Summary of Significant Accounting Policies

6 Months Ended

Jul. 02, 2022

Summary of Significant Accounting Policies

a)Basis of Presentation

The condensed consolidated financial statements have been prepared by The Middleby Corporation (the "company" or “Middleby”), pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements are unaudited and certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information not misleading. These financial statements should be read in conjunction with the financial statements and related notes contained in the company's 2021 Form 10-K. The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2022.

In the opinion of management, the financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position of the company as of July 2, 2022 and January 1, 2022, the results of operations for the three and six months ended July 2, 2022 and July 3, 2021, cash flows for the six months ended July 2, 2022 and July 3, 2021 and statement of stockholders' equity for the three and six months ended July 2, 2022 and July 3, 2021.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long-lived and intangible assets, warranty reserves, insurance reserves, income tax reserves, non-cash share-based compensation and post-retirement obligations. Actual results could differ from the company's estimates.

b)Non-Cash Share-Based Compensation

The company estimates the fair value of market-based stock awards and stock options at the time of grant and recognizes compensation cost over the vesting period of the awards and options. Non-cash share-based compensation expense was $13.2 million and $9.3 million for the three months period ended July 2, 2022 and July 3, 2021, respectively. Non-cash share-based compensation expense was $26.9 million and $16.9 million for the six months period ended July 2, 2022 and July 3, 2021, respectively.

c)Income Taxes

A tax provision of $38.0 million, at an effective rate of 25.1%, was recorded during the three months period ended July 2, 2022, as compared to a $13.9 million tax provision at an effective rate of 10.3% in the prior year period. A tax provision of $64.6 million, at an effective rate of 24.5%, was recorded during the six months period ended July 2, 2022, as compared to a $42.8 million tax provision at a 16.9% effective rate in the prior year period. In the three months period ended July 3, 2021, the company recorded several discrete tax benefits, including a deferred tax benefit for the enacted future UK tax rate change from 19% to 25% and tax benefits for amended U.S. tax returns. When excluding the discrete tax adjustments, the 2021 rates for the three and six month periods ended July 3, 2021 were approximately 24.5%.

d)Fair Value Measures

Accounting Standards Codification ("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, that are observable either directly or indirectly.

Level 3 – Unobservable inputs based the company's own assumptions.

The company’s financial assets and liabilities that are measured at fair value and are categorized using the fair value hierarchy are as follows (in thousands):


	Fair Value Level 1		Fair Value Level 2		Fair Value Level 3		Total
As of July 2, 2022
Financial Assets:
Interest rate swaps	$	—	$	35,069	$	—	$	35,069

Financial Liabilities:

Contingent consideration	$	—	$	—	$	29,100	$	29,100
Foreign exchange derivative contracts	$	—	$	360	$	—	$	360

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 July 2, 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 agreement. On a quarterly basis, the company assesses the projected results for each acquired business in comparison to the earnout targets and adjusts the liability accordingly.

e) Consolidated Statements of Cash Flows

Cash paid for interest was $34.1 million and $26.8 million for the six months ended July 2, 2022 and July 3, 2021, respectively. Cash payments totaling $52.8 million and $42.8 million were made for income taxes for the six months ended July 2, 2022 and July 3, 2021, respectively.

f) 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 7,546 and 12,656 for the three months ended July 2, 2022, and July 3, 2021, 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 6,600 and 10,463 for the six months ended July 2, 2022 and July 3, 2021, respectively. For the six months ended July 2, 2022 and July 3, 2021, the average market price of the company's common stock exceeded the exercise price of the Convertible Notes (as defined below) resulting in 1,150,852 and 1,430,308 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 12, Financing Arrangements for further details on the Convertible Notes. There were no anti-dilutive restricted stock grants excluded from common stock equivalents in any period presented.