MIDDLEBY Corp 10-K

Item 8. Financial Statements and Supplementary Data Page Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 44 Consolidated Balance Sheets 48 Consolidated Statements of Earnings 49 Consolidated Statements of Comprehensive Income 50 Consolidated Statements of Changes in Stockholders’ Equity 51 Consolidated Statements of Cash Flows 52 Notes to Consolidated Financial Statements 53 The following consolidated financial statement schedule is included in response to Item 15 Schedule II - Valuation and Qualifying Accounts and Reserves 91 All other schedules for which provision is made to applicable regulation of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and, therefore, have been omitted. 43 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Middleby Corporation Opinion on Internal Control over Financial Reporting We have audited The Middleby Corporation’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), (the COSO criteria). In our opinion, The Middleby Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Kloppenberg, Proxaut, Icetro, CP Packaging, Colussi, Escher and Marco which are included in the 2022 consolidated financial statements of the Company and constituted 6.0% and 0.2% of total and net assets, respectively, as of December 31, 2022 and 1.7% and (0.5)% of net sales and net earnings, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Kloppenberg, Proxaut, Icetro, CP Packaging, Colussi, Escher and Marco. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and January 1, 2022, the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 8 and our report dated March 1, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Chicago, Illinois March 1, 2023 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Middleby Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Middleby Corporation (the Company) as of December 31, 2022 and January 1, 2022, the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 8 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2023 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 45 Accounting for acquisitions Description of the Matter As described in Note 2 of the consolidated financial statements, the Company completed its acquisition of Novy Invest NV for net consideration of approximately $267 million on July 12, 2021 and its acquisition of Kamado Joe and Masterbuilt for net consideration of approximately $406 million on December 27, 2021. Each transaction was accounted for as a business combination. The Company finalized the fair value allocations for each acquisition in 2022. Auditing the Company's accounting for its acquisitions of Novy Invest NV and Kamado Joe and Masterbuilt was complex due to the significant estimation uncertainty in determining the fair value of identified intangible assets of approximately $131 million and $187 million, respectively, which principally consisted of trade names. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of each acquired business. The Company used discounted cash flow models to measure the trade names intangible assets. The significant assumptions used to estimate the value of the trade names intangible assets include revenue growth rates, discount rates, and royalty rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over accounting for the acquisitions of Novy Invest NV and Kamado Joe and Masterbuilt, including controls over the determination of the fair value of the acquired trade names intangible assets, and management's evaluation of the underlying assumptions described above. We also tested management's controls over the completeness and accuracy of the data used in the valuation models. To test the estimated fair value of the trade names intangible assets, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodologies, evaluating the methods and significant assumptions used by the Company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We compared the assumptions related to the revenue growth rate to the past performance of each company, the Company's history related to similar acquisitions, and third-party industry data. We tested the assumptions related to discount rates and royalty rates to the Company’s history related to similar acquisitions and third-party industry data. We involved a valuation specialist to assist with our evaluation of the methodologies used by the Company and significant assumptions included in the fair value estimates. Valuation of Kamado Joe and Masterbuilt indefinite-lived intangible assets Description of the Matter At December 31, 2022, the carrying value of the Kamado Joe and Masterbuilt indefinite-lived intangible assets was approximately $145 million, which consists of trade names. As discussed in Note 3 to the consolidated financial statements, indefinite-lived intangibles assets are tested for impairment at least annually, in the fiscal fourth quarter, or when impairment indicators are present at the intangible asset level. Auditing management’s assessment of the estimated fair value of the Kamado Joe and Masterbuilt indefinite-lived intangible assets was complex due to the judgmental nature of the assumptions used in the valuation process. The fair value estimates were sensitive to significant assumptions including future revenues and royalty rates. 46 How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s indefinite-lived intangible asset fair value assessment process. This included testing controls over management’s review over the projected financial information and significant assumptions used in the valuation models to estimate fair value of the indefinite-lived intangible assets. To test the estimated fair values of the Kamado Joe and Masterbuilt indefinite-lived intangible assets, we performed audit procedures that included, among others, assessing methodologies used in the models and testing the significant assumptions discussed above. This included comparing the significant assumptions used by management to current industry and economic trends, changes to the Company’s business models and other relevant factors. We assessed the reasonableness of management’s projections used in the fair value calculations and obtained support for initiatives supporting these projections. We also compared previous forecasts to actual results to assess management’s forecasting process. To assess the discount rates, we reviewed the methodology used by the Company and considered each input relative to current economic factors. We performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the indefinite-lived intangible asset that would result from changes in the assumptions. In addition, we tested the mathematical accuracy of the models. /s/ Ernst & Young LLP We have served as the Company's auditor since 2012. Chicago, Illinois March 1, 2023 47 THE MIDDLEBY CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2022 AND JANUARY 1, 2022 (amounts in thousands, except share data) 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 162,001 $ 180,362 Accounts receivable, net of reserve for doubtful accounts of $ 20,295 and $ 18,770 631,134 577,142 Inventories, net 1,077,729 837,418 Prepaid expenses and other 125,640 92,269 Prepaid taxes 9,492 19,894 Total current assets 2,005,996 1,707,085 Property, plant and equipment, net of accumulated depreciation of $ 299,572 and $ 266,203 443,528 380,980 Goodwill 2,411,834 2,243,469 Other intangibles, net of amortization of $ 503,034 and $ 442,208 1,794,232 1,875,377 Long-term deferred tax assets 6,738 33,194 Other assets 212,538 143,493 Total assets $ 6,874,866 $ 6,383,598 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 45,583 $ 27,293 Accounts payable 271,374 304,740 Accrued expenses 671,327 582,855 Total current liabilities 988,284 914,888 Long-term debt 2,676,741 2,387,001 Long-term deferred tax liability 220,204 186,935 Accrued pension benefits 14,948 219,680 Other non-current liabilities 176,942 180,818 Stockholders' equity: Preferred stock, $ 0.01 par value; nonvoting; 2,000,000 shares authorized; none issued — — Common stock, $ 0.01 par value; 63,508,855 and 63,666,020 shares issued in 2022 and 2021, respectively 147 147 Paid-in capital 408,376 357,309 Treasury stock, at cost; 9,814,480 and 8,170,276 shares in 2022 and 2021 ( 831,176 ) ( 566,399 ) Retained earnings 3,498,872 3,062,303 Accumulated other comprehensive loss ( 278,472 ) ( 359,084 ) Total stockholders' equity 2,797,747 2,494,276 Total liabilities and stockholders' equity $ 6,874,866 $ 6,383,598 The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. 48 THE MIDDLEBY CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2022, JANUARY 1, 2022 AND JANUARY 2, 2021 (amounts in thousands, except per share data) 2022 2021 2020 Net sales $ 4,032,853 $ 3,250,792 $ 2,513,257 Cost of sales 2,586,299 2,055,932 1,631,209 Gross profit 1,446,554 1,194,860 882,048 Selling, general, and administrative expenses 797,234 667,976 531,897 Restructuring expenses 9,716 7,655 12,375 Merger termination fee — ( 110,000 ) — Gain on sale of plant — ( 763 ) ( 1,982 ) Impairments — — 15,327 Income from operations 639,604 629,992 324,431 Interest expense and deferred financing amortization, net 88,977 57,157 78,617 Net periodic pension benefit (other than service cost & curtailment) ( 42,681 ) ( 45,066 ) ( 39,996 ) Curtailment loss — — 14,682 Other expense (income), net 28,893 ( 1,603 ) 3,071 Earnings before income taxes 564,415 619,504 268,057 Provision for income taxes 127,846 131,012 60,763 Net earnings $ 436,569 $ 488,492 $ 207,294 Net earnings per share: Basic $ 8.07 $ 8.85 $ 3.76 Diluted $ 7.95 $ 8.62 $ 3.76 Weighted average number of shares Basic 54,095 55,216 55,093 Dilutive common stock equivalents 852 1,449 43 Diluted 54,947 56,665 55,136 The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. 49 THE MIDDLEBY CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE FISCAL YEARS ENDED DECEMBER 31, 2022, JANUARY 1, 2022 AND JANUARY 2, 2021 (amounts in thousands) 2022 2021 2020 Net earnings $ 436,569 $ 488,492 $ 207,294 Other comprehensive income (loss): Foreign currency translation adjustments ( 107,691 ) ( 47,693 ) 55,744 Pension liability adjustment, net of tax 127,995 151,223 ( 172,583 ) Unrealized gain (loss) on interest rate swaps, net of tax 61,638 24,484 ( 20,656 ) Unrealized (loss) gain on certain investments, net of tax ( 1,330 ) 1,330 — Other comprehensive income (loss): $ 80,612 $ 129,344 $ ( 137,495 ) Comprehensive income $ 517,181 $ 617,836 $ 69,799 The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. 50 THE MIDDLEBY CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED DECEMBER 31, 2022, JANUARY 1, 2022 AND JANUARY 2, 2021 (amounts in thousands) Common Stock Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income/(loss) Total Stockholders' Equity Balance, December 28, 2019 $ 145 $ 387,402 $ ( 451,262 ) $ 2,361,462 $ ( 350,933 ) $ 1,946,814 Net earnings — — — 207,294 — 207,294 Currency translation adjustments — — — — 55,744 55,744 Change in unrecognized pension benefit costs, net of tax of $( 40,426 ) — — — — ( 172,583 ) ( 172,583 ) Unrealized loss on interest rate swap, net of tax of $( 7,147 ) — — — — ( 20,656 ) ( 20,656 ) Stock compensation — 19,613 — — — 19,613 Stock issuance 2 25,985 — — — 25,987 Purchase of treasury stock — — ( 85,872 ) — — ( 85,872 ) Equity component of issuance of convertible notes — 308 — — — 308 Balance, January 2, 2021 $ 147 $ 433,308 $ ( 537,134 ) $ 2,568,756 $ ( 488,428 ) $ 1,976,649 Net earnings — — — 488,492 — 488,492 Adoption of ASU 2020-06 (1) — ( 79,430 ) — 5,055 — ( 74,375 ) Currency translation adjustments — — — — ( 47,693 ) ( 47,693 ) Change in unrecognized pension benefit costs, net of tax of $ 49,589 — — — — 151,223 151,223 Unrealized gain on interest rate swap, net of tax of $ 8,619 — — — — 24,484 24,484 Unrealized gain on certain investments, net of tax of $ 443 — — — — 1,330 1,330 Stock compensation — 42,330 — — — 42,330 Stock issuance — 2,522 — — — 2,522 Purchase of treasury stock — — ( 29,265 ) — — ( 29,265 ) Purchase of capped calls, net of tax of $( 13,132 ) — ( 41,421 ) — — — ( 41,421 ) Balance, January 1, 2022 $ 147 $ 357,309 $ ( 566,399 ) $ 3,062,303 $ ( 359,084 ) $ 2,494,276 Net earnings — — — 436,569 — 436,569 Currency translation adjustments — — — — ( 107,691 ) ( 107,691 ) Change in unrecognized pension benefit costs, net of tax of $ 37,475 — — — — 127,995 127,995 Unrealized gain on interest rate swap, net of tax of $ 21,337 — — — — 61,638 61,638 Unrealized loss on certain investments, net of tax of $( 443 ) — — — — ( 1,330 ) ( 1,330 ) Stock compensation — 58,368 — — — 58,368 Purchase of treasury stock — — ( 264,777 ) — — ( 264,777 ) Purchase of capped calls, net of tax of $( 2,354 ) — ( 7,301 ) — — — ( 7,301 ) Balance, December 31, 2022 $ 147 $ 408,376 $ ( 831,176 ) $ 3,498,872 $ ( 278,472 ) $ 2,797,747 (1) As of January 3, 2021 the company adopted ASU No. 2020-06, A ccounting for Convertible Instruments and Contracts in an Entity’s Own Equity using the modified retrospective method. The adoption of this guidance resulted in a $ 79.4 million reduction to paid-in capital, net of tax of $ 25.5 million, and the recognition of $ 5.1 million as an adjustment to the opening balance of retained earnings, net of tax of $ 1.6 million. The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. 51 THE MIDDLEBY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2022, JANUARY 1, 2022 AND JANUARY 2, 2021 (amounts in thousands) 2022 2021 2020 Cash flows from operating activities— Net earnings $ 436,569 $ 488,492 $ 207,294 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 138,061 125,243 110,532 Amortization of discount and issuance costs on convertible notes — — 7,971 Non-cash share-based compensation 58,368 42,330 19,613 Deferred income taxes ( 6,642 ) 6,863 16,421 Net periodic pension benefit (other than service costs) ( 42,681 ) ( 45,066 ) ( 25,314 ) Gain on sale of plant — ( 763 ) ( 1,982 ) Impairments — — 15,327 Non-cash restructuring — 1,924 — Other non-cash items ( 12,127 ) ( 11,805 ) — Changes in assets and liabilities, net of acquisitions Accounts receivable, net ( 28,392 ) ( 93,988 ) 90,399 Inventories, net ( 196,313 ) ( 198,264 ) 66,690 Prepaid expenses and other assets ( 5,201 ) 10,853 782 Accounts payable ( 47,742 ) 61,336 ( 3,015 ) Accrued expenses and other liabilities 38,652 36,244 20,067 Net cash provided by operating activities 332,552 423,399 524,785 Cash flows from investing activities— Net additions to property, plant and equipment ( 67,289 ) ( 46,551 ) ( 34,849 ) Proceeds from sale of property, plant and equipment — 6,290 14,147 Purchase of intangible assets ( 2,233 ) ( 5,000 ) ( 7,052 ) Acquisitions, net of cash acquired ( 278,797 ) ( 963,600 ) ( 79,003 ) Net cash used in investing activities ( 348,319 ) ( 1,008,861 ) ( 106,757 ) Cash flows from financing activities— Proceeds under Credit Facility 1,870,000 1,739,101 2,567,305 Repayments under Credit Facility ( 1,555,250 ) ( 1,135,058 ) ( 3,345,770 ) Proceeds from issuance of convertible notes, net of issuance costs — — 729,933 Premiums paid for capped call ( 9,655 ) ( 54,553 ) ( 104,650 ) Net (repayments) proceeds under foreign bank loan ( 24,470 ) ( 2,030 ) 1,305 Payments of deferred purchase price ( 7,930 ) ( 5,861 ) ( 3,700 ) Repurchase of treasury stock ( 264,777 ) ( 29,265 ) ( 85,872 ) Debt issuance costs — ( 9,242 ) ( 10,974 ) Other, net ( 287 ) ( 303 ) ( 45 ) Net cash provided by (used in) financing activities 7,631 502,789 ( 252,468 ) Effect of exchange rates on cash and cash equivalents ( 10,225 ) ( 5,068 ) 8,043 Changes in cash and cash equivalents— Net (decrease) increase in cash and cash equivalents ( 18,361 ) ( 87,741 ) 173,603 Cash and cash equivalents at beginning of year 180,362 268,103 94,500 Cash and cash equivalents at end of year $ 162,001 $ 180,362 $ 268,103 Non-cash investing and financing activities: Stock issuance related to acquisition and purchase of intangible assets — 2,522 15,869 The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. 52 THE MIDDLEBY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2022, JANUARY 1, 2022 AND JANUARY 2, 2021 (1) NATURE OF OPERATIONS The Middleby Corporation (the "company") is engaged in the design, manufacture and sale of commercial foodservice, food processing equipment and residential kitchen equipment. The company manufactures and assembles this equipment at forty-one U.S. and thirty-four international manufacturing facilities. The company operates in three business segments: 1) the Commercial Foodservice Equipment Group, 2) the Food Processing Equipment Group and 3) the Residential Kitchen Equipment Group. The Commercial Foodservice Equipment Group has a broad portfolio of foodservice equipment, which enable it to serve virtually any cooking, warming, refrigeration, freezing and beverage application within a commercial kitchen or foodservice operation. This equipment is used across all types of foodservice operations, including quick-service restaurants, full-service restaurants, convenience stores, retail outlets, hotels and other institutions. The products offered by this group include conveyor ovens, combi-ovens, convection ovens, baking ovens, proofing ovens, deck ovens, speed cooking ovens, hydrovection ovens, ranges, fryers, rethermalizers, steam cooking equipment, food warming equipment, catering equipment, heated cabinets, charbroilers, ventless cooking systems, kitchen ventilation, induction cooking equipment, countertop cooking equipment, toasters, griddles, charcoal grills, professional mixers, stainless steel fabrication, custom millwork, professional refrigerators, blast chillers, coldrooms, ice machines, freezers, soft serve ice cream equipment, coffee and beverage dispensing equipment, home and professional craft brewing equipment, fry dispensers, bottle filling and canning equipment, and IoT solutions. The Food Processing Equipment Group offers a broad portfolio of processing solutions for customers producing pre-cooked meat products, such as hot dogs, dinner sausages, poultry and lunchmeats and baked goods such as muffins, cookies and bread. Through its broad line of products, the company is able to deliver a wide array of cooking solutions to service a variety of food processing requirements demanded by its customers. The company can offer highly integrated solutions that provide a food processing operation a uniquely integrated solution providing for the highest level of food quality, product consistency, and reduced operating costs resulting from increased product yields, increased capacity and greater throughput and reduced labor costs through automation. The products offered by this group include a wide array of cooking and baking solutions, including batch ovens, baking ovens, proofing ovens, conveyor belt ovens, continuous processing ovens, frying systems and automated thermal processing systems. The company also provides a comprehensive portfolio of complementary food preparation equipment such as tumblers, massagers, grinders, slicers, reduction and emulsion systems, mixers, blenders, formers, battering equipment, breading equipment, seeding equipment, water cutting systems, food presses, food suspension equipment, filling and depositing solutions, and forming equipment, as well as a variety of automated loading and unloading systems, automated washing systems, auto-guided vehicles, food safety, food handling, freezing, defrosting and packaging equipment. This portfolio of equipment can be integrated to provide customers a highly efficient and customized solution. The Residential Kitchen Equipment Group has a broad portfolio of innovative and professional-style residential kitchen equipment. The products offered by this group include ranges, cookers, stoves, cooktops, microwaves, ovens, refrigerators, dishwashers, undercounter refrigeration, wine cellars, ice machines, beer dispensers, ventilation equipment, mixers, rotisseries and outdoor cooking equipment. 53 (2) ACQUISITIONS AND PURCHASE ACCOUNTING The following represents the company's significant acquisitions in 2022 and 2021, the termination of a Merger Agreement, as well as summarized information on various acquisitions that were not individually material. Termination of Welbilt Merger On April 20, 2021, Middleby entered into a Merger Agreement with Welbilt, Inc. Following Welbilt's receipt of an alternative acquisition proposal, on July 13, 2021, Middleby announced that, under the terms of the Merger Agreement, it would not exercise its right to propose any modifications to the terms of the Merger Agreement and would allow the match period to expire. Accordingly, on July 14, 2021, Welbilt delivered to Middleby a written notice terminating the Merger Agreement and, concurrently with Middleby’s receipt of the termination fee of $ 110.0 million in cash from Welbilt, the Merger Agreement was terminated on July 14, 2021. The termination fee received is reflected in the Consolidated Statements of Comprehensive Earnings as the "merger termination fee" and $ 19.7 million of deal costs associated with the transaction are reflected in selling, general and administrative expenses in the Consolidated Statements of Comprehensive Earnings. Other 2021 Acquisitions During 2021, the company completed various acquisitions that were not individually material. The final allocation of consideration paid for the other 2021 acquisitions is summarized as follows (in thousands): Preliminary Opening Balance Sheet Measurement Period Adjustments Adjusted Opening Balance Sheet Cash $ 6,414 $ ( 45 ) $ 6,369 Current assets 76,077 477 76,554 Property, plant and equipment 19,561 ( 252 ) 19,309 Goodwill 85,270 30,968 116,238 Other intangibles 158,725 ( 31,566 ) 127,159 Other assets 2,101 31 2,132 Current liabilities ( 33,910 ) 53 ( 33,857 ) Long-term deferred tax (liability) asset ( 3,010 ) 3,457 447 Other non-current liabilities ( 7,092 ) ( 3,397 ) ( 10,489 ) Consideration paid at closing $ 304,136 $ ( 274 ) $ 303,862 Contingent consideration 9,404 ( 200 ) 9,204 Net assets acquired and liabilities assumed $ 313,540 $ ( 474 ) $ 313,066 The long-term deferred tax asset amounted to $ 0.4 million. The net deferred tax asset is comprised of $ 0.6 million of deferred tax asset related to tax loss carryforwards and $ 0.2 million of deferred tax liability related to the difference between the book and tax basis on identifiable tangible asset and liability accounts. The goodwill and $ 84.6 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $ 35.4 million allocated to customer relationships, $ 3.4 million allocated to developed technology, and $ 3.8 million allocated to backlog, which are being amortized over periods of 7 years, 7 to 10 years, and 3 months, respectively. Goodwill of $ 51.2 million and other intangibles of $ 66.6 million are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Goodwill of $ 65.0 million and other intangibles of $ 60.6 million are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. Of these assets, goodwill of $ 114.2 million and intangibles of $ 126.0 million are expected to be deductible for tax purposes. 54 One purchase agreement includes earnout provisions providing for contingent payments due to the sellers to the extent certain financial targets are exceeded and upon the achievement of product rollout targets. One earnout is payable upon the achievement of product rollout targets. The second earnout is payable during 2026 if the company exceeds certain earnings targets. The contractual obligation associated with the contingent earnout provisions recognized on the acquisition date amounts to $ 9.2 million. Novy Invest NV On July 12, 2021, the company completed its acquisition of all of the capital stock of Novy Invest NV ("Novy"), a leading manufacturer of premium residential ventilation hoods and cook tops located in Belgium, for a purchase price of approximately $ 250.9 million, net of cash acquired. The final allocation of consideration paid for the Novy acquisition is summarized as follows (in thousands): Preliminary Opening Balance Sheet Measurement Period Adjustments Adjusted Opening Balance Sheet Cash $ 16,152 $ — $ 16,152 Current assets 23,762 234 23,996 Property, plant and equipment 17,058 4,383 21,441 Goodwill 142,741 ( 6,938 ) 135,803 Other intangibles 126,557 4,149 130,706 Other assets 26 173 199 Current liabilities ( 23,440 ) 182 ( 23,258 ) Long-term deferred tax liability ( 33,918 ) ( 2,072 ) ( 35,990 ) Other non-current liabilities ( 1,930 ) ( 111 ) ( 2,041 ) Net assets acquired and liabilities assumed $ 267,008 $ — $ 267,008 The long-term deferred tax liability amounted to $ 36.0 million. The deferred tax liability is comprised of $ 32.7 million related to the difference between the book and tax basis of identifiable intangible assets and $ 3.3 million related to the difference between the book and tax basis on identifiable tangible asset and liability accounts. The goodwill and $ 106.6 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $ 24.1 million allocated to customer relationships, which is being amortized over a period of 10 years. Goodwill of $ 135.8 million and other intangibles of $ 130.7 million from this acquisition are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Goodwill and other intangibles are not expected to be deductible for tax purposes. 55 Kamado Joe and Masterbuilt On December 27, 2021, the company completed its acquisition of Masterbuilt Holdings, LLC, including its residential outdoor brands ("Kamado Joe and Masterbuilt"), a leader in outdoor residential cooking located in the Atlanta, Georgia area, for a purchase price of approximately $ 403.6 million, net of cash acquired. The purchase price was comprised of $ 403.6 million in cash and 12,921 shares of Middleby common stock valued at $ 2.5 million. During the third quarter of 2022, the company finalized the purchase price adjustment provided for by the purchase agreement, resulting in a payment to sellers of $ 2.8 million. The final allocation of consideration paid for the Kamado Joe and Masterbuilt acquisition is summarized as follows (in thousands): Preliminary Opening Balance Sheet Measurement Period Adjustments Adjusted Opening Balance Sheet Cash $ 5,381 $ ( 70 ) $ 5,311 Current assets 137,826 ( 5,623 ) 132,203 Property, plant and equipment 7,773 ( 1,678 ) 6,095 Goodwill 110,052 44,490 154,542 Other intangibles 215,577 ( 28,677 ) 186,900 Other assets 2,143 ( 1,174 ) 969 Current liabilities ( 54,865 ) ( 8,111 ) ( 62,976 ) Long-term deferred tax liability ( 15,907 ) 2,718 ( 13,189 ) Other non-current liabilities ( 1,914 ) 946 ( 968 ) Net assets acquired and liabilities assumed $ 406,066 $ 2,821 $ 408,887 The long-term deferred tax liability amounted to $ 13.2 million. The net deferred tax liability is comprised of $ 2.3 million of deferred tax asset related to tax loss carryforwards, $ 4.6 million of deferred tax asset related to the difference between the book and tax basis of identifiable intangible assets, and $ 20.1 million of deferred tax liability related to the difference between the book and tax basis on identifiable tangible asset and liability accounts. The goodwill and $ 145.4 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $ 31.4 million allocated to customer relationships, $ 3.0 million allocated to developed technology, and $ 7.1 million allocated to backlog, which are being amortized over periods of 10 to 12 years, 11 years, and 3 to 6 months, respectively. Goodwill of $ 154.5 million and other intangibles of $ 186.9 million of the company are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Of these assets, goodwill of $ 54.5 million and intangibles of $ 186.9 million are expected to be deductible for tax purposes. 56 Other 2022 Acquisitions As of December 31, 2022, the company completed various acquisitions that were not individually material. The following estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition dates for the other 2022 acquisitions and are summarized as follows (in thousands): Preliminary Opening Balance Sheet Preliminary Measurement Period Adjustments Adjusted Opening Balance Sheet Cash $ 25,860 $ 144 $ 26,004 Current assets 115,264 ( 2,403 ) 112,861 Property, plant and equipment 44,598 642 45,240 Goodwill 139,633 4,994 144,627 Other intangibles 93,147 2,112 95,259 Long-term deferred tax asset 426 104 530 Other assets 1,420 3,034 4,454 Current portion of long-term debt ( 22,841 ) 2,154 ( 20,687 ) Current liabilities ( 57,158 ) ( 241 ) ( 57,399 ) Long term debt ( 5,646 ) ( 2,320 ) ( 7,966 ) Long-term deferred tax liability ( 23,137 ) 637 ( 22,500 ) Other non-current liabilities ( 19,061 ) ( 6,157 ) ( 25,218 ) Consideration paid at closing $ 292,505 $ 2,700 $ 295,205 Contingent consideration 19,105 3,394 22,499 Net assets acquired and liabilities assumed $ 311,610 $ 6,094 $ 317,704 The long-term deferred tax liability amounted to $ 22.5 million. The deferred tax liability is comprised of $ 19.5 million related to the difference between the book and tax basis of identifiable intangible assets and $ 3.0 million related to the difference between the book and tax basis on identifiable tangible asset and liability accounts. The goodwill and $ 42.9 million of other intangibles associated with the trade names are subject to the non-amortization provisions of ASC 350. Other intangibles also include $ 38.2 million allocated to customer relationships, $ 6.2 million allocated to developed technology, and $ 8.0 million allocated to backlog, which are being amortized over periods of 7 years, 5 to 10 years, and 3 to 6 months, respectively. Goodwill of $ 112.3 million and other intangibles of $ 59.1 million are allocated to the Food Processing Equipment Group for segment reporting purposes. Goodwill of $ 30.0 million and other intangibles of $ 35.4 million are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. Goodwill of $ 2.3 million and other intangibles of $ 0.8 million are allocated to the Residential Kitchen Equipment Group for segment reporting purposes. Of these assets, goodwill of $ 20.8 million and intangibles of $ 11.7 million are expected to be deductible for tax purposes. Four purchase agreements include earnout provisions providing for a contingent payment due to the sellers for the achievement of certain targets. Three earnouts are payable to the extent certain EBITDA targets are met with measurement dates ending between 2022 and 2025. One earnout is payable yearly through 2026 based on product sales. The contractual obligation associated with the contingent earnout provisions recognized on the acquisition date amount to $ 22.5 million. The company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the company is waiting for additional information necessary to finalize those fair values for all acquisitions completed during 2022. Certain intangible assets are preliminarily valued using historical information from the Commercial Foodservice Equipment Group, Food Processing Equipment Group and Residential Kitchen Equipment Group and qualitative assessments of the individual businesses at acquisition date. Specifically, the company estimated the fair values of the intangible assets based on the percentage of purchase price assigned to similar intangible assets in previous acquisitions. Thus, the provisional measurements of fair values set forth above are subject to change. The company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. 57 Pro Forma Financial Information In accordance with ASC 805 Business Combinations , the following unaudited pro forma results of operations for the twelve months ended December 31, 2022 and January 1, 2022, assumes the 2021 and 2022 acquisitions described above were completed on January 3, 2021 (first day of fiscal year 2021). The following pro forma results include adjustments to reflect amortization of intangibles associated with the acquisitions and the effects of adjustments made to the carrying value of certain assets (in thousands, except per share data): Twelve Months Ended December 31, 2022 January 1, 2022 Net sales $ 4,135,012 $ 3,895,490 Net earnings 463,180 486,546 Net earnings per share: Basic $ 8.56 $ 8.81 Diluted $ 8.43 $ 8.59 The historical consolidated financial information of the company and the acquisitions have been adjusted in the pro forma information to give effect to pro forma events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. Pro forma data may not be indicative of the results that would have been obtained had these acquisitions occurred at the beginning of the periods presented, nor is it intended to be a projection of future results. Additionally, the pro forma financial information does not reflect the costs which the company has incurred or may incur to integrate the acquired businesses. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. Significant items that are subject to such estimates and judgments include allowances for doubtful accounts, reserves for excess and obsolete inventories, long-lived and intangible assets, warranty reserves, insurance reserves, income tax reserves and post-retirement obligations. On an ongoing basis, the company evaluates its estimates and assumptions based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The company's fiscal year ends on the Saturday nearest December 31. Fiscal years 2022, 2021, and 2020 ended on December 31, 2022, January 1, 2022 and January 2, 2021, respectively, and included 52, 52 and 53 weeks, respectively. Certain prior year amounts have been reclassified to be consistent with current year presentation, including non-cash unrealized foreign exchange on non-functional currency third party debt, previously reported in changes in assets and liabilities, net of acquisitions to other non-cash items as an adjustments to reconcile net earnings to cash provided by operating activities on the Consolidated Statements of Cash Flows. (b) Cash and Cash Equivalents The company considers all short-term investments with original maturities of three months or less when acquired to be cash equivalents. The company’s policy is to invest its excess cash in interest-bearing deposits with major banks that are subject to minimal credit and market risk. 58 (c) Accounts Receivable Accounts receivable, as shown in the consolidated balance sheets, are net of allowances for doubtful accounts of $ 20.3 million and $ 18.8 million at December 31, 2022 and January 1, 2022, respectively. At December 31, 2022, all accounts receivable are expected to be collected within one year. (d) Inventories Inventories are composed of material, labor and overhead and are stated at the lower of cost or net realizable value. Costs for inventory have been determined using the first-in, first-out ("FIFO") method. The company estimates reserves for inventory obsolescence and shrinkage based on its judgment of future realization. Inventories at December 31, 2022 and January 1, 2022 are as follows (in thousands): 2022 2021 Raw materials and parts $ 595,325 $ 421,361 Work in process 86,083 65,581 Finished goods 396,321 350,476 $ 1,077,729 $ 837,418 (e) Property, Plant and Equipment Property, plant and equipment are carried at cost as follows (in thousands): 2022 2021 Land $ 65,794 $ 54,477 Building and improvements 306,004 270,812 Furniture and fixtures 59,438 56,706 Machinery and equipment 311,864 265,188 743,100 647,183 Less accumulated depreciation ( 299,572 ) ( 266,203 ) $ 443,528 $ 380,980 Property, plant and equipment are depreciated or amortized on a straight-line basis over their useful lives based on management's estimates of the period over which the assets will be utilized to benefit the operations of the company. The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. The company periodically reviews these lives relative to physical factors, economic factors and industry trends. If there are changes in the planned use of property and equipment or if technological changes were to occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods. Following is a summary of the estimated useful lives: Description Life Building and improvements 20 to 40 years Furniture and fixtures 3 to 7 years Machinery and equipment 3 to 10 years Depreciation expense amounted to $ 44.2 million, $ 42.7 million and $ 39.1 million in fiscal 2022, 2021 and 2020, respectively. Expenditures which significantly extend useful lives are capitalized. Maintenance and repairs are charged to expense as incurred. Asset impairments are recorded whenever events or changes in circumstances indicate that the recorded value of an asset is greater than the sum of its expected future undiscounted cash flows. Asset impairments are recorded at the amount by which the recorded value of an asset exceeds its fair value. 59 (f) Goodwill and Other Intangibles 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. 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. Identifiable intangible assets are recognized separately from goodwill and include trademarks and trade names, technology, customer relationships and other specifically identifiable assets. Trademarks and trade names are deemed to be indefinite-lived. Goodwill and indefinite-lived intangible assets are not amortized but are subject to impairment testing. The company performs the annual impairment assessment for goodwill and indefinite-lived intangible assets as of first day of the fourth quarter of the fiscal year and more frequently if indicators of impairment exist. The goodwill impairment test is performed at the reporting unit level. The company initially performs a qualitative analysis to determine if it is more likely than not that the goodwill balance or indefinite-life intangible asset is impaired. In conducting a qualitative assessment, the company analyzes a variety of events or factors that may influence the fair value of the reporting unit or indefinite-life intangible, including, but not limited to: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, share price and other relevant factors. If an indicator of impairment is determined from the qualitative analysis, then the company will perform a quantitative analysis. The fair value of each reporting unit is compared to its carrying value. If the fair value of the reporting unit is less than its carrying value, the resulting difference will be a charge to impairment of goodwill in the Consolidated Statements of Earnings in the period in which the determination is made. Fair value is determined using a combination of present value techniques and market prices of comparable businesses. The company performed a qualitative assessment as of October 2, 2022 over all three reporting units. As a result of the financial performance for the Residential Kitchen reporting unit, the company completed a quantitative analysis. The fair value of the reporting unit exceeded its carrying unit by approximately 20% and no impairment of goodwill was recognized. Based on the qualitative assessment for all other reporting units it was determined there was no impairment of goodwill. The company has not recognized any goodwill impairments and therefore there are no accumulated impairment losses. Goodwill is allocated to the business segments as follows (in thousands): Commercial Foodservice Food Processing Residential Kitchen Total Balance as of January 2, 2021 $ 1,228,436 $ 255,798 $ 450,027 $ 1,934,261 Goodwill acquired during the year 63,849 — 266,170 330,019 Measurement period adjustments to goodwill acquired in prior year 2,411 — — 2,411 Exchange effect ( 9,609 ) ( 5,083 ) ( 8,530 ) ( 23,222 ) Balance as of January 1, 2022 $ 1,285,087 $ 250,715 $ 707,667 $ 2,243,469 Goodwill acquired during the year 30,107 112,254 2,266 144,627 Measurement period adjustments to goodwill acquired in prior year 923 — 75,344 76,267 Exchange effect ( 19,623 ) 616 ( 33,522 ) ( 52,529 ) Balance as of December 31, 2022 $ 1,296,494 $ 363,585 $ 751,755 $ 2,411,834 60 Intangible assets consist of the following (in thousands): December 31, 2022 January 1, 2022 Estimated Weighted Avg Remaining Life Gross Carrying Amount Accumulated Amortization Estimated Weighted Avg Remaining Life Gross Carrying Amount Accumulated Amortization Amortized intangible assets: Customer relationships 7.6 $ 839,811 $ ( 460,885 ) 7.6 $ 863,339 $ ( 411,327 ) Backlog 0.1 8,301 ( 6,352 ) 0.2 13,684 ( 929 ) Developed technology 8.3 79,763 ( 35,797 ) 8.9 73,461 ( 29,952 ) $ 927,875 $ ( 503,034 ) $ 950,484 $ ( 442,208 ) Indefinite-lived intangible assets: Trademarks and trade names $ 1,369,391 $ 1,367,101 The company completed its annual impairment assessment for indefinite-lived intangible assets as of October 2, 2022. We identified indicators of impairment with certain tradenames within the Commercial Foodservice and Residential Kitchen reporting units based on the qualitative assessment. The primary indicator of impairment was lower than expected revenue performance in the current year, forecasted revenues for future periods and market conditions. Based on the results of the quantitative assessments, the company determined there was no impairment of any of the indefinite-lived intangible assets. The Kamado Joe and Masterbuilt trademarks were at risk at October 2, 2022. The company believes the assumptions utilized within the quantitative analysis are reasonable and consistent with assumptions that would be used by other marketplace participants. The fair values of all other trademarks exceeded their carrying values by an amount sufficient to not be deemed "at risk." The company performed a qualitative assessment as of October 2, 2022 for all other trademarks and trade names and determined it is more like than not that the fair value of its other indefinite-life intangible assets are greater than the carrying amounts. The company elected to perform a qualitative assessment on the other indefinite-life intangible assets noting no events that indicated that the fair value was less than the carrying value that would require a quantitative impairment assessment. The estimates of future cash flows used in determining the fair value of goodwill and indefinite-lived intangible assets involve significant management judgment and are based upon assumptions about expected future operating performance, economic conditions, market conditions and cost of capital. Inherent in estimating the future cash flows are uncertainties beyond our control, such as changes in capital markets. The company continues to monitor the impacts from the COVID-19 pandemic and subsequent accelerated recovery, along with inflationary impacts from the war in Ukraine to assess the outlook for demand of its products and the impact on its business and financial performance. The actual cash flows could differ materially from management's estimates due to changes in business conditions, operating performance and economic conditions. Definite-lived intangible assets are amortized over their estimated useful lives and tested for impairment in accordance with the methodology discussed above under "Property, Plant and Equipment." The aggregate intangible amortization expense was $ 86.3 million, $ 75.8 million and $ 69.0 million in 2022, 2021 and 2020, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands): 2023 $ 74,787 2024 61,716 2025 55,578 2026 52,411 2027 43,893 2028 and thereafter 136,456 $ 424,841 61 (g) Accrued Expenses Accrued expenses consist of the following at December 31, 2022 and January 1, 2022, respectively (in thousands): 2022 2021 Contract liabilities $ 185,824 $ 133,315 Accrued payroll and related expenses 122,861 115,762 Accrued warranty 82,096 80,215 Accrued customer rebates 70,706 72,451 Accrued short-term leases 25,250 22,753 Accrued sales and other tax 24,044 22,684 Accrued contingent consideration 20,529 18,728 Accrued professional fees 19,541 19,292 Accrued agent commission 17,381 13,670 Accrued product liability and workers compensation 11,326 10,952 Other accrued expenses 91,769 73,033 $ 671,327 $ 582,855 (h) Litigation Matters From time to time, the company is subject to proceedings, lawsuits and other claims related to products, suppliers, employees, customers and competitors. The company maintains insurance to partially cover product liability, workers compensation, property and casualty, and general liability matters. The company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after assessment of each matter and the related insurance coverage. The required accrual may change in the future due to new developments or changes in approach such as a change in settlement strategy in dealing with these matters. The company does not believe that any such matter will have a material adverse effect on its financial condition, results of operations or cash flows of the company. 62 (i) Accumulated Other Comprehensive Income (Loss) The following table summarizes the components of accumulated other comprehensive income (loss) as reported in the consolidated balance sheets (in thousands): 2022 2021 Unrecognized pension benefit costs, net of tax of $( 1,995 ) and $( 39,470 ) $ ( 121,701 ) $ ( 249,696 ) Unrealized loss on interest rate swap, net of tax of $ 16,836 and $( 4,501 ) 48,574 ( 13,064 ) Unrealized gain on certain investments, net of tax of $ — and $ 433 — 1,330 Currency translation adjustments ( 205,345 ) ( 97,654 ) $ ( 278,472 ) $ ( 359,084 ) Changes in accumulated other comprehensive income (loss) (1) were as follows (in thousands): Currency Translation Adjustment Pension Benefit Costs Unrealized Gain/(Loss) Interest Rate Swap Unrealized Gain/(Loss) Certain Investments Total Balance as of January 2, 2021 $ ( 49,961 ) $ ( 400,919 ) $ ( 37,548 ) $ — $ ( 488,428 ) Other comprehensive income before reclassification ( 47,693 ) 137,187 6,015 1,330 96,839 Amounts reclassified from accumulated other comprehensive income — 14,036 18,469 — 32,505 Net current-period other comprehensive income $ ( 47,693 ) $ 151,223 $ 24,484 1,330 $ 129,344 Balance as of January 1, 2022 $ ( 97,654 ) $ ( 249,696 ) $ ( 13,064 ) $ 1,330 $ ( 359,084 ) Other comprehensive income before reclassification ( 107,691 ) 117,840 58,135 ( 1,330 ) 66,954 Amounts reclassified from accumulated other comprehensive income — 10,155 3,503 — 13,658 Net current-period other comprehensive income $ ( 107,691 ) $ 127,995 $ 61,638 $ ( 1,330 ) $ 80,612 Balance as of December 31, 2022 $ ( 205,345 ) $ ( 121,701 ) $ 48,574 $ — $ ( 278,472 ) (1) As of December 31, 2022 pension and unrealized gain/(loss) interest rate swap amounts are net of tax of $( 2.0 ) million, and $ 16.8 million, respectively. During the twelve months ended December 31, 2022, the adjustments to pension benefit costs unrealized gain/(loss) interest rate swap and gain/(loss) on certain investments were net of tax of $ 37.5 million, $ 21.3 million and $( 0.4 ) million, respectively. 63 (j) Fair Value Measures ASC 820 Fair Value Measurements and Disclosures defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into the following levels: Level 1 – Quoted prices in active markets for identical assets or liabilities Level 2 – Inputs, other than quoted prices in active markets, which are observable either directly or indirectly Level 3 – Unobservable inputs based on our own assumptions The company’s financial assets and liabilities that are measured at fair value are categorized using the fair value hierarchy at December 31, 2022 and January 1, 2022 are as follows (in thousands): Fair Value Level 1 Fair Value Level 2 Fair Value Level 3 Total As of December 31, 2022 Financial Assets: Interest rate swaps $ — $ 64,985 $ — $ 64,985 Financial Liabilities: Contingent consideration $ — $ — $ 47,242 $ 47,242 Foreign exchange derivative contracts $ — $ 474 $ — $ 474 As of January 1, 2022 Financial Assets: Interest rate swaps $ — $ 3,645 $ — $ 3,645 Foreign exchange derivative contracts $ — $ 1,095 $ — $ 1,095 Financial Liabilities: Interest rate swaps $ — $ 21,635 $ — $ 21,635 Contingent consideration $ — $ — $ 34,983 $ 34,983 The contingent consideration, as of December 31, 2022 and January 1, 2022, relates to the earnout provisions recorded in conjunction with various purchase agreements. The earnout provisions associated with these acquisitions are based upon performance measurements related to sales and earnings, as defined in the respective purchase agreements. On a quarterly basis, the company assesses the projected results for each of the acquisitions in comparison to the earnout targets and adjusts the liability accordingly. Discount rates for valuing contingent consideration are determined based on the company rates and specific acquisition risk considerations. Changes in fair value associated with the earnout provisions are recognized in Selling, general and administrative expenses within the Consolidated Statements of Earnings. The following table represents changes in the fair value of the contingent consideration liabilities for the fiscal years 2022 and 2021: December 31, 2022 January 1, 2022 Beginning balance $ 34,983 $ 25,558 Payments of contingent consideration ( 5,103 ) ( 528 ) New contingent consideration 22,299 8,567 Changes in fair value ( 4,937 ) 1,386 Ending balance $ 47,242 $ 34,983 64 (k) Foreign Currency The income statements of the company’s foreign operations are translated at the monthly average rates. Assets and liabilities of the company’s foreign operations are translated at exchange rates at the balance sheet date. These translation adjustments are not included in determining net income for the period but are disclosed and accumulated in a separate component of stockholders’ equity. Exchange gains and losses on foreign currency transactions are included in determining net income for the period in which they occur. These transactions amounted to a loss of $ 28.1 million, gain of $ 0.3 million and a loss of $ 2.9 million in 2022, 2021 and 2020, respectively, and are included in other expense on the statements of earnings. (l) Shipping and Handling Costs Fees billed to the customer for shipping and handling are classified as a component of net revenues. Shipping and handling costs are included in cost of products sold. (m) Warranty Costs In the normal course of business, the company issues product warranties for specific product lines and provides for the estimated future warranty cost in the period in which the sale is recorded. The estimate of warranty cost is based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Because warranty estimates are forecasts that are based on the best available information, claims costs may differ from amounts provided. Adjustments to initial obligations for warranties are made as changes in the obligations become reasonably estimable. A rollforward of the warranty reserve for the fiscal years 2022 and 2021 are as follows (in thousands): 2022 2021 Beginning balance $ 80,215 $ 69,667 Warranty reserve related to acquisitions 3,607 5,046 Warranty expense 70,774 68,199 Warranty claims paid ( 72,500 ) ( 62,697 ) Ending balance $ 82,096 $ 80,215 (n) Research and Development Costs Research and development costs, included in cost of sales in the consolidated statements of earnings, are charged to expense when incurred. These costs were $ 48.9 million, $ 41.8 million and $ 35.3 million in fiscal 2022, 2021 and 2020, respectively. (o) Non-Cash Share-Based Compensation The company's 2021 Stock Incentive Plan (the "2021 Plan"), allows for the granting of stock options, stock appreciation rights, restricted stock and restricted stock units, performance stock, phantom units and other equity-based awards. The company estimates the fair value of restricted stock grants, restricted stock units and performance stock units at the time of grant and recognizes compensation costs over the vesting period of the grants. The expense, net of forfeitures, is recognized using the straight-line method. Non-cash share-based compensation expense is only recognized for those grants expected to vest. See Note 6, "Common and Preferred Stock," for further information on the company's share-based incentive plans. 65 (p) Earnings Per Share “Basic earnings per share” is calculated based upon the weighted average number of common shares actually outstanding, and “diluted earnings per share” is calculated based upon the weighted average number of common shares outstanding and other dilutive securities. The company’s potentially dilutive securities consist of shares issuable on vesting of restricted stock grants computed using the treasury method and amounted to 852,000 , 1,449,000 and 43,000 for fiscal 2022, 2021 and 2020, respectively. The company's potentially dilutive securities consist of shares issuable on vesting of restricted stock grants computed using the treasury method and amounted to approximately 73,000 and 56,000 for fiscal 2022 and 2021, respectively. During fiscal 2022 and 2021, the average market price of the company's common stock exceeded the exercise price of the Convertible Notes (as defined below) resulting in approximately 779,000 and 1,393,000 diluted common stock equivalents to be included in the diluted net earnings per share, respectively. There have been no material conversions to date. See Note 5, Financing Arrangements, in these Notes to the Consolidated Financial Statements for further details on the Convertible Notes. There were no anti-dilutive equity awards excluded from common stock equivalents for 2022, 2021 or 2020. (q) Consolidated Statements of Cash Flows Cash paid for interest was $ 77.2 million, $ 50.6 million and $ 65.6 million in fiscal 2022, 2021 and 2020, respectively. Cash payments totaling $ 114.0 million, $ 125.8 million, and $ 41.2 million were made for income taxes during fiscal 2022, 2021 and 2020, respectively. (r) New Accounting Pronouncements Accounting Pronouncements - Recently Adopted On May 3, 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The company adopted this standard in the first quarter of 2022 and it did not have a material impact on its Consolidated Financial Statements and disclosures. Accounting Pronouncements - To be adopted In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The new standard is effective for the company on January 2, 2022 and only impacts annual financial statement footnote disclosures. The company is currently evaluating the impacts the adoption of this guidance will have on its Consolidated Financial Statements and disclosures. In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance for troubled debt restructurings by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current-period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The standard should be applied prospectively, and it allows for a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The company is currently evaluating the impacts the adoption of this guidance will have on its Consolidated Financial Statements and disclosures. 66 In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. The new standard expands and clarifies the use of the portfolio layer method for fair value hedges of interest rate risk. The new standard allows non-prepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The new guidance on hedging multiple layers in a closed portfolio should be applied prospectively and the guidance on the accounting for fair value basis adjustments should be applied on a modified retrospective basis. The company is currently evaluating the impacts the adoption of this guidance will have on its Consolidated Financial Statements and disclosures. (4) REVENUE RECOGNITION 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. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The company’s contracts can have multiple performance obligations or just a single performance obligation. For contracts with multiple performance obligations, the contracts transaction price is allocated to each performance obligation using the company’s best estimate of the standalone selling price of each distinct good or service in the contract. As the company’s standard payment terms are less than one year, the company does not assess whether a contract has a significant financing component. The company treats shipping and handling activities performed after the customer obtains control of the good as a contract fulfillment activity. Sales, use and value added taxes assessed by governmental authorities are excluded from the measurement of the transaction price within the company’s contracts with its customers. The company generally expenses sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expenses. Within the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups, the estimated standalone selling price of equipment is based on observable prices. Within the Food Processing Equipment Group, the company estimates the standalone selling price based on expected cost to manufacture the good or complete the service plus an appropriate profit margin. Control may pass to the customer over time or at a point in time. In general, the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups recognize revenue at the point in time control transfers to their customers based on contractual shipping terms. Revenue from equipment sold under our long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. Installation services provided in connection with the delivery of the equipment are also generally recognized as those services are rendered. Over time transfer of control is measured using an appropriate input measure (e.g., costs incurred or direct labor hours incurred in relation to total estimate). These measures include forecasts based on the best information available and therefore reflect the company's judgment to faithfully depict the transfer of the goods. Contract Estimates Accounting for long-term contracts within the Food Processing Equipment group involves the use of various techniques to estimate total contract revenue and costs. For the company’s long-term contracts, estimated profit for the equipment performance obligations is recognized as the equipment is manufactured and assembled. Profit on the equipment performance obligations is estimated as the difference between the total estimated revenue and expected costs to complete a contract. Contract cost estimates are based on labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials and labor, and the performance of subcontractors. The company does not disclose information about remaining performance obligations that have original expected durations of one year or less. Contracts within the Commercial Foodservice and Residential Foodservice Equipment groups may contain variable consideration in the form of volume rebate programs. The company’s estimate of variable consideration is based on its experience with similarly situated customers using the portfolio approach. 67 Disaggregation of Revenue We disaggregate our net sales by reportable operating segment and geographical location as we believe it best depicts how the nature, timing and uncertainty of our net sales and cash flows are affected by economic factors. In general, the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups recognize revenue at the point in time control transfers to their customers based on contractual shipping terms. Revenue from equipment sold under our long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. The following table summarizes our net sales by reportable operating segment and geographical location (in thousands): Commercial Foodservice Food Processing Residential Kitchen Total Twelve Months Ended December 31, 2022 United States and Canada $ 1,766,257 $ 410,853 $ 701,909 $ 2,879,019 Asia 212,193 20,295 32,121 264,609 Europe and Middle East 364,143 100,216 303,840 768,199 Latin America 67,673 43,101 10,252 121,026 Total $ 2,410,266 $ 574,465 $ 1,048,122 $ 4,032,853 Twelve Months Ended January 1, 2022 United States and Canada $ 1,435,120 $ 347,280 $ 454,375 $ 2,236,775 Asia 204,432 17,641 11,154 233,227 Europe and Middle East 344,273 77,671 265,508 687,452 Latin America 48,936 38,154 6,248 93,338 Total $ 2,032,761 $ 480,746 $ 737,285 $ 3,250,792 Twelve Months Ended January 2, 2021 United States and Canada $ 1,067,872 $ 311,042 $ 373,864 $ 1,752,778 Asia 155,742 26,778 6,711 189,231 Europe and Middle East 246,845 78,690 182,919 508,454 Latin America 39,820 20,762 2,212 62,794 Total $ 1,510,279 $ 437,272 $ 565,706 $ 2,513,257 Contract Balances Contract assets primarily relate to the company's right to consideration for work completed but not billed at the reporting date and are recorded in prepaid expenses and other in the Consolidated Balance Sheet. Contract assets are transferred to receivables when the right to consideration becomes unconditional. Contract liabilities relate to advance consideration received from customers for which revenue has not been recognized. Current contract liabilities are recorded in accrued expenses in the Consolidated Balance Sheet. Non-current contract liabilities are recorded in other non-current liabilities in the Consolidated Balance Sheet. Contract liabilities are reduced when the associated revenue from the contract is recognized. The following table provides information about contract assets and contract liabilities from contracts with customers (in thousands): December 31, 2022 January 1, 2022 Contract assets $ 40,438 $ 21,592 Contract liabilities $ 185,824 $ 133,315 Non-current contract liabilities $ 12,495 $ 11,602 68 During the twelve months period ended December 31, 2022, the company reclassified $ 16.1 million to accounts receivable which was included in the contract asset balance at the beginning of the period. During the twelve months period ended December 31, 2022, the company recognized revenue of $ 123.3 million which was included in the contract liability balance at the beginning of the period. Additions to contract liabilities representing amounts billed to clients in excess of revenue recognized to date were $ 174.4 million during the twelve months period ended December 31, 2022. In addition, contract liabilities increased due to acquisitions during fiscal 2022. Substantially all of the company's outstanding performance obligations will be satisfied within 12 to 36 months. There were no contract asset impairments during twelve months period ended December 31, 2022. (5) FINANCING ARRANGEMENTS 2022 2021 (in thousands) Senior secured revolving credit line $ 251,805 $ 683,175 Term loan facility 975,785 993,340 Delayed draw term loan facility 750,000 — Convertible senior notes 737,918 734,417 Foreign loans 5,917 2,224 Other debt arrangement 899 1,138 Total debt 2,722,324 2,414,294 Less: Current maturities of long-term debt 45,583 27,293 Long-term debt $ 2,676,741 $ 2,387,001 Credit Facility On October 21, 2021, the company entered into an amended and restated five-year, $ 4.5 billion multi-currency senior secured credit agreement (the "Credit Facility") that amends and restates the company's pre-existing $ 3.1 billion credit facility which had an original maturity of January 31, 2025. The Credit Facility consists of (i) a $ 1 billion term loan facility, (ii) a $ 750 million delayed draw term loan facility, and (iii) a $ 2.75 billion multi-currency revolving credit facility, with the potential under certain circumstances, to increase the amount of the credit facility by the greater of $ 625 million and 100 % of consolidated EBITDA for the most recently ended period of consecutive fiscal quarters (plus additional amounts, subject to compliance with a senior secured net leverage ratio), either by increasing the revolving commitment or by adding one or more revolver or term loan tranches. The Credit Facility matures on October 21, 2026, with the potential to extend the maturity date in one-year increments with the consent of the extending lenders. The term facility will amortize in equal quarterly installments due on the last day of each fiscal quarter, commencing with the first full fiscal quarter after October 21, 2021, in an aggregate amount equal to 2.50 % of the original aggregate principal amount of the term loan facility, with the balance, plus any accrued interest, due and payable on October 21, 2026. The delayed draw term loan facility is available for borrowing within one year and will amortize in quarterly installments due on the last day of each fiscal quarter, commencing with the first full fiscal quarter after each delayed draw term loan borrowing in an amount equal to 0.625 % of the original aggregate principal amount of such borrowing, with the balance, plus any accrued interest, due and payable on October 21, 2026. Fees associated with the amendment of the term loan facilities are recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheets and amortized to interest expense over the term of the Credit Facility. On August 11, 2022, the company borrowed $ 750 million against the delayed draw term facility as provided under the Credit Agreement. The funds were used to reduce outstanding borrowings under the revolver. The delayed draw term loan amortizes in quarterly installments due on the last day of each fiscal quarter, commencing on December 31, 2022, in an amount equal to 0.625 % of the principal drawn, with the balance, plus any accrued interest payable by October 21, 2026. As of December 31, 2022, the company had $ 2.0 billion of borrowings outstanding under the Credit Facility, including $ 1.0 billion outstanding under the term loan ($ 976 million, net of unamortized issuance fees) and $ 750 million outstanding under the delayed draw term loan. The company also had $ 1.9 million in outstanding letters of credit as of December 31, 2022, which reduces the borrowing availability under the Credit Facility. Remaining borrowing capacity under this facility was $ 2.5 billion at December 31, 2022. 69 At December 31, 2022, borrowings under the Credit Facility accrued interest at a rate of 1.625 % above LIBOR per annum or 0.625 % above the highest of the prime rate, the federal funds rate plus 0.50 % and one month LIBOR plus 1.00 %. The interest rates on borrowings under the Credit Facility may be adjusted quarterly based on the company’s Funded Debt less Unrestricted Cash to Pro Forma EBITDA (the “Leverage Ratio”) on a rolling four-quarter basis. Additionally, a commitment fee based upon the Leverage Ratio is charged on the unused portion of the commitments under the Credit Facility. Borrowings under the Credit Facility will accrue interest at a minimum of 1.625 % above LIBOR and the variable unused commitment fee will be at a minimum of 0.25 %. The average interest rate per annum, inclusive of hedging instruments, on the debt under the Credit Facility was equal to 4.27 % at the end of the period and the variable commitment fee was equal to 0.25 % per annum as of December 31, 2022. The term loan and delayed draw term loan facilities had an average interest rate per annum, inclusive of hedging instruments, of 4.36 % as of December 31, 2022. In addition, the company has international credit facilities to fund working capital needs outside the United States. At December 31, 2022, these foreign credit facilities amounted to $ 5.9 million in U.S. Dollars with a weighted average per annum interest rate of approximately 1.13 %. The company’s debt is reflected on the balance sheet at cost. The fair values of the Credit Facility, term debt and foreign and other debt is based on the amount of future cash flows associated with each instrument discounted using the company's incremental borrowing rate. The company believes its interest rate margins on its existing debt are consistent with current market conditions and therefore the carrying value of debt reflects the fair value. The interest rate margin is based on the company's Leverage Ratio. The carrying value and estimated aggregate fair value, a level 2 measurement, based primarily on market prices, of debt excluding the Convertible Notes is as follows (in thousands): Dec 31, 2022 Jan 1, 2022 Carrying Value Fair Value Carrying Value Fair Value Total debt excluding convertible senior notes $ 1,984,406 $ 1,989,871 $ 1,679,877 $ 1,686,537 The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At December 31, 2022, the company had outstanding floating-to-fixed interest rate swaps totaling $ 233.0 million notional amount carrying an average interest rate of 2.13 % maturing in less than 12 months and $ 850.0 million notional amount carrying an average interest rate of 1.73 % that mature in more than 12 months but less than 62 months. The terms of the Credit Facility, as amended, limit the ability of the company and its subsidiaries to, with certain exceptions: incur indebtedness; grant liens; engage in certain mergers, consolidations, acquisitions and dispositions; make restricted payments; enter into certain transactions with affiliates; and 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 , (ii) a maximum Secured Leverage Ratio (as defined in the Credit Facility) of Funded Debt less Unrestricted Cash to Pro Forma EBITDA (each as defined in the Credit Facility) of 3.75 to 1.00 , which may be adjusted to 4.25 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. The Credit Facility is secured by substantially all of the assets of Middleby Marshall, the company and the company's domestic subsidiaries and is unconditionally guaranteed by, subject to certain exceptions, the company and certain of the company's direct and indirect material foreign and domestic subsidiaries. The Credit Facility contains certain customary events of default, including, but not limited to, the failure to make required payments; bankruptcy and other insolvency events; the failure to perform certain covenants; the material breach of a representation or warranty; non-payment of certain other indebtedness; the entry of undischarged judgments against the company or any subsidiary for the payment of material uninsured amounts; the invalidity of the company guarantee or any subsidiary guaranty; and a change of control of the company. At December 31, 2022, the company was in compliance with all covenants pursuant to its borrowing agreements. 70 Convertible Notes The following table summarizes the outstanding principal amount and carrying value of the Convertible Notes: Dec 31, 2022 Jan 1, 2022 (in thousands) Principal amounts: Principal $ 747,499 $ 747,500 Unamortized issuance costs ( 9,581 ) ( 13,083 ) Net carrying amount $ 737,918 $ 734,417 The following table summarizes total interest expense recognized related to the Convertible Notes: Twelve Months Ended Dec 31, 2022 Jan 1, 2022 Jan 2, 2021 Contractual interest expense $ 7,475 $ 7,454 $ 2,720 Interest cost related to amortization of debt issuance costs 3,587 3,484 7,971 Total interest expense $ 11,062 $ 10,938 $ 10,691 On August 21, 2020, the company issued $ 747.5 million aggregate principal amount of 1.00 % Convertible Senior Notes due 2025 in a private offering pursuant to an indenture, dated August 21, 2020 (the "Indenture"), between the company and U.S. Bank National Association, as trustee. The net proceeds from the sale of the Convertible Notes were approximately $ 729.9 million after deducting the initial purchasers' discounts and the offering expenses payable by the company. In connection with the pricing of the Convertible Notes, the company entered into privately negotiated Capped Call Transactions (the "2020 Capped Call Transactions") and the company used the net proceeds of the offering of the Convertible Notes to pay the aggregate amount of $ 104.7 million for them. The estimated fair value of the Convertible Notes was $ 844.5 million as of December 31, 2022 and was determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 3 (j), Fair Value Measurements , in these Notes to the Consolidated Financial Statements included in this Part II, Item 8 of this Annual Report on Form 10-K . The if-converted value of the Convertible Notes exceeded their respective principal value by $ 30.7 million as of December 31, 2022. The Convertible Notes are general unsecured obligations of the company. The Convertible Notes rank senior in right of payment to any of the company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; rank equal in right of payment to the company’s existing and future unsecured indebtedness that is not so subordinated; are effectively subordinated in right of payment to any of the company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and are structurally subordinated to all existing and future indebtedness and liabilities of the company’s subsidiaries. The company initially separated the Convertible Notes into liability and equity components. The equity component of the Convertible Notes of approximately $ 105.0 million was included in the additional paid-in capital and the resulting debt discount was being amortized to interest expense at an effective interest rate of 1.5 %. In fiscal 2021, upon adoption of ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, the equity component was essentially reversed, increasing the liability and no longer requiring the company to recognize non-cash interest expense associated with the amortization of the debt discount. 71 The Convertible Notes were issued pursuant to the Indenture and bear interest semi-annually in arrears at a rate of 1.00 % per annum on March 1 and September 1 of each year. The Convertible Notes are convertible based upon an initial conversion rate of 7.7746 shares of the company's common stock per $ 1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $ 128.62 per share of the company's common stock. The conversion rate will be subject to adjustment upon occurrence of certain specified events in accordance with the Indenture but will not be adjusted for accrued and unpaid interest. Additionally, in the event of a Fundamental Change (as defined in the Indenture), holders of the Convertible Notes may require the company to repurchase all or a portion of their Convertible Notes at a price equal to 100.0 % of the principal amount of Convertible Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date. Upon conversion, the company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the company's election, in respect of the remainder, if any, of the company's conversion obligation in excess of the aggregate principal amount of the notes being converted. At December 31, 2022, none of these conditions existed. 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. Prior to the close of business on the business day immediately preceding June 1, 2025, the notes will be convertible at the option of the holders only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 2, 2021 (and only during such fiscal quarter), if the last reported sale price of the company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130.0 % of the conversion price for the Convertible Notes on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $ 1,000 principal amount of the Convertible Notes for each trading day of that ten consecutive trading day period was less than 98.0 % of the product of the last reported sale price of the company's common stock and the conversion rate of the Convertible Notes on each such trading day; (3) if the company calls such Convertible Notes for redemption; or (4) upon the occurrence of specified corporate events. On or after June 1, 2025, the notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Holders of the Convertible Notes who convert in connection with a Make-Whole Fundamental Change or during a Redemption Period (each as defined in the Indenture) will be, under certain circumstances, entitled to an increase in the conversion rate. The company may settle the conversions of the Convertible Notes in cash, shares of the company's common stock or any combination thereof at its election. The number of shares of the company's common stock issuable at the conversion price of $ 128.62 per share is expected to be 5.8 million shares. However, the Capped Call Transactions are expected generally to reduce the potential dilution of the company's common stock upon any conversion of Convertible Notes and/or offset the cash payments the company is required to make in excess of the principal amount of the Notes. Under the 2020 Capped Call Transactions, the number of shares of common stock issuable at the conversion price of $ 207.93 is expected to be 3.6 million shares. Under the 2021 Capped Call Transactions, the number of shares of common stock issuable at the conversion prices of $ 216.50 and $ 225.00 is expected to be 3.5 million shares and 3.3 million shares, respectively. Under the 2022 Capped Call Transactions, the number of shares of common stock issuable at the conversion price of $ 229.00 is expected to be 3.3 million shares. During the twelve months period ended December 31, 2022, one Convertible Note has been converted to date. The company may redeem all or any portion of the Convertible Notes, at its option, on or after September 5, 2023 and prior to the 41st scheduled trading day immediately preceding the maturity date, at a redemption price equal to 100.0 % of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest thereon, if the last reported sales price of the company's common stock has been at least 130.0 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the company provides written notice of redemption. The Indenture includes customary terms and covenants, including certain events of default after which the Convertible Notes may become due and payable immediately. 72 Capped Call Transactions In connection with the pricing of the Convertible Notes, the company entered into privately negotiated Capped Call Transactions (the "2020 Capped Call Transactions") and the company used the net proceeds of the offering of the Convertible Notes to pay the aggregate amount of $ 104.7 million for them. The company entered into two tranches of privately negotiated Capped Call Transactions in December 2021 (the "2021 Capped Call Transactions") in the aggregate amount of $ 54.6 million. On March 15, 2022, the company entered into an additional tranche of privately negotiated Capped Call Transactions (the "2022 Capped Call Transactions") in the amount of $ 9.7 million. The 2020, 2021, and 2022 Capped Call Transactions (collectively, the "Capped Call Transactions") are expected generally to reduce the potential dilution and/or offset the cash payments the company is required to make in excess of the principal amount of the Convertible Notes upon conversion of the Convertible Notes in the event that the market price per share of the company's common stock is greater than the strike price of the Capped Call Transactions (which initially corresponds to the initial conversion price of the Convertible Notes and is subject to certain adjustments under the terms of the Capped Call Transactions), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Transactions. The 2020 Capped Call Transactions have an initial cap price of $ 207.93 per share of the company's common stock. The 2021 Capped Call Transactions have initial cap prices of $ 216.50 and $ 225.00 per share of the company's common stock. The 2022 Capped Call Transactions have an initial cap price of $ 229.00 per share of the company's common stock. The Capped Call Transactions cover, initially, the number of shares of the company's common stock underlying the Convertible Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes. The Capped Call Transactions are separate transactions entered into by the company with the capped call counterparties and are not part of the terms of the Convertible Notes and will not affect any holder's right under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Capped Call Transactions. The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the company's stock. The premiums paid of the Capped Call Transactions have been included as a net reduction to additional paid-in capital with stockholders' equity. The aggregate amount of debt payable during each of the next five years is as follows (in thousands): 2023 $ 45,583 2024 43,788 2025 780,826 2026 1,850,752 2027 and thereafter 1,375 $ 2,722,324 73 (6) COMMON AND PREFERRED STOCK (a) Shares Authorized At December 31, 2022 and January 1, 2022, the company had 95,000,000 authorized shares of common stock and 2,000,000 authorized shares of non-voting preferred stock. (b) Treasury Stock In November 2017, the company's Board of Directors approved a stock repurchase program authorizing the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock. In May 2022, the company's Board of Directors approved the company to repurchase an additional 2,500,000 shares of its outstanding common stock under the current program. During 2021, the company repurchased 141,500 shares of its common stock under the program for $ 26.6 million, including applicable commissions, which represented an average price of $ 188.17 . During 2022, the company repurchased 1,553,961 shares of its common stock under the program for $ 249.0 million, including applicable commissions, which represented an average price of $ 160.27 . As of December 31, 2022, 2,718,626 shares had been purchased under the 2017 stock repurchase program and 2,281,374 remain authorized for repurchase. The company also treats shares withheld for tax purposes on behalf of employees in connection with the vesting of restricted share grants as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. During 2021, the company repurchased 15,480 shares of its common stock that were surrendered to the company for withholding taxes related to restricted stock vestings for $ 2.7 million. During 2022, the company repurchased 90,243 shares of its common stock that were surrendered to the company for withholding taxes related to restricted stock vestings for $ 15.8 million. (c) Share-Based Awards The company maintains an incentive plan under which the company's Board of Directors grants share-based awards to key employees. On May 10, 2021, the 2021 Stock Incentive Plan (the "2021 Plan") was approved, which included a maximum amount of 1,350,000 shares allowed to be awarded plus the shares remaining for future grants under the 2011 Stock Incentive Plan (the "2011 Plan") as of the approval date and any shares outstanding that are subsequently forfeited or expired. Thus, no further shares are available to grant under the 2011 Plan and the maximum amount of shares available for future grants under the 2021 Plan as of December 31, 2022 is 1,367,271 . Non-cash share-based compensation of $ 58.4 million, $ 42.3 million and $ 19.6 million was recognized for fiscal 2022, 2021 and 2020, respectively, associated with restricted share grants and restricted stock units. The company recorded a related tax benefit of $ 1.3 million, $ 0.4 million and less than $ 2.7 million in fiscal 2022, 2021 and 2020, respectively. Restricted share grants: The company has issued restricted share grant awards, which are generally time and performance based and were not subject to market conditions. The fair value of restricted share grants represents the closing share price of the company's stock as of the date of the grant and is recognized over the vesting period of the awards. The weighted average grant date fair value was $ 188.31 , $ 181.31 and $ 57.74 per share for restricted share grants in fiscal 2022, 2021 and 2020 respectively, which represents the closing share price of the company’s stock as of the date of grant. The approximate fair value of restricted shares vested were $ 29.1 million, $ 7.3 million, $ 44.8 million for fiscal 2022, 2021 and 2020, respectively. 74 A summary of the company’s nonvested restricted share grant activity and their corresponding fair value on the date of grant for fiscal year ended December 31, 2022 is as follows: Shares Weighted Average Grant-Date Fair Value Nonvested shares at January 1, 2022 180,306 $ 113.31 Granted 4,000 188.31 Vested ( 167,174 ) 123.13 Forfeited ( 2,776 ) 126.71 Nonvested shares at December 31, 2022 14,356 $ 134.43 As of December 31, 2022, there was $ 0.3 million of total unrecognized compensation cost related to nonvested restricted share grant compensation arrangements, if all performance conditions are fully achieved. The remaining weighted average life is 0.5 years. Restricted stock units: During 2020, the company began granting restricted stock units, which entitle the holder to shares of common stock subject to time vesting and the achievement of certain market and performance goals. The fair value for time-based units are valued at the closing share price of the company’s stock as of the date of the grant and the fair value for performance units are based upon valuations using the Monte Carlo Methodology. Compensation expense is recognized over the performance measurement period of the units in accordance with ASC 718 Stock Compensation for awards with market and performance vesting conditions. Time vesting units vest equally over two or three years and performance units vest based on achievement of certain company performance criteria over the two or three year period, as set forth in the grant agreement ranging from 0 to 200% of the target shares granted. The weighted average grant date fair value was $ 150.07 , $ 166.41 and $ 134.25 per share for restricted stock units in fiscal 2022, 2021 and 2020, respectively. The approximate fair value of restricted stock units vested were $ 9.1 million for fiscal 2022. A summary of the company’s nonvested restricted stock unit activity at target shares and their corresponding fair value on the date of grant for fiscal year ended December 31, 2022 is as follows: Units Weighted Average Grant-Date Fair Value Nonvested shares at January 1, 2022 335,124 $ 161.85 Granted 241,321 150.07 Vested ( 52,211 ) 150.36 Forfeited ( 2,779 ) 162.08 Nonvested shares at December 31, 2022 521,455 $ 157.55 As of December 31, 2022, there was $ 70.8 million of total unrecognized compensation cost related to nonvested restricted stock unit compensation arrangements, if all performance conditions are fully achieved. The remaining weighted average life is 1.65 years. 75 (7) INCOME TAXES Earnings before taxes is summarized as follows (in thousands): 2022 2021 2020 Domestic $ 383,813 $ 453,357 $ 178,813 Foreign 180,602 166,147 89,244 Total $ 564,415 $ 619,504 $ 268,057 The provision for income taxes is summarized as follows (in thousands): 2022 2021 2020 Federal $ 62,416 $ 84,689 $ 36,908 State and local 23,892 24,363 8,815 Foreign 41,538 21,960 15,040 Total $ 127,846 $ 131,012 $ 60,763 Current $ 134,488 $ 124,149 $ 44,342 Deferred ( 6,642 ) 6,863 16,421 Total $ 127,846 $ 131,012 $ 60,763 Reconciliation of the differences between income taxes computed at the federal statutory rate to the effective rate are as follows: 2022 2021 2020 U.S. federal statutory tax rate 21.0 % 21.0 % 21.0 % State taxes, net of federal benefit 3.3 3.1 3.2 Permanent differences 0.9 0.5 ( 0.4 ) Foreign income tax rate at rates other than U.S. statutory 0.2 -2.2 0.2 0.5 Deferred tax changes — ( 2.2 ) ( 0.7 ) Change in valuation allowances — 0.4 ( 0.1 ) Tax on unremitted earnings 0.3 0.4 1.2 Federal Refund — ( 0.7 ) — Internal restructuring ( 2.3 ) — — Other ( 0.7 ) ( 1.6 ) ( 2.0 ) Consolidated effective tax 22.7 % 21.1 % 22.7 % (1) Net of changes in related tax attributes. A tax provision of $ 127.8 million, at an effective rate of 22.7 %, was recorded for fiscal 2022 as compared to $ 131.0 million at an effective rate of 21.1 %, in fiscal 2021. The fiscal 2022 tax provision includes a deferred tax benefit of approximately $13 million associated with legal entity restructuring the company undertook to integrate and simplify the company’s business operations. The fiscal 2022 tax provision also reflects higher non-deductible stock compensation expense, where the prior year included favorable tax adjustments for deferred tax rate changes, tax refunds and adjustments for the finalization of 2020 tax returns. The effective rates in 2022 and 2021 are higher than the federal tax rate of 21.0 % primarily due to state taxes and foreign tax rate differentials. On August 16, 2022, the Inflation Reduction Act ("IRA") was enacted into law. The IRA enacted a 15% corporate minimum tax effective in 2023, a 1% tax on share repurchases after December 31, 2022, and created and extended certain tax-related energy incentives. We currently do not expect the tax-related provisions of the IRA to have a material impact on our financial results. 76 At December 31, 2022 and January 1, 2022, the company had recorded the following deferred tax assets and liabilities (in thousands): 2022 2021 Deferred tax assets: Compensation related $ 26,273 $ 21,543 Pension and post-retirement benefits 1,640 49,072 Inventory reserves 26,134 14,453 Accrued liabilities and reserves 7,992 17,088 Warranty reserves 17,593 19,286 Operating lease liability 19,890 18,643 Basis difference on affiliates 14,473 — Interest rate swaps — 4,573 Convertible debt 39,388 37,034 Net operating loss carryforwards 12,964 17,083 Other 14,879 12,695 Gross deferred tax assets 181,226 211,470 Valuation allowance ( 11,599 ) ( 10,222 ) Deferred tax assets $ 169,627 $ 201,248 Deferred tax liabilities: Intangible assets $ ( 287,433 ) $ ( 273,974 ) Depreciable assets ( 32,267 ) ( 26,996 ) Basis difference on affiliates — ( 18,795 ) Operating lease right-of-use assets ( 19,240 ) ( 18,029 ) Interest rate swaps ( 16,836 ) — Other ( 27,317 ) ( 17,195 ) Deferred tax liabilities $ ( 383,093 ) $ ( 354,989 ) Net deferred tax assets (liabilities) $ ( 213,466 ) $ ( 153,741 ) Long-term deferred asset 6,738 33,194 Long-term deferred liability ( 220,204 ) ( 186,935 ) Net deferred tax assets (liabilities) $ ( 213,466 ) $ ( 153,741 ) The company has recorded tax reserves on undistributed foreign earnings not permanently reinvested of $ 10.0 million and $ 9.7 million at December 31, 2022 and January 1, 2022, respectively. No further provisions were made for income taxes that may result from future remittances of undistributed earnings of foreign subsidiaries that are determined to be permanently reinvested, which were $ 637.0 million on December 31, 2022. Determination of the total amount of unrecognized deferred income taxes on undistributed earnings net of foreign subsidiaries is not practicable. The company has a deferred tax asset on net operating loss carryforwards totaling $ 13.0 million as of December 31, 2022. These net operating losses are available to reduce future taxable earnings of certain domestic and foreign subsidiaries. United States federal loss carryforwards total $ 10.3 million of which $ 3.8 million will expire through 2036 and $ 6.5 million have no expiration date. State loss carryforwards total $ 22.6 million and expire through 2038 and international loss carryforwards total $ 44.4 million and expire through 2038; however, some have no expiration date. Of these carryforwards, $ 29.8 million are subject to full valuation allowance. 77 As of December 31, 2022, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $ 33.6 million (of which $ 33.6 million would impact the effective tax rate if recognized) plus approximately $ 8.0 million of accrued interest and $ 6.9 million of penalties. The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. Interest recognized in fiscal years 2022, 2021 and 2020 was $ 0.6 million, $ 0.9 million and $ 0.8 million, respectively. Penalties recognized in fiscal years 2022, 2021 and 2020 was $ 0.2 million, $( 1.0 ) million and $( 0.2 ) million, respectively. The following table summarizes the activity related to the unrecognized tax benefits for the fiscal years ended January 2, 2021, January 1, 2022 and December 31, 2022 (in thousands): Balance at January 2, 2021 $ 30,329 Increases to current year tax positions 1,760 Increase to prior year tax positions 6,796 Decrease to prior year tax positions ( 576 ) Settlements ( 1,180 ) Lapse of statute of limitations ( 920 ) Balance at January 1, 2022 $ 36,209 Increases to current year tax positions 2,195 Increase to prior year tax positions 534 Decrease to prior year tax positions ( 1,709 ) Settlements ( 1,974 ) Lapse of statute of limitations ( 1,607 ) Balance as of December 31, 2022 $ 33,648 It is reasonably possible that the amounts of unrecognized tax benefits associated with state, federal and foreign tax positions may decrease over the next twelve months due to expiration of a statute or completion of an audit. The company believes that it is reasonably possible that $ 3.2 million of its remaining unrecognized tax benefits may be recognized by the end of 2022 as a result of settlements with taxing authorities or lapses of statutes of limitations. In the normal course of business, income tax authorities in various income tax jurisdictions both in the United States and internationally conduct routine audits of our income tax returns filed in prior years. These audits are generally designed to determine if individual income tax authorities are in agreement with our interpretations of complex tax regulations regarding the allocation of income to the various income tax jurisdictions. Income tax years are open from 2017 through the current year for the United States federal jurisdiction. Income tax years open for our other major jurisdictions range from 2016 through the current year. Although the company believes its tax returns are correct, the final determination of tax examinations may be different than what was reported on the tax returns. In the opinion of management, adequate tax provisions have been made for the years subject to examination. 78 (8) FINANCIAL INSTRUMENTS Derivatives are measured at fair value and recognized as either assets or liabilities. Derivatives that do not qualify as a hedge must be adjusted to fair value in earnings. If a derivative does qualify, changes in the fair value will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments or recognized in other accumulated comprehensive income until the hedged item is recognized in earnings. (a) Foreign Exchange The company periodically enters into derivative instruments, principally forward contracts to reduce exposures pertaining to fluctuations in foreign exchange rates. The notional amount of foreign currency contracts outstanding was $ 562.5 million and $ 350.5 million as of December 31, 2022 and January 1, 2022, respectively. The fair value of these forward contracts was an unrealized loss of $ 0.5 million at the end of the year. (b) Interest Rate The company has entered into interest rate swaps to fix the interest rate applicable to certain of its variable-rate debt. The agreements swap one-month LIBOR for fixed rates. In February 2022, the company entered into an additional floating-to-fixed interest rate swap agreement that uses a daily Secured Overnight Financing Rate ("SOFR") in lieu of LIBOR. The company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income. The fair value of these instruments was an asset of $ 65.0 million and a liability of $ 18.0 million as of December 31, 2022 and January 1, 2022, respectively. The change in fair value of these swap agreements in 2022 was a gain of $ 61.6 million, net of taxes. A summary of the company’s interest rate swaps is as follows (in thousands): Twelve Months Ended Location Dec 31, 2022 Jan 1, 2022 Fair value Prepaid expenses $ 6,805 $ — Fair value Other assets $ 58,180 $ 3,645 Fair value Accrued expenses $ — $ 1,171 Fair value Other non-current liabilities $ — $ 20,464 Amount of gain/(loss) recognized in other comprehensive income Other comprehensive income $ 79,472 $ 14,634 Gain/(loss) reclassified from accumulated other comprehensive income (effective portion) Interest expense $ ( 3,503 ) $ ( 18,469 ) Interest rate swaps are subject to default risk to the extent the counterparty is unable to satisfy its settlement obligations under the interest rate swap agreements. The company reviews the credit profile of the financial institutions that are counterparties to such swap agreements and assesses their creditworthiness prior to entering into the interest rate swap agreements and throughout the term. The interest rate swap agreements typically contain provisions that allow the counterparty to require early settlement in the event that the company becomes insolvent or is unable to maintain compliance with its covenants under its existing debt agreement. 79 (9) LEASE COMMITMENTS Accounting Policy At the commencement date of a lease, the company recognizes a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. The lease liability is measured at the present value of lease payments over the lease term, including variable fees that are known or subject to a minimum floor. The lease liability includes lease component fees, while non-lease component fees are expensed as incurred for all asset classes. The company's lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. When a contract excludes an implicit rate, the company utilizes an incremental borrowing rate based on information available at the lease commencement date including lease term and geographic region. The initial valuation of the right-of-use (“ROU”) asset includes the initial measurement of the lease liability, lease payments made in advance of the lease commencement date and initial direct costs incurred by the company and excludes lease incentives. Operating lease ROU assets are included in other assets and operating lease liabilities are included in accrued expenses and other non-current liabilities. Leases with an initial term of 12 months or less are classified as short-term leases and are not recorded on the Consolidated Balance Sheets. The lease expense for short-term leases is recognized on a straight-line basis over the lease term. Leases The company leases warehouse space, office facilities and equipment under operating leases. The company has operating lease costs of $ 35.7 million, $ 31.5 million and $ 30.1 million in fiscal 2022, 2021 and 2020 respectively, including short-term lease expense and variable lease costs, which were immaterial in the year. Leases (in thousands) December 31, 2022 January 1, 2022 Operating lease right-of-use assets: Other assets $ 102,314 $ 93,388 Operating lease liabilities: Accrued expenses 25,250 22,753 Other non-current liabilities 80,242 74,202 Total Liability $ 105,492 $ 96,955 Total Lease Commitments (in thousands) Operating Leases 2023 $ 27,645 2024 23,177 2025 18,086 2026 14,818 2027 10,453 2028 and thereafter 20,181 Total future lease commitments 114,360 Less imputed interest 8,868 Total $ 105,492 80 Other Lease Information (in thousands, except lease term and discount rate) Twelve Months Ended December 31, 2022 Twelve Months Ended January 1, 2022 Supplemental cash flow information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 28,104 $ 25,957 Right-of-use assets obtained in exchange for lease obligations: Operating leases 20,725 16,353 December 31, 2022 January 1, 2022 Weighted-average remaining lease terms - Operating 5.5 years 5.6 years Weighted-average discount rate - Operating 2.9 % 2.8 % 81 (10) SEGMENT INFORMATION The company operates in three reportable operating segments defined by management reporting structure and operating activities. The Commercial Foodservice Equipment Group manufactures, sells, and distributes foodservice equipment for the restaurant and institutional kitchen industry. The Food Processing Equipment Group manufactures preparation, cooking, packaging food handling and food safety equipment for the food processing industry. The Residential Kitchen Equipment Group manufactures, sells and distributes kitchen equipment for the residential market. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief operating decision maker evaluates individual segment performance based on operating income. Management believes that intersegment sales are made at established arm's length transfer prices. The following table summarizes the results of operations for the company’s business segments (1) (dollars in thousands): Commercial Foodservice Food Processing Residential Kitchen Corporate and Other (2) Total 2022 Net sales $ 2,410,266 $ 574,465 $ 1,048,122 $ — $ 4,032,853 Income (loss) from operations (3) 549,764 106,231 127,948 ( 144,339 ) 639,604 Depreciation expense (4) 24,432 5,912 13,596 679 44,619 Amortization expense (5) 55,506 13,400 17,376 7,159 93,441 Net capital expenditures 28,735 13,940 20,604 4,010 67,289 Total assets 3,789,437 982,605 1,972,351 130,473 6,874,866 Long-lived assets (6) 319,337 83,490 151,499 108,478 662,804 2021 Net sales $ 2,032,761 $ 480,746 $ 737,285 $ — $ 3,250,792 Income (loss) from operations (3,7,8) 423,121 94,414 124,701 ( 12,244 ) 629,992 Depreciation expense (4) 23,814 5,601 12,655 611 42,681 Amortization expense (5) 56,910 7,247 11,628 6,777 82,562 Net capital expenditures 26,507 9,111 9,232 1,701 46,551 Total assets 3,522,630 637,252 2,153,758 69,958 6,383,598 Long-lived assets (6) 292,593 54,934 169,028 41,112 557,667 2020 Net sales $ 1,510,279 $ 437,272 $ 565,706 $ — $ 2,513,257 Income (loss) from operations (3,8) 239,625 78,008 67,046 ( 60,248 ) 324,431 Depreciation expense (4) 21,768 5,507 11,691 120 39,086 Amortization expense (5) 51,985 7,319 9,657 2,485 71,446 Net capital expenditures 25,463 3,427 4,801 1,158 34,849 Total assets 3,249,441 617,171 1,221,229 114,633 5,202,474 Long-lived assets (6) 279,481 55,069 192,940 19,849 547,339 (1) Non-operating expenses are not allocated to the reportable segments. Non-operating expenses consist of interest expense and deferred financing amortization, foreign exchange gains and losses and other income and expense items outside of income from operations. (2) Includes corporate and other general company assets and operations. (3) Restructuring expenses are included in operating income of the segment to which they pertain. See note 12 for further details . (4) Includes depreciation on right of use assets. (5) Includes amortization of deferred financing costs and Convertible Notes issuance costs. (6) Long-lived assets consist of property, plant and equipment, long-term deferred tax assets and other assets. (7) Termination fee from Welbilt merger is included in Corporate and Other. (8) Gain on sale of plant is included in Commercial Foodservice and Residential Kitchen for 2021 and Gain on sale of plant is included in Commercial Foodservice for 2020. 82 Geographic Information Long-lived assets, not including goodwill and other intangibles (in thousands): 2022 2021 2020 United States and Canada $ 471,375 $ 379,431 $ 332,854 Asia 35,965 17,818 19,646 Europe and Middle East 142,326 152,384 188,448 Latin America 13,138 8,034 6,391 Total International 191,429 178,236 214,485 $ 662,804 $ 557,667 $ 547,339 (11) EMPLOYEE RETIREMENT PLANS (a) Pension Plans U.S. Plans: The company maintains a non-contributory defined benefit plan for its union employees at the Elgin, Illinois facility. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2002, and no further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 30, 2002 upon reaching retirement age. The company maintains a non-contributory defined benefit plan for its employees at the Smithville, Tennessee facility. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 1, 2008, and no further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 1, 2008 upon reaching retirement age. The company also maintains a retirement benefit agreement with its former Chairman ("Chairman Plan"). The retirement benefits are based upon a percentage of the former Chairman’s final base salary. Non-U.S. Plans: The company maintains a defined benefit plan for its employees at the Wrexham, the United Kingdom facility. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2010 and no further benefits accrue to the participants beyond this date. Plan participants will receive or continue to receive payments for benefits earned on or prior to April 30, 2010 upon reaching retirement age. The company maintains several pension plans related to AGA and its subsidiaries (collectively, the "AGA Group"), the most significant being the Aga Rangemaster Group Pension Scheme in the United Kingdom. Membership in the plan on a defined benefit basis of pension provision was closed to new entrants in 2001. The plan became open to new entrants on a defined contribution basis of pension provision in 2002 but was generally closed to new entrants on this basis during 2014. In December 2020, it was agreed that the Group Pension Scheme will be closed to future pension accruals effective April 5, 2021. The other, much smaller, defined benefit pension plans operating within the AGA Group cover employees in France and the United Kingdom. All pension plan assets are held in separate trust funds although the net defined benefit pension obligations are included in the company's consolidated balance sheet. 83 A summary of the plans’ net periodic pension cost, benefit obligations, funded status, and net balance sheet position is as follows (dollars in thousands) Fiscal 2022 Fiscal 2021 U.S. Plans Non-U.S. Plans U.S. Plans Non-U.S. Plans Net Periodic Pension Cost (Benefit): Service cost $ — $ — $ — $ 773 Interest cost 923 25,032 841 17,340 Expected return on assets ( 1,073 ) ( 74,581 ) ( 1,029 ) ( 78,956 ) Amortization of net loss 758 3,671 1,118 12,741 Amortization of prior service cost — 2,589 — 2,879 $ 608 $ ( 43,289 ) $ 930 $ ( 45,223 ) Change in Benefit Obligation: Benefit obligation – beginning of year $ 36,423 $ 1,544,147 $ 38,897 $ 1,744,574 Service cost — — — 773 Interest on benefit obligations 923 25,032 841 17,340 Member contributions — — — 81 Actuarial gain ( 8,060 ) ( 409,462 ) ( 1,617 ) ( 135,475 ) Net benefit payments ( 1,736 ) ( 59,682 ) ( 1,698 ) ( 65,138 ) Exchange effect — ( 153,882 ) — ( 18,008 ) Benefit obligation – end of year $ 27,550 $ 946,153 $ 36,423 $ 1,544,147 Change in Plan Assets: Plan assets at fair value – beginning of year $ 18,289 $ 1,342,601 $ 17,455 $ 1,296,516 Company contributions 1,173 5,442 1,233 4,890 Investment (loss) gain ( 2,728 ) ( 207,270 ) 1,299 123,708 Member contributions — — — 81 Benefit payments and plan expenses ( 1,736 ) ( 59,682 ) ( 1,698 ) ( 65,138 ) Exchange effect — ( 137,334 ) — ( 17,456 ) Plan assets at fair value – end of year $ 14,998 $ 943,757 $ 18,289 $ 1,342,601 Funded Status: Unfunded benefit obligation $ ( 12,552 ) $ ( 2,396 ) $ ( 18,134 ) $ ( 201,546 ) Amounts recognized in balance sheet at year end: Accrued pension benefits $ ( 12,552 ) $ ( 2,396 ) $ ( 18,134 ) $ ( 201,546 ) 84 Fiscal 2022 Fiscal 2021 U.S. Plans Non-U.S. Plans U.S. Plans Non-U.S. Plans Pre-tax components in accumulated other comprehensive income at period end: Net actuarial loss $ 2,402 $ 121,292 $ 7,419 $ 281,745 Pre-tax components recognized in other comprehensive income for the period: Current year actuarial gain $ ( 4,259 ) $ ( 148,515 ) $ ( 1,887 ) $ ( 181,518 ) Actuarial loss recognized ( 758 ) ( 4,272 ) ( 1,118 ) ( 12,832 ) Prior service cost recognized — ( 7,666 ) — ( 3,457 ) Total amount recognized $ ( 5,017 ) $ ( 160,453 ) $ ( 3,005 ) $ ( 197,807 ) Accumulated Benefit Obligation $ 27,550 $ 946,136 $ 36,423 $ 1,544,117 Salary growth rate n/a 0.8 % n/a 0.8 % Assumed discount rate 4.9 % 4.8 % 2.6 % 1.9 % Expected return on assets 6.0 % 6.2 % 6.0 % 6.2 % The company has engaged non-affiliated third-party professional investment advisors to assist the company in developing its investment policy and establishing asset allocations. The company's overall investment objective is to provide a return, that along with company contributions, is expected to meet future benefit payments. Investment policy is established in consideration of anticipated future timing of benefit payments under the plans. The anticipated duration of the investment and the potential for investment losses during that period are carefully weighed against the potential for appreciation when making investment decisions. The company routinely monitors the performance of investments made under the plans and reviews investment policy in consideration of changes made to the plans or expected changes in the timing of future benefit payments. The assets of the plans were invested in the following classes of securities (none of which were securities of the company): U.S. Plans: Target Allocation Percentage of Plan Assets 2022 2021 Equity 48 % 45 % 53 % Fixed income 40 40 36 Money market 4 5 1 Other (real estate investment trusts & commodities contracts) 8 10 10 100 % 100 % 100 % Non-U.S. Plans: Target Allocation Percentage of Plan Assets 2022 2021 Equity 17 % 10 % 11 % Fixed income 38 55 56 Alternatives/Other 32 19 15 Real Estate 13 10 15 Cash and cash equivalents — 6 3 100 % 100 % 100 % 85 In accordance with ASC 820 Fair Value Measurements and Disclosures , the company has measured its defined benefit pension plans at fair value. In accordance with ASU 2015-04, "Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets", the company has elected to measure the pension plan assets and obligations as of the calendar month end closest to the fiscal year end. The following tables summarize the basis used to measure the pension plans’ assets at fair value as of December 31, 2022 and January 1, 2022 (in thousands): U.S. Plans: Fiscal 2022 Fiscal 2021 Asset Category Total Quoted Prices in Active Markets for Identical Assets (Level 1) Net Asset Value Total Quoted Prices in Active Markets for Identical Assets (Level 1) Net Asset Value Short Term Investment Fund (a) $ 771 $ — $ 771 $ 274 $ — $ 274 Equity Securities: Large Cap 2,818 2,818 — 3,928 3,928 — Mid Cap 555 555 — 413 413 — Small Cap 329 329 — 424 424 — International 3,002 3,002 — 4,918 4,918 — Fixed Income: Government/Corporate 4,973 4,973 — 5,137 5,137 — High Yield 1,041 1,041 — 1,383 1,383 — Alternative: Global Real Estate Investment Trust 602 602 — 758 758 — Commodities Contracts 907 907 — 1,054 1,054 — Total $ 14,998 $ 14,227 $ 771 $ 18,289 $ 18,015 $ 274 (a) Represents collective short term investment fund, composed of high-grade money market instruments with short maturities. 86 Non-U.S. Plans: Fiscal 2022 Asset Category Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Net Asset Value Cash and cash equivalents $ 52,041 $ 5,372 $ 7,372 $ — $ 39,297 Equity Securities: UK 3,677 68 — — 3,609 International: Developed 70,611 2,634 — — 67,977 Emerging 18,642 298 — — 18,344 Unquoted/Private Equity 2,083 — — — 2,083 Fixed Income: Government/Corporate: UK 191,868 8,933 — — 182,935 International 127,485 — — — 127,485 Index Linked 199,220 1,433 — — 197,787 Other 1,806 — — — 1,806 Real Estate: Direct 83,280 — 83,280 — — Indirect 5,073 58 — — 5,015 Hedge Fund Strategy: Equity Long/Short 30,266 — — — 30,266 Arbitrage & Event 22,398 — — — 22,398 Directional Trading & Fixed Income 6,099 — — — 6,099 Cash & Other 169,504 — — — 169,504 Direct Sourcing 4,014 — — — 4,014 Leveraged Loans 8,539 — — — 8,539 Alternative/Other ( 52,849 ) 1,583 — — ( 54,432 ) Total $ 943,757 $ 20,379 $ 90,652 $ — $ 832,726 87 Fiscal 2021 Asset Category Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Net Asset Value Cash and cash equivalents $ 51,780 $ 6,566 $ 5,092 $ — $ 40,122 Equity Securities: UK 6,470 1,878 — — 4,592 International: Developed 117,751 3,034 — — 114,717 Emerging 31,392 435 — — 30,957 Unquoted/Private Equity 2,195 1 — — 2,194 Fixed Income: Government/Corporate: UK 259,833 15,471 — — 244,362 International 114,973 — — — 114,973 Index Linked 364,666 2,138 — — 362,528 Other 7,811 — — — 7,811 Convertible Bonds 185 — — — 185 Real Estate: Direct 183,045 — 183,045 — — Indirect 8,030 80 3,038 — 4,912 Hedge Fund Strategy: Equity Long/Short 29,345 — — — 29,345 Arbitrage & Event 25,788 — — — 25,788 Directional Trading & Fixed Income 3,266 — — — 3,266 Cash & Other 196,930 — — — 196,930 Direct Sourcing 1,156 — — — 1,156 Leveraged Loans 30,224 — — — 30,224 Alternative/Other ( 92,239 ) 453 — — ( 92,692 ) Total $ 1,342,601 $ 30,056 $ 191,175 $ — $ 1,121,370 The fair value of the Level 1 assets is based on observable, quoted market prices of the identical underlying security in an active market. The fair value of the Level 2 assets is primarily based on market observable inputs to quoted market prices, benchmark yields and broker/dealer quotes. Level 3 inputs, as applicable, represent unobservable inputs that reflect assumptions developed by management to measure assets at fair value. The expected return on assets is developed in consideration of the anticipated duration of investment period for assets held by the plan, the allocation of assets in the plan, and the historical returns for plan assets. 88 Estimated future benefit payments under the plans are as follows (dollars in thousands): U.S. Plans Non-U.S. Plans 2023 $ 1,814 $ 55,341 2024 1,822 55,551 2025 1,841 56,522 2026 1,784 56,243 2027 through 2032 11,573 338,542 Expected contributions to the U.S. Plans and Non-U.S. Plans to be made in 2023 are $ 0.3 million and $ 5.6 million, respectively. (b) Defined Contribution Plans As of December 31, 2022, the company maintained two separate defined contribution 401(k) savings plans covering all employees in the United States. These two plans separately cover the union employees at the Elgin, Illinois facility and all other remaining union and non-union employees in the United States. The company also maintained defined contribution plans for its UK based employees. 89 (12) RESTRUCTURING AND ACQUISITION INTEGRATION INITIATIVES Commercial Foodservice Equipment Group: During the fiscal years 2022, 2021 and 2020, the company undertook cost reduction initiatives related to the Commercial Foodservice Equipment Group including headcount reductions and facility consolidations. These actions resulted in expenses of $ 2.0 million, $ 5.4 million and $ 10.1 million in the twelve months ended December 31, 2022, January 1, 2022 and January 2, 2021 respectively. These expenses are reflected in restructuring expenses in the Consolidated Statements of Earnings. The primary realization of cost savings from the restructuring initiatives began in 2020 with expected annual savings of approximately $ 20.0 million. At December 31, 2022, the restructuring obligations accrued for these initiatives are immaterial and will be substantially complete by the end of fiscal year 2023. Residential Kitchen Equipment Group: During fiscal year 2022, the company initiated cost reduction initiatives related to the Residential Kitchen Equipment Group of $ 5.1 million, primarily related to headcount reductions and facility consolidations. These expenses are reflected in restructuring expenses in the Consolidated Statements of Earnings. The primary realization of cost savings from the restructuring initiatives began in 2023 with an expected annual savings of approximately $ 8.0 million. At December 31, 2022, the restructuring obligations accrued for these initiatives are immaterial and will be substantially complete by the end of fiscal year 2023. The restructuring expenses for the other segment of the company were not material during fiscal years 2022, 2021 and 2020. In December 2020, the company recorded an impairment of approximately $ 2.9 million associated to reflect the fair market value of assets held for sale of a non-core business within the Residential Kitchen Equipment Group. This charge was reflected in impairments in the Consolidated Statements of Earnings. 90 THE MIDDLEBY CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS ENDED DECEMBER 31, 2022, JANUARY 1, 2022 AND January 2, 2021 (amounts in thousands) Balance Beginning Of Period Additions/ (Recoveries) Charged to Expense Other Adjustments (1) Write-Offs During the Period Balance At End Of Period Allowance for doubtful accounts; deducted from accounts receivable on the balance sheets- 2022 $ 18,770 $ 4,311 $ 776 $ ( 3,562 ) $ 20,295 2021 $ 19,225 $ 809 $ 554 $ ( 1,818 ) $ 18,770 2020 $ 14,886 $ 6,868 $ 1,239 $ ( 3,768 ) $ 19,225 (1) Amounts consist primarily of valuation allowances assumed from acquired companies. Balance Beginning Of Period Additions/ (Recoveries) Charged to Expense Write-Offs During the Period Balance At End Of Period Valuation allowance - Deferred tax assets 2022 $ 10,222 $ 1,377 $ — $ 11,599 2021 $ 11,731 $ 1,138 $ ( 2,647 ) $ 10,222 2020 $ 7,754 $ 3,977 $ — $ 11,731 91 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None