MIDD

The Middleby Corporation (MIDD)

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Middleby Corporation (MIDD)

Q1 2008 Earnings Call

May 8, 2008 11:00 am ET

Executives

Tim Fitzgerald - Chief Financial Officer

Selim A. Bassoul - Chairman of the Board, President, Chief Executive Officer

Analysts

Peter Lisnic - Robert W. Baird & Co.

Anton Brenner - Roth Capital Partners LLC

Amit Daryanani - RBC Capital Markets

Jamie Clement - Sidoti & Co.

Jason Rodgers – Great Lakes Review

Mark E. Grzymski - TimesSquare Capital Management, Inc.,

Presentation

Operator

Good morning, my name is Tatiana and I will be your conference operator today. At this time I would like to welcome everyone to the Middleby Corporation First Quarter Conference Call. (Operator Instructions)

Tim Fitzgerald

Good morning and thank you for attending today’s conference call. I am Tim Fitzgerald, CFO of the Middleby Corporation and joining me today is Selim Bassoul, our Chairman and CEO. I have some initial comments about the company’s 2008 first quarter results and then we will open up the conference call for questions and answers.

We are pleased to report our 25th consecutive quarter over quarter record net earnings. The first quarter results included the impact from five acquisitions complete during the last 12 months, including Jade Range acquired on April 1, 2007, Carter Hoffman on June 30, 2007, MP Equipment on July 2, Wells Bloomfield on August 3, and Star Manufacturing on December 31, 2007.

The first quarter results did not reflect the impact of Giga Grandi Cucine and FriFri which were completed on April 22 and April 23, subsequent to the company’s first quarter.

Net sales in the first quarter increased 52% to $160.9 million as compared to $105.7 million in the first quarter of 2007. Sales from the acquisitions completed over the last 12 months amounted to $55.3 million in the quarter.

Excluding the impact of acquisitions, sales were flat for with the prior year first quarter and were comprised of a 2% growth in sales of commercial food service equipment group, while domestic sales were affected by a slowing economy, international sales for that group increased 16%. The rise in international sales reflects strong growth in emerging markets with US and international restaurant chains, growth in new products including a new Combi line from Houno in a positive effect of the weaker US dollar.

Sales in the food processing group were 16% lower and reflected delayed customer purchases during the quarter due to economic conditions and the timing of impact of large orders which can cause quarter-to-quarter variability for his business.

Gross profit increased from $41.1 million in the first quarter of 2007 to $58.9 million in 2008 on higher sales volumes and the gross margin rate decreased from 38.9% to 36.6%. The gross margin rate for the quarter includes a $1.5 million charge to adjust inventories at Star to share market value. The gross margin rate also reflects the dilutive impact of the acquisitions completed in the last 12 months, as gross margins at these companies continue to improve.

The newly acquired companies had an average gross margin of 33%, reflecting improvement from 29% in the fourth quarter of 2007 and 25% in the third quarter of 2007. Excluding the impact of these recent acquisitions gross margins would have been 40% during the quarter, despite the continuing challenges of rising fuel costs.

The recent acquisitions will continue to dilute margins in the first half of 2008; however we should see continued improvement in margins if those operations and integration initiatives implemented are fully realized.

Selling expenses increased $5.1 million to $16.2 million and general and administrative expenses increased $5.5 million to $16.6 million. Of the $10.6 million increase in selling general and administrative expenses approximately $9.7 million was attributable to the recently acquired companies.

Interest and deferred financing costs increased from $1.2 million in the first quarter of 2007 with $3.7 million in the first quarter of 2008 as a result of higher debt balances associated with the recent acquisitions and other non-operating expenses of $400,000 included $200,000 of unrealized foreign exchange losses and $200,000 of unrealized losses on interest rate swaps.

The provision for income taxes of $8.7 million was reported at a 40% effective rate, as compared to a $6.9 million provision at 39%. The increased tax rate reflects an increase in tax reserves of approximately $275,000 recorded in accordance with accounting standard 10-48 primarily for increased end tax exposures. These increased reserve requirements are due in part to growth of the company through acquisitions.

Net earnings for the 2008 first quarter increased 23% to $13.1 million from $10.7 million in the prior year and diluted earnings per share increased 20% to $0.77 per share from $0.64 per share in the prior year quarter.

Turning to the balance sheet and first quarter cash flows, the net change in the balance sheet from year-end reflects the impact of the 2008 acquisition of Star. The Star acquisition added $11 million to accounts receivable, $11 million to inventory, $7.9 million to property plant and equipment, $6.5 million of accounts payable and $10.7 million of accrued expenses. Additionally, we recorded $1.1 million of goodwill and $73.8 million of other intangible assets associated with this acquisition.

Other changes in the balance sheet accounts primarily reflect normal variations driven by seasonal work and capital requirements.

Cash flows provided by operating activities amounted to $12.6 million during the quarter, as compared to $4.4 million of cash utilized in the prior year first quarter. Non-cash expenses added back in calculating operating cash flows included depreciation and amortization of $3.5 million for the quarter and non-cash share based compensation costs of $2.3 million.

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