasis added]

In the first paragraph of its Q4 18 Earnings Release on 02/27/19, the Company highlighted Q4 18 adjusted earnings increased 10.5% year-over-year to $1.79 (from $1.62 in Q4 17).

Net earnings in the current quarter were impacted by the dilutive impact of the Taylor acquisition and restructuring. Net earnings in the prior year were impacted by restructuring, the gain on sale of plant, the impairment of intangible assets, complying with the Tax Cuts and Job Act of 2017 and the adoption of ASU No, 2016-09. Excluding these items, adjusted earnings per share was $1.79 and $1.62 for the 2018 and 2017 fourth quarter periods, respectively. (Q4 18 Earnings Release, 02/27/19) [emphasis added]

In its June 2019 Investor Presentation, the Company provided a detailed adjusted earnings reconciliation for the first time. However, the reconciliation indicated Q3 18 adjusted earnings only increased 7.1% year-over-year to $1.65 (from $1.54 in Q3 17) vs. the 14.7% reported in the Q3 18 Earnings Release. Moreover, Q4 18 adjusted earnings were flat year-over-year at $1.87 vs. the 10.5% increase reported in the Q4 18 Earnings Release. We are not only concerned the disclosures are inconsistent, but the Earnings Releases, which we believe are more widely distributed to analysts and financial media, showed higher adjusted earnings growth than the more detailed reconciliation in the Investor Presentation.





https://middlebycorporation.gcs-web.com/news-releases/news-release-details/middleby-corporation-reports-third-quarter-results-8

https://middlebycorporation.gcs-web.com/news-releases/news-release-details/middleby-corporation-reports-third-quarter-results-8

https://middlebycorporation.gcs-web.com/news-releases/news-release-details/middleby-corporation-reports-fourth-quarter-and-full-year-6

https://middlebycorporation.gcs-web.com/news-releases/news-release-details/middleby-corporation-reports-fourth-quarter-and-full-year-6



TriFin Advisors

Adjusted Earnings in Investor Presentation Inconsistent with Earnings Releases


Commercial Foodservice Growth May Slow Considerably Commercial Foodservice is the largest and most important segment, it generates over 60.0% of revenue and gross profit and over 70.0% of EBITDA. Consistent with consolidated trends, Commercial Foodservice reported and organic growth diverged considerably over the last few years. In fact, Middleby historically highlighted Commercial Foodservice’s organic growth in its Investor Presentations but removed the slide in FY 17 as organic growth started to deteriorate. We are concerned more difficult times lie ahead as Middleby annualized its largest acquisition to date in Q2 19 and will start to lap multi-year high growth rates over the next four quarters. In addition, incremental M&A may be more difficult as leverage is near peak levels. Profitability expansion may prove challenging as well. In Q1 19, EBITDA margin declined for the third consecutive quarter and remained well below the Company’s long-term guidance. Moreover, we find it concerning how the cadence of adjusted non-GAAP EBITDA margin (yes, that’s adjusted non-GAAP EBITDA margin) commentary changed over the last three quarters. We believe profitability from recent M&A and/or legacy businesses may be underperforming. Low-single-digit Commercial Foodservice organic revenue growth well below reported growth of over 25.0% In its FY 18 10K, Middleby attributed reported revenue growth to M&A including Sveba Dahlen, QualServ, L2F, Globe, Firex, Josper, Taylor, and Crown. Taylor is Middleby’s largest acquisition to date and was acquired for $1,000.0 million in Q2 18. Organic growth was attributed to increased domestic sales with major chain restaurants and retail customers.

Domestically…Excluding acquisitions, net sales increased $40.9 million, or 4.2%, related to increased sales with major chain restaurants and retail customers…Excluding acquisitions and foreign exchange, the net sales increase in international sales was $2.0 million, or 0.5%. (FY 18 10K)







TriFin Advisors

Majority of Recent Commercial Foodservice Growth Due to M&A; Organic Growth Soft

($ in millions)


Commercial Foodservice will be lapping toughest comp set in years over the next four quarters In Q2 19, Middleby annualized the Taylor acquisition and will lap multi-year high growth rates. Accordingly, we believe reported growth will decelerate considerably and track more closely in line with organic growth trends absent another large acquisition. However, we believe the likelihood of another large M&A deal is somewhat low given Middleby’s leverage ratio is near peak levels.

Over the Next Four Quarters Commercial Foodservice Will Comp Toughest Base Rates in Years

($ in millions)

Source: Company 10Qs and 10Ks

Commercial Foodservice organic growth slide removed from recent Investor Presentations In its June 2017 Investor Presentation, the Company highlighted average Commercial Foodservice organic growth since FY 10 was 6.5%. However, the Company omitted this slide in its three most recent presentations (June 2018, November 2018, and June 2019). In our experience, it’s typically not a favorable sign when a Company ceases commentary and/or removes disclosure about a previously touted metric.

13.9%

16.3%

7.7%

13.0%

9.1%

25.2%

11.1% 8.9%

6.3% 5.5%

(1.8%)

3.1%

$0.0

$200.0

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$800.0

$1,000.0

$1,200.0

$1,400.0

$1,600.0

$1,800.0

$2,000.0

FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0





https://middlebycorporation.gcs-web.com/static-files/fe89990d-99bc-4d56-a931-6bde61998cfa

https://middlebycorporation.gcs-web.com/static-files/89512794-00a7-40ce-9201-b20f03d060d3



TriFin Advisors

Commercial Foodservice Organic Growth Slide Removed from Recent Presentations

Source: June 2017 Investor Presentation

Commercial Foodservice non-GAAP EBITDA margin at five-year low and well below long-term target In its June 2017 Investor Presentation, the Company attributed FY 16 Commercial Foodservice non-GAAP EBITDA margin expansion to (1) acquisition integration, (2) platform synergies, and (3) product innovation. Interestingly, the Company provided little additional commentary or granularity about the margin expansion on its Earnings Calls during FY 16. Throughout FY 17 and FY 18, the Company attributed the decline in Commercial Foodservice non-GAAP EBITDA margin to the “dilutive effect” of M&A. On a few occasions, the Company indicated non-GAAP EBITDA margin excluding the impact of recent acquisitions (i.e. adjusted non-GAAP EBITDA) increased, but never provided a reconciliation of how adjusted non-GAAP EBITDA was calculated. In its June 2019 Investor Presentation, the Company continued to highlight Commercial Foodservice EBITDA margin guidance of greater than 30.0%.

Commercial Foodservice Profitability at Five-Year Low

($ in millions)


Q3 18 non-GAAP EBITDA margin decline attributed to “dilutive” M&A In Q3 18, Commercial Foodservice non-GAAP EBITDA margin declined 130 basis points year-over-year to 26.6%. On its Q3 18 Earnings Call on 11/07/18, the Company indicated non-GAAP EBITDA margin included the “dilutive

28.4%

27.8%

28.2%

29.3%

27.8%

26.3%

24.5%

25.0%

25.5%

26.0%

26.5%

27.0%

27.5%

28.0%

28.5%

29.0%

29.5%

30.0%

FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

$0.0

$50.0

$100.0

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$200.0

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$500.0








https://seekingalpha.com/article/4219552-middleby-corporation-midd-ceo-selim-bassoul-q3-2018-results-earnings-call-transcript?part=single


TriFin Advisors

effect” of recent acquisitions. Adjusted non-GAAP EBITDA (i.e. excluding dilutive M&A) increased 110 basis points to 28.8% due to (1) favorable mix with sales of higher technology equipment and (2) continued benefits from efficiency gains at companies acquired over the last several years.

EBITDA at the Commercial Foodservice Group amounted to $125.4 million at 26.6% and includes the dilutive effect of recent acquisitions, most notably the recent acquisition of Taylor. Excluding the impact of recent acquisitions, the EBITDA margin increased to 28.8% versus 27.7% in the prior year quarter. The margin improvement reflects the favorable mix with sales of higher technology equipment and the continued benefits of efficiency gains at companies acquired over the last several years. (CFO Mr. Timothy FitzGerald, Q3 18 Earnings Call, 11/07/18)

Recall, Q3 18 was the first quarter Middleby started to disclose a GAAP to non-GAAP EBITDA reconciliation in its Earnings Releases. However, as noted above, the Company also referenced an adjusted non-GAAP EBITDA margin figure whereby no reconciliation was provided as to its calculation. Q4 18 non-GAAP EBITDA margin continued to decline In Q4 18, Commercial Foodservice non-GAAP EBITDA margin declined 120 basis points year-over-year to 26.6%. On its Q4 18 Earnings Call on 02/27/19, Middleby did not explicitly discuss the decline. Instead, the Company highlighted adjusted non-GAAP EBITDA margin was 27.5% and indicated profitability improvements at Taylor and other acquisitions remained a “critical” mission. The Company did not provide the base period for adjusted non-GAAP EBITDA margin.

EBITDA for commercial foodservice amounted to $129 million, a 26.6% or 27.5% excluding the dilutive effect of recent acquisitions. Driving profitability improvements at Taylor and all of our acquisitions remains a critical mission for us. We will continue to focus on the expansion of profitability. Our goal continues to be to grow margins at the recent acquisitions to levels consistent with the overall platform. (CFO Mr. Bryan Mittelman, Q4 18 Earnings Call, 02/27/19)

Q1 19 non-GAAP EBITDA margin declined for the third consecutive quarter In Q1 19, Commercial Foodservice non-GAAP EBITDA margin declined 60 basis points year-over-year to 24.8%. On its Q1 19 Earnings Call on 05/18/19, the Company indicated EBITDA margin was impacted by M&A over the last two years, especially in cases where it was broadening technologies and capabilities (i.e. L2F and QualServ). In addition, weaker profitability was attributed to product mix, including the impact of the prior year significant beverage rollout and further investments to enhance its selling presence. Interestingly, the Company did not provide adjusted non-GAAP EBITDA margin.

EBITDA for commercial foodservice amounted to $113 million, representing 24.8% of sales…The EBITDA percentage is also impacted by acquisitions over the last 2 years, especially where we have sought to increase our investments in technology and automation, namely L2F as well as we are broadening our capability such as in fabrication and store design with QualServ. This broadening of our portfolio brands, technologies and capabilities will drive top line growth and improve profitability over the long term, but our work continues in the near term. Within the first quarter, product mix, including the impact of the prior year significant beverage rollout and further investments to enhance our selling presence were detractors on the margins. (CFO Mr. Bryan Mittelman, Q1 19 Earnings Call, 05/08/19)

We find it concerning how the cadence of adjusted non-GAAP EBITDA margin commentary changed drastically over the last three quarters. In Q3 18, the Company highlighted adjusted non-GAAP EBITDA margin growth and provided the base period. In Q4 18, adjusted non-GAAP EBITDA margin was again highlighted but no base period was disclosed to provide context. Finally, in Q1 19, adjusted non-GAAP EBITDA margin was not mentioned at all. Given Commercial Foodservice non-GAAP EBITDA margin declined for the third consecutive quarter in Q1 19 and remained well below long-term guidance of +30.0%, we believe profitability from recent M&A and/or legacy businesses may be underperforming.



https://seekingalpha.com/article/4219552-middleby-corporation-midd-ceo-selim-bassoul-q3-2018-results-earnings-call-transcript?part=single

https://seekingalpha.com/article/4244920-middleby-corp-midd-ceo-timothy-fitzgerald-q4-2018-results-earnings-call-transcript?part=single





TriFin Advisors

Commercial Foodservice EBITDA Margin Continued to Decline


Residential Kitchen Revenue Plateaued; Margin Contribution Subdued

Residential Kitchen is the second largest segment and accounts for approximately 20.0% of revenue and gross profit and 15.0% of EBITDA. After several years of rapid growth (primarily from M&A), Residential Kitchen reported revenue has more-or-less plateaued since FY 16 while organic growth has been negative since FY 15. In Q1 19, organic growth improved to low-single-digits and EBITDA margin expanded significantly from an easy comparable period, but Company commentary suggested growth may not be sustainable throughout the year. In addition, Residential Kitchen’s quarterly revenue contribution was at the second lowest level in four years. Consequently, we are cautious about sustained improvement and the ability for the segment to meaningfully contribute to consolidated growth in FY 19. Residential Kitchen revenue plateaued since peaking in FY 16; organic growth negative the last four years From FY 13 through FY 15, Middleby made several large acquisitions in its Residential Kitchen business which facilitated high reported year-over-year growth and successively record revenue through FY 16. Viking was acquired in Q1 13 for $361.7 million, U-Line in Q4 14 for $142.0 million, AGA Rangemaster in Q3 15 for $201.0 million, and Lynx Grills in Q4 15 for $83.8 million. However, organic growth did not follow suit and was negative the last four years. Middleby attributed negative organic growth to the following:

• FY 15: (1) recall of Viking products and (2) discontinuation of certain non-Viking manufactured products sold by distributors in 2014 resulting in comparatively lower sales in 2015 and lack of product availability related to the transition and initial production startup for a new line of Viking refrigeration in H1 15.

Organic sales growth for the year was adversely impacted by the announced recall of Viking product in 2015. Additionally, sales were impacted by the discontinuation of certain non-Viking manufactured products sold by the Distributors in 2014, resulting in comparatively lower sales in 2015 and lack of product availability related to the transition and initial production startup for a new line of Viking refrigeration in the first half of 2015. (FY 15 10K)

• FY 16: (1) lower sales at U-Line due to a prior year new product launch resulting in higher sales to dealers (i.e. tough base period) and (2) the 2015 recall of certain Viking products.

27.9% 27.8%

25.4%

26.4% 26.6% 26.6%

24.8%

Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19

23.0%

23.5%

24.0%

24.5%

25.0%

25.5%

26.0%

26.5%

27.0%

27.5%

28.0%

28.5%

Non-GAAP EBITDA margin



https://www.sec.gov/Archives/edgar/data/769520/000076952016000010/midd-201510216x10k.htm


TriFin Advisors

Organic sales growth for the year was adversely impacted by lower sales at U-Line due to a prior year new product launch resulting in higher sales to dealers. Additionally, sales continued to be affected by the 2015 recall of certain Viking products manufactured prior to 2013 and Middleby's acquisition of Viking. (FY 16 10K)

• FY 17: (1) residual impact of Viking recall, (2) product rationalization at the AGA Group, and (3) restructuring actions related to non-core businesses.

Domestic sales declined primarily due to lower sales of Viking products, reflecting the residual impact of a product recall…Excluding foreign exchange, the net sales decrease in international sales was $32.1 million, or 10.8%. The sales decrease reflects the impact of product rationalization at the AGA Group in conjunction with acquisition integration initiatives and restructuring actions impacting sales related to non-core businesses within that group. (FY 17 10K)

• FY 18: (1) slower conditions in the UK market and (2) lower sales at non-core businesses acquired in connection with AGA due to restructuring activities.

The net sales decrease in international sales was $27.8 million, or 10.8%, related to slower conditions in the UK market. In addition, sales decreased at non-core businesses, acquired in connection with AGA, and have been impacted by restructuring initiatives. Restructuring initiatives at Grange, one of the non-core businesses, was substantially completed at the end of fiscal 2018. (FY 18 10K)

Residential Kitchen Revenue Stagnant Since Peaking in FY 16; Organic Growth Negative

($ in millions)


Q1 19 organic growth improved, but quarterly revenue at second lowest level in four years In Q1 19, Residential Kitchen revenue increased 0.3% year-over-year to $136.8 million. Organic growth was 5.5%. On its Q1 19 Earnings Call, Middleby highlighted “strong” results at Viking and indicated it was “pleased” with the recent performance within the AGA Rangemaster family of products. However, Middleby caveated that (1) sustaining Viking’s performance would be challenging through H1 19 and (2) AGA Rangemaster performance may not be sustainable due to uncertainty in the UK market.

Domestic sales increased by 6.8% as we continue to see strong results at Viking, which increased double digits over the prior year quarter. International sales increased by 3.6%. While we are pleased by this recent performance, primarily within the AGA and Rangemaster family of products, given the continuing uncertainty around the U.K. market, such growth rates may not be sustainable in the near term.

17.6%

49.7%

61.5%

(8.8%)

0.5%

12.8%

(11.6%)(7.7%) (7.2%)

(0.9%)

$0.0

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FY 14 FY 15 FY 16 FY 17 FY 18

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TriFin Advisors

Coming back to the North American market, with our new Viking product offerings and successes in gaining dealer and consumer acceptance, our strong growth has continued. While we have been successful in growing our business, increasing our market share, sustaining this performance in the face of various market pressures will be challenging for the remainder of the first half of this year. (CFO Mr. Bryan Mittelman, Q1 19 Earnings Call, 05/08/19)

In addition, Q1 19 Residential Kitchen revenue was at the second lowest level since Q4 15. So, despite improving organic growth, we remain cautious about Residential Kitchen’s ability to meaningfully contribute to consolidated performance. Moreover, commentary about challenging market pressures for Viking and potentially unsustainable growth rates for AGA Rangemaster gives us even more caution about extrapolating favorable Q1 19 growth rates to the remainder of FY 19.

Residential Kitchen Organic Growth Improved, But Contribution Remained Near Multi-Year Lows

($ in millions)


EBITDA margin relatively stable in the mid-teens for the last three years In its June 2019 Investor Presentation, the Company attributed recent Residential Kitchen margin expansion to (1) acquisition integration, (2) leverage distribution, (3) platform synergies, and (4) product innovation.

(40.0%)

(20.0%)

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TriFin Advisors

Residential Kitchen EBITDA Margin Relatively Stable in the Mid-Teens

($ in millions)


Q1 19 EBITDA margin improved significantly from easy comparable period, similar expansion over the remainder of the year may be more difficult In Q1 19, Residential Kitchen non-GAAP EBITDA margin increased 680 basis points year-over-year to 17.7%, from a very depressed base period. In Q1 18, Residential Kitchen profitability was negatively impacted by transition costs and lower volumes related to the cancellation of certain distributors and investments in product display and promotions at Viking. On its Q1 19 Earnings Call, the Company attributed margin expansion to (1) increased profitability at domestic brands (e.g. Viking), (2) efficiency benefits, and (3) manufacturing and distribution initiatives.

Gross margin at the residential group improved to 39% as opposed to 33.5% in the prior year period, while EBITDA margins improved to 17.7% from 10.9% in the prior year. Excluding the impact of FX rates and the disposed non-core business, EBITDA for the current year would have been 19%. The margin improvements reflect increased profitability at our domestic brands, driven by higher sales at Viking as well as with under counter refrigeration, along with some efficiency benefits and manufacturing and distribution initiatives. (CFO Mr. Bryan Mittelman, Q1 19 Earnings Call, 05/08/19)

Over the next three quarters, we are concerned Residential Kitchen margin growth may be more challenging as (1) the segment will begin to lap more normal base periods and (2) revenue growth over the remainder of FY 19 may not be as strong as Q1 19.

15.1% 15.4%

13.6%

15.9% 16.9% 16.4%

0.0%

2.0%

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FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

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TriFin Advisors

Residential Kitchen EBITDA Margin Improved Significantly from Easy Base Period


Food Processing Large Orders Remained Elusive, Mix Shifts Negative Food Processing is the smallest segment and accounts for less than 15.0% of revenue, gross profit, and EBITDA. Food Processing performance has been somewhat volatile over the last five years. In FY 18, the decline in organic growth accelerated to the mid-teens and EBITDA margin cratered, both of which were attributed to the timing/deferral of certain larger projects and negative mix. In Q1 19, the Company highlighted it was “cautiously optimistic” revenue and profitability would improve as FY 19 progresses. We believe Food Processing improvement is heavily predicated on whether these larger orders materialize as expected. In our experience, this can be very difficult to predict. Given FY 18 organic revenue and profitability were weak, the bar is very low for FY 19. As a result, we would not be surprised if the Company can show year-over-year improvement. However, given the Food Processing segment is the smallest segment and less than 15.0% of revenue and EBITDA, we are concerned improvement may not make a material impact on consolidated results. Food Processing under significant pressure as large orders remained elusive and mix shifts negative In FY 18, Food Processing revenue increased 10.5% year-over-year to $389.6 million. Organic growth was negative 15.7%. In its FY 18 10K, Middleby attributed reported growth to several acquisitions including Burford, CVP Systems, Scanico, Hinds-Bock, Ve.Ma.C, and M-TEK. Negative organic growth was attributed to the “timing and deferral” of certain larger projects.

Net sales of the Food Processing Equipment Group increased by $36.9 million, or 10.5%, to $389.6 million in fiscal 2018, as compared to $352.7 million in fiscal 2017. Net sales from the acquisitions of Burford, CVP Systems, Scanico, Hinds-Bock, Ve.Ma.C, and M-TEK…Revenues for the Food Processing Equipment Group have been affected by the timing and deferral of certain larger projects. (FY 18 10K)

16.5% 17.1%

10.9%

16.9% 18.1%

19.2% 17.7%

Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19

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TriFin Advisors

Food Processing Performance Under Pressure as Organic Revenue Declined Double-Digits

($ in millions)


Q1 19 organic growth remained negative In Q1 19, Food Processing revenue increased 4.4% year-over-year to $92.5 million. Organic growth was negative 3.2%. In its Q1 19 10Q, Middleby attributed reported revenue growth to the Hinds-Bock, Ve.Ma.C, and M-TEK acquisitions. On its Q1 19 Earnings Call, the Company guided for Food Processing revenue to return to growth with improving mix in Q2 19 due to recovery in core hot dog and sausage markets.

At our Food Processing Group, we believe, we will return to top line growth and improving mix in the second quarter. We anticipate this improvement resulting from the measured recovery in core hot dog and sausage markets, driven in part by emerging markets, and the adoption of upgraded technologies by our customers to drive operating efficiencies and profit improvements. (CEO Mr. Timothy FitzGerald, Q1 19 Earnings Call, 05/08/19)

Given FY 18 organic revenue growth was at the lowest level in at least five years, we believe that if certain large projects come to fruition growth may return as the Company laps easy base rates. However, large project timing can be very difficult to predict and given customers already deferred certain projects once, it’s possible customers could continue to push out projects. Moreover, Food Processing revenue accounts for under 15.0% of revenue, so even if growth rates improve, we are concerned it may not materially impact consolidated results.

7.1%

(7.8%)

15.0%

3.1%

10.5%

3.7%

(8.3%)

13.7%

(3.5%)

(15.7%)$0.0

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FY 14 FY 15 FY 16 FY 17 FY 18

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TriFin Advisors

Food Processing Reported vs. Organic Revenue Growth

($ in millions)


FY 18 EBITDA margin cratered after years of expansion In FY 18, Food Processing non-GAAP EBITDA margin declined 790 basis points year-over-year to 19.5%. On its Q4 18 Earnings Call, the Company indicated margins continued to be significantly impacted by lower sales volumes from fewer large orders and negative mix due to lower contribution from the highest margin business (meat processing).

Margins at this business continue to be significantly impacted by lower sales volumes and a negative mix impact. We had a lower contribution from our meat processing division which has the highest margins. The absence of large customer orders will likely continue to present a challenge to revenues for this segment. We're cautiously optimistic that we'll see improvement in both the top line and EBITDA margins as 2019 progresses into the second half, but performance will likely be challenging in the beginning of the year. (CFO Mr. Bryan Mittelman, Q4 18 Earnings Call, 02/27/19)

Food Processing EBITDA Margin Craters Due to Lower Large Orders & Negative Mix

($ in millions)


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19.4%

23.1%

26.2% 27.1% 27.4%

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FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

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https://seekingalpha.com/article/4244920-middleby-corp-midd-ceo-timothy-fitzgerald-q4-2018-results-earnings-call-transcript?part=single?part=single




TriFin Advisors

Q1 19 profitability remained under pressure and well below historical levels In Q1 19, Food Processing non-GAAP EBITDA margin increased 90 basis points year-over-year to 17.5%. On its Q1 19 Earnings Call, the Company indicated profitability continued to be significantly impacted by lower sales and negative mix. However, the Company highlighted it was “cautiously optimistic” revenue and profitability would improve as FY 19 progress, but performance would “likely” be challenging in the beginning of the year.

Gross margins at the Food Processing Group improved to 35% as compared to 31.7% in the prior year period, while EBITDA margins improved to 17.5% as compared to 16.6% in the prior year. Margins of this business have improved as we have worked to control costs. The absence of large customer orders will be a headwind for this segment. We are optimistic that we will see improvement in both the top line and EBITDA margins as 2019 progresses, but meaningful increases remain a challenge in the absence of these large customer orders. (CFO Mr. Bryan Mittelman, Q1 19 Earnings Call, 05/08/19)

Similar to FY 18 revenue growth, we believe EBITDA margin expansion is somewhat dependent on large project activity, especially in meat processing. Given weak results in FY 18, margin improvement may be achievable if customers follow through with these large projects. However, Food Processing accounts for only ~12.0% of EBITDA, so it may be challenging for any improvement to materially impact consolidated results.

Food Processing EBITDA Margin Improved Slightly, But Remained Under Pressure


Inventory Levels & DSI Spike to Decade High In Q1 19, inventory levels and DSI spiked to the highest levels in over a decade. The Company attributed higher inventory to (1) M&A, (2) building inventory in Residential Kitchen for opportunities at Viking, AGA, and Rangemaster, and (3) order timing. The Company did not make any material acquisitions in Q1 19, so we do not believe M&A was the primary contributor. Instead, we are concerned about potentially overestimated demand and/or excess inventory in Residential Kitchen given commentary about challenging market pressures for Viking and potentially unsustainable growth rates for AGA Rangemaster for the rest of FY 19. In addition, we believe profitability not only unsustainably benefited from significantly above average DSI in Q1 19, but margins could be further pressured if inventory cannot be rationalized by revenue growth. Q1 19 inventory levels reached decade high and were well above historical averages In Q1 19, inventory (revenue) increased 26.4% (17.4%) year-over-year to $580.2 million ($686.8 million). Accordingly, inventory relative to revenue increased 7.6% to 0.845. On its Q1 19 Earnings Call, the Company

25.9%

29.4%

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17.5%

Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19

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TriFin Advisors

attributed the build to (1) M&A, (2) increasing inventories in Residential Kitchen to ensure it’s well positioned to take advantage of opportunities in Viking and AGA Rangemaster, and (3) order timing.

There are variety of factors happening with inventory levels. Acquisitions are some of them as well as investments following on some of our previous acquisitions, namely in residential, we've been increasing inventory levels there somewhat robustly to ensure that we are well positioned to take advantage of the opportunities that are there in front of us whether it be Viking or AGA Rangemaster, so that has been a big driver. We also saw some impacts this quarter with a little bit of order timing where somethings didn't happen at the end of Q1 roll into Q2. So we got a little bit higher there as well as being somewhat opportunistic around purchasing. (CEO Mr. Timothy FitzGerald, Q1 19 Earnings Call, 05/08/19)

We acknowledge M&A activity may have materially contributed to historical inventory level builds but given the Company does not break-out inventory as a separate line-item in its purchase price allocations it’s difficult to quantify the exact impact. However, as the Company did not make any material acquisitions in Q1 19, we believe the inventory level spike may be less attributable to M&A and more likely related to increasing inventory for certain Residential brands and order timing. Based on commentary about challenging market pressures for Viking and potentially unsustainable growth rates for AGA Rangemaster for the rest of FY 19, we are concerned about the Company’s ability to rationalize the inventory build. As a result, we believe there is higher risk of overestimated demand and/or excess inventory for certain products.

Inventory-to-Revenue Levels Reached Decade High

Source: TriFin calculations

Q1 19 DSI at decade high increases margin risk In Q1 19, days sales in inventory (DSI) increased 8.3% year-over-year to 115 days, the highest level since at least FY 09 and well above the five-year average of 102 days. Given concerns about the Company’s ability to rationalize inventory levels, we believe the DSI spike increases margin risk due to potentially excess inventory. Moreover, profitability may be further pressured if (1) discounts or concessions are used to move inventory and/or (2) inventory is written down due to weaker-than-expected demand.

0.699

0.6120.643

0.588

0.680 0.669

0.833

0.6620.712

0.672 0.6710.617

0.747 0.728 0.7180.671

0.7850.739 0.719

0.690

0.845

0.000

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Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19

Inventory-to-revenue





TriFin Advisors

DSI Spiked to Decade High

Source: TriFin calculations. DSI = average inventory / COGS * days in the period

DSI build may have materially benefited profitability In Q1 19, DSI of 115 days was 13 days higher than the five-year average of 102 days. If Q1 19 DSI was in-line with the five-year average, we estimate cost of goods sold (COGS) would have been $486.2 million, $56.8 million higher than reported COGS; an 830 basis point impact. We acknowledge inventory levels and DSI fluctuate from quarter-to-quarter (as is normal) and consequently we are hesitant to suggest Q1 19 margins should actually be 830 basis points lower. However, we do believe the recent DSI build materially benefited profitability.

DSI Benefit/(Detriment) to COGS Q1 19

($ in millions)

5-year average DSI (A) 102 days

Inventory (B) $551.0

Days in the period (C) 90.0

Estimated COGS based on 5-year average (D = B x C / A) $486.2

COGS (reported) (E) $429.5

Estimated COGS benefit/(detriment) (F = D - E) $56.8

Revenue (G) $686.8

Estimated COGS benefit/(detriment) (H = F / G) 830 bps

Source: Company 10Ks, 10Qs, Estimates

Negative Adjusted Free Cash Flow Suggests Poor Earnings Quality We often find highly acquisitive companies report “strong” operating cash from operations and free cash flow given the inherent nature of acquisition accounting (i.e. acquired working capital is recorded in cash from operations while cash paid for acquisitions is recorded in cash from investing activities). Accordingly, we believe adjusted free cash flow is a more appropriate metric because it accounts for the cash paid for acquisitions.

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DSI




TriFin Advisors

In six of the last ten years, Middleby reported negative adjusted free cash flow. Perhaps more concerning is the fact cumulative adjusted free cash flow since FY 09 trended successively more negative over the last five years. We believe this suggests (1) cash flow growth may be dependent on M&A, (2) post-integration acquisition performance may be weaker-than-expected, and/or (3) certain acquisitions have significantly lower cash conversion than the consolidated Company. In any of those scenarios, we are concerned cash from operations and free flow growth may not be as strong as it appears. Middleby regularly touts “consistent” free cash flow growth In its Investor Presentations, Middleby regularly includes a slide highlighting its free cash flow growth. While free cash flow generally trended higher since FY 06, there have been a few noticeably large year-over-year increases. In FY 14, free cash flow increased 67.8% to $220.7 million and in FY 18, free cash flow increased 33.2% to $332.9 million. Unsurprisingly, aggregate M&A activity during and in the year prior to each of those periods was at record levels.

Investor Presentations Regularly Highlight “Consistent” Free Cash Flow Growth


Cash conversion down from peak highs, but within historical range at ~1.0x In Q1 19, last twelve-month cash from operations (last twelve-month non-GAAP net income) increased 18.5% (9.5%) year-over-year to $358.1 million ($320.7 million). Accordingly, last twelve-month cash conversion increased 8.2% to 1.117. Most of the improvement resulted from higher depreciation and favorable movements in accounts payable, accrued expenses and other liabilities, and deferred income taxes. However, cash consumed by working capital increased over 6.0x to $66.8 million, driven by higher inventory.





TriFin Advisors

Cash Conversion Just Over 1.0x; Below Peak Levels, but Within Historical Range


Adjusted free cash flow may be a better indicator of earnings quality and M&A performance Highly acquisitive companies can often report flattering cash from operations and free cash flow given the inherent nature of acquisition accounting. Working capital (i.e. inventory, receivables, payables, etc.) acquired via M&A is recorded in cash from operations, while the cash paid for the acquisition is reported in cash from investing activities. So, if the target operated with positive working capital (i.e. inventory + receivables > payables), the acquiror’s cash from operations would increase without a corresponding cash outflow for the acquired assets. Consequently, these mechanics can provide an unsustainable boost to cash from operations and free cash flow without any improvement in the acquiror’s underlying/organic business. As a result, we believe adjusted free cash flow is an important metric to assess a highly acquisitive company’s earnings quality and the performance of acquisitions post-integration. 7 Negative adjusted free cash flow suggests earnings quality and cash conversion may not be as strong as it appears Since FY 09, adjusted free cash flow was negative in six of the ten years. In FY 18, adjusted free cash flow was negative $865.1 million. It’s somewhat understandable FY 18 had the lowest reading given Middleby made its largest acquisition to date in Q2 18; Taylor was acquired for $1,000.0 million. However, persistently negative adjusted free cash flow suggests (1) earnings quality and cash conversion may not be as strong as it appears and/or (2) post-integration acquisition performance may be weaker-than-expected.

7 Adjusted free cash flow = cash flow from operations - capital expenditures - cash paid for acquisitions

0.737

1.064

1.216 1.240

1.371 1.367

1.130 1.131 1.034

0.949 0.967 1.035

1.087

0.932

1.066 1.021 1.032

1.220 1.182 1.163 1.117

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Cash from operations-to-non-GAAP net income (LTM)




TriFin Advisors

Adjusted Free Cash Flow Negative in Six of the Last Ten Years

($ in millions)


Successively negative cumulative adjusted free cash flow reinforces concerns about poor earnings quality/cash conversion and weaker-than-expected post-integration acquisition performance As discussed above, it’s not surprising FY 18 adjusted free cash flow was at the lowest level ever reported given Middleby made its largest acquisition in Q2 18. However, we find it highly concerning cumulative adjusted free cash flow has been negative since FY 13 and for the most part became successively more negative each year. At a minimum, this reinforces concerns earnings quality and cash conversion is much weaker than it appears. Given Middleby does not provide granular detail on post-M&A cash flow, we believe certain acquisitions may (1) have significantly lower cash conversion than the consolidated Company and/or (2) be materially underperforming.

Cumulative Adjusted Free Cash Flow Negative Since FY 13

($ in millions)


Compensation Plan Incentivizes Growth Irrespective of Quality

($38.3)

$69.1

($58.5)

$58.5

($335.0)

$0.8

($121.4)

$58.4

($55.3)

($865.1)($1,000.0)

($500.0)

$0.0

$500.0

$1,000.0

$1,500.0


Free cash flow Cash paid for acquisitions Adjusted free cash flow

($38.3)

$30.8

($27.7)

$30.8

($304.3) ($303.5)

($424.9)($366.5)

($421.8)

($1,286.9)($1,400.0)

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Cumulative adjusted free cash flow (since FY 09)




TriFin Advisors

Executive compensation plans are a core driver to management decision making; well-constructed plans incentivize long-term value creation while poorly constructed plans can do the opposite. We believe the most effective compensation plans include components based on growth and profitability. So, we found the change in long-term performance-based compensation metrics from share price & ROE to EBITDA & earnings growth to be very concerning. While the new compensation plan was instituted in FY 11, we observed a few noticeable changes in the M&A strategy shortly thereafter that have continued through today. The size and quantity of acquisitions ramped up significantly while target revenue growth and margin quality meaningfully deteriorated. In addition, FY 18 ROIC + organic growth was at the lowest level since at least FY 10. So, while the Company continues to tout is EBITDA and earnings growth, we believe the quality is much weaker than it has been in the past. Long-term performance-based compensation metrics changed from ROE & share price metrics to EBITDA & earnings growth Prior to FY 11, the Company granted performance-based compensation that vested based on return on equity (ROE) and share price metrics.

The Company has historically granted performance-based equity compensation to its CEO and CFO, consisting of stock options and restricted stock with performance-based vesting features, such as stock price increases or ROE performance. Accordingly, equity awards granted to the CEO and CFO only vest if there is a positive return to stockholders. (2012 Proxy Statement, 03/30/12)

In FY 11, the Company adopted a new long-term based equity incentive plan based on EBITDA and earnings year-over-year growth goals.

The performance stock awards vest based upon achievement of various levels of year over year growth in EBITDA and year over year growth in EPS goals. The goals were set based on an analysis of historical growth in EPS and EBITDA, as well as an analysis of industry and analyst growth expectations. (2012 Proxy Statement, 03/30/12)

Annual cash bonus incentive plan also based on EBITDA and earnings growth Since at least FY 12, the Company’s annual cash bonus incentive plan was based on EBITDA and earnings growth.

The 2018 annual cash bonus incentive plan and long-term equity incentive awards are both 100% performance-based benefits that focus on increasing both earnings before interest, taxes, depreciation and amortization ("EBITDA") and EPS. (2019 Proxy Statement, 04/18/19)

In our experience, the most effective executive compensation plans to generate long-term sustainable value include components based on growth and profitability. We have found compensation plans based singularly on one or the other can incentivize executives to manage the business in order to achieve bonus targets rather than create long-term sustainable value. We are concerned the change in Middleby’s executive compensation plans may have incentivized lower quality M&A to generate EBITDA and earnings growth. For example, we don’t think it’s a coincidence Middleby’s M&A activity ramped up in both size and quantity shortly after this new compensation plan (based solely on EBITDA & earnings growth) was instituted. Moreover, recall M&A revenue growth and gross margin also started to deteriorate around the same time. Removed ROE peer comparison metric in its FY 14 Proxy; removed TSR in FY 18 In its 2014 Proxy Statement on 03/27/14, Middleby highlighted its FY 13 financial performance for ROE and Total Shareholder Return (TSR) was above the peer group median. This was the fourth consecutive year the Company highlighted ROE and TSR outperformed the peer group.

The executive team led by Mr. Bassoul, our CEO, has driven the performance of the Company, outperforming its peers in many respects. For example, our 2013 financial performance on Return on



https://www.sec.gov/Archives/edgar/data/769520/000104746912003643/a2208522zdef14a.htm






TriFin Advisors

Equity ("ROE") and Total Shareholder Return ("TSR") was above the peer group median. (2014 Proxy Statement, 03/27/14)

In its Proxy Statements for FY 14 through FY 17, the Company removed its commentary about ROE and instead highlighted earnings and TSR.

The executive team led by Mr. Bassoul, our CEO, has driven the performance of the Company, outperforming its peers in many respects. For example, our five year financial performance on Total Shareholder Return ("TSR") and Earnings Per Share ("EPS") was significantly above the peer group median. (2018 Proxy Statement, 03/29/18)

In its 2019 Proxy Statement, the Company removed its TSR commentary and solely highlighted its earnings performance.

In 2018, the executive team led by Mr. Bassoul, our CEO during fiscal year 2018 (who has subsequently retired), drove the performance of the Company, outperforming its peers in many respects. For example, our five year financial performance on Earnings Per Share ("EPS") was significantly above the peer group median. (2019 Proxy Statement, 04/18/19)

We understand why the Company removed the ROE peer comparison metric in FY 14 and the TSR metric in FY 18; ROE and TSR were not meaningfully outperforming the peer group and therefore were no longer worth highlighting. However, we believe there is a strong correlation between the removal of ROE as a bonus compensation metric and the underperformance of ROE relative to the peer group. Similarly, we find it unsurprising earnings growth outperformed the peer group given earnings is a core tenant of the executive compensation bonus plan. All said, we believe compensation plans drive executive decision making and poorly constructed plans can incentivize short-term decision making at the expense of long-term value. ROIC + organic growth at lowest level since FY 10 We believe return on invested capital (ROIC) + organic revenue growth can be useful metric to assess shareholder return for acquisitive companies with minimal capital expenditure (capex). Historically, Middleby’s annual capex accounted for less than 1.5% of revenue. In FY 18, ROIC (organic revenue growth) was 11.5% (negative 0.8%). Accordingly, ROIC + organic revenue growth was 10.7%, the lowest level since at least FY 10. As discussed throughout the report, we are concerned M&A quality started to deteriorate in FY 13/FY 14. We believe ROIC + organic revenue growth at levels ~50.0% lower than pre-FY 13 corroborates these concerns. So, while the Company touts and pays its executives on EBITDA and earnings growth, we believe the quality of the growth is much weaker than it’s been in the past.









TriFin Advisors

ROIC + Organic Growth less than Half Pre-FY 13 Returns


Executives Unload as Shares Peak, Insider Ownership at Record Lows From FY 09 to FY 14, beneficial ownership of company insiders declined significantly and has subsequently stayed at decade lows while shares are near all-time highs. We don’t necessarily take issue with insiders monetizing their equity, but when insiders meaningfully reduce their beneficial ownership it can be a red flag that the Company’s outlook may not be as strong as it has in the past. Moreover, the abrupt departure of the long-tenured CEO Mr. Bassoul only one-year after signing a new three-year contract raises more red flags about the Company’s prospects. Insider ownership at lowest levels in over a decade as shares hover around all-time high Since FY 09, the beneficial ownership of former CEO Mr. Selim A. Bassoul (all directors, nominees, and executive officers) declined from 7.9% to 1.2% (11.5% to 2.0%). The bulk of selling ranged from FY 09 through the beginning of FY 14, when the share price increased ~9.0x (from ~$10.00/share to ~$90.00/share). Over the last few years, shares continued the upward trend (albeit at a much slower rate) to peak levels just under $140.00/share, while insider ownership reached decade lows.

12.6% 14.2% 15.6% 14.8% 14.1% 11.9%

14.9% 15.6% 11.5%

5.4% 7.0%

7.2% 10.4% 8.4%

0.4%

3.9%

(3.6%)(0.8%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

Return on invested capital (ROIC) Organic revenue growth ROIC + organic revenue growth




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Beneficial Ownership Reach Lowest Levels as Shares Near All-Time Highs

(beneficial ownership as % of shares outstanding)

Source: Company Proxy filings, Thomson Reuters

Abrupt departure of long-tenured CEO after recent contract renewal raises red flags In its 8K on 02/22/18, the Company entered into an amended employment agreement with CEO Mr. Selim Bassoul whereby Mr. Bassoul would continue to serve as CEO for a three-year term ending on 12/31/2020.

On February 19, 2018, The Middleby Corporation, a Delaware corporation (the “Company”), along with Middleby Marshall Inc., a Delaware corporation (“MMI”), entered into an amendment to the Employment Agreement dated January 25, 2013 with Selim A. Bassoul, the Company’s Chief Executive Officer and President (the “Bassoul Amendment”)…Pursuant to the Amendments, each of Messrs. Bassoul and FitzGerald will continue to serve the Company and MMI in their present capacities for a three year term ending on December 31, 2020. The Bassoul Amendment provides for an increase, effective as of January 1, 2018, in Mr. Bassoul’s base salary from $1,000,000 to $1,500,000, and provides that the base salary for purposes of the calculation of the retirement benefit provided under Mr. Bassoul’s Employment Agreement will remain at $1,000,000. (8K, 02/22/18) [emphasis added]

In its 8K on 02/19/19, the Company announced CEO Mr. Bassoul would retire as Chairman, President and CEO, and as a director of the Company, effective immediately. The Company appointed CFO Mr. Timothy FitzGerald as the new CEO upon Mr. Bassoul’s retirement.

On February 16, 2019, The Middleby Corporation, a Delaware corporation (the “Company”), announced the retirement of Selim A. Bassoul as Chairman, President and Chief Executive Officer of the Company, and as a director of the Company, effective immediately. (8K, 02/19/19) [emphasis added]

We believe its relatively well-known throughout the shareholder base and the analyst community that Mr. Bassoul was instrumental to Middleby’s turnaround in the early 2000’s and integral to making it the Company it is today. While it’s easy to speculate why an executive may leave a company, it’s significantly more difficult to know the true motives. However, we find his abrupt departure very concerning given he resigned only a year after signing a new three-year contract and the resignation from all his titles/positions was effective immediately. While he did agree to a massive consulting agreement (discussed herein), it’s not uncommon for a long-tenured CEO to provide at least several weeks (if not months) notice to assist in finding a successor and/or remain with the company as non-executive Chairman, but in this situation that was not the case. Mr. Bassoul received a 2-year $10.0 million retirement/consulting agreement for services of no more than 25 hours/month + lifetime retirement payment of >$50k per month



https://www.sec.gov/Archives/edgar/data/769520/000110465918011225/a18-6444_18k.htm





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The Company entered into a retirement and consulting agreement with Mr. Bassoul whereby he would be entitled to a $10.0 million cash consulting fee. $8.0 million would be paid in a lump sum within five business days following the effective date of the release and $2.0 million paid in equal monthly installments during a two-year consulting period beginning on the date of his retirement. During the consulting period, Mr. Bassoul will report to the Board of Directors and make himself available for up to 25 hours per month to provide transition assistance and other advisory services.

The Retirement and Consulting Agreement provides that Mr. Bassoul will, subject to his execution and non-revocation of a general release of claims and continued compliance with the restrictive covenants set forth therein, be entitled to a cash consulting fee of $10,000,000, of which $8,000,000 will be paid in a lump sum within five business days following the effective date of the release, and $2,000,000 will be paid in substantially equal monthly installments during the consulting period commencing on his date of retirement and ending on the second anniversary thereof. During the consulting period, Mr. Bassoul will report to the Board and make himself available for up to twenty-five hours per month to provide transition services and assistance in effectuating a transition of his duties and responsibilities to Mr. FitzGerald, as successor Chief Executive Officer, and such other advisory services as requested by the Board. (8K, 02/19/19

In addition, Mr. Bassoul will receive a monthly retirement payment of $56,320 ($675,840/year) for the remainder of his life.

Upon Mr. Bassoul's retirement on or after the date on which he attains the age of 55 (the "Age 55 Retirement Benefit"), he will be fully vested in a monthly retirement benefit equal to one-twelfth of 50% of $1,000,000, payable for the remainder of his life. This percentage increases ratably, depending upon the age of Mr. Bassoul at the time of his retirement…The monthly retirement benefit payable to Mr. Bassoul, based on his age on the date of his actual retirement, is $56,320. (2019 Proxy Statement, 04/18/19)

We don’t think there is anything inherently wrong with consulting agreements with former executives, especially if they are adequately disclosed to investors. However, we find this particular consulting agreement to be incredibly large relative to the number of potential hours to be provided. Over the contract period, Mr. Bassoul’s minimum hourly rate is over $16,000/hour.

Valuation: Shares Could Fall More Than 25.0% Shares trade at a premium to peer EV/EBITDA and P/E Middleby shares trade at 13.7x FY 19 EV/EBITDA, 11.3% above the peer group average of 12.3x. FY 19 P/E of 20.8x is 10.6% above the peer group average.






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FY 18 EV/EBITDA P/E

Company Name Ticker Share Price

Market Cap.

E/V Gross

Margin Adj. EBITDA

Margin FY 19E FY 20E FY 19E FY 20E

($ in millions, except share price)

Barnes Group Inc B $52.59 $2,628.5 $3,453.3 35.6% 28.3% 10.2x 9.6x 16.2x 14.9x

Colfax Corp CFX $28.14 $3,349.2 $7,444.4 30.9% 12.6% 9.5x 8.6x 11.1x 10.3x

Dover Corp DOV $96.78 $14,283.4 $17,276.2 36.8% 17.1% 12.8x 12.0x 16.9x 15.8x

Gardner Denver Holdings, Inc. GDI $32.30 $6,685.5 $8,052.0 37.6% 25.3% 12.3x 11.4x 18.1x 16.6x

Graco Inc GGG $48.12 $8,145.1 $8,225.6 53.4% 29.3% 16.9x 16.0x 25.5x 23.7x

John Bean Technologies Corp JBT $121.48 $3,843.4 $4,247.7 28.0% 12.9% 15.5x 13.9x 26.6x 23.5x

Lincoln Electric Holdings Inc LECO $85.77 $5,364.3 $5,915.6 34.0% 15.8% 11.9x 11.0x 17.3x 15.6x

Nordson Corp NDSN $139.68 $8,148.2 $9,377.8 54.8% 27.0% 14.9x 13.9x 23.1x 20.6x

Enpro Industries, Inc NPO $64.60 $1,393.9 $1,736.2 31.3% 14.2% 7.8x 6.9x 16.2x 13.7x

Pentair Plc PNR $38.96 $6,587.3 $7,721.9 35.3% 21.0% 13.4x 12.4x 16.8x 15.2x

Wabco Holdings Inc. WBC $132.69 $6,809.1 $6,984.3 30.7% 17.5% 11.2x 10.9x 17.4x 16.8x

Welbilt, Inc. WBT $16.03 $2,241.9 $3,648.4 35.9% 18.3% 11.9x 10.6x 20.9x 16.4x

Max $139.68 $14,283.4 $17,276.2 54.8% 29.3% 16.9x 16.0x 26.6x 23.7x

Avg. $71.43 $5,790.0 $7,006.9 37.0% 19.9% 12.3x 11.4x 18.8x 16.9x

Min $16.03 $1,393.9 $1,736.2 28.0% 12.6% 7.8x 6.9x 11.1x 10.3x

Middleby Corp MIDD $134.91 $7,684.4 $9,495.5 36.9% 19.9% 13.7x 12.6x 20.8x 17.6x

Source: Thomson Reuters

EV/EBITDA valuation Based on our EV/EBITDA valuation, Middleby’s shares have over 25.0% downside. Our base valuation assumptions include:

• Weaker-than-expected revenue growth: We are concerned consensus FY 19 revenue growth of 12.0% is too optimistic given (1) the Company annualized the Taylor acquisition in Q2 19, (2) the base rates from Q2 19 through Q4 19 is one of the most difficult comp sets in years, and (3) organic growth over the last two years has been low single-digits at best. In addition, we are concerned a softer overall demand environment may be an additional headwind. Our FY 19 revenue growth estimate of 6.0% assumes Q1 19 organic revenue growth of 2.9% will continue at a similar run-rate throughout FY 19 in addition to a few percentage points from M&A. We believe this is a very conservative estimate and wouldn’t be surprised if revenue growth is closer to low single-digits/flat; in which case downside risk to shares would be significantly greater.

• Lower-than-expected non-GAAP EBITDA margin expansion: Our valuation assumes a FY 19 non-GAAP EBITDA margin of 21.5%, 100 basis points below consensus but still a 70 basis point increase from FY 18. Consensus expects FY 19 EBITDA to increase $119.0 million (20.9%) year-over-year, the largest absolute increase in over a decade. In addition to the dynamics discussed above, we believe lower margin M&A will continue to weigh on profitability. Record inventory levels and DSI will be an incremental headwind. Moreover, we believe the Company’s historical practice of excluding restructuring costs from non-GAAP EBITDA does not accurately present underlying profitability given M&A is integral to the Company’s growth strategy. Over the last five-years, restructuring expenses averaged approximately 0.8% of revenue. Accordingly, we added back 75.0% of the estimated FY 19 restructuring charges (i.e. FY 19 revenue x 0.8% x 75.0%) to reach a sustainable non-GAAP EBITDA.

• Slight EV/EBITDA multiple contraction: Based on the two components above, we believe shares should trade closer in-line to the peer group average rather than at a premium. Accordingly, our analysis uses the peer group average EV/EBITDA of 12.3x vs. the consensus multiple of 13.7x.




TriFin Advisors

We believe these assumptions are very conservative given they assume Middleby will continue to grow mid-single-digits with margin expansion and slight multiple contraction. In our bear case, we assume FY 19 revenue growth will be 3.0% (in-line with Q1 19 organic growth), non-GAAP EBITDA margin will be flat, and a 5.0% discount to the peer group EV/EBITDA; yielding a downside of 36.6%. Downside risk could be significantly greater if FY 19 revenue and/or margins decline.

EV/EBITDA Consensus

FY 19E TriFin (Base)

FY 19E TriFin (Bear)

FY 19E

(in millions, except share price)

Revenue $3,051.0 $2,886.3 $2,804.6

Year-over-year 12.0% 6.0% 3.0%

Non-GAAP EBITDA margin 22.5% 21.5% 20.9%

Non-GAAP EBITDA $688.0 $620.6 $586.1

(-) 75% of restructuring expenses -- ($17.5) ($17.5)

Sustainable non-GAAP EBITDA $688.0 $603.1 $568.6

EV/EBITDA multiple 13.7 12.3 11.7

Enterprise value $9,433.42 $7,418.0 $6,644.1

Less: debt ($1,892.0) ($1,892.0) ($1,892.0)

Add: cash $81.0 $81.0 $81.0

Equity value $7,622.4 $5,607.0 $4,833.1

Shares outstanding (diluted) 56.5 56.5 56.5

Share price $134.91 $99.24 $85.54

Current price $134.91 $134.91 $134.91

Downside -- (26.4%) (36.6%)

Source: Estimates

P/E valuation Based on our P/E valuation, Middleby’s shares have over 25.0% downside. Our base valuation assumptions include:

• Weaker-than-expected revenue and lower-than-expected non-GAAP EBITDA margin: Our P/E analysis uses the same revenue and margin assumptions in our EV/EBITDA valuation.

• P/E multiple contraction to be in-line with peers, but still above market: We believe shares should trade closer in-line to the peer group average rather than at a premium. Accordingly, our analysis uses the peer group average P/E of 18.8x vs. the consensus multiple of 20.8x.

As stated above, our bear case assumes FY 19 revenue growth will be 3.0% (in-line with Q1 19 organic growth), non-GAAP EBITDA margin will be flat, and a 5.0% discount to the peer group P/E; yielding a downside of 35.7%.




TriFin Advisors

P/E Consensus

FY 19E TriFin (Base)

FY 19E TriFin (Bear)

FY 19E

(in millions, except share price)

Non-GAAP EBITDA $688.0 $603.1 $568.6

(-) depreciation and amortization ($117.0) ($117.0) ($117.0)

Non-GAAP EBIT $571.0 $486.1 $451.6

Interest expense $96.0 $96.0 $96.0

Income before income taxes $475.0 $390.1 $355.6

Tax rate 22.8% 22.8% 22.8%

Estimated income taxes $108.5 $89.1 $81.2

Non-GAAP net income $366.5 $301.0 $274.4

Shares outstanding (diluted) 56.5 56.5 56.5

Non-GAAP earnings $6.49 $5.33 $4.86

P/E multiple 20.8 18.8 17.9

Share price $134.91 $100.16 $86.74

Current price $134.91 $134.91 $134.91

Downside -- (25.8%) (35.7%)

Source: Estimates

Blended price target suggests over 25.0% downside

Blended Price Target Base Bear

EV/EBITDA $99.24 $85.54

P/E $100.16 $86.74

Blended Share price $99.70 $86.14

Current price $134.91 $134.91

Downside (26.1%) (36.1%)

Source: Estimates




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Appendix Acquisition history

Company Acquired Segment Date Purchase

Price Annual

Revenue Price/ Sales

($ in millions) TurboChef Technologies, Inc. (Jan 2009) Commercial Foodservice Q1 09 $160.3 $85.0 1.9x

CookTek LLC (Apr 2009) Commercial Foodservice Q2 09 $9.0 $10.0 0.9x

Anetsberger Brothers, Inc. (Apr 2009) Commercial Foodservice Q2 09 $3.9 $10.0 0.4x

Doyon Equipment Inc. (Dec 2009) Commercial Foodservice Q4 09 $6.4 $15.0 0.4x

PerfectFry Company (Jul 2010) Commercial Foodservice Q3 10 $4.9 $5.0 1x

Cozzini Inc. (Jul 2010) Food Processing Q3 10 $23.0 $30.0 0.8x

J.W. Beech Pty. Ltd. (Apr 2011) Commercial Foodservice Q2 11 $13.0 $10.0 1.3x

Lincat Group PLC (May 2011) Commercial Foodservice Q2 11 $82.1 $50.0 1.6x

Danfotech Inc. (Jul 2011) Food Processing Q2 11 $7.6 -- --

Maurer-Atmos GmbH (Jul 2011) Food Processing Q3 11 $3.3 -- --

Auto-Bake Pty. Ltd. (Aug 2011) Food Processing Q3 11 $22.5 -- --

Danfotech + Maurer-Atmos + Auto-Bake Food Processing Q3 11 $33.4 $45.0 0.7x

F.R. Drake Company (Dec 2011) Food Processing Q4 11 $21.7 $15.0 1.4x

Armor Inox, S.A. (Dec 2011) Food Processing Q4 11 $28.7 $25.0 1.1x

Turkington USA, LLC (Mar 2012) Food Processing Q1 12 $10.3 -- --

Stewart Systems Global, LLC (Sep 2012) Food Processing Q3 12 $27.8 $30.0 0.9x

Nieco Corporation (Oct 2012) Commercial Foodservice Q4 12 $23.9 $20.0 1.2x

Viking Range Corporation (Jan 2013) Residential Kitchen Q1 13 $361.7 $200.0 1.8x

Viking's former distributors (Apr - Jun 2013) Residential Kitchen Q2 13 $23.6 -- --

Celfrost Innovations Pvt. Ltd. (Oct 2013) Commercial Foodservice Q4 13 $11.2 $20.0 0.6x

Automatic Bar Controls, Inc. (Dec 2013) Commercial Foodservice Q4 13 $74.1 $30.0 2.5x

Market Forge Industries, Inc. (Jan 2014) Commercial Foodservice Q1 14 $7.0 $15.0 0.5x

Viking's former distributors (Jan 2014) Residential Kitchen Q1 14 $44.5 -- --

Processing Equipment Solutions, Inc. (Mar 2014) Food Processing Q1 14 $15.0 $15.0 1x

Concordia Coffee Company, Inc. (Sept 2014) Commercial Foodservice Q3 14 $12.5 $15.0 0.8x

U-Line Corporation (Nov 2014) Residential Kitchen Q4 14 $142.0 $60.0 2.4x

Desmon Food Service Equipment Company (Jan 2015) Commercial Foodservice Q1 15 $13.5 $15.0 0.9x

J. Goldstein & Co. Pty. Ltd. (Jan 2015) Commercial Foodservice Q1 15 $27.4 $25.0 1.1x

Marsal & Sons, Inc (Feb 2015) Commercial Foodservice Q1 15 $5.5 $5.0 1.1x

High Speed Slicing business unit of Marel (Apr 2015) Food Processing Q2 15 $12.6 $15.0 0.8x

Induc Commercial Electronics Co. Ltd. (May 2015) Commercial Foodservice Q2 15 $10.6 $10.0 1.1x

AGA Rangemaster Group plc (Sep 2015) Residential Kitchen Q3 15 $201.0 $400.0 0.5x

Lynx Grills, Inc. (Dec 2015) Residential Kitchen Q4 15 $83.8 $50.0 1.7x

Follett Corporation (May 2016) Commercial Foodservice Q2 16 $207.7 $140.0 1.5x

Emico Automated Bakery Equipment (May 2016) Food Processing Q2 16 $1.0 -- --

Burford Corp. (May 2017) Food Processing Q2 17 $14.8 $15.0 1x

Sveba Dahlen Group (Jun 2017) Commercial Foodservice Q2 17 $81.4 $60.0 1.4x

CVP Systems (Jun 2017) Food Processing Q2 17 $29.8 $20.0 1.5x

QualServ Solutions (Aug 2017) Commercial Foodservice Q3 17 $39.9 $100.0 0.4x

Globe Food Equipment (Oct 2017) Commercial Foodservice Q4 17 $105.0 $50.0 2.1x

L2F Inc. (Oct 2017) Commercial Foodservice Q4 17 $7.5 -- --

Scanico A/S (Dec 2017) Food Processing Q4 17 $34.5 $30.0 1.2x

Hinds-Bock (Feb 2018) Food Processing Q1 18 $25.4 $15.0 1.7x

JoeTap (Mar 2018) Commercial Foodservice Q1 18 $3.2 -- --

Firex S.r.l (Apr 2018) Commercial Foodservice Q2 18 $53.7 $20.0 2.7x

Ve.Ma.C. S.r.l. (Apr 2018) Food Processing Q2 18 $10.5 $15.0 0.7x

Josper S.A. (May 2018) Commercial Foodservice Q2 18 $39.3 $20.0 2x

Taylor Company (Jun 2018) Commercial Foodservice Q2 18 $1,000.0 $315.0 3.2x

M-TEK (Oct 2018) Food Processing Q4 18 $20.0 $10.0 2x

EVO America (Dec 2018) Commercial Foodservice Q4 18 $12.5 $8.0 1.6x

Crown Food Service Equipment (Dec 2018) Commercial Foodservice Q4 18 $42.0 $20.0 2.1x





TriFin Advisors

Disclaimer This report expresses our research opinions based on publicly available information from sources believed to be accurate and reliable. The information is presented “as is,” without warranty of any kind – whether express or implied. TriFin Advisors LLC (“TriFin”) makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report is for information purposes only and is not intended as an official confirmation of any transaction. All market prices, data, and other information are not warranted as to completeness or accuracy and are subject to change without notice. Forecasts, estimates, and other forward-looking statements contained in this report are for illustrative purpose only and are subject to change without notice. This report is neither investment nor accounting advice. This report is neither a solicitation nor an offer to buy or sell securities and it does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. TriFin and/or its principals, members, affiliates, associates, and employees may have either a long or short position in the securities of companies discussed in this report and therefore stand to realize gains in the event of a share price movement toward our price target. Following publication, TriFin may transact in the securities of the companies covered herein. All expressions of opinion are subject to change without notice and TriFin does not undertake to update this report or any information therein. All rights reserved. This report may not be reproduced or disseminated in whole or in part without the prior written consent of TriFin Advisors LLC.



the middleby corporation initiation (midd)

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