The Middleby Corporation

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The Middleby Corporation

1400 Toastmaster Drive
Elgin, Illinois 60120
U.S.A.
(847) 741-3300
Fax: (847) 741-0015
Web site: http://www.middleby.com

Public Company
Incorporated: 1985
Employees: 965
Sales: $124.8 million (1996)
Stock Exchanges: NASDAQ
SICs: 3556 Food Products Machinery; 6719 Holding Companies, Not Elsewhere Classified

The Middleby Corporation is a major designer, manufacturer, and marketer of a wide range of commercial and institutional foodservice equipment. Its products include conveyor and infrared ovens used in the quick-service pizza industry; heavy-duty cooking equipment such as ranges, convection ovens, broilers, and grills used in restaurants and other institutional kitchens; commercial toasters, mixers, griddles, and other cooking equipment used in quick-service and full-service restaurants; and other innovative foodservice products that Middleby either manufactures or distributes. According to its annual report, The Middleby Corporation is “the brand behind America’s best-loved, foodservice brands.”

Middleby sells to a diverse group of customers of all sizes, whose “success depends on serving well-prepared menu items that keep diners coming back for more.” The company claims that its customers lead the fast-growing segments of the foodservice industry: full-service restaurants, quick-service chains, supermarket and convenience stores, resorts, hotels, stadiums, schools, hospitals, long-term care and correctional facilities, and other institutions. It counts among its customers the top 100 quick-service chains.

Since its predecessor company acquired the Middleby Marshall Oven Co., Inc., in 1983, The Middleby Corporation has grown from a company that essentially sold conveyor ovens to customers in the United States to one that offers a broad line of cooking equipment to customers around the world. Middleby entered the rapidly growing international foodservice market around 1990, and by 1996 international sales accounted for 37 percent of the company’s total sales. Fueling the international growth of the foodservice market has been the expansion of American restaurant chains, especially the quick-service chains, into other countries.

Incorporated in 1985

The Middleby Corporation was incorporated in Delaware on May 14, 1985, as a successor to TMC Industries Ltd. From 1978 to 1985, TMC Industries was the parent company of WWG Industries, Inc., a Georgia-based carpet manufacturer. TMC Industries had acquired WWG Industries in 1978 for $100 million from Champion International Corporation. High interest rates and a collapsing housing market forced WWG Industries into Chapter 11 bankruptcy protection in the early 1980s. When it emerged from Chapter 11 protection in 1983, largely under the guidance of William F. Whitman, Jr., a former PaineWebber executive, WWG Industries acquired the Middleby Marshall Oven Co., Inc., in a highly leveraged deal.

Middleby Marshall was a well-established manufacturer of conveyor ovens with a reputation for high quality products. It was founded in 1888 by Joseph Middleby, who owned a bakery supply firm, and John Marshall, a licensed engineer. The business was created to produce custom designed movable ovens. Up to the time it was acquired in 1983, the company specialized in developing and introducing new innovations in baking technology and equipment. In 1976 descendants of the founding families sold the company to Stewart Systems, Inc., a Dallasbased baking systems engineering firm.

The 1983 sale of Middleby Marshall was engineered by David P. Riley, who managed the unit for Stewart Systems, and William F. Whitman, Jr. Riley first saw the possibility of splitting off Middleby Marshall from Stewart in 1982 and contacted an investment banker about a possible leveraged buyout. A year later Whitman emerged as a partner after steering WWG out of bankruptcy. Following the acquisition of Middleby Marshall by WWG, Whitman held 51 percent of the new company and became chairman of the board, and Riley was named president and, later, chief executive officer. Recalling the acquisition, Whitman told Crain’s Chicago Business, “I liked the company because of its proprietary, patented oven, with its strong margins. The company also has a sterling, almost Rolls Royce, reputation.”

The leading pizza chains, notably Domino’s Pizza Inc. and the Pizza Hut subsidiary of PepsiCo Inc., recognized the superiority of Middleby Marshall’s conveyor ovens, whose greater cooking speed and patented cooking methods enabled them to guarantee faster pizza deliveries. With WWG Industries as Middleby Marshall’s parent company, Middleby Marshall benefited from WWG’s net loss carry-forward tax benefits, which were valued at $50 million, and its status as a public company.

First Years Difficult for The Middleby Corporation

The first two years for Middleby were marked by flat sales and earnings, and the company reported a net loss of $1.1 million on net sales of $24.8 million in 1986. Cooking ovens were the company’s core business, accounting for approximately 75 percent of net sales. Its recent acquisition of Reynolds Electric Co. for $1.4 million in cash gave Middleby a presence in the commercial mixer business, but it was facing stiff competition from Hobart Corporation, which held an 80 percent share of the $100 million commercial mixer market. Middleby looked to its core business for future growth and enjoyed 40 percent margins on the sales of its cooking ovens.

In November 1986 Middleby divested itself of its revolvingtray oven business, Culter Industries, Inc., for $200,000. The unit had been a significant drag on earnings, accounting for only 12 percent of sales while occupying some 35 percent of manufacturing space. Following the sale, earnings improved with the help of other cost-cutting measures, and in 1987 Middleby reported net income of $629,000 on net sales to $29.1 million, a 17 percent increase in net sales over the previous year.

Achieved Record Sales and Net Income in 1988

Middleby posted record sales in 1988, up 18 percent over the previous year to $34.2 million, and net income of $4.2 million, a peak it was unable to match in subsequent years (through 1996). Middleby was able to improve its balance sheet and eliminate much of its debt, significantly reducing interest expense and improving the bottom line of its income statement. At the end of 1986, debt had accounted for 97 percent of Middleby’s capital structure. In November 1987 the company was able to refinance and reduce debt to 61 percent, with 25 percent preferred stock and 14 percent shareholders’ equity accounting for the company’s remaining capitalization. Middleby’s strong performance in 1988 then allowed it to prepay all of its revolving bank debt more than four years ahead of schedule, so that by year-end 1988 debt represented only 34 percent of the company’s capitalization.

On July 13, 1988, the company’s stock, which had been trading on NASDAQ over-the-counter markets, was listed on the American Stock Exchange (AMEX). In December the company began a cash dividend program, starting with a $.02 quarterly dividend and a special year-end dividend of $.03 per share. To improve the liquidity and marketability of the company’s stock, a five-for-four common stock split was effected June 1, 1988. The dividends would be suspended in 1991, however, and no further dividends have been paid.

At this time, the company’s principal product was the Pacesetter oven, which was sold to what was then called “fastfood chain” markets and, especially, pizza makers. Middleby’s strategy was to broaden the acceptance of Pacesetter ovens in other foodservice markets, while at the same time broadening its product base. Other products included conventional deck ovens (Middleby entered the market in 1988 with a South Koreamanufactured product), a proprietary oven ventilation system (introduced in 1987), and Titan brand commercial electric food mixers and related accessories.

Looking ahead, overall market conditions were promising. Foodservice sales were $213 billion in 1988, or about five percent of the gross national product (GNP). Fast-food chains were the fastest growing subgroup with $63 billion in sales projected for 1989. Pizza sales were greater than $20 billion annually, and the two largest chains, Pizza Hut and Domino’s, were Middleby’s two largest customers.

Major Acquisition in 1989

Full of confidence in the future growth of the foodservice market and not anticipating the recession of the early 1990s, Middleby acquired the Foodservice Equipment Group of Hussmann Corporation, a subsidiary of Whitman Corporation, for $62.5 million on July 14, 1989. The acquisition included four established businesses with well-known industry brand names: Southbend (heavy duty cooking equipment), Toastmaster (cooking and warming equipment), Victory (refrigeration), and Seco (holding and serving systems). It should be noted that an unaffiliated company, Toastmaster, Inc., owned the rights to the Toastmaster brand name for consumer products; Toastmaster products manufactured by Middleby were limited to commercial products for the foodservice industry.

Company Perspectives:

Our mission is to be a world class manufacturer, distributor and provider of premium equipment and services for the foodservice industry. Middleby is dedicated to being the leading brand behind the market’s favorite foodservice brands. From concept to kitchen, our team is committed to providing the best solutions for our customers worldwide.

To finance the acquisition, Middleby took on a significant amount of debt, again raising its annual interest expense. It entered into a $77.5 million credit agreement with a major lending institution. It reduced its debt somewhat by applying the proceeds from the sale of its Southern Equipment Company Division of St. Louis in February 1990 for $7.9 million in cash to a group of private investors that included managers of the company.

After the acquisition, the new businesses reported a $10 million loss for the first half of 1989, three times the amount originally forecast. In 1990 Middleby brought a lawsuit against Whitman, parent of Hussmann, over the Foodservice Equipment Group acquisition. The suit was settled in Middleby’s favor in October 1992, when the jury awarded Middleby $27 million. The award was later set aside by a judge on a technicality, but Middleby and Hussmann reached a $19.5 million cash settlement out of court in 1993.

In the suit, Middleby claimed that Hussmann’s overly optimistic financial projections led it to pay too much for the companies. The losses greatly affected Middleby’s financial performance over the next several years. Even though 1989 sales more than doubled to $72.2 million from $34.2 million in 1988, net income dropped 86 percent to only $573,000. While the reduction of net income was due in part to the poor performance of the newly acquired subsidiaries, Middleby had also assumed a gigantic debt in the acquisition and was saddled with $3.6 million in interest expense in 1989, more than three times its 1988 level of about $1 million.

Middleby’s growing interest expense continued to negatively impact the company’s bottom line in 1990, a year in which the company also experienced flat sales volume in a highly competitive environment. Interest expense grew to $8.3 million in 1990. The company was forced to take drastic costcutting measures during the year, reducing the work force at continuing operations by 22 percent and slashing administrative and overhead costs by 25 percent. Still, Middleby reported a net loss of $978,000 on record sales of $113 million for the year.

International Growth in 1990s

In April 1990 Middleby acquired a majority interest in Asbury Associates Inc., a foodservice equipment manufacturer and distributor based in Manila, the Philippines. It was a key step in building an international organization. Middleby increased its interest in Asbury to 80 percent in 1991, and it was soon expanded from serving the Pacific basin to become Middleby’s export distributor throughout the world, except Canada, where Middleby owned a distributor called Escan. In 1991 Asbury established a separate unit, Fab-Asia, Inc., in metropolitan Manila to fabricate kitchen equipment for the Asian market and to produce some components for Middleby’s domestic factories. Asbury’s new corporate headquarters were opened in Miramar, Florida, in October 1992.

The year 1991 was one of international growth that was offset by declining domestic sales. International business increased by 33 percent over 1990, accounting for 21 percent of Middleby’s total sales in 1991. The next year Asbury’s sales doubled as it expanded sales in Latin America, the Middle East, and Europe. Middleby reported higher net sales in 1992 of $110 million, up from $103 million in 1991, and reduced its net loss for the year to $1.9 million from $7.5 million in 1991.

On August 21, 1992, Middleby completed the sale of its Seco division, which was one of the units acquired from Hussmann in 1989, to a newly formed company called Seco Products Corporation. Net proceeds of $11 million were used to reduce debt. Middleby retained a minority interest in the new company, which it later sold in 1995 for $1.4 million net of expenses.

During the first half of 1992 Middleby consolidated its foodservice equipment divisions, closing plants in Niles and Morton Grove, Illinois, and consolidating production at an Elgin, Illinois facility to save nearly $2 million in annual overhead expenses. The previous year Middleby had consolidated the Middleby Marshall and Toastmaster divisions into a newly formed Cooking Systems Group. During 1991 Middleby had also closed its Montreal manufacturing operations and dissolved its U.K. distribution center.

Middleby Cooking Systems Group Established in 1993

In 1993 management was consolidated at the Elgin-based Middleby Cooking Systems Group, the company’s largest operating unit. David P. Riley, parent company Middleby’s president and CEO, also assumed presidency of the newly formed Middleby Cooking Systems Group. Middleby Marshall became part of Middleby Cooking Systems, with Middleby Marshall’s General Manager John Hastings named corporate executive vice-president, chief financial officer, and vice-president of administration. Two other financial executives left the company as part of the consolidation. Hastings told Crain’s Chicago Business, “The management changes have basically been driven by the desire to reduce overhead and streamline decision-making.”

As part of its strategy to introduce new products into a relatively flat foodservice equipment market, Middleby formed a joint venture in 1993 with Rational GmbH, a German manufacturer of high-tech oven equipment that combined steam and convection cooking capabilities. The joint venture, called Rational Cooking Systems International, Inc., and headquartered in Schaumburg, Illinois, targeted the expanding U.S. market for high-tech ovens. Middleby would distribute the German company’s product under the trade name Rational Combi-Steamer. Middleby marketed both compact floor and countertop units that were capable of multiple cooking processes, including cooking, baking, roasting, steaming, poaching, blanching, boiling, basting, grilling, and pressure cooking.

Returned to Profitability in 1994

Middleby did not return to profitability until 1994, reporting net income of $3.0 million on net sales of $130.0 million. It noted in its annual report that results from operations confirmed the expansion of margins and operating income increased fivefold. (Middleby had reported net income of $3.4 million in 1993, but that was helped by a one-time $7.7 million income item related to the settlement of its 1990 lawsuit with Hussmann and Whitman.) The balance sheet was restructured with an influx of new capital, and a new incentive system was put into place to link managers’ compensation directly to shareholder return.

Middleby also noted in its annual report that it had repositioned itself to participate “in the rapid worldwide expansion of the hotel and fast food restaurant chains.” Through its export management company, Asbury Associates, Middleby had the “unique capacity to offer turnkey, ’concept to kitchen floor’ packages worldwide.” In 1994 international sales accounted for one-quarter of total sales.

As part of a major expansion of the company’s manufacturing capabilities in the Philippines, Middleby Philippines Corporation (MPC) was incorporated in 1995. Middleby owned 80 percent of MPC, with the remaining 20 percent in the hands of local management. MPC’s predecessor, Fab-Asia, Inc., was formed in 1991, with Middleby owning a majority interest. Middleby increased its ownership to 80 percent in 1994, and the operating assets of Fab-Asia were transferred to MPC on January 1, 1996. In April 1996 it moved to a new facility. MPC primarily served the Asian operations of major foodservice chains and hotels.

On January 23, 1997, Middleby sold its Victory Refrigeration Company to an investor group led by local management at Victory for approximately $11.8 million. Middleby had acquired Victory as part of its Foodservice Equipment Group acquisition in 1990. When Middleby’s previous years’ earnings were restated to exclude Victory, international sales accounted for an even greater proportion of the company’s earnings.

For fiscal 1996, international sales accounted for approximately 37 percent of total sales, up from 36 percent of the previous year’s restated sales. With operations organized under two international business units and two domestic units, Middleby reported net earnings from continuing operations of $473,000 on net sales of $124.8 million in 1996. Earnings were adversely affected by one-time losses from discontinued operations (Victory) of approximately $1.1 million. Income from operations was $8.7 million, more than enough to offset the company’s interest expense of $4.4 million.

Recognizing the need to improve its capital structure by reducing debt and increasing shareholder equity, Middleby announced a public offering of stock in September 1997 at a price of $10 per share. Management hoped to raise approximately $18.5 million, which would be used in part to reduce debt. The company’s stock had been trading on the NASDAQ National Market since November 1995, when it switched from the American Stock Exchange. The reason for the switch was to “provide broader liquidity for our shareholders and offer greater coverage within the investment community,” according to Chairman Whitman. Following Middleby’s 1997 public offering, at least one investment firm began covering the stock, giving it an “outperform-significantly” rating.

Principal Operating Units

Middleby Marshall, Inc. (Elgin, Illinois); Middleby Cooking Systems Group (Elgin, Illinois); Southbend (Fuquay-Varina, North Carolina); Asbury Associates (Miramar, Florida); Middleby Philippines Corporation.