What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-03 compared with 2020-02-26 · 165 added, 145 removed, 248 unchanged (56% of the section changed)

15 unchanged sentences

• the state of the credit markets, including mortgages, home equity loans and consumer credit;

the company's ability to maintain and grow the Viking reputation and brand image;

• intense competition in the company's business segments including the impact of both new and established global competitors;

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Fiscal Year Ended (1)

2020 2019 2018

Sales Percent Sales Percent Sales Percent

Business Segments:

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Residential Kitchen 565,706 22.5 574,150 19.4 603,523 22.2

Total $ 2,513,257 100.0 % $ 2,959,446 100.0 % $ 2,722,931 100.0 %

(1) The company's fiscal year ends on the Saturday nearest to December 31.

2 unchanged sentences

Fiscal Year Ended (1)

2020 2019 2018

Net sales 100.0 % 100.0 % 100.0 %

Cost of sales 64.9 62.7 63.1

Gross profit 35.1 37.3 36.9

Selling, general and administrative expenses 21.2 20.1 19.8

2 unchanged sentences

Gain on sale of plant (0.1) — —

Impairment of intangible assets

Impairments 0.6 — —

Income from operations 12.9 17.4 16.4

Interest expense and deferred financing amortization, net 3.1 2.9 2.2

Net periodic pension benefit (other than service costs)

Other (income) expense, net

Net periodic pension benefit (other than service cost & curtailment) (1.6) (1.0) (1.4)

Curtailment loss 0.6 — —

Other expense (income), net 0.1 (0.1) 0.1

Earnings before income taxes 10.7 15.6 15.5

Provision for income taxes 2.4 3.7 3.9

Net earnings 8.3 % 11.9 % 11.6 %

(1) The company's fiscal year ends on the Saturday nearest to December 31.

Fiscal Year Ended January 2, 2021 as Compared to December 28, 2019

Net sales in fiscal 2020 decreased by $446.1 million, or 15.1%, to $2,513.3 million as compared to $2,959.4 million in fiscal 2019.

Net sales increased by $72.3 million, or 2.4%, from the fiscal 2019 acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Pacproinc, Brava, and Synesso and the fiscal 2020 acquisitions of RAM, Deutsche, Wild Goose, and United Foodservice Equipment Zhuhai.

Excluding acquisitions, net sales decreased $518.4 million, or 17.5%, from the prior year.

The impact of foreign exchange rates on foreign sales translated into U.S.

Dollars for fiscal 2020 increased net sales by approximately $0.2 million.

Excluding the impact of foreign exchange and acquisitions, sales decreased 17.5% for the year, including a net sales decrease of 26.5% at the Commercial Foodservice Equipment Group, a net sales increase of 5.9% at the Food Processing Equipment Group and a net sales decrease of 2.9% at the Residential Kitchen Equipment Group.

• Net sales of the Commercial Foodservice Equipment Group decreased by $474.0 million, or 23.9%, to $1,510.3 million in fiscal 2020 as compared to $1,984.3 million in fiscal 2019.

Net sales from the acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Synesso, RAM, Deutsche, Wild Goose, and United Foodservice Equipment Zhuhai, which were acquired on April 1, 2019, April 1, 2019, June 15, 2019, November 27, 2019, January 13, 2020, March 2, 2020, December 7, 2020, and December 18, 2020, respectively, accounted for an increase of $53.1 million during fiscal 2020.

Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group decreased $527.1 million, or 26.6%, as compared to the prior year.

Excluding the impact of foreign exchange and acquisitions, net sales decreased $525.6 million, or 26.5% at the Commercial Foodservice Equipment Group.

Domestically, the company realized a sales decrease of $266.9 million, or 20.0%, to $1,067.9 million, as compared to $1,334.8 million in the prior year.

This includes an increase of $43.0 million from recent acquisitions.

Excluding acquisitions, the net decrease in domestic sales was $309.9 million, or 23.2%.

International sales decreased $207.1 million, or 31.9%, to $442.4 million, as compared to $649.5 million in the prior year.

This includes the increase of $10.1 million from recent acquisitions and a decrease of $1.5 million related to the unfavorable impact of exchange rates.

Excluding acquisitions and foreign exchange, the net sales decrease in international sales was $215.7 million, or 33.2%.

The decline in both domestic and international sales reflects the impacts of COVID-19.

This was most prevalent in the second quarter of 2020 and despite decline over prior year gradually recovered in the second half of the year.

• Net sales of the Food Processing Equipment Group increased by $36.3 million, or 9.1%, to $437.3 million in fiscal 2020, as compared to $401.0 million in fiscal 2019.

Excluding the impact of foreign exchange and the acquisition of Pacproinc, acquired July 16, 2019, net sales increased $23.8 million, or 5.9% at the Food Processing Equipment Group.

Domestically, the company realized a sales increase of $64.5 million, or 26.2%, to $311.1 million, as compared to $246.6 million in the prior year.

Excluding the acquisition, net sales increased $51.8 million, or 21.0%.

The increase in domestic sales reflects growth in protein equipment sales.

International sales decreased $28.2 million, or 18.3%, to $126.2 million, as compared to $154.4 million in the prior year.

This includes a decrease of $1.1 million related to the unfavorable impact of exchange rates.

Excluding the acquisition and foreign exchange, the net sales decrease in international sales was $28.0 million, or 18.1%.

The decrease in international revenues reflects declines in sales primarily due to the disruptive impact of COVID-19 on our customers' operations.

• Net sales of the Residential Kitchen Equipment Group decreased by $8.4 million, or 1.5%, to $565.7 million in fiscal 2020, as compared to $574.1 million in fiscal 2019.

Excluding the impact of foreign exchange, the acquisition of Brava, acquired November, 19, 2019, net sales decreased $16.8 million, or 2.9% at the Residential Kitchen Equipment Group.

Domestically, the company realized a sales increase of $11.2 million, or 3.1%, to $373.9 million, as compared to $362.7 million in the prior year.

Excluding the acquisition, net sales increased $5.6 million, or 1.5%.

The increase in domestic sales is primarily related to strong consumer demand in the last six months of the year, offset by the impacts of COVID-19 in the first half of the year.

International sales decreased $19.6 million, or 9.3% to $191.8 million, as compared to $211.4 million in the prior year.

This includes an increase of $2.8 million related to the favorable impact of exchange rates.

Excluding foreign exchange, the net sales decrease in international sales was $22.4 million, or 10.6%, primarily in the European market, reflecting the impacts of Brexit and the outbreak of COVID-19 partially offset by strong consumer demand in the last six months of the year.

GROSS PROFIT .

Gross profit decreased by $221.5 million to $882.0 million in fiscal 2020 from $1,103.5 million in fiscal 2019, primarily reflecting the lower sales volumes related to COVID-19, lower margins at recent acquisitions, offset by the favorable impact of foreign exchange rates of $1.7 million.

The gross margin rate decreased from 37.3% in 2019 to 35.1% in 2020.

The gross margin rate in fiscal 2020 excluding acquisitions and impact of foreign exchange was 35.3%.

• Gross profit at the Commercial Foodservice Equipment Group decreased by $224.4 million, or 30.1%, to $522.2 million in fiscal 2020 as compared to $746.6 million in fiscal 2019.

Gross profit from the acquisitions of Cooking Solutions Group, Powerhouse, Ss Brewtech, Synesso, RAM, Deutsche, Wild Goose, and United Foodservice Equipment Zhuhai, accounted for an approximately $13.0 million increase in gross profit during fiscal 2020.

Excluding acquisitions, the gross profit decreased by approximately $237.4 million largely due to lower sales volumes.

The impact of foreign exchange rates increased gross profit by approximately $0.1 million.

The gross profit margin rate decreased to 34.6% as compared to 37.6% in the prior year, primarily due to lower margins at recent acquisitions.

The gross margin rate in fiscal 2020 excluding acquisitions and the impact of foreign exchange was 34.9%.

• Gross profit at the Food Processing Equipment Group increased by $14.9 million, or 10.5%, to $157.1 million in fiscal 2020 as compared to $142.2 million in fiscal 2019.

Excluding the acquisition, gross profit increased by approximately $10.6 million.

The impact of foreign exchange rates increased gross profit by approximately $0.4 million.

The gross profit margin rate increased to 35.9% in fiscal 2020 as compared to 35.5% in the prior year.

The gross margin rate in fiscal 2020 excluding the acquisition and the impact of foreign exchange was 35.9%.

• Gross profit at the Residential Kitchen Equipment Group decreased by $12.5 million, or 5.8%, to $204.3 million in fiscal 2020 as compared to $216.8 million in fiscal 2019.

The impact of foreign exchange rates increased gross profit by approximately $1.2 million.

The gross margin rate decreased to 36.1% in fiscal 2020 as compared to 37.8% in the prior year, primarily related to lower sales volumes and the impact of facility consolidations.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES .

Combined selling, general, and administrative expenses decreased by $61.9 million to $531.9 million in fiscal 2020 from $593.8 million in 2019.

As a percentage of net sales, selling, general and administrative expenses amounted to 21.2% in fiscal 2020 and 20.1% in fiscal 2019.

Selling, general and administrative expenses reflect increased costs of $30.2 million associated with acquisitions, including $7.2 million of non-cash intangible amortization expense.

Selling, general and administrative expenses decreased $35.7 million related to compensation costs and commissions and $59.2 million due to controllable cost reductions primarily within professional fees, travel and entertainment, convention costs, and advertising.

Foreign exchange rates had a favorable impact of $0.5 million.

The decreases were partially offset by a $11.5 million increase related to higher non-cash share based compensation and$5.8 million related to increased allowances for doubtful accounts given the current market conditions.

The prior year expenses also included $10.1 million related to transition costs with the former Chairman and CEO upon his retirement in February 2019.

RESTRUCTURING EXPENSES.

Restructuring expenses increased $1.9 million to $12.4 million from $10.5 million in the prior year period.

In fiscal 2020, restructuring expenses related primarily to headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group.

During fiscal 2019, restructuring charges related primarily to headcount reductions and cost reduction initiatives related to facility consolidations at the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group.

GAIN ON LITIGATION SETTLEMENT.

In fiscal 2019, the company reached a settlement with respect to a lawsuit filed by the company arising from a prior acquisition included in the Residential Kitchen Equipment Group.

The gain associated with this settlement, which is net of the release of funds in escrow, is reflected in the consolidated statement of earnings.

In fiscal 2020, the company recognized impairment of $11.6 million associated with several tradenames in conjunction with the diminution of value as we assessed current market conditions and future business plans.

See Note 3 (f) to the Consolidated Financial Statements for further information on the annual impairment testing.

In addition the company recorded an impairment charge of approximately $2.9 million to reflect the fair market value of assets held for sale for a non-core business within the Residential Kitchen Equipment Group.

See Note 13, Restructuring and Acquisition Integration Initiatives, in the Notes to the Consolidated Financial Statements for further information on restructuring initiatives.

INCOME FROM OPERATIONS .

Income from operations decreased $189.6 million to $324.4 million in fiscal 2020 from $514.0 million in fiscal 2019.

Operating income as a percentage of net sales amounted to 12.9% in 2020 as compared to 17.4% in 2019.

The decrease in operating income resulted from the impacts of COVID-19.

Operating income in fiscal 2019 included the gain on litigation settlement, offset by the transition costs related to the former Chairman and CEO.

Operating income in fiscal 2020 included impairment charges related to intangible assets, fixed assets, and assets held for sale.

Income from operations in 2020 included $127.7 million of non-cash expenses, including $39.1 million of depreciation expense, $69.0 million of intangible amortization related to acquisitions and $19.6 million of stock based compensation.

This compares to $110.0 million of non-cash expenses in the prior year, including $37.9 million of depreciation expense, $64.0 million of intangible amortization related to acquisitions and $8.1 million of stock based compensation costs.

NON-OPERATING EXPENSES .

Non-operating expenses increased $5.0 million to $56.4 million of expense in fiscal 2020 from $51.4 million of income in fiscal 2019.

Net interest expense and deferred financing decreased $4.0 million to $78.6 million in fiscal 2020 from $82.6 million in fiscal 2019 reflecting the reduction in the average interest rates under the Credit Facility and benefit from the Convertible Notes, offset by higher non-cash interest from the lower interest rate on Convertible Notes.

Net periodic pension benefit (other than service costs and curtailment) increased $10.3 million to $40.0 million in fiscal 2020 from $29.7 million in fiscal 2019, related to the increase in discount rate used to calculate the interest cost and lower expected returns on assets driven by lower asset values for fiscal 2019.

During fiscal 2020 a curtailment cost of approximately $14.7 million was recognized as a result of closing the AGA Group Pension Scheme to future pension accruals.

INCOME TAXES .

A tax provision of $60.8 million, at an effective rate of 22.7%, was recorded for fiscal 2020 as compared to $110.4 million at an effective rate of 23.9%, in fiscal 2019.

In comparison to the prior year, the tax provision reflects favorable tax adjustments for deferred tax rate changes and adjustments for the finalization of 2019 tax returns.

The effective rates in 2020 and 2019 are higher than the federal tax rate of 21% primarily due to state taxes and foreign tax rate differentials.

Fiscal Year Ended December 28, 2019 as Compared to December 29, 2018

69 unchanged sentences

INCOME FROM OPERATIONS .

Income from operations increased $68.0 million to $514.0 million in fiscal 2019 from $446.0 million in fiscal 2018 .

Income from operations increased $68.0 million to $514.0 million in fiscal 2019 from

$446.0 million in fiscal 2018.

Operating income as a percentage of net sales amounted to 17.4% in 2019 as compared to 16.4% in 2018.

13 unchanged sentences

The effective rates in 2019 and 2018 are higher than the federal tax rate of 21% primarily due to state taxes, non-deductible expenses and foreign tax rate differentials.

Fiscal Year Ended December 29, 2018 as Compared to December 30, 2017

Net sales in fiscal 2018 increased by $387.4 million, or 16.6%, to $2,722.9 million as compared to $2,335.5 million in fiscal 2017.

The increase in net sales of $375.2 million, or 16.1%, was attributable to acquisition growth, resulting from the fiscal 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen, QualServ, L2F, Globe, and Scanico and the fiscal 2018 acquisitions of Hinds-Bock, Ve.Ma.C, Firex, Josper, Taylor, M-TEK, and Crown.

Excluding acquisitions, net sales increased $12.2 million, or 0.5%, from the prior year.

The impact of foreign exchange rates on foreign sales translated into U.S.

Dollars for fiscal 2018 increased net sales by approximately $9.4 million or 0.4%.

The adoption of ASC 606 increased net sales by approximately $20.6 million primarily related to previously recognized revenue on long-term equipment sales and contracts at the Food Processing Equipment Group.

Excluding the impact of foreign exchange, acquisitions and the adoption of ASC 606, sales decreased 0.8% for the year, including a net sales increase of 3.1% at the Commercial Foodservice Equipment Group, a net sales decrease of 15.7% at the Food Processing Equipment Group and a net sales decrease of 0.9% at the Residential Kitchen Equipment Group.

Net sales of the Commercial Foodservice Equipment Group increased by $347.7 million, or 25.2%, to $1,729.8 million in fiscal 2018 as compared to $1,382.1 million in fiscal 2017.

Net sales from the acquisitions of Sveba Dahlen, QualServ, L2F, Globe, Firex, Josper, Taylor, and Crown which were acquired on June 30, 2017, August 31, 2017, October 6, 2017, October 17, 2017, April 27, 2018, May 10, 2018, June 22, 2018, and December 3, 2018, respectively, accounted for an increase of $304.7 million during fiscal 2018.

Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group increased $43.0 million, or 3.1%, as compared to the prior year.

Excluding the impact of foreign exchange and acquisitions, net sales increased $42.9 million, or 3.1% at the Commercial Foodservice Equipment Group.

Domestically, the company realized a sales increase of $207.5 million, or 21.4%, to $1,176.0 million, as compared to $968.5 million in the prior year.

This includes an increase of $166.6 million from recent acquisitions.

Excluding acquisitions, net sales increased $40.9 million, or 4.2%, related to increased sales with major chain restaurants and retail customers.

International sales increased $140.2 million, or 33.9%, to $553.8 million, as compared to $413.6 million in the prior year.

This includes the increase of $138.1 million from recent acquisitions and an increase of $0.1 million related to the favorable impact of exchange rates.

Excluding acquisitions and foreign exchange, the net sales increase in international sales was $2.0 million, or 0.5%.

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 which were acquired on May 1, 2017, June 30, 2017, December 7, 2017, February 16, 2018, April 3, 2018, and October 1, 2018, respectively, accounted for an increase of $70.5 million.

Excluding the impact of these acquisitions, net sales of the Food Processing Equipment Group decreased $33.6 million, or 9.5%.

The adoption of ASC 606 increased net sales by approximately $20.6 million.

Excluding the impact of foreign exchange, acquisitions, and ASC 606 net sales decreased $55.4 million, or 15.7% at the Food Processing Equipment Group.

Domestically, the company realized a sales increase of $7.0 million, or 2.7%, to $263.7 million, as compared to $256.7 million in the prior year.

This includes an increase of $33.2 million from recent acquisitions.

Excluding acquisitions, net sales decreased $26.2 million, or 10.2%.

International sales increased $29.9 million, or 31.1%, to $125.9 million, as compared to $96.0 million in the prior year.

This includes the increase of $37.3 million from the recent acquisitions and an increase of $1.2 million related to the favorable impact of exchange rates.

Excluding acquisitions and foreign exchange, the net sales decrease in international sales was $8.6 million, or 9.0%.

Revenues for the Food Processing Equipment Group have been affected by the timing and deferral of certain larger projects.

Net sales of the Residential Kitchen Equipment Group increased by $2.8 million, or 0.5%, to $603.5 million in fiscal 2018, as compared to $600.7 million in fiscal 2017.

Excluding the impact of foreign exchange, net sales decreased $5.3 million, or 0.9% at the Residential Kitchen Equipment Group.

Domestically, the company realized a sales increase of $22.5 million, or 6.5%, to $366.7 million, as compared to $344.2 million in the prior year.

Sales at Viking increased by approximately 15% in fiscal 2018.

International sales decreased $19.7 million, or 7.7% to $236.8 million, as compared to $256.5 million in the prior year.

This includes a favorable impact of exchange rates of $8.1 million.

Excluding foreign exchange, 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.

GROSS PROFIT .

Gross profit increased by $91.4 million to $1,004.1 million in fiscal 2018 from $912.7 million in fiscal 2017, reflecting the impact of increased sales from acquisitions, adoption of ASC 606 and favorable impact of foreign exchange rates of $3.9 million.

The gross margin rate decreased from 39.1% in 2017 to 36.9% in 2018.

The gross margin rate in fiscal 2018 excluding acquisitions, adoption of ASC 606 and impact of foreign exchange was 38.4%.

Gross profit at the Commercial Foodservice Equipment Group increased by $106.6 million, or 19.3%, to $658.5 million in fiscal 2018 as compared to $551.9 million in fiscal 2017.

Gross profit from the acquisitions of Sveba Dahlen, QualServ, L2F, Globe, Firex, Josper, Taylor, and Crown accounted for approximately $80.5 million of the increase in gross profit during fiscal 2018.

Excluding acquisitions, the gross profit increased by approximately $26.1 million due to higher sales volume.

The impact of foreign exchange rates increased gross profit by approximately $0.6 million.

The gross profit margin rate decreased to 38.1% as compared to 39.9% in the prior year, primarily due to lower margins at recent acquisitions.

The gross margin rate in fiscal 2018 excluding acquisitions and impact of foreign exchange was 40.5%.

Gross profit at the Food Processing Equipment Group decreased by $9.5 million, or 6.6%, to $133.6 million in fiscal 2018 as compared to $143.1 million in fiscal 2017.

Gross profit from the acquisitions of Burford, CVP Systems, Scanico, Hinds-Bock, Ve.Ma.C, and M-TEK accounted for approximately $25.1 million of the increase in gross profit during fiscal 2018.

The adoption of ASC 606 increased gross profit by approximately $5.3 million.

Excluding the recent acquisitions and adoption of ASC 606, the gross profit decreased by approximately $39.9 million based on lower sales volumes.

The impact of foreign exchange rates increased gross profit by approximately $0.8 million.

The gross profit margin rate decreased to 34.3% in fiscal 2018 as compared to 40.6% in the prior year, reflecting the impact of lower volumes and unfavorable product mix resulting from lesser sales of protein equipment which generally have higher margins.

The gross margin rate in fiscal 2018 excluding acquisitions, adoption of ASC 606, and impact of foreign exchange was 34.4%.

Gross profit at the Residential Kitchen Equipment Group decreased by $5.8 million, or 2.6%, to $217.1 million in fiscal 2018 as compared to $222.9 million in fiscal 2017.

The impact of foreign exchange rates increased gross profit by approximately $2.5 million.

The gross margin rate decreased to 36.0% in fiscal 2018 as compared to 37.1% in the prior year, primarily related to the impact of domestic distribution changes and sales incentives for the Viking brand.

The gross margin rate in fiscal 2018 excluding the impact of foreign exchange was 36.0%.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES .

Combined selling, general, and administrative expenses increased by $70.6 million to $538.8 million in fiscal 2018 from $468.2 million in 2017.

As a percentage of net sales, selling, general and administrative expenses amounted to 19.8% in fiscal 2018 and 20.0% in fiscal 2017.

Selling, general and administrative expenses reflect increased costs of $78.3 million associated with the fiscal 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen, QualServ, L2F, Globe, and Scanico and the fiscal 2018 acquisitions of Hinds-Bock, Ve.Ma.C, Firex, Josper, Taylor, M-TEK, and Crown, including $27.1 million of non-cash intangible amortization expense.

The unfavorable impact of foreign exchange rates increased selling, general and administrative expenses by approximately $3.0 million.

Additionally, selling, general and administrative expenses decreased by $3.7 million related to lower non-cash share based compensation and $5.7 million related to lower intangible amortization expense.

RESTRUCTURING EXPENSES.

Restructuring expenses decreased $0.7 million to $19.3 million from $20.0 million in the prior year period.

In fiscal 2018, restructuring charges primarily related to exiting operations of a non-core business in the Residential Kitchen Equipment Group, headcount reductions at the Commercial Foodservice Equipment Group and additional cost reduction initiatives related to the AGA Group.

Restructuring expenses during fiscal 2017 included cost reduction initiatives primarily related to headcount reductions at all three operating segments.

GAIN ON SALE OF PLANT .

In fiscal 2017, the gain on sale of plant in the amount of $12.0 million was related to the sale of a manufacturing facility, proceeds of which were used to purchase a larger manufacturing facility to gain efficiencies in workflow and allow for future manufacturing consolidation efforts.

IMPAIRMENT OF INTANGIBLE ASSET .

In fiscal 2017, the impairment of intangible asset in the amount of $58.0 million was recognized related to the Viking tradename within the company's annual impairment assessment of goodwill and indefinite-lived assets.

The impairment resulted from weaker than expected revenue performance in 2017 and a corresponding reduction in the future revenue expectations.

The decline in revenues was attributable, in part, to the product recall announced in 2015 related to products manufactured prior to the acquisition of Viking.

INCOME FROM OPERATIONS .

Income from operations increased $67.4 million to $446.0 million in fiscal 2018 from $378.6 million in fiscal 2017.

Operating income as a percentage of net sales amounted to 16.4% in 2018 as compared to 16.2% in 2017.

The increase in operating income resulted from the increase in net sales and gross profit, offset partially by increased operating expenses.

Operating income in fiscal 2017 included the gain on sale of plant and impairment of intangible assets.

Excluding the impact of restructuring expenses, gain on sale of plant, and impairment of intangible assets, operating income increased $20.7 million to $465.3 million in fiscal 2018 from $444.6 million in fiscal 2017.

Operating income as a percentage of net sales, excluding those items, amounted to 17.1% in 2018 in comparison to 19.0% in 2017, reflecting the impact of acquisitions.

Income from operations in 2018 included $98.3 million of non-cash expenses, including $35.8 million of depreciation expense, $60.0 million of intangible amortization related to acquisitions and $2.5 million of stock based compensation.

This compares to $132.5 million of non-cash expenses in the prior year, including $29.7 million of depreciation expense, $38.6 million of intangible amortization related to acquisitions, $58.0 million related to the impairment of intangible asset and $6.2 million of stock based compensation costs.

NON-OPERATING EXPENSES .

Non-operating expenses increased $27.3 million to $22.4 million of expense in fiscal 2018 from $4.9 million of income in fiscal 2017.

Net interest expense and deferred financing increased $32.7 million to $58.7 million in fiscal 2018 from $26.0 million in fiscal 2017 reflecting higher interest rates and higher debt balances related to the funding of acquisitions.

Net periodic pension benefit (other than service costs) increased $6.4 million to $38.1 million in fiscal 2018 from $31.7 million in fiscal 2017.

INCOME TAXES .

A tax provision of $106.4 million, at an effective rate of 25.1%, was recorded for fiscal 2018 as compared to $85.4 million at an effective rate of 22.3%, in fiscal 2017.

In comparison to the prior year period, the tax provision reflects a lower federal tax rate of 21.0% as opposed to 35.0% in 2017, partially offset by additional taxes due under the Tax Cuts and Jobs Act of 2017.

The 2017 tax provision was lower than the statutory rate of 35.0% primarily due to deferred tax adjustments resulting from the tax rate reduction to 21% under the Tax Cuts and Job Act of 2017, discrete tax benefit recognized as a result of the adoption of ASU No.

2016-09, "Compensation - Stock Compensation (Topic 718):

Improvements to Employee Share-Based Accounting" and the reversal of a valuation allowance.

Financial Condition and Liquidity

Total cash and cash equivalents increased by $22.8 million to $94.5 million at December 28, 2019 from $71.7 million at December 29, 2018 .

Net borrowings decreased to $1,873.1 million at December 28, 2019 , from $1,892.1 million at December 29, 2018 .

Total cash and cash equivalents increased by $173.6 million to $268.1 million at January 2, 2021 from $94.5 million at December 28, 2019.

Total debt, excluding the unamortized debt discount associated with the Convertible Notes, decreased to $1.8 billion at January 2, 2021 from $1.9 billion at December 28, 2019.

OPERATING ACTIVITIES .

Net cash provided by operating activities before changes in assets and liabilities amounted to $457.2 million as compared to $405.7 million in the prior year.

Net cash provided by operating activities after changes in assets and liabilities amounted to $524.8 million as compared to $377.4 million in the prior year.

During fiscal 2019 , net cash used to fund changes in assets and liabilities amounted to $79.7 million , primarily related to higher working capital levels.

This resulted from the timing of payments and collections and inventory increases largely attributable to mitigating risks around order fulfillment rates managing ongoing facility consolidations efforts.

During fiscal 2020, sales volumes were significantly lower as compared to 2019 due to the impacts of the COVID-19 pandemic, primarily in the Commercial Foodservice Equipment Group.

Lower earnings generated less income and associated cash flows.

However, reductions in working capital requirements generated more than offsetting cash flow benefits.

Net cash used to fund changes in assets and liabilities amounted to $174.9 million in 2020, primarily related to lower receivables, reductions in inventory levels, the amount and timing of payments, as well as increases in employer payroll tax accruals from the CARES Act.

In connection with the company’s acquisition activities during the year, the company added assets and liabilities from the opening balance sheets of the acquired businesses in its consolidated balance sheets and accordingly these amounts are not reflected in the net change in working capital.

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During 2020, net cash used for investing activities amounted to $106.8 million.

This included $281.3 million of the 2019 acquisitions of EVO, Cooking Solutions Group, Powerhouse, Ss Brewtech, Pacproinc, Brava and Synesso, and $46.6 million primarily associated with additions and upgrades of production equipment and manufacturing facilities.

This included $79.6 million primarily for the 2020 acquisitions of RAM, Deutsche, Wild Goose and United Foodservice Equipment Zhuhai.

Additionally, $34.8 million was expended, primarily associated with additions and upgrades of production equipment, manufacturing facilities and residential and commercial showrooms, and was offset by $14.1 million in proceeds on the sale of properties following facility consolidations actions.

FINANCING ACTIVITIES.

Net cash flows used for financing activities amounted to $252.5 million in 2020.

The company's borrowing activities included $17.1 million of net repayments under its $3.0 billion Credit Facility.

Additionally, the company used $6.1 million to repurchase 50,848 shares of Middleby common stock that were surrendered to the company for withholding taxes related to restricted stock vestings during the quarter.

During 2018, financing cash flows were primarily impacted by the purchase of Taylor, which resulted in approximately $1.0 billion of borrowings, as well as other acquisitions.

Subsequent to the end of fiscal year December 28, 2019 , the company entered into an amended and restated credit agreement.

See Note 14 to the consolidated financial statements for further information.

At December 28, 2019 , the company was in compliance with all covenants pursuant to its borrowing agreements.

Management believes that future cash flows from operating activities and borrowings from current lenders will provide the company with sufficient financial resources to meet its anticipated requirements for working capital, capital expenditures and debt amortization for the foreseeable future.

On January 31, 2020, the company entered into an amended and restated five-year, $3.5 billion multi-currency senior secured credit agreement (the "Credit Facility").

On August 21, 2020, the company issued $747.5 million aggregate principal amount of 1.00% Convertible Senior Notes due 2025, and incurred $17.6 million of issuance costs.

The company then entered into privately negotiated capped call transactions (the "Capped Call Transactions") in an aggregate amount of $104.7 million.

A portion of the net proceeds from the offering of the Convertible Notes was used to prepay $400.0 million aggregate principal amount of its term loan obligations and to execute an amendment to the Credit Facility.

The company incurred approximately $11.0 million of debt issuance costs, in aggregate, for amendments to the Credit Facility.

The company’s borrowing activities during 2020 included $48.5 million of net repayments under its Credit Facility.

Additionally, the company repurchased $85.9 million of Middleby common shares during 2020.

This was comprised of $16.2 million to repurchase 176,242 shares of Middleby common stock that were surrendered to the company for withholding taxes related to restricted stock vestings and $69.7 million used to repurchase 896,965 shares of its common stock under a repurchase program.

At January 2, 2021, the company was in compliance with all covenants pursuant to its borrowing agreements.

The company has run various scenarios to estimate the impact of the COVID-19 pandemic and continues to believe that its future cash generated from operations, together with its capacity under its Credit Facility and its cash on hand, will provide adequate resources to meet its working capital needs and cash requirements and maintain compliance with financial covenants in its Credit Facility for at least the next 12 months.

Contractual Obligations

The company's contractual cash payment obligations are set forth below (dollars in thousands):

Acquisition Debt Estimated

on Debt Operating

Less than 1 year $ 13,787 $ 22,944 $ 55,755 $ 24,675 $ 117,161

1-3 years 17,972 38,317 99,712 37,880 193,881

4-5 years 1,137 1,668,091 57,556 22,529 1,749,313

After 5 years 1,875 244 580 23,446 26,145

(1) Excludes amortization of the term loan as described in Note 14 to the consolidated financial statements.

$ 34,771 $ 1,729,596 $ 213,603 $ 108,530 $ 2,086,500

The company has obligations to make $34.8 million of estimated contingent purchase price payments to the sellers that were deferred in conjunction with various acquisitions.

As of December 28, 2019 , the company had $1.9 billion outstanding under its Credit Facility.

The average interest rate on this debt amounted to 3.37% at the end of the period.

On January 31, 2020, the company entered into an amended and restated five-year, $3.5 billion multi-currency senior secured credit agreement.

This facility replaces the company's pre-existing $3.0 billion Credit Facility, which had an original maturity of July 2021.

The newly amended and restated facility (the "Amended Facility") consists of (i) a $750.0 million term loan facility and (ii) a $2.75 billion multi-currency revolving credit facility, with the potential under certain circumstances, to increase the amount of the credit facility to up to a total of $4.0 billion (plus additional amounts, subject to compliance with a senior secured net leverage ratio).

The Amended Facility matures on January 31, 2025.

At inception, the Amended Facility bears an interest rate of LIBOR plus a margin of 1.625% , which is adjusted quarterly based upon the company's leverage ratio.

The Amended Facility provides the availability to fund working capital, capital expenditures, to support the issuance of letters of credit and other general corporate purposes.

As of December 28, 2019 , the company also has $3.6 million of debt outstanding under various foreign credit facilities.

The estimated interest payments reflected in the table above assume that the level of debt and average interest rate on the company’s revolving credit line under its Amended Facility does not change until the facility reaches maturity.

The estimated payments also assume that relative to the company’s foreign borrowings:

As of January 2, 2021, the company had $1.1 billion outstanding under its Credit Facility.

The average interest rate on this debt, inclusive of hedging instruments, amounted to 3.97% at the end of the period.

As of January 2, 2021, the company also has $4.4 million of debt outstanding under various foreign credit facilities and $1.4 million of other debt arrangements.

The estimated interest payments reflected in the table above assume that the level of debt and average interest rate on the company’s revolving credit line under its Credit Facility does not change until the facility reaches maturity.

The estimated payments also assume that relative to the company’s foreign borrowings and other debt arrangements:

all scheduled term loan payments are made;

the level of borrowings does not change;

and the average interest rates remain at their December 28, 2019 rates.

Also reflected in the table above is $4.9 million of payments to be received related to the company’s interest rate swap agreements in 2020.

The contractual maturities reflected above give effect to the Amended Facility.

and the average interest rates remain at their January 2, 2021 rates.

As of January 2, 2021, the company has $747.5 million aggregate principal amount of Convertible Notes outstanding that bear interest semi-annually in arrears at a rate of 1.00% per annum.

The Convertible Notes will mature on September 1, 2025 unless they are redeemed, repurchased or converted prior to such date in accordance with their terms.

Also reflected in the table above is $17.4 million of payments to be made related to the company’s interest rate swap agreements in 2021.

As indicated in Note 11 to the consolidated financial statements, the company’s projected benefit obligation under its defined benefit plans exceeded the plans’ assets by $469.5 million at the end of 2020 as compared to $289.1 million at the end of 2019.

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These purchase orders are generally to fulfill short-term manufacturing requirements of less than 90 days and most are cancelable with a restocking penalty.

The company has no long-term purchase contracts or minimum purchase obligations with any supplier.

The company has no material long-term purchase contracts or minimum purchase obligations with any supplier.

Off-Balance Sheet Arrangements

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Revenue Recognition

On December 31, 2017, the company adopted the new accounting standard ASU No.

2014-09, Revenue from Contracts with Customers (ASC 606) using the modified retrospective method to contracts that were not completed as of December 30, 2017.

Revenue is recognized when the control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and represents the unit of account in ASC 606.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and represents the unit of account.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

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The company’s business acquisitions result in the recognition of goodwill and other intangible assets, which are a significant portion of the company’s total assets.

The company recognizes goodwill and other intangible assets under the guidance of ASC Topic 350-10, Intangibles — Goodwill and Other .

Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination.

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If the fair value is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of goodwill.

In performing a quantitative assessment, if required, we estimate each reporting unit's fair value under an income approach using a discounted cash flow model.

In performing a quantitative assessment, if required, the company estimates each reporting unit's fair value under an income approach using a discounted cash flow model.

The income approach uses each reporting unit's projection of estimated operating results and cash flows that are discounted using a market participant discount rate based on a weighted-average cost of capital.

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The estimated fair value of each reporting unit is compared to their respective carrying values.

Additionally, we validate our estimates of fair value under the income approach by comparing the fair value estimate using a market approach.

Additionally, the company validates the estimates of fair value under the income approach by comparing the fair value estimate using a market approach.

A market approach estimates fair value by applying cash flow multiples to the reporting unit's operating performance.

The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting units.

We consider the implied control premium and conclude whether it is reasonable based on other recent market transactions.

We performed a qualitative assessment as of September 29, 2019 over all three reporting units and determined it is more likely than not that the fair value of our reporting units are greater than the carrying amounts.

In estimating the fair value of our reporting units, management relies on a number of factors, including operating results, business plans, economic projections, anticipated future cash flows, comparable transactions and other market data.

The company considers the implied control premium and conclude whether it is reasonable based on other recent market transactions.

The company performed a qualitative assessment as of September 27, 2020 over all three reporting units and determined it is more likely than not that the fair value of our reporting units are greater than the carrying amounts.

As a result of the financial performance indicators for the Commercial Foodservice reporting unit, the company completed a quantitative analysis.

The fair value of the reporting unit exceeded its carrying value by more than 100% and no impairment of goodwill was recognized.

As a result of the qualitative assessment for the other two segments, the company determined it is more likely than not that the fair value of our reporting units are greater than the carrying amounts.

In estimating the fair value of its reporting units, management relies on a number of factors, including operating results, business plans, economic projections, anticipated future cash flows, comparable transactions and other market data.

There are inherent uncertainties related to these factors and management’s judgment in applying them in the impairment tests of goodwill.

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• In developing discount rates for the valuation of our trademarks, we used the market based weighted average cost of capital, adjusted for higher relative level of risks associated with doing business in other countries, as applicable, as well as the higher relative levels of risks associated with intangible assets.

As a result of quantitative testing the company determined there were no impairments of trademarks.

The gross value of the trademarks tested was approximately $75.0 million.

The fair values of the trademarks tested exceeded their carrying values by more than 10%.

As a result of quantitative testing the company recognized $ 11.6 million of impairment charges associated with several trademarks, none of which were individually material.

The gross value of the trademarks tested, including the impaired trademarks, was approximately $ 90.0 million.

The fair values of the other trademarks tested with no impairment per the analyses, exceeded their carrying values by more than 20%.

The company believes the assumptions utilized within the quantitative analysis are reasonable.

We performed a qualitative assessment as of September 29, 2019 over all the other trademarks and trade names and determined it is more likely than not that the fair value of our other indefinite-life intangible assets are greater than the carrying amounts.

The company performed a qualitative assessment as of September 27, 2020 over all the other trademarks and trade names and determined it is more likely than not that the fair value of its other indefinite-life intangible assets are greater than the carrying amounts.

The company continues to monitor the global outbreak of the COVID-19 pandemic to assess the outlook for demand of its products and the impact on its business and financial performance.

If actual results are not consistent with management's estimate and assumptions, a material impairment charge of our trademarks and trade names could occur, which could have an adverse effect on the company's financial condition and results of operations.

Convertible Debt

The company issued convertible debt with debt and equity components.

The company evaluated the different components and features of the hybrid instrument and determined whether certain elements were embedded derivative instruments which require bifurcation.

Components of convertible debt instruments that upon conversion may be settled fully in cash or partly in cash based on a net-share settlement basis are accounted for separately as long-term debt and equity when the conversion feature of the convertible bonds constitute an embedded equity instrument.

When an equity instrument is identified, proceeds from issuance are allocated between debt and equity by measuring first the liability component and then determining the equity component as a residual amount.

The liability component is measured as the fair value of a similar nonconvertible debt, which results in the recognition of a debt discount.

In subsequent periods, the company will amortize the debt discount to interest expense, net within the Consolidated Statements of Earnings, using the effective interest method based on the expected maturity of the debt.

The equity component is reported in additional paid-in capital within the Consolidated Statement of Changes in Stockholders' Equity and is not remeasured as long as it continues to meet the conditions for equity classification.

The company allocated transaction costs related to the issuance of convertible debt using the same proportions as the proceeds from the convertible debt.

Transaction costs attributable to the liability component are recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheets and are amortized to interest expense, net within the Consolidated Statements of Earnings over the term of the convertible debt using the effective interest rate method.

Transaction costs attributable to the equity component are netted within additional paid-in capital within the Consolidated Statement of Stockholders' Equity.

For additional information regarding the company's convertible debt, see Note 5, Financing Arrangements, in the Notes to the Consolidated Financial Statements.

Pension Benefits

The company provides pension benefits to certain employees and accounts for these benefits in accordance with ASC 715, Compensation-Retirement Benefits .

For financial reporting purposes, long-term assumptions are developed through consultations with actuaries.

Such assumptions include the expected long-term rate of return on plan assets and discount rates.

The company sponsors pension benefits to certain employees.

The accounting for these plans depends on assumptions made by management, which are used by actuaries the company engages to calculate the projected and accumulated obligations and the annual expense recognized for these plans.

These assumptions include expected long-term rate of return on plan assets and discount rates.

The amount of unrecognized actuarial gains and losses recognized in the current year’s operations is based on amortizing the unrecognized gains or losses for each plan that exceed the larger of 10% of the projected benefit obligation or the fair value of plan assets, also known as the corridor.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis