The Middleby
Annual Report 2017

Plain-text annual report

ANNUAL REPORT 2017 2017 FINANCIAL HIGHLIGHTS (dollars in thousands) NET SALES GROSS PROFIT 2017 2016 2015 2014 2013 $2,335,542 $2,267,852 $1,826,598 $1,636,538 $1,428,685 $912,741 $901,180 $706,505 $640,585 $550,011 INCOME FROM OPERATIONS $410,341 $446,225 $302,603 $300,432 $244,462 NET EARNINGS $298,128 $284,216 $191,610 $193,312 $153,928 EPS ON NET EARNINGS $5.26 $4.98 $3.36 $3.40 $2.74 WEIGHTED AVERAGE SHARES 56,719,000 57,085,000 56,973,000 56,784,000 56,148,000 CASHFLOW FROM OPERATIONS $304,455 $294,110 $249,592 $233,882 $146,158 TOTAL ASSETS TOTAL DEBT $3,339,713 $2,917,136 $2,761,151 $2,066,131 $1,819,206 $1,028,881 $732,126 $766,061 $598,167 $571,598 STOCKHOLDERS´ EQUITY $1,361,148 $1,265,318 $1,166,830 $1,006,760 $838,347 $2,600 $350 $6 7 1 0 2 6 1 0 2 5 1 0 2 4 1 0 2 3 1 0 2 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 7 1 0 2 6 1 0 2 5 1 0 2 4 1 0 2 3 1 0 2 300 250 200 150 100 50 0 7 1 0 2 6 1 0 2 5 1 0 2 4 1 0 2 3 1 0 2 5 4 3 2 1 0 NET SALES (dollars in millions) NET EARNINGS (dollars in millions) EPS ON NET EARNINGS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Fiscal Year Ended December 30, 2017 or Commission File No. 1-9973 THE MIDDLEBY CORPORATION (Exact name of Registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number) Delaware 36-3352497 1400 Toastmaster Drive, Elgin, Illinois (Address of principal executive offices) Registrant’s telephone number, including area code: 847-741-3300 Securities registered pursuant to Section 12(b) of the Act: 60120 (Zip Code) Title of each class Name of each exchange on which registered Common stock, par value $0.01 per share The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. No Yes Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). No Yes Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of June 30, 2017 was approximately $6,845,527,947. The number of shares outstanding of the Registrant’s class of common stock, as of February 26, 2018, was 55,730,624 shares. Part III of Form 10-K incorporates by reference the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A in connection with the 2018 annual meeting of stockholders. Documents Incorporated by Reference THE MIDDLEBY CORPORATION DECEMBER 30, 2017 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Issues PART I PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosure about Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation PART III Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedule Item 16. Form 10-K Summary Page 1 10 18 19 20 20 21 22 23 36 38 85 85 87 88 88 88 88 88 89 90 Item 1. Business General PART I The Middleby Corporation (“Middleby” or the “company”), through its operating subsidiary Middleby Marshall Inc. (“Middleby Marshall”) and its subsidiaries, is a leader in the design, manufacture, marketing, distribution, and service of a broad line of (i) foodservice equipment used in all types of commercial restaurants and institutional kitchens, (ii) food preparation, cooking, baking, chilling and packaging equipment for food processing operations, and (iii) premium kitchen equipment including ranges, ovens, refrigerators, ventilation and dishwashers primarily used in the residential market. Founded in 1888 as a manufacturer of baking ovens, Middleby Marshall Oven Company was acquired in 1983 by TMC Industries Ltd., a publicly traded company that changed its name in 1985 to The Middleby Corporation. The company has established itself as a leading provider of (i) commercial restaurant equipment, (ii) food processing equipment and (iii) residential kitchen equipment as a result of its acquisition of industry leading brands and through the introduction of innovative products within each of these segments. The company's annual reports on Form 10-K, including this Form 10-K, as well as the company's quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports are available, free of charge, on the company's internet website, www.middleby.com. These reports are available as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Business Segments and Products The company conducts its business through three principal business segments: the Commercial Foodservice Equipment Group, the Food Processing Equipment Group and the Residential Kitchen Equipment Group. See Note 9 to the Consolidated Financial Statements for further information on the company's business segments. Commercial Foodservice Equipment Group The Commercial Foodservice Equipment Group has a broad portfolio of foodservice equipment, which enable it to serve virtually any cooking or warming application within a commercial kitchen or foodservice operation. This cooking and warming equipment is used across all types of foodservice operations, including quick-service restaurants, full-service restaurants, convenience stores, retail outlets, hotels and other institutions. This commercial foodservice equipment is marketed under a portfolio of forty-six brands, including Anets, Bear Varimixer, Beech, Blodgett, Blodgett Combi, Blodgett Range, Bloomfield, Britannia, CTX, Carter-Hoffmann, Celfrost, Concordia, CookTek, Desmon, Doyon, Eswood, Follett, Frifri, Giga, Globe, Goldstein, Holman, Houno, IMC, Induc, Jade, L2F, Lang, Lincat, MagiKitch’n, Market Forge, Marsal, Middleby Marshall, MPC, Nieco, Nu-Vu, PerfectFry, Pitco, QualServ, Southbend, Star, Sveba Dahlen, Toastmaster, TurboChef, Wells and Wunder-Bar. 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, professional mixers, stainless steel fabrication, custom millwork, professional refrigerators, blast chillers, coldrooms, ice machines, freezers and coffee and beverage dispensing equipment. Food Processing Equipment Group 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, greater throughput and reduced labor costs though automation. 1 This food processing equipment is marketed under a portfolio of eighteen brands, including Alkar, Armor Inox, Auto-Bake, Baker Thermal Solutions, Burford, Cozzini, CVP Systems, Danfotech, Drake, Emico, Glimek, Maurer-Atmos, MP Equipment, RapidPak, Scanico, Spooner Vicars, Stewart Systems and Thurne. 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 grinders, slicers, reduction and emulsion systems, mixers, blenders, battering equipment, breading equipment, seeding equipment, water cutting systems, food presses, food suspension equipment and forming equipment, as well as a variety of automated loading and unloading systems, 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. Residential Kitchen Equipment Group The Residential Kitchen Equipment Group manufactures, sells and distributes kitchen equipment for the residential market. Principal product lines of this group are ranges, cookers, stoves, ovens, refrigerators, dishwashers, microwaves, cooktops, refrigerators, wine coolers, ice machines, ventilation equipment and outdoor equipment. These products are sold and marketed under a portfolio of nineteen brands, including AGA, AGA Cookshop, Brigade, Fired Earth, Grange, Heartland, La Cornue, Leisure Sinks, Lynx, Marvel, Mercury, Rangemaster, Rayburn, Redfyre, Sedona, Stanley, TurboChef, U-Line and Viking. Acquisition Strategy The company has pursued a strategy to acquire and assemble a leading portfolio of brands and technologies for each of its three business segments. Over the past two years, the company has completed nine acquisitions to add to its portfolio of brands and technologies of the Commercial Foodservice Equipment Group, the Food Processing Equipment Group and the Residential Kitchen Equipment Group. These acquisitions have added eleven brands to the Middleby portfolio and positioned the company as a leading provider of equipment in each respective industry. Commercial Foodservice Equipment Group • May 2016: The company acquired substantially all of the assets of Follett Corporation ("Follett"), a leading manufacturer of ice machines, ice and water dispensing equipment, ice storage and transport products and medical grade refrigeration products for the foodservice and healthcare industries headquartered in Easton, Pennsylvania, for a purchase price of approximately $206.9 million, net of cash acquired. • June 2017: The company completed its acquisition of all of the capital stock of Sveba Dahlen Group ("Sveba Dahlen"), a developer and manufacturer of ovens and baking equipment for the commercial foodservice and industrial baking industries headquartered in Fristad, Sweden, for a purchase price of $81.4 million, net of cash acquired. • August 2017: The company completed its acquisition of substantially all of the assets of QualServ Solutions LLC ("QualServ"), a global commercial kitchen design, manufacturing, engineering, project management and equipment solutions provider located in Fort Smith, Arkansas, for a purchase price of $40.2 million, net of cash acquired. • October 2017: The company completed its acquisition of all of the capital stock of Globe Food Equipment Company ("Globe"), a leading brand in slicers and mixers for the commercial foodservice industry located in Dayton, Ohio, for a purchase price of $104.6 million, net of cash acquired. • October 2017: The company completed its acquisition of all of the capital stock of L2F Inc. ("L2F"), an integrator of robotics and automation systems, located in Fremont, California for a purchase price of $7.5 million, net of cash acquired. Food Processing Equipment Group • May 2016: The company completed its acquisition of certain assets of Emico Automated Bakery Equipment Solutions ("Emico"), manufacturer of high speed dough make-up bakery equipment located in Sante Fe Springs, California, for a purchase price of approximately $1.0 million. 2 • May 2017: The company completed its acquisition of all of the capital stock of Burford Corp. ("Burford"). Burford is a leading manufacturer of industrial baking equipment for the food processing industry located in Maysville, Oklahoma, for a purchase price of approximately $14.8 million, net of cash acquired. • June 2017: the company completed its acquisition of all of the capital stock of CVP Systems, Inc. ("CVP Systems"), a leading manufacturer of high-speed packaging systems for the meat processing industry located in Downers Grove, Illinois, for a purchase price of approximately $30.3 million, net of cash acquired. • December 2017: the company completed its acquisition of all of the capital stock of Scanico A/S ("Scanico"), a leading manufacturer of industrial cooling and freezing equipment for the food processing industry located in Aalborg, Denmark, for a purchase price of $34.9 million, net of cash acquired. The Customers and Market Commercial Foodservice Equipment Industry The company's end-user customers include: (i) fast food, fast casual and quick-service restaurants, (ii) full-service restaurants, including casual-theme restaurants, (iii) retail outlets, such as convenience stores, supermarkets and department stores and (iv) public and private institutions, such as hotels, resorts, schools, hospitals, long-term care facilities, correctional facilities, stadiums, airports, corporate cafeterias, military facilities and government agencies. The company's domestic sales are primarily through independent dealers and distributors and are marketed by the company's sales personnel and network of independent manufacturers' representatives. Many of the dealers in the U.S. belong to buying groups that negotiate sales terms with the company. Certain large multi-national restaurant and hotel chain customers have purchasing organizations that manage product procurement for their systems. Included in these customers are several large multi-national restaurant chains, which account for a meaningful portion of the company's business, although no single customer accounts for more than 10% of net sales. Over the past several decades, the commercial foodservice equipment industry has enjoyed steady growth in the United States due to the development of new quick-service and casual-theme restaurant chain concepts, the expansion of foodservice into nontraditional locations such as convenience stores and store equipment modernization driven by efforts to improve efficiencies within foodservice operations. In the international markets, foodservice equipment manufacturers have been experiencing stronger growth than the U.S. market due to expanding international economies and increased opportunity for expansion by U.S. chains into developing regions. The company believes that the worldwide commercial foodservice equipment market has sales in excess of $20.0 billion. The cooking, warming and beverage dispensing equipment segment of this market is estimated by management to exceed $3.0 billion in North America and $5.0 billion worldwide. The company believes that continuing growth in demand for foodservice equipment will result from the development of new restaurant concepts in the U.S. and the expansion of U.S. and foreign chains into international markets, the replacement and upgrade of existing equipment and new equipment requirements resulting from menu changes. Food Processing Equipment Industry The company's customers include a diversified base of leading food processors. Customers include several large international food processing companies, which account for a significant portion of the revenues of this business segment, although none of which is greater than 10% of net sales. A large portion of the company's revenues have been generated from producers of pre- cooked meat products such as hot dogs, dinner sausages, poultry, and lunchmeats and producers of baked goods such as muffins, cookies and bread; however, the company believes that it can leverage its expertise and product development capabilities in thermal processing to organically grow into new end markets. Food processing has quickly become a highly competitive landscape dominated by a few large conglomerates that possess a variety of food brands. The consolidation of food processing plants associated with industry consolidation drives a need for more flexible and efficient equipment that is capable of processing large volumes in quicker cycle times. In recent years, food processors have had to conform to the demands of “big-box” retailers and the restaurant industry, including, most importantly, greater product consistency and exact package weights. Food processors are beginning to realize that their old equipment is no longer capable of efficiently producing adequate uniformity in the large product volumes required, and they are turning to equipment manufacturers that offer product consistency, innovative packaging designs and other solutions. To protect their own brands and reputations, retailers and large restaurant chains are also dictating food safety standards that are often more strict than government regulations. 3 A number of factors, including raw material prices, labor and health care costs, are driving food processors to focus on ways to improve their generally thin profitability margins. In order to increase the profitability and efficiency in processing plants, food processors pay increasingly more attention to the performance of their machinery and the flexibility in the functionality of the equipment. Food processors are continuously looking for ways to make their plants safer and reduce labor-intensive activities. Food processors have begun to recognize the value of new technology as an important vehicle to drive productivity and profitability in their plants. Due to customer requirements, food processors are expected to continue to demand new and innovative equipment that addresses food safety, food quality, automation and flexibility. Improving living standards in developing countries is spurring increased worldwide demand for pre-cooked and convenience food products. As industrializing countries create more jobs, consumers in these countries will have the means to buy pre- cooked food products. In industrialized regions, such as Western Europe and the U.S., consumers are demanding more pre- cooked and convenience food products, such as deli tray variety packs, frozen food products and ready-to-eat varieties of ethnic foods. The global food processing equipment industry is highly fragmented, large and growing. The company estimates demand for food processing equipment is approximately $5.0 billion in North America and $40.0 billion worldwide. The company’s product offerings compete in a subsegment of the total industry, and the relevant market size for its products is estimated by management to exceed $3.0 billion in North America and $5.0 billion worldwide. Residential Kitchen Equipment Industry The company’s end-user include customers with high-end residential kitchens. The premium segment of the residential kitchen equipment industry is estimated to be in excess of $1.0 billion annually in North America and $3.0 billion worldwide. The market potential for such equipment has continued to broaden due to an increase in interest from the consumer to have professional style higher performing appliances in their home. The kitchen has been an area in which consumers have invested over the past several decades to increase the personal satisfaction and the value of their home. Other important factors which affect the market size and growth include the level of new home starts, home remodels and general macro-economic factors. Macro-economic factors such as GDP growth, employment rates, inflation and consumer confidence, which impact the overall economy, impact the residential kitchen equipment industry and cause variability in the revenues at this segment. Backlog Commercial Foodservice Equipment Group The backlog of orders for the Commercial Foodservice Equipment Group was $105.2 million at December 30, 2017, all of which is expected to be filled during 2018. The acquired Sveba Dahlen, Qualserv, Globe and L2F businesses accounted for $27.2 million of the backlog. The Commercial Foodservice Equipment Group's backlog was $77.7 million at December 31, 2016. The backlog is not necessarily indicative of the level of business expected for the year, as there is generally a short time between order receipt and shipment for the majority of this segment's products. Food Processing Equipment Group The backlog of orders for the Food Processing Equipment Group was $61.6 million at December 30, 2017, all of which is expected to be filled during 2018. The acquired Burford, CVP Systems and Scanico accounted for $11.5 million of the backlog. The Food Processing Equipment Group's backlog was $115.9 million at December 31, 2016. Residential Kitchen Equipment Group The backlog of orders for the Residential Kitchen Equipment Group was $35.0 million at December 30, 2017, all of which is expected to be filled during 2018. The Residential Kitchen Equipment Group's backlog was $44.2 million at December 31, 2016. The backlog is not necessarily indicative of the level of business expected for the year, as there is generally a short time between order receipt and shipment for the majority of this segment's products. 4 Marketing and Distribution Commercial Foodservice Equipment Group Middleby's products and services are marketed in the U.S. and in over 100 countries through a combination of the company's sales and marketing personnel, together with an extensive network of independent dealers, distributors, consultants, sales representatives and agents. In the United States, the company distributes its products to independent end-users primarily through a network of non- exclusive dealers nationwide, who are supported by manufacturers' marketing representatives. Sales are made direct to certain large restaurant chains that have established their own procurement and distribution organization for their franchise system. The company's relationships with major restaurant chains are primarily handled through an integrated effort of top-level executive and sales management at the corporate and business division levels to best serve each customer's needs. International sales are primarily made through a network of company owned and local independent distributors and dealers. Food Processing Equipment Group The company maintains a direct sales force to market the brands and maintain direct relationships with each of its customers. In North America, the company employs regional sales managers, each with responsibility for a group of customers and a particular region. This sales force is complimented with involvement of executive management to maintain relationships with customer executives and facilitate coordination amongst the brands for the key global accounts. Internationally, the company maintains sales and distribution offices along with global sales managers supported by a network of independent sales representatives. The company’s sale process is highly consultative due to the highly technical nature of the equipment. During a typical sales process, a salesperson makes several visits to the customer’s facility to conceptually discuss the production requirements, footprint and configuration of the proposed equipment. The company employs a technically proficient sales force, many of whom have previous technical experience with the company as well as education backgrounds in food science. Residential Kitchen Equipment Group The company’s products are marketed through a network of distributors, dealers, designers, and home builders to the residential customers. The company markets and sells its products to these channels through a company-employed sales force. The company’s products are distributed through a combination of an independent network of distributors and its wholly owned distribution operations. The company's wholly owned distribution operations were established in connection with the Viking and related Viking Distributors' acquisitions and include two primary customer support centers and regional warehouse and logistic operations, which stock products and service parts for the respective region. Marketing support is provided to and coordinated with its network of dealers, designers, and home builders sales partners to allow for coordinated efforts to market jointly to the end-user customers. The company in certain cases offers incentive based financial programs to invest in local marketing activities with these sales partners. Services and Product Warranty The company is an industry leader in equipment installation programs and after-sales support and service. The company provides a warranty on its products typically for a one year period and in certain instances greater periods. The emphasis on global service increases the likelihood of repeat business and enhances Middleby's image as a partner and provider of quality products and services. Commercial Foodservice Equipment Group The company's domestic service network consists of over 100 authorized service parts distributors and 3,000 independent certified technicians who have been formally trained and certified by the company through its factory training school and on- site installation training programs. Technicians work through service parts distributors, which are required to provide around- the-clock service. The company provides real-time technical support to the technicians in the field through factory-based technical service engineers. The company maintains sufficient service parts inventory to ensure short lead times for service calls. 5 It is critical to major foodservice chains that equipment providers be capable of supporting equipment on a worldwide basis. The company's international service network covers over 100 countries with thousands of service technicians trained in the installation and service of the company's products and supported by internationally-based service managers along with the factory-based technical service engineers. Food Processing Equipment Group The company maintains a technical service group of employees that oversees and performs installation and startup of equipment and completes warranty and repair work. This technical service group provides services for customers both domestically and internationally. Service technicians are trained regularly on new equipment to ensure the customer receives a high level of customer service. From time to time the company utilizes trained third party technicians supervised by company employees to supplement company employees on large projects. Residential Kitchen Equipment Group The company maintains a network of independent authorized service agents throughout North America. Authorized service agents are supported and trained by regional factory-support centers of the company. Trained technical support personnel are available to support independent service agents with technical information and assist in repair issues. The factory-support centers also dispatch service technicians to the customer and provide follow-up and monitoring to ensure field issues are resolved. The company's independent service agents maintain a stock of factory-supplied parts to allow for a high first-call completion rate for service and warranty repairs. The company maintains a substantial amount of service parts at each of its manufacturing operations and distribution operations to provide for quick ship of parts to service agents and end-user customers when necessary. Internationally, the company has a network of company owned and independent distributors that provide sales and technical service support in their respective markets. These distributors are required to have a team of factory-trained service technicians and maintain a required stock of service parts to support the equipment in the market. The factory supports the international distributors with technical trainers which travel to the various markets to provide on-hands training and monitoring of the distributor service operations. Competition The commercial foodservice, food processing and residential kitchen equipment industries are highly competitive and fragmented. Within a given product line the company may compete with a variety of companies, including companies that manufacture a broad line of products and those that specialize in a particular product category. Competition is based upon many factors, including brand recognition, product features, reliability, quality, price, delivery lead times, serviceability and after-sale service. The company believes that its ability to compete depends on strong brand equity, exceptional product performance, short lead-times and timely delivery, competitive pricing and superior customer service support. In the international markets, the company competes with U.S. manufacturers and numerous global and local competitors. The company believes that it is one of the largest multiple-line manufacturers of commercial kitchen, food processing and residential kitchen equipment in the U.S. and worldwide although some of its competitors are units of operations that are larger than the company and possess greater financial and personnel resources. Among the company's major competitors to the Commercial Foodservice Equipment Group are: Welbilt, Inc.; Vulcan-Hart and Hobart Corporation, subsidiaries of Illinois Tool Works Inc.; Electrolux; Groen, a subsidiary of Dover Corporation; Rational AG; and the Ali Group. Major competitors to the Food Processing Equipment Group include AMF Bakery Systems, The GEA Group, JBT Technologies, Marel, and Provisur. The residential kitchen appliance sector is highly competitive and includes a number of large global competitors including, Whirlpool Corporation, Electrolux, GE Appliances, LG Corporation, Panasonic Corporation and Samsung Group. However, within the premium segment of this kitchen equipment market, there are fewer competitors and the company’s competition includes Wolf and Sub-Zero, subsidiaries of Sub-Zero Group, Inc.; Thermador, Bosch and Gaggenau, subsidiaries of Bosch Siemens; Dacor, subsidiary of Samsung Electronics America; and Miele. 6 Manufacturing and Quality Control The company’s manufacturing operations provide for an expertise in the design and production of specific products for each of the three business segments. The company has from time to time either consolidated manufacturing facilities producing similar product or transferred production of certain products to another existing operation with a higher level of expertise or efficiency. The Commercial Foodservice Equipment Group manufactures its products in sixteen domestic and twelve international production facilities. These production facilities are located in Fort Smith, Arkansas; Brea, California; Vacaville, California; Windsor, California; Elgin, Illinois; Mundelein, Illinois; Menominee, Michigan; Bow, New Hampshire; Fuquay-Varina, North Carolina; Dayton, Ohio; Bethlehem, Pennsylvania; Easton, Pennsylvania; Smithville, Tennessee; Carrollton, Texas; Essex Junction, Vermont; Redmond, Washington; New South Wales, Australia; Shanghai, China; Brondby, Denmark; Randers, Denmark; Viljandi, Estonia; Nusco, Italy; Scandicci, Italy; Laguna, the Philippines; Wislina, Poland; Fristad, Sweden; Lincoln, the United Kingdom; and Wrexham, the United Kingdom. The Food Processing Equipment Group manufactures its products in nine domestic and five international production facilities. These production facilities are located in Gainesville, Georgia; Chicago, Illinois; Downers Grove, Illinois; Algona, Iowa; Clayton, North Carolina; Maysville, Oklahoma; Plano, Texas; Waynesboro, Virginia; Lodi, Wisconsin; Aalborg, Denmark; Mauron, France; Reichenau, Germany; Bangalore, India and Norwich, the United Kingdom. The Residential Kitchen Equipment Group manufactures its products in six domestic and nine international production facilities. These production facilities are located in Downey, California; Greenville, Michigan; Greenwood, Mississippi (three separate facilities); Brown Deer, Wisconsin; Rosyl St. Pierre, France; Saint Ouen L'aumone, France; Saint Symhorien, France; Waterford, Ireland; Gee Targu Mures, Romania; Coalbrookdale, the United Kingdom; Ketley, the United Kingdom; Leamington Spa, the United Kingdom and Nottingham, the United Kingdom. Metal fabrication, finishing, sub-assembly and assembly operations are conducted at each manufacturing facility. Equipment installed at individual manufacturing facilities includes numerically controlled turret presses and machine centers, shears, press brakes, welding equipment, polishing equipment, CAD/CAM systems and product testing and quality assurance measurement devices. The company's CAD/CAM systems enable virtual electronic prototypes to be created, reviewed and refined before the first physical prototype is built. Detailed manufacturing drawings are quickly and accurately derived from the model and passed electronically to manufacturing for programming and optimal parts nesting on various numerically controlled punching cells. The company believes that this integrated product development and manufacturing process is critical to assuring product performance, customer service and competitive pricing. The company has established comprehensive programs to ensure the quality of products, to analyze potential product failures and to certify vendors for continuous improvement. Products manufactured by the company are tested prior to shipment to ensure compliance with company standards. Sources of Supply The company purchases its raw materials and component parts from a number of suppliers. The majority of the company’s material purchases are standard commodity-type materials, such as stainless steel, electrical components and hardware. These materials and parts generally are available in adequate quantities from numerous suppliers. Some component parts are obtained from sole sources of supply. In such instances, management believes it can substitute other suppliers as required. The majority of fabrication is done internally through the use of automated equipment. Certain equipment and accessories are manufactured by other suppliers for sale by the company. The company believes it enjoys good relationships with its suppliers and considers the present sources of supply to be adequate for its present and anticipated future requirements. 7 Research and Development The company believes its future success will depend in part on its ability to develop new products and to improve existing products. Much of the company's research and development efforts at the Commercial Foodservice Equipment Group, the Food Processing Equipment Group and the Residential Kitchen Equipment Group are directed to the development and improvement of products designed to reduce cooking and processing time, increase capacity or throughput, reduce energy consumption, minimize labor costs, improve product yield and improve safety, while maintaining consistency and quality of cooking production and food preparation. The company has identified these issues as key concerns for most of its customers. The company often identifies product improvement opportunities by working closely with customers on specific applications. Most research and development activities are performed by the company's technical service and engineering staff located at each manufacturing location. On occasion, the company will contract outside engineering firms to assist with the development of certain technical concepts and applications. See Note 3(o) to the Consolidated Financial Statements for further information on the company's research and development activities. Trademarks, Patents and Licenses The company has developed, acquired and assembled a leading portfolio of trademarks and trade names. The company believes that these trademarks and trade names provide for a significant competitive advantage due to a long-standing recognition in the marketplace with customers, restaurant operators, distribution partners, sales and service agents, and foodservice consultants that specify foodservice equipment. The company has historically maintained a high level of market share of products sold with these trademarks and trade names. The company's leading portfolio of trade names of its Commercial Foodservice Equipment Group include Anets, Bear Varimixer, Beech, Blodgett, Blodgett Combi, Blodgett Range, Bloomfield, Britannia, CTX, Carter-Hoffmann, Celfrost, Concordia, CookTek, Desmon, Doyon, Eswood, Follett, Frifri, Giga, Globe, Goldstein, Holman, Houno, IMC, Induc, Jade, L2F, Lang, Lincat, MagiKitch’n, Market Forge, Marsal, Middleby Marshall, MPC, Nieco, Nu-Vu, PerfectFry, Pitco, QualServ, Southbend, Star, Sveba Dahlen, Toastmaster, TurboChef, Wells and Wunder-Bar. The company’s leading portfolio of trade names of its Food Processing Equipment Group include Alkar, Armor Inox, Auto- Bake, Baker Thermal Solutions, Burford, Cozzini, CVP Systems, Danfotech, Drake, Emico, Glimek, Maurer-Atmos, MP Equipment, RapidPak, Scanico, Spooner Vicars, Stewart Systems and Thurne. The company’s leading portfolio of trade names of its Residential Kitchen Equipment Group include AGA, AGA Cookshop, Brigade, Fired Earth, Grange, Heartland, La Cornue, Leisure Sinks, Lynx, Marvel, Mercury, Rangemaster, Rayburn, Redfyre, Sedona, Stanley, TurboChef, U-Line and Viking. The company holds a broad portfolio of patents and licenses covering technology and applications related to various products, equipment and systems. Management believes the expiration of any one of these patents would not have a material adverse effect on the overall operations or profitability of the company. Employees Commercial Foodservice Equipment Group As of December 30, 2017, 4,496 persons were employed within the Commercial Foodservice Equipment Group. Of this amount, 1,827 were management, administrative, sales, engineering and supervisory personnel; 2,245 were hourly production non-union workers; and 424 were hourly production union members. Included in these totals were 1,741 individuals employed outside of the United States, of which 909 were management, sales, administrative and engineering personnel, 757 were hourly production non-union workers and 75 were hourly production union workers, who participate in an employee cooperative. At its Windsor, California facility, the company has a union contract with the Sheet Metal Workers International Association that expires on December 31, 2020. At its Elgin, Illinois facility, the company has a union contract with the International Brotherhood of Teamsters that expires on July 31, 2022. At its Easton, Pennsylvania facility, the company has a union contract with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union that expires on May 4, 2019. The company also has a union workforce at its manufacturing facility in the Philippines, under a contract that expires on June 30, 2021. Management believes that the relationships between employees, unions and management are good. 8 Food Processing Equipment Group As of December 30, 2017, 1,248 persons were employed within the Food Processing Equipment Group. Of this amount, 599 were management, administrative, sales, engineering and supervisory personnel; 523 were hourly production non-union workers; and 126 were hourly production union members. Included in these totals were 479 individuals employed outside of the United States, of which 244 were management, sales, administrative and engineering personnel and 235 were hourly production non-union workers. At its Lodi, Wisconsin facility, the company has a contract with the International Association of Bridge, Structural, Ornamental and Reinforcing Ironworkers that expires on December 31, 2018. At its Algona, Iowa facility, the company has a union contract with the United Food and Commercial Workers that expires on December 31, 2018. Management believes that the relationships between employees, unions and management are good. Residential Kitchen Equipment Group As of December 30, 2017, 2,719 persons were employed within the Residential Kitchen Equipment Group. Of this amount, 1,307 were management, administrative, sales, engineering and supervisory personnel and 1,412 were hourly production workers. Included in these totals were 1,594 individuals employed outside of the United States, of which 900 were management, sales, administrative and engineering personnel and 694 were hourly non-union production workers. Management believes that the relationships between employees and management are good. Corporate As of December 30, 2017, 30 persons were employed at the corporate office. Seasonality The company’s revenues at the Commercial Foodservice Equipment Group historically have been slightly stronger in the second and third quarters due to increased purchases from customers involved with the catering business and institutional customers, particularly schools, during the summer months. Revenues at the Residential Kitchen Equipment Group are historically stronger in the second and third quarters, due to increased purchases of outdoor cooking equipment and greater new home construction and remodels during the summer months, and the fourth quarter, due to increased holiday purchases in the European markets. 9 Item 1A. Risk Factors The company’s business, results of operations, cash flows and financial condition are subject to various risks, including, but not limited to those set forth below. If any of the following risks actually occurs, the company’s business, results of operations, cash flows and financial condition could be materially adversely affected. These risk factors should be carefully considered together with the other information in this Annual Report on Form 10-K, including the risks and uncertainties described under the heading “Special Note Regarding Forward-Looking Statements". Economic conditions may cause a decline in business and consumer spending which could adversely affect the company’s business and financial performance. The company’s operating results are impacted by the health of the North American, European, Asian and Latin American economies. The company’s business and financial performance, including collection of its accounts receivable, may be adversely affected by the current and future economic conditions that caused, and may cause in the future, a decline in business and consumer spending, a reduction in the availability of credit and decreased growth by its existing customers, resulting in customers electing to delay the replacement of aging equipment. Higher energy costs, rising interest rates, weakness in the residential construction, housing and home improvement markets, financial market volatility, recession and acts of terrorism may also adversely affect the company’s business and financial performance. Additionally, the company may experience difficulties in scaling its operations due to economic pressures in the U.S. and International markets. The company’s level of indebtedness could adversely affect its business, results of operations and growth strategy. The company now has and may continue to have a significant amount of indebtedness. At December 30, 2017, the company had $1,028.9 million of borrowings and $7.5 million in letters of credit outstanding. To the extent the company requires additional capital resources, there can be no assurance that such funds will be available on favorable terms, or at all. The unavailability of funds could have a material adverse effect on the company’s financial condition, results of operations and ability to expand the company’s operations. The company’s level of indebtedness could adversely affect it in a number of ways, including the following: • • • • • the company may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate purposes; a significant portion of the company’s cash flow from operations must be dedicated to debt service, which reduces the amount of cash the company has available for other purposes; the company may be more vulnerable in the event of a downturn in the company’s business or general economic and industry conditions; the company may be disadvantaged competitively by its potential inability to adjust to changing market conditions, as a result of its significant level of indebtedness; and the company may be restricted in its ability to make strategic acquisitions and to pursue new business opportunities. 10 The company’s current credit agreement limits its ability to conduct business, which could negatively affect the company’s ability to finance future capital needs and engage in other business activities. The covenants in the company’s existing credit agreement contain a number of significant limitations on its ability to, among other things: • • • • pay dividends; incur additional indebtedness; create liens on the company’s assets; engage in new lines of business; • make investments; • make capital expenditures and enter into leases; and • acquire or dispose of assets. These restrictive covenants, among others, could negatively affect the company’s ability to finance its future capital needs, engage in other business activities or withstand a future downturn in the company’s business or the economy. Under the company’s current credit agreement, the company is required to maintain certain specified financial ratios and meet financial tests, including certain ratios of leverage and fixed charge coverage. The company’s ability to comply with these requirements may be affected by matters beyond its control, and, as a result, there can be no assurance that the company will be able to meet these ratios and tests. A breach of any of these covenants would prevent the company from being able to draw under the company's revolver and would result in a default under the company’s current credit agreement. In the event of a default under the company’s current credit agreement, the lenders could terminate their commitments and declare all amounts borrowed, together with accrued interest and other fees, to be immediately due and payable. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may also be accelerated and become due and payable at such time. The company may be unable to pay these debts in these circumstances. The company has a significant amount of goodwill and could suffer losses due to asset impairment charges. The company’s balance sheet includes a significant amount of goodwill, which represents approximately 38% of its total assets as of December 30, 2017. The excess of the purchase price over the fair value of assets acquired, including identifiable intangible assets, and liabilities assumed in conjunction with acquisitions is recorded as goodwill. In accordance with Accounting Standards Codification (“ASC”) 350 “Intangibles-Goodwill and Other”, the company’s long-lived assets (including goodwill and other intangibles) are reviewed for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of long-lived assets, the company considers changes in economic conditions and makes assumptions regarding estimated future cash flows and other factors. Various uncertainties, including continued adverse conditions in the capital markets or changes in general economic conditions, could impact the future operating performance at one or more of the company’s businesses, which could significantly affect the company’s valuations and could result in additional future impairments. Also, estimates of future cash flows are judgments based on the company’s experience and knowledge of operations. These estimates can be significantly impacted by many factors, including changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If the company’s estimates or the underlying assumptions change in the future, the company may be required to record impairment charges. Any such charge could have a material adverse effect on the company’s reported net earnings. The company's defined benefit pension plans are subject to financial market risks that could adversely affect the company's financial statements. The performance of the financial markets and interest rates impact our defined benefit pension plan expenses and funding obligations. Significant changes in market interest rates, decreases in fair value of plan assets, investment losses on plan assets and changes in discount rates may increase the company's funding obligations and adversely impact our financial statements. In addition, upward pressure on the cost of providing healthcare coverage to current employees and retirees may increase our future funding obligations and adversely affect our financial statements. 11 Competition in the commercial foodservice, food processing, and residential kitchen equipment industries is intense and could impact the company’s results of operations and cash flows. The company operates in highly competitive industries. In each of the company’s three business segments, competition is based on a variety of factors including product features and design, brand recognition, reliability, durability, technology, energy efficiency, breadth of product offerings, price, customer relationships, delivery lead-times, serviceability and after-sale service. The company has numerous competitors in each business segment. Many of the company’s competitors are substantially larger and enjoy substantially greater financial, marketing, technological and personnel resources. These factors may enable them to develop similar or superior products, to provide lower cost products and to carry out their business strategies more quickly and efficiently than the company can. In addition, some competitors focus on particular product lines or geographic regions or emphasize their local manufacturing presence or local market knowledge. Some competitors have different pricing structures and may be able to deliver their products at lower prices. Although the company believes that the performance and price characteristics of its products will provide competitive solutions for its customers’ needs, there can be no assurance that the company’s customers will continue to choose the company’s products over products offered by its competitors. Further, the markets for the company’s products are characterized by changing technology and evolving industry standards. The company’s ability to compete in the past has depended in part on the company’s ability to develop innovative new products and bring them to market more quickly than the company’s competitors. The company’s ability to compete successfully will depend, in large part, on its ability to enhance and improve its existing products, to continue to bring innovative products to market in a timely fashion, to adapt the company’s products to the needs and standards of its current and potential customers and to continue to improve operating efficiencies and lower manufacturing costs. Moreover, competitors may develop technologies or products that render the company’s products obsolete or less marketable. If the company’s products, markets and services are not competitive, the company’s business, financial condition and operating results will be materially harmed. The company is subject to risks associated with developing products and technologies, which could delay product introductions and result in significant expenditures. The product, program and service needs of the company’s customers change and evolve regularly, and the company invests substantial amounts in research and development efforts to pursue advancements in a wide range of technologies, products and services. Also, the company continually seeks to refine and improve upon the performance, utility and physical attributes of its existing products and to develop new products. As a result, the company’s business is subject to risks associated with new product and technological development, including unanticipated technical or other problems, meeting development, production, certification and regulatory approval schedules, execution of internal and external performance plans, availability of supplier- and internally-produced parts and materials, performance of suppliers and subcontractors, hiring and training of qualified personnel, achieving cost and production efficiencies, identification of emerging technological trends in the company’s target end-markets, validation of innovative technologies, the level of customer interest in new technologies and products, and customer acceptance of the company’s products and products that incorporate technologies that the company develops. These factors involve significant risks and uncertainties. Also, any development efforts divert resources from other potential investments in the company’s businesses, and these efforts may not lead to the development of new technologies or products on a timely basis or meet the needs of the company’s customers as fully as competitive offerings. In addition, the markets for the company’s products or products that incorporate the company’s technologies may not develop or grow as the company anticipates. The company or its suppliers and subcontractors may encounter difficulties in developing and producing these new products and services, and may not realize the degree or timing of benefits initially anticipated. Due to the design complexity of the company's products, the company may in the future experience delays in completing the development and introduction of new products. Any delays could result in increased development costs or deflect resources from other projects. The occurrence of any of these risks could cause a substantial change in the design, delay in the development, or abandonment of new technologies and products. Consequently, there can be no assurance that the company will develop new technologies superior to the company’s current technologies or successfully bring new products to market. Additionally, there can be no assurance that new technologies or products, if developed, will meet the company’s current price or performance objectives, be developed on a timely basis, or prove to be as effective as products based on other technologies. The inability to successfully complete the development of a product, or a determination by the company, for financial, technical or other reasons, not to complete development of a product, particularly in instances in which the company has made significant expenditures, could have a material adverse effect on the company’s financial condition and operating results. 12 The company has depended, and will continue to depend, on key customers for a material portion of its revenues. As a result, changes in the purchasing patterns of such key customers could adversely impact the company’s operating results. Many of the company’s key customers are large restaurant chains and major food processing companies. The demand for the company’s equipment can vary from quarter to quarter depending on the company’s customers’ internal growth plans, construction, seasonality and other factors. In addition, during an economic downturn, key customers could both open fewer facilities and defer purchases of new equipment for existing operations. Either of these conditions could have a material adverse effect on the company’s financial condition and results of operations. Price changes in some materials and disruptions in supply could affect the company’s profitability. The company uses large amounts of stainless steel, aluminized steel and other commodities in the manufacture of its products. A significant increase in the price of steel or any other commodity that the company is not able to pass on to its customers would adversely affect the company’s operating results. In addition, an unanticipated delay in delivery of raw materials and component inventories by suppliers—including a delay due to capacity constraints, labor disputes, the financial condition of suppliers, weather emergencies, or other natural disasters—may impair the ability of the company to satisfy customer demand. An interruption in or the cessation of an important supply by any third party and the company’s inability to make alternative arrangements in a timely manner, or at all, could have a material adverse effect on the company’s business, financial condition and operating results. The company’s acquisition, investment and alliance strategy involves risks. If the company is unable to effectively manage these risks, its business will be materially harmed. To achieve the company’s strategic objectives, the company has pursued and may continue to pursue strategic acquisitions and investments or invest in other companies, businesses or technologies. Acquisitions entail numerous risks, including the following: • difficulties in the assimilation of acquired businesses or technologies; • • • • inability to operate acquired businesses or utilize acquired technologies profitably; diversion of management’s attention from other business concerns; potential assumption of unknown material liabilities; failure to achieve financial or operating objectives; • unanticipated costs relating to acquisitions or to the integration of the acquired businesses; • • loss of customers, suppliers, or key employees; and the impact on the company's internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002. The company may not be able to successfully integrate any operations, personnel, services or products that it has acquired or may acquire in the future. The company may seek to expand or enhance some of its operations by forming joint ventures or alliances with various strategic partners throughout the world. Entering into joint ventures and alliances also entails risks, including difficulties in developing and expanding the businesses of newly formed joint ventures, exercising influence over the activities of joint ventures in which the company does not have a controlling interest and potential conflicts with the company’s joint venture or alliance partners. 13 An inability to identify or complete future acquisitions could adversely affect future growth. The company has historically followed a strategy of identifying and acquiring businesses with complementary products and services. As part of its growth strategy, the company intends to pursue acquisitions that provide opportunities for profitable growth and which enable it to leverage its competitive strengths. While the company continues to evaluate potential acquisitions, it may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory terms, obtain regulatory approval for certain acquisitions, or otherwise complete acquisitions in the future. An inability to identify or complete future acquisitions could limit the company’s growth. Expansion of the company’s operations internationally involves special challenges that it may not be able to meet. The company’s failure to meet these challenges could adversely affect its business, financial condition and operating results. The company plans to continue to expand its operations internationally. The company faces certain risks inherent in doing business in international markets. These risks include: • extensive regulations and oversight, tariffs and other trade barriers; • reduced protection for intellectual property rights; • • • • • • difficulties in staffing and managing foreign operations; potentially adverse tax consequences; limitations on ownership and on repatriation of earnings; transportation delays and interruptions; political, social, and economic instability and disruptions; labor unrests; • potential for nationalization of enterprises; and • limitations on the company’s ability to enforce legal rights and remedies. In addition, the company is and will be required to comply with the laws and regulations of foreign governmental and regulatory authorities of each country in which the company conducts business. There can be no assurance that the company will be able to succeed in marketing its products and services in international markets. The company may also experience difficulty in managing its international operations because of, among other things, competitive conditions overseas, management of foreign exchange risk, established domestic markets, language and cultural differences and economic or political instability. Any of these factors could have a material adverse effect on the success of the company’s international operations and, consequently, on the company’s business, financial condition and operating results. The company is subject to currency fluctuations and other risks from its operations outside the United States. The company has manufacturing and distribution operations located in Asia, Europe and Latin America. The company’s operations are subject to the impact of economic downturns, political instability and foreign trade restrictions, which may adversely affect the company’s business, financial condition and operating results. The company anticipates that international sales will continue to account for a significant portion of consolidated net sales in the foreseeable future. Some sales and operating costs of the company’s foreign operations are realized in local currencies, and an increase in the relative value of the U.S. dollar against such currencies would lead to a reduction in consolidated sales and earnings. Additionally, foreign currency exposures are not fully hedged, and there can be no assurances that the company’s future results of operations will not be adversely affected by currency fluctuations. Furthermore, currency fluctuations may affect the prices paid to the company’s suppliers for materials the company uses in production. As a result, operating margins may also be negatively impacted by worldwide currency fluctuations that result in higher costs for certain cross-border transactions. 14 The company may not be able to adequately protect its intellectual property rights, and this inability may materially harm its business. The company relies primarily on trade secret, copyright, service mark, trademark and patent law and contractual protections to protect the company’s proprietary technology and other proprietary rights. The company has filed numerous patent applications covering the company’s technology. Notwithstanding the precautions the company takes to protect its intellectual property rights, it is possible that third parties may copy or otherwise obtain and use the company’s proprietary technology without authorization or may otherwise infringe on the company’s rights. In some cases, including with respect to a number of the company’s most important products, there may be no effective legal recourse against duplication by competitors. In the future, the company may have to rely on litigation to enforce its intellectual property rights, protect its trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs to the company and diversions of the company’s resources, either of which could adversely affect the company’s business. Any infringement by the company on patent rights of others could result in litigation and adversely affect its ability to continue to provide, or could increase the cost of providing, the company’s products and services. Patents of third parties may have an important bearing on the company’s ability to offer some of its products and services. The company’s competitors, as well as other companies and individuals, may obtain patents related to the types of products and services the company offers or plans to offer. There can be no assurance that the company is or will be aware of all patents containing claims that may pose a risk of infringement by its products and services. In addition, some patent applications in the United States are confidential until a patent is issued and, therefore, the company cannot evaluate the extent to which its products and services may be covered or asserted to be covered by claims contained in pending patent applications. In general, if one or more of the company’s products or services were to infringe patents held by others, the company may be required to stop developing or marketing the products or services, to obtain licenses from the holders of the patents to develop and market the services, or to redesign the products or services in such a way as to avoid infringing on the patent claims. The company cannot assess the extent to which it may be required in the future to obtain licenses with respect to patents held by others, whether such licenses would be available or, if available, whether it would be able to obtain such licenses on commercially reasonable terms. If the company were unable to obtain such licenses, it also may not be able to redesign the company’s products or services to avoid infringement, which could materially adversely affect the company’s business, financial condition and operating results. The company may be the subject of product liability claims or product recalls, and it may be unable to obtain or maintain insurance adequate to cover potential liabilities. Product liability is a significant commercial risk to the company. The company’s business exposes it to potential liability risks that arise from the manufacture, marketing and sale of the company’s products. In addition to direct expenditures for damages, settlement and defense costs, there is a possibility of adverse publicity as a result of product liability claims. Some plaintiffs in some jurisdictions have received substantial damage awards against companies based upon claims for injuries allegedly caused by the use of their products. In addition, it may be necessary for the company to recall products that do not meet approved specifications, which could result in adverse publicity as well as costs connected to the recall and loss of revenue. The company cannot be certain that a product liability claim or series of claims brought against it would not have an adverse effect on the company’s business, financial condition or results of operations. If any claim is brought against the company, regardless of the success or failure of the claim, the company cannot assure you that it will be able to obtain or maintain product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities or the cost of a recall. The company currently maintains insurance programs consisting of self-insurance up to certain limits and excess insurance coverage for claims over established limits. There can be no assurance that the company will be able to obtain insurance on acceptable terms or that its insurance programs will provide adequate protection against actual losses. In addition, the company is subject to the risk that one or more of its insurers may become insolvent or become unable to pay claims that may be made in the future. An increase in warranty expenses could adversely affect the company’s financial performance. The company offers purchasers of its products warranties covering workmanship and materials typically for one year and, in certain circumstances, for periods of up to ten years, during which periods the company or an authorized service representative will make repairs and replace parts that have become defective in the course of normal use. The company estimates and records its future warranty costs based upon past experience. These warranty expenses may increase in the future and may exceed the company’s warranty reserves, which, in turn, could adversely affect the company’s financial performance. 15 The company may be subject to litigation, environmental, and other legal compliance risks. In addition to product liability claims, the company is subject to a variety of litigation, tax, and legal compliance risks. These risks include, among other things, possible liability relating to personal injuries, intellectual property rights, contract-related claims, taxes, environmental matters, and compliance with U.S. and foreign export laws, competition laws, and laws governing improper business practices. The company or one of its business units could be charged with wrongdoing as a result of such matters. If convicted or found liable, the company could be subject to significant fines, penalties, repayments, or other damages. The company is subject to potential liability under environmental laws. The company’s operations are regulated under a number of federal, state and local environmental laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of these materials. Compliance with these environmental laws and regulations is a significant consideration for the company because it uses hazardous materials in its manufacturing processes. In addition, because the company is a generator of hazardous wastes, even if it fully complies with applicable environmental laws, it may be subject to financial exposure for costs associated with an investigation and remediation of sites at which it has arranged for the disposal of hazardous wastes if these sites become contaminated. In the event of a violation of environmental laws, the company could be held liable for damages and for the costs of remedial actions. Environmental laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation, which could negatively affect the company’s operating results. There can be no assurance that identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory authorities, or other unanticipated events will not arise in the future and give rise to additional environmental liabilities, compliance costs, and penalties that could be material. Environmental laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the financial condition, results of operations, or cash flows of the company. Unfavorable tax law changes and tax authority rulings may adversely affect results. The company is subject to income taxes in the United States and in various foreign jurisdictions. Domestic and international tax liabilities are based on the income and expenses in various tax jurisdictions. The amount of the company’s income and other tax liability is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts recorded, future financial results may include unfavorable tax adjustments. The company’s reputation, ability to do business, and results of operations may be impaired by improper conduct by any of its employees, agents, or business partners. While the company strives to maintain high standards, the company cannot provide assurance that its internal controls and compliance systems will always protect it from acts committed by its employees, agents, or business partners that would violate U.S. and/or foreign laws or fail to protect the company’s confidential information, including the laws governing payments to government officials, bribery, fraud, anti-kickback and false claims rules, competition, export and import compliance, money laundering, and data privacy laws, as well as the improper use of proprietary information or social media. Any such violations of law or improper actions could subject the company to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil or criminal, monetary and non-monetary penalties, and related shareholder lawsuits, could lead to increased costs of compliance and could damage the company’s reputation. 16 The company’s financial performance is subject to significant fluctuations. The company’s financial performance is subject to quarterly and annual fluctuations due to a number of factors, including: • general economic conditions; • the lengthy, unpredictable sales cycle for commercial foodservice equipment, food processing equipment and residential kitchen equipment group; • the gain or loss of significant customers; • unexpected delays in new product introductions; • the level of market acceptance of new or enhanced versions of the company’s products; • unexpected changes in the levels of the company’s operating expenses; and • competitive product offerings and pricing actions. Each of these factors could result in a material and adverse change in the company’s business, financial condition and results of operations. The company may be unable to manage its growth. The company has recently experienced rapid growth in business. Continued growth could place a strain on the company’s management, operations and financial resources. There also will be additional demands on the company’s sales, marketing and information systems and on the company’s administrative infrastructure as it develops and offers additional products and enters new markets. The company cannot be certain that the company’s operating and financial control systems, administrative infrastructure, outsourced and internal production capacity, facilities and personnel will be adequate to support the company’s future operations or to effectively adapt to future growth. If the company cannot manage the company’s growth effectively, the company’s business may be harmed. The company’s business could suffer in the event of a work stoppage by its unionized labor force. Because the company has a significant number of workers whose employment is subject to collective bargaining agreements and labor union representation, the company is vulnerable to possible organized work stoppages and similar actions. Unionized employees accounted for approximately 6% of the company’s workforce as of December 30, 2017. The company has union contracts with employees at its facilities in Windsor, California; Algona, Iowa; Elgin, Illinois; Easton, Pennsylvania and Lodi, Wisconsin that extend through December 2020, December 2018, July 2022, May 2019 and December 2018, respectively. The company also has a union workforce at its manufacturing facility in the Philippines under a contract that extends through June 2021. Approximately 2% of the company's workforce is covered by collective bargaining agreements that expire within one year. Any future strikes, employee slowdowns or similar actions by one or more unions, in connection with labor contract negotiations or otherwise, could have a material adverse effect on the company’s ability to operate the company’s business. The company depends significantly on its key personnel. The company depends significantly on the company’s executive officers and certain other key personnel, whom could be difficult to replace. While the company has employment agreements with certain key executives, the company cannot be certain that it will succeed in retaining this personnel or their services under existing agreements. The incapacity, inability or unwillingness of certain of these people to perform their services may have a material adverse effect on the company. There is intense competition for qualified personnel within the company’s industry, and there can be no assurance that the company will be able to continue to attract, motivate and retain personnel with the skills and experience needed to successfully manage the company's business and operations. 17 The company may be subject to information technology system failures, network disruptions, cybersecurity attacks and breaches in data security, which may materially adversely affect the company’s operations, financial condition and operating results. The company depends on information technology as an enabler to improve the effectiveness of its operations and to interface with its customers, as well as to maintain financial accuracy and efficiency. Information technology system failures, including suppliers’ or vendors’ system failures, could disrupt the company’s operations by causing transaction errors, processing inefficiencies, delays or cancellation of customer orders, the loss of customers, impediments to the manufacture or shipment of products, other business disruptions, or the loss of or damage to intellectual property through security breach. The company’s information systems, or those of its third-party service providers, could also be penetrated by outside parties intent on extracting information, corrupting information or disrupting business processes. Such unauthorized access could disrupt the company’s business and could result in the loss of assets. Cybersecurity attacks are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data. These events could impact the company’s customers and reputation and lead to financial losses from remediation actions, loss of business or potential liability or an increase in expense, all of which may have a material adverse effect on the company’s business. The impact of future transactions on the company’s common stock is uncertain. The company periodically reviews potential transactions related to products or product rights and businesses complementary to the company’s business. Such transactions could include mergers, acquisitions, joint ventures, alliances or licensing agreements. In the future, the company may choose to enter into such transactions at any time. The impact of transactions on the market price of a company’s stock is often uncertain, but it may cause substantial fluctuations to the market price. Consequently, any announcement of any such transaction could have a material adverse effect upon the market price of the company’s common stock. Moreover, depending upon the nature of any transaction, the company may experience a charge to earnings, which could be material and could possibly have an adverse impact upon the market price of the company’s common stock. The trading price of the company's common stock has been volatile, and investors in the company's common stock may experience substantial losses. The trading price of the company's common stock has been volatile and may become volatile again in the future. The trading price of the company's common stock could decline or fluctuate in response to a variety of factors, including: • • • • • • the company's failure to meet the performance estimates of securities analysts; changes in buy/sell recommendations by securities analysts; fluctuations in our operating results; substantial sales of the company's common stock general stock market conditions; or other economic or external factors. Item 1B. Unresolved Staff Comments Not applicable. 18 Item 2. Properties The company's principal executive offices are located in Elgin, Illinois. The company operates thirty-one manufacturing facilities in the U.S. and twenty-six manufacturing facilities internationally. The principal properties of the company used to conduct business operations are listed below: Location Principal Function Square Footage Owned/ Leased Lease Expiration Commercial Foodservice: Fort Smith, AR Brea, CA Vacaville, CA Windsor, CA Elgin, IL Mundelein, IL Menominee, MI Bow, NH Pembroke, NH Fuquay-Varina, NC Dayton, OH Bethlehem, PA Easton, PA Smithville, TN Carrollton, TX Essex Junction, VT Redmond, WA New South Wales, Australia Shanghai, China Brøndby, Denmark Randers, Denmark Viljandi, Estonia Nusco, Italy Scandicci, Italy Laguna, the Philippines Fristad, Sweden Lincoln, the United Kingdom Wrexham, the United Kingdom Food Processing: Gainesville, GA Chicago, IL Downers Grove, IL Algona, IA Clayton, NC Maysville, OK Plano, TX Waynesboro, VA Lodi, WI Aalborg, Denmark Mauron, France Reichenau, Germany Bangalore, India Norwich, the United Kingdom Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Warehousing Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices Manufacturing, Warehousing and Offices 19 30,000 80,700 81,200 75,000 207,000 70,000 60,000 100,000 111,900 138,900 37,700 71,700 156,700 268,000 132,400 180,000 42,400 204,900 74,000 50,900 78,500 47,000 24,200 37,600 115,200 77,500 158,100 100,000 62,600 107,000 64,400 18,000 70,100 65,300 36,700 339,100 26,400 114,600 64,000 98,000 57,900 75,000 39,200 Leased Leased Leased Leased Owned Owned Owned Owned Leased Owned Owned Leased Owned Owned Leased Owned Leased Owned Leased Owned Owned Owned Owned Leased Owned Owned Owned Owned Owned Owned Leased Leased Owned Leased Leased Leased Owned Owned Leased Leased Owed Leased Owned August 2024 September 2020 May 2027 October 2022 N/A N/A N/A N/A July 2024 N/A N/A December 2024 N/A N/A August 2022 N/A May 2022 N/A April 2020 N/A N/A N/A N/A April 2025 N/A N/A N/A N/A N/A N/A March 2019 April 2020 N/A October 2019 December 2018 April 2022 N/A N/A December 2022 January 2023 N/A February 2022 N/A Principal Function Location Residential Kitchen: Warehousing and Offices Chino, CA Manufacturing, Warehousing and Offices Downey, CA Warehousing and Offices Burford, GA Warehousing and Offices Suwanee, GA Manufacturing, Warehousing and Offices Greenville, MI Manufacturing, Warehousing and Offices * Greenwood, MS Manufacturing, Warehousing and Offices Brown Deer, WI Manufacturing and Warehousing Rosyl St Pierre, France Manufacturing and Warehousing Saint Ouen L'aumone, France Manufacturing and Warehousing Saint Symphorien, France Manufacturing, Warehousing and Offices Waterford, Ireland Manufacturing and Warehousing Gee Targu Mures, Romania Warehousing and Offices Adderbury, the United Kingdom Manufacturing and Offices Coalbrookdale, the United Kingdom Ketley, the United Kingdom Manufacturing and Offices Leamington Spa, the United Kingdom Manufacturing and Offices Leamington Spa, the United Kingdom Warehousing and Offices Nottingham, the United Kingdom Manufacturing and Offices Square Footage Owned/ Leased Lease Expiration 100,000 122,500 178,000 142,000 225,000 738,000 165,400 40,900 30,400 138,000 73,000 48,000 82,500 153,100 217,300 270,200 100,300 153,100 Leased Leased Leased Leased Owned Owned Leased Owned Leased Owned Leased Owned Leased Owned Owned Owned Leased Owned April 2021 December 2019 June 2022 January 2018 N/A N/A May 2022 N/A April 2021 N/A July 2027 N/A August 2020 N/A N/A N/A August 2019 N/A * Contains three separate manufacturing facilities. At various other locations the company leases small amounts of space for administrative, manufacturing, distribution and sales functions, and in certain instances limited short-term inventory storage. These locations are in Australia, Brazil, Canada, China, Czech Republic, Denmark, Dubai, France, India, Italy, Mexico, Russia, Spain, the United Kingdom and various locations in the United States. Management believes that these facilities are adequate for the operation of the company's business as presently conducted. Item 3. Legal Proceedings The company is routinely involved in litigation incidental to its business, including product liability claims, which are partially covered by insurance or in certain cases by indemnification provisions under purchase agreements for recently acquired companies. Such routine claims are vigorously contested and management does not believe that the outcome of any such pending litigation will have a material effect upon the financial condition, results of operations or cash flows of the company. Item 4. Mine Safety Issues Not applicable. 20 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Principal Market The company's Common Stock trades on the Nasdaq Global Market under the symbol "MIDD". The following table sets forth, for the periods indicated, the high and low closing sale prices per share of Common Stock, as reported by the Nasdaq Global Market. Fiscal 2017 First quarter Second quarter Third quarter Fourth quarter Fiscal 2016 First quarter Second quarter Third quarter Fourth quarter Shareholders Closing Share Price Low High $ $ $ $ 141.74 141.07 131.74 134.95 108.38 126.52 132.17 142.38 128.59 120.04 115.72 108.72 80.62 103.39 112.94 109.23 The company estimates there were approximately 68,714 record holders of the company's common stock as of February 26, 2018. Dividends The company does not currently pay cash dividends on its common stock. Any future payment of cash dividends on the company’s common stock will be at the discretion of the company’s Board of Directors and will depend upon the company’s results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors. The company’s Board of Directors currently intends to retain any future earnings to support its operations and to finance the growth and development of the company’s business and does not intend to declare or pay cash dividends on its common stock for the foreseeable future. In addition, the company’s revolving credit facility limits its ability to declare or pay dividends on its common stock. Issuer Purchases of Equity Securities October 1 to October 28, 2017 October 29 to November 25, 2017 November 26 to December 30, 2017 Quarter ended December 30, 2017 Total Number of Shares Purchased — $ 20,000 106,200 126,200 $ Average Price Paid per Share — 116.40 117.84 117.61 Total Number of Shares Purchased as Part of Publicly Announced Plan or Program — 20,000 106,200 126,200 Maximum Number of Shares that May Yet be Purchased Under the Plan or Program (1) 709,270 2,480,000 2,373,800 2,373,800 (1) On November 7, 2017, the company's Board of Directors resolved to terminate the company's existing share repurchase program, effective as of such date, which was originally adopted in 1998, and approved a new stock repurchase program. This program authorizes the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock. As of December 30, 2017, 126,200 shares had been purchased under the 2017 stock repurchase program. At December 30, 2017, the company had a total of 6,889,241 shares in treasury amounting to $445.1 million. 21 Item 6. Selected Financial Data (amounts in thousands, except per share data) Fiscal Year Ended(1, 2) Income Statement Data: Net sales Cost of sales Gross profit Selling, general, and administrative expenses Restructuring expenses Gain on litigation settlement Gain on sale of plant Impairment of intangible asset Income from operations Net interest expense and deferred financing amortization, net Other expense, net Earnings before income taxes Provision for income taxes Net earnings Net earnings per share: Basic Diluted Weighted average number of shares outstanding: Basic Diluted Balance Sheet Data: Working capital Total assets Total debt Stockholders' equity 2017 2016 2015 2014 2013 $ 2,335,542 1,422,801 912,741 436,491 19,951 — (12,042) 58,000 410,341 $ 2,267,852 1,366,672 901,180 444,431 10,524 — — — 446,225 $ 1,826,598 1,120,093 706,505 375,148 28,754 — — — 302,603 $ 1,636,538 995,953 640,585 339,594 7,078 (6,519) — — 300,432 $ 1,428,685 878,674 550,011 296,448 9,101 — — — 244,462 25,983 829 383,529 85,401 298,128 5.26 5.26 56,715 56,719 458,236 3,339,713 1,028,881 1,361,148 23,880 1,040 421,305 137,089 284,216 4.98 4.98 57,030 57,085 323,290 2,917,136 732,126 1,265,318 16,967 4,469 281,167 89,557 191,610 3.36 3.36 56,951 56,973 285,191 2,761,151 766,061 1,166,830 $ $ $ $ $ $ $ $ 15,592 4,050 280,790 87,478 193,312 3.41 3.40 56,764 56,784 285,817 2,066,131 598,167 1,006,760 15,901 2,780 225,781 71,853 153,928 2.76 2.74 55,831 56,148 234,349 1,819,206 571,598 838,347 $ $ $ $ $ $ $ $ $ $ $ $ (1) (2) The company's fiscal year ends on the Saturday nearest to December 31. The company has acquired numerous businesses in the periods presented. Please see Note 2 in the Notes to Consolidated Financial Statements for further information. 22 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Forward-Looking Statements This report contains "forward-looking statements" subject to the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which could cause the company's actual results, performance or outcomes to differ materially from those expressed or implied in the forward-looking statements. The following are some of the important factors that could cause the company's actual results, performance or outcomes to differ materially from those discussed in the forward-looking statements: • • • • • • • • • • • • • • • • • changing market conditions; volatility in earnings resulting from goodwill impairment losses, which may occur irregularly and in varying amounts; variability in financing costs; quarterly variations in operating results; dependence on key customers; risks associated with the company's foreign operations, including market acceptance and demand for the company's products and the company's ability to manage the risk associated with the exposure to foreign currency exchange rate fluctuations; the company's ability to protect its trademarks, copyrights and other intellectual property; the impact of competitive products and pricing; the state of the residential construction, housing and home improvement markets; the state of the credit markets, including mortgages, home equity loans and consumer credit; the company's ability to maintain and grow the Viking reputation and brand image; intense competition in the company's business segments including the impact of both new and established global competitors; unfavorable tax law changes and tax authority rulings; cybersecurity attacks and other breaches in security; the continued ability to realize profitable growth through the sourcing and completion of strategic acquisitions; the timely development and market acceptance of the company's products; and the availability and cost of raw materials. The company cautions readers to carefully consider the statements set forth in the section entitled "Item 1A. Risk Factors" of this filing and discussion of risks included in the company's SEC filings. 23 NET SALES SUMMARY (dollars in thousands) Fiscal Year Ended(1) 2017 2016 2015 Sales Percent Sales Percent Sales Percent Business Segments: Commercial Foodservice $ 1,382,108 59.2% $ 1,266,955 55.9% $ 1,121,046 61.4% Food Processing Residential Kitchen 352,717 600,717 15.1 25.7 342,235 658,662 15.1 29.0 297,712 407,840 16.3 22.3 Total $ 2,335,542 100.0% $ 2,267,852 100.0% $ 1,826,598 100.0% (1) The company's fiscal year ends on the Saturday nearest to December 31. 24 Results of Operations The following table sets forth certain items in the consolidated statements of earnings as a percentage of net sales for the periods presented: Net sales Cost of sales Gross profit Selling, general and administrative expenses Restructuring expenses Gain on sale of plant Impairment of intangible asset Income from operations Interest expense and deferred financing amortization, net Other expense, net Earnings before income taxes Provision for income taxes Net earnings 2017 Fiscal Year Ended(1) 2016 2015 100.0% 60.9 39.1 18.7 0.9 (0.5) 2.5 17.5 1.1 — 16.4 3.7 12.7% 100.0% 60.3 39.7 19.6 0.5 — — 19.6 1.1 — 18.5 6.0 12.5% 100.0% 61.3 38.7 20.6 1.6 — — 16.5 0.9 0.2 15.4 4.9 10.5% (1) The company's fiscal year ends on the Saturday nearest to December 31. 25 Fiscal Year Ended December 30, 2017 as Compared to December 31, 2016 Net sales. Net sales in fiscal 2017 increased by $67.6 million or 3.0% to $2,335.5 million as compared to $2,267.9 million in fiscal 2016. The increase in net sales of $161.9 million, or 7.1%, was attributable to acquisition growth, resulting from the fiscal 2016 acquisition of Follett and the fiscal 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen, QualServ, L2F, Globe and Scanico. Excluding acquisitions, net sales decreased $94.3 million, or 4.2%, from the prior year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for fiscal 2017 reduced net sales by approximately $12.0 million or 0.5%. Excluding the impact of foreign exchange and acquisitions, sales decreased 3.6% for the year, including a net sales decrease of 1.8% at the Commercial Foodservice Equipment Group, a net sales decrease of 3.5% at the Food Processing Equipment Group and a net sales decrease of 7.2% at the Residential Kitchen Equipment Group. • Net sales of the Commercial Foodservice Equipment Group increased by $115.1 million or 9.1% to $1,382.1 million in fiscal 2017, as compared to $1,267.0 million in fiscal 2016. Net sales from the acquisitions of Follett, Sveba Dahlen, QualServ, L2F and Globe, which were acquired on May 31, 2016, June 30, 2017, August 31, 2017, October 6, 2017 and October 17, 2017, respectively, accounted for an increase of $140.2 million during fiscal 2017. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group decreased $25.1 million, or 2.0%, as compared to the prior year. Excluding the impact of foreign exchange and acquisitions, net sales decreased $22.5 million, or 1.8% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $85.3 million, or 10.0%, to $939.2 million, as compared to $853.9 million in the prior year. This includes an increase of $102.5 million from recent acquisitions. Excluding acquisitions, net sales decreased $17.2 million, or 2.0%. The domestic sales decrease reflects slower purchases from major restaurant chains as equipment upgrade and replacement purchases were delayed. International sales increased $29.8 million, or 7.2%, to $442.9 million, as compared to $413.1 million in the prior year. This includes the increase of $37.7 million from the recent acquisitions, offset by $2.6 million related to the unfavorable impact of exchange rates. Excluding acquisitions and foreign exchange, the net sales decrease in international sales was $5.3 million, or 1.3%. The decline in international sales reflects strong chain rollouts in the prior year that were not repeated and disruption in the Latin America market due in part to natural disasters in the region. • Net sales of the Food Processing Equipment Group increased by $10.5 million or 3.1% to $352.7 million in fiscal 2017, as compared to $342.2 million in fiscal 2016. Net sales from the acquisitions of Burford, CVP Systems and Scanico, which were acquired on May 1, 2017, June 30, 2017, and December 7, 2017, respectively, accounted for an increase of $21.7 million. Excluding the impact of these acquisitions, net sales of the Food Processing Equipment Group decreased $11.2 million, or 3.3%. Excluding the impact of foreign exchange and acquisitions, net sales decreased $12.1 million, or 3.5% at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $8.0 million, or 3.1%, to $262.4 million, as compared to $254.4 million in the prior year. This includes an increase of $14.9 million from recent acquisitions. Excluding acquisitions, net sales decreased $6.9 million, or 2.7%. International sales increased $2.5 million, or 2.8%, to $90.3 million, as compared to $87.8 million in the prior year. This includes the increase of $6.8 million from the recent acquisitions and $0.9 million related to the favorable impact of exchange rates. • Net sales of the Residential Kitchen Equipment Group decreased by $58.0 million or 8.8% to $600.7 million in fiscal 2017, as compared to $658.7 million in fiscal 2016. Excluding the impact of foreign currency, net sales decreased $47.7 million, or 7.2% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales decrease of $15.6 million, or 4.3%, to $346.7 million, as compared to $362.3 million in the prior year. Domestic sales declined primarily due to lower sales of Viking products, reflecting the residual impact of a product recall. International sales decreased $42.4 million, or 14.3% to $254.0 million, as compared to $296.4 million in the prior year, including a reduction of $10.3 million related to the unfavorable impact of exchange rates. Excluding foreign exchange, the net sales decrease in international sales was $32.1 million, or 10.8%. The sales decrease reflects the impact of product rationalization at the AGA Group in conjunction with acquisition integration initiatives and restructuring actions impacting sales related to non-core businesses within that group. 26 Gross profit. Gross profit increased by $11.5 million to $912.7 million in fiscal 2017 from $901.2 million in fiscal 2016. The increase in the gross profit reflects the impact of increased sales from acquisitions, offset by the impact of foreign exchange rates, which reduced gross profit by $4.5 million. The gross margin rate decreased from 39.7% in 2016 to 39.1% in 2017. • Gross profit at the Commercial Foodservice Equipment Group increased by $19.0 million, or 3.6%, to $551.9 million in fiscal 2017 as compared to $532.9 million in fiscal 2016. Gross profit from the acquisitions of Follett, Sveba Dahlen, QualServ, L2F, and Globe accounted for approximately $38.0 million of the increase in gross profit during fiscal 2017. Excluding the recent acquisitions, the gross profit decreased by approximately $19.0 million due to lower sales volume and product mix in comparison to the prior year. The impact of foreign exchange rates reduced gross profit by approximately $0.6 million. The gross profit margin rate decreased to 39.9% as compared to 42.1% in the prior year, primarily due to lower margins at recent acquisitions. • Gross profit at the Food Processing Equipment Group increased by $5.4 million, or 3.9%, to $143.1 million in fiscal 2017 as compared to $137.7 million in fiscal 2016. Gross profit from the acquisitions of Burford, CVP Systems, and Scanico accounted for approximately $8.9 million of the increase in gross profit during fiscal 2017. Excluding the recent acquisitions, the gross profit decreased by approximately $3.5 million based on lower sales volumes. The impact of foreign exchange rates increased gross profit by approximately $0.1 million. The gross profit margin rate increased to 40.6% in fiscal 2017 as compared to 40.2% in fiscal 2016. The increase in the gross margin rate reflects the favorable impact of ongoing cost efficiency initiatives. • Gross profit at the Residential Kitchen Equipment Group decreased by $9.8 million, or 4.2%, to $222.9 million in fiscal 2017 as compared to $232.7 million in fiscal 2016. The impact of foreign exchange rates reduced gross profit by approximately $4.0 million. The gross margin rate increased to 37.1% in fiscal 2017 as compared to 35.3% in fiscal 2016, due to the impact of improved margins at the AGA Group, U-Line and Lynx as a result of cost reduction and acquisition integration initiatives. Selling, general and administrative expenses. Combined selling, general, and administrative expenses decreased by $7.9 million to $436.5 million in fiscal 2017 from $444.4 million in 2016. As a percentage of net sales, selling, general and administrative expenses amounted to 18.7% in fiscal 2017 and 19.6% in fiscal 2016. Selling, general and administrative expenses reflect increased costs of $36.3 million associated with the Follett, Burford, CVP Systems, Sveba Dahlen, QualServ, L2F, Globe and Scanico acquisitions, including $8.3 million of non-cash intangible amortization expense. The unfavorable impact of foreign exchange rates increased selling, general and administrative expenses by approximately $1.0 million. Selling, general and administrative expenses decreased $3.9 million related to net periodic pension benefit and $3.1 million related to trade advertising, offset by an increase of $6.9 million related to strategic expenses associated with acquisition activities. Additionally, selling, general and administrative expenses decreased $19.8 million related to lower salaries and bonuses due to reorganization activities and $21.7 million related to lower non-cash share based compensation. Restructuring expenses. Restructuring expenses increased $9.5 million to $20.0 million from $10.5 million in the prior year period. Restructuring expenses during fiscal 2017 included cost reduction initiatives primarily related to headcount reductions at the Commercial Foodservice Equipment Group, Food Processing Equipment Group and Residential Kitchen Equipment Group. Restructuring expenses during fiscal 2016 were primarily associated with acquisition integration initiatives at AGA. Gain on sale of plant. Gain on sale of plant in the amount of $12.0 million was related to the sale of a manufacturing facility, proceeds of which were used to purchase a larger manufacturing facility to gain efficiencies in workflow and allow for future manufacturing consolidation efforts. Impairment of intangible asset. The impairment of intangible asset in the amount of $58.0 million was recognized related to the Viking tradename within the company's annual impairment assessment of goodwill and indefinite-lived assets. The impairment resulted from weaker than expected revenue performance in the current year and a corresponding reduction in the future revenue expectations. The decline in revenues was attributable, in part, to the product recall announced in 2015 related to products manufactured prior to the acquisition of Viking. 27 Income from operations. Income from operations decreased $35.9 million to $410.3 million in fiscal 2017 from $446.2 million in fiscal 2016. The decrease in operating income resulted from the increased restructuring expenses and the impairment of intangible assets, offset by the increase in net sales, gross profit and the gain on sale of plant. Operating income as a percentage of net sales amounted to 17.5% in 2017 as compared to 19.6% in 2016. Excluding the impact of restructuring expenses, gain on sale of plant and impairment of intangible assets operating income increased $19.6 million to $476.3 million in fiscal 2017 from $456.7 million in fiscal 2016. Operating income as a percentage of net sales, excluding those items, amounted to 20.4% in 2017 in comparison to 20.1% in 2016, reflecting an increase in the net periodic pension benefit and ongoing cost reduction initiatives. Income from operations in 2017 included $74.5 million of non-cash expenses, including $29.7 million of depreciation expense, $38.6 million of intangible amortization related to acquisitions and $6.2 million of stock based compensation. This compares to $84.0 million of non-cash expenses in the prior year, including $26.2 million of depreciation expense, $29.9 million of intangible amortization related to acquisitions, and $27.9 million of stock based compensation costs. Non-operating expenses. Non-operating expenses increased $1.9 million to $26.8 million in fiscal 2017 from $24.9 million in fiscal 2016. Net interest expense and deferred financing increased $2.1 million from $23.9 million in fiscal 2016 to $26.0 million in fiscal 2017 reflecting increased interest due to higher debt balances related to the funding of acquisitions. Other expense was $0.8 million in fiscal 2017 as compared to $1.0 million in fiscal 2016 and consists mainly of net foreign exchange gains and losses. Income taxes. A tax provision of $85.4 million, at an effective rate of 22.3%, was recorded for fiscal 2017 as compared to $137.1 million at an effective rate of 32.5%, in fiscal 2016. The effective tax rate for 2017 is lower than the statutory tax rate of 35% primarily due to the impact of complying with the Tax Cuts and Job Act of 2017. The Tax Cuts and Job Act of 2017 includes a tax benefit for revaluing the U.S. deferred taxes based on the 2018 enacted corporate income tax rate of 21%, partially offset by additional taxes related to the transition tax for the move from a worldwide tax system to a territorial tax system. Additionally, the effective tax rate was impacted by excess stock compensation tax benefits from the adoption of Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Accounting." The effective tax rates for both 2017 and 2016 similarly benefited from the U.S. domestic manufacturers deduction, permanent tax deductions and favorable foreign rate differentials. 28 Fiscal Year Ended December 31, 2016 as Compared to January 2, 2016 Net sales. Net sales in fiscal 2016 increased by $441.3 million or 24.2% to $2,267.9 million as compared to $1,826.6 million in fiscal 2015. The increase in net sales of $409.6 million, or 22.4%, was attributable to acquisition growth, resulting from the fiscal 2015 acquisitions of Goldstein Eswood, Marsal, Induc, Thurne, AGA and Lynx and the fiscal 2016 acquisition of Follett. Excluding acquisitions, net sales increased $31.7 million, or 1.7%, from the prior year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for fiscal 2016 reduced net sales by approximately $39.9 million or 2.2%. Excluding the impact of foreign exchange, organic sales growth amount to 3.9% for the year, including a net sales increase of 5.5% at the Commercial Foodservice Equipment Group, a net sales increase of 13.7% at the Food Processing Equipment Group and a net sales decrease of 7.7% at the Residential Kitchen Equipment Group. • Net sales of the Commercial Foodservice Equipment Group increased by $146.0 million or 13.0% to $1,267.0 million in fiscal 2016, as compared to $1,121.0 million in fiscal 2015. Net sales from the acquisitions of Goldstein Eswood, Marsal, Induc and Follett which were acquired on January 30, 2015, February 10, 2015, May 30, 2015, and May 31, 2016, respectively, accounted for an increase of $106.0 million during fiscal 2016. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group increased $40.0 million, or 3.6%, as compared to the prior year. Excluding the impact of foreign exchange, organic net sales increased $62.2 million, or 5.5% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $70.1 million, or 8.9%, to $853.9 million, as compared to $783.8 million in the prior year. This includes an increase of $90.4 million from recent acquisitions. Excluding acquisitions, net sales decreased $20.3 million, or 2.6%. The decline in domestic sales reflect the impact of several large rollouts with major restaurant chain customers in the prior year period. International sales increased $75.9 million, or 22.5%, to $413.1 million, as compared to $337.2 million in the prior year. This includes the increase of $15.6 million from the recent acquisitions, offset by $22.2 million related to the unfavorable impact of exchange rates. Excluding acquisitions and exchange effect, net sales increased $82.5 million, or 24.5%. Strong international growth continued in all regions due to more favorable market conditions than in the prior year and growth with local restaurant chain concepts. • Net sales of the Food Processing Equipment Group increased by $44.5 million or 14.9% to $342.2 million in fiscal 2016, as compared to $297.7 million in fiscal 2015. Net sales from the acquisition of Thurne which was acquired on April 7, 2015, accounted for an increase of $5.6 million. Excluding the impact of this acquisition, net sales of the Food Processing Equipment Group increased $38.9 million, or 13.1%. Excluding the impact of foreign exchange, organic net sales increased $40.7 million, or 13.7% at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $58.0 million, or 29.5%, to $254.4 million, as compared to $196.4 million in the prior year. This includes an increase of $5.3 million from the recent acquisition. Excluding this acquisition, net sales increased $52.7 million, or 26.8%. International sales decreased $13.5 million, or 13.3%, to $87.8 million, as compared to $101.3 million in the prior year. This includes the increase of $0.3 million from the recent acquisition, offset by $1.8 million related to the unfavorable impact of exchange rates. The overall net sales growth at the Food Processing Equipment Group reflects revenue recognized from a strong backlog and continued strong incoming order levels as customers continue to upgrade facilities to new technologies and expand capacity to meet growing demand. The variability in growth rates for domestic and international sales reflects the shift in mix related to the timing of certain larger projects in differing geographic regions that regularly occur between comparative periods. 29 • Net sales of the Residential Kitchen Equipment Group increased by $250.9 million or 61.5% to $658.7 million in fiscal 2016, as compared to $407.8 million in fiscal 2015. Net sales from the acquisitions of AGA and Lynx which were acquired on September 23, 2015 and December 15, 2015, respectively, accounted for an increase of $298.0 million. Excluding the impact of these acquisitions, net sales of the Residential Kitchen Equipment Group decreased $47.1 million, or 11.5%. Excluding the impact of foreign currency, organic net sales decreased $31.2 million, or 7.7% at the Residential Kitchen Equipment Group. This decrease is net of price increases, which are estimated to have added 2.0% to net sales in comparison to the prior year. Domestically, the company realized a sales increase of $67.7 million, or 23.0%, to $362.3 million, as compared to $294.6 million in the prior year. This includes an increase of $93.0 million from recent acquisitions. Excluding acquisitions, net sales decreased $25.3 million, or 8.6%. International sales increased $183.2 million, or 161.8% to $296.4 million, as compared to $113.2 million in the prior year. This includes an increase of $205.0 million from recent acquisitions and a reduction of $15.9 million related to the unfavorable impact of exchange rates. Excluding acquisitions and exchange effect, net sales decreased $5.9 million, or 5.2%. Organic sales growth for the year was adversely impacted by lower sales at U-Line due to a prior year new product launch resulting in higher sales to dealers. Additionally, sales continued to be affected by the 2015 recall of certain Viking products manufactured prior to 2013 and Middleby's acquisition of Viking. Gross profit. Gross profit increased by $194.7 million to $901.2 million in fiscal 2016 from $706.5 million in fiscal 2015. The increase in the gross profit reflects the impact of increased sales from revenue growth and acquisition sales, offset by the impact of foreign exchange rates, which reduced gross profit by $13.2 million. The gross margin rate increased from 38.7% in 2015 to 39.7% in 2016. • Gross profit at the Commercial Foodservice Equipment Group increased by $75.0 million, or 16.4%, to $532.9 million in fiscal 2016 as compared to $457.9 million in fiscal 2015. Gross profit from the acquisitions of Goldstein Eswood, Marsal, Induc, and Follett accounted for approximately $36.9 million of the increase in gross profit during fiscal 2016. Excluding the recent acquisitions, the gross profit increased by approximately $38.1 million on the higher sales volumes. The impact of foreign exchange rates reduced gross profit by approximately $5.8 million. The gross profit margin rate increased to 42.1% as compared to 40.8% in the prior year, due primarily to changes in sales mix and efficiency gains, as compared to the prior year period. • Gross profit at the Food Processing Equipment Group increased by $21.6 million, or 18.6%, to $137.7 million in fiscal 2016 as compared to $116.1 million in fiscal 2015. Gross profit from the acquisition of Thurne accounted for approximately $3.0 million of the increase in gross profit during fiscal 2016. Excluding the recent acquisition, the gross profit increased by approximately $18.6 million on higher sales volumes. The impact of foreign exchange rates reduced gross profit by approximately $1.6 million. The gross profit margin rate increased to 40.2% in fiscal 2016 as compared to 39.0% in fiscal 2015. The increase in the gross margin rate reflects the favorable impact of ongoing cost efficiency initiatives related to recent acquisitions and favorable sales mix. • Gross profit at the Residential Kitchen Equipment Group increased by $101.8 million, or 77.8%, to $232.7 million in fiscal 2016 as compared to $130.9 million in fiscal 2015. Gross profit from the acquisitions of AGA and Lynx accounted for approximately $96.3 million of the increase in gross profit during fiscal 2016. Excluding the recent acquisitions, the gross profit increased by approximately $5.5 million on lower sales volumes offsetting price increases. The impact of foreign exchange rates reduced gross profit by approximately $5.8 million. The gross margin rate increased to 35.3% in fiscal 2016 as compared to 32.1% in fiscal 2015, due to improved margins at Viking as a result of continued efficiency gains and AGA profitability improvements recognized in connection with ongoing integration initiatives. Selling, general and administrative expenses. Combined selling, general, and administrative expenses increased by $69.3 million to $444.4 million in fiscal 2016 from $375.1 million in 2015. As a percentage of net sales, operating expenses amounted to 19.6% in fiscal 2016 and 20.5% in fiscal 2015, excluding restructuring charges. Selling, general and administrative expenses increased $80.0 million associated with the Goldstein Eswood, Thurne, Induc, AGA, Lynx, and Follett acquisitions, including $8.8 million of non-cash intangible amortization expense. This increase was offset by the favorable impact of foreign exchange rates of $3.4 million, reduced compensation and commissions of $2.5 million, lower trade advertising expense of $2.1 million and the net periodic pension benefit related to the AGA pension plans which amount to $24.5 million. 30 Restructuring expenses. Restructuring expenses decreased $18.3 million to $10.5 million from $28.8 million in the prior year period. Restructuring expenses during fiscal 2016 are related to acquisition integration initiatives to reduce costs related to AGA. Restructuring expenses during fiscal 2015 were associated with cost reductions initiatives related to AGA, the closure and consolidation of distribution facilities at the Residential Kitchen Equipment Group and the consolidation of two production facilities at the Food Processing and Commercial Foodservice Equipment Groups. Income from operations. Income from operations increased $143.6 million to $446.2 million in fiscal 2016 from $302.6 million in fiscal 2015. The increase in operating income resulted from the increase in net sales and gross profit, offset in part by increased operating and restructuring expenses. Operating income as a percentage of net sales amounted to 19.6% in 2016 as compared to 16.5% in 2015. Excluding the impact of restructuring expenses, operating income as a percentage of net sales amounted to 20.1% in 2016 in comparison to 18.1% in 2015, reflecting an increase in the net periodic pension benefit and ongoing cost reduction initiatives. Income from operations in 2016 included $84.0 million of non-cash expenses, including $26.2 million of depreciation expense, $29.9 million of intangible amortization related to acquisitions and $27.9 million of stock based compensation. This compares to $68.8 million of non-cash expenses in the prior year, including $25.5 million of depreciation expense, $27.4 million of intangible amortization related to acquisitions, and $15.9 million of stock based compensation costs. Non-operating expenses. Non-operating expenses increased $3.4 million to $24.9 million in fiscal 2016 from $21.5 million in fiscal 2015. Net interest expense increased $6.9 million from $17.0 million in fiscal 2015 to $23.9 million in fiscal 2016 reflecting increased interest due to higher debt balances related to the funding of acquisitions. Other expense was $1.0 million in fiscal 2016 as compared to $4.5 million in fiscal 2015 and consists mainly of net foreign exchange losses attributable to the strengthening of the U.S. Dollar. Income taxes. A tax provision of $137.1 million, at an effective rate of 32.5%, was recorded for fiscal 2016 as compared to $89.6 million at an effective rate of 31.9%, in fiscal 2015. The effective tax rates for both years were lower than the statutory tax rate of 35.0% primarily due to tax benefits from the U.S. domestic manufacturers deduction, permanent tax deductions and favorable foreign rate differentials. 31 Financial Condition and Liquidity Total cash and cash equivalents increased by $21.2 million to $89.7 million at December 30, 2017 from $68.5 million at December 31, 2016. Net borrowings increased to $1,028.9 million at December 30, 2017, from $732.1 million at December 31, 2016. Operating activities. Net cash provided by operating activities before changes in assets and liabilities amounted to $408.7 million as compared to $391.7 million in the prior year. Adjustments to reconcile 2017 net earnings to operating cash flows before changes in assets and liabilities included $29.7 million of depreciation expense and $40.1 million of amortization expense, $6.2 million of non-cash stock compensation expense, $58.0 million of impairment of intangible asset, $3.1 million of impairment of equipment, $12.0 million of gain on sale of plant and $14.5 million of deferred tax benefit. Net cash provided by operating activities after changes in assets and liabilities amounted to $304.5 million as compared to $294.1 million in the prior year. During fiscal 2017, net cash used to fund changes in assets and liabilities amounted to $104.2 million. These changes included a $26.2 million decrease in accounts receivable due to the impact of lower sales volumes and due to the impact of lower receivable balances at the Food Processing Equipment Group due to the timing of projects which are often paid in advance. Inventory increased $9.7 million and accounts payables decreased by $21.6 million due to several factors including normal business seasonality affecting working capital, the timing of large orders for the Food Processing Equipment Group and lower sales volumes. Prepaid expenses and other assets increased $34.1 million primarily due to an increase in prepaid taxes. Accrued expenses and other non-current liabilities decreased by $65.0 million due in part to reduced customer deposits due to timing of projects related to the Food Processing Equipment Group, reduced incentive compensation in comparison to the prior year and payments related to restructuring initiatives. In connection with the company’s acquisition activities during the year, the company added assets and liabilities from the opening balance sheets of the acquired businesses in its consolidated balance sheets and accordingly these amounts are not reflected in the net change in working capital. Investing activities. During 2017, net cash used for investing activities amounted to $345.5 million. This included $300.2 million of the 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen, QualServ, Globe, L2F, and Scanico, $5.9 million related to deferred and contingent consideration payments from previous years' acquisitions and $54.5 million primarily associated with additions and upgrades of production equipment and the purchase of a manufacturing facility. During 2017, the company completed the sale of an existing manufacturing facility. The $14.3 million proceeds from the sale were used to purchase a larger facility to gain efficiencies in workflow and allow for future manufacturing consolidation efforts. Financing activities. Net cash flows provided by financing activities amounted to $55.8 million in 2017. The company borrowed $296.8 million under its $2.5 billion Credit Facility and repaid $1.1 million under foreign borrowing facilities. The company repurchased $239.8 million of Middleby common shares during 2017. This was comprised of $24.6 million used to repurchase 177,097 shares of its common stock that were surrendered to the company by employees in lieu of cash for payment for withholding taxes related to restricted stock vestings that occurred during 2017 and $215.2 million used to repurchase 1,806,595 shares of its common stock under a stock repurchase program. See Part 1, Notes to Condensed Consolidated Financial Statements, Note 13 - Share Repurchases for further details. At December 30, 2017, the company was in compliance with all covenants pursuant to its borrowing agreements. Management believes that future cash flows from operating activities and borrowings from current lenders will provide the company with sufficient financial resources to meet its anticipated requirements for working capital, capital expenditures and debt amortization for the foreseeable future. 32 Contractual Obligations The company's contractual cash payment obligations are set forth below (dollars in thousands): Less than 1 year 1-3 years 4-5 years After 5 years $ Amounts Due Sellers From Acquisition 2,020 — — — Estimated Interest on Debt 31,575 63,046 19,192 721 $ Operating Leases 25,689 37,946 26,428 19,815 $ Total Contractual Cash Obligations 64,433 101,493 1,068,851 20,536 $ $ Debt 5,149 501 1,023,231 — $ 2,020 $ 1,028,881 $ 114,534 $ 109,878 $ 1,255,313 The company has obligations to make $2.0 million of estimated contingent purchase price payments to the sellers of Desmon, Emico and Scanico that were deferred in conjunction with the acquisitions. As of December 30, 2017, the company had $1,022.9 million outstanding under its Credit Facility. The average interest rate on this debt amounted to 2.72% at December 30, 2017. This facility matures on July 28, 2021. As of December 30, 2017, the company also has $5.8 million of debt outstanding under various foreign credit facilities. The estimated interest payments reflected in the table above assume that the level of debt and average interest rate on the company’s revolving credit line under its senior credit agreement does not change until the facility reaches maturity in July 2021. The estimated payments also assume that relative to the company’s foreign borrowings: all scheduled term loan payments are made; the level of borrowings does not change; and the average interest rates remain at their December 30, 2017 rates. Also reflected in the table above is $0.1 million of payments to be made related to the company’s interest rate swap agreements in 2018. As indicated in Note 10 to the consolidated financial statements, the company’s projected benefit obligation under its defined benefit plans exceeded the plans’ assets by $334.5 million at the end of 2017 as compared to $323.0 million at the end of 2016. The unfunded benefit obligations were comprised of a $15.8 million underfunding of the company's U.S. Plans and $318.7 million underfunding of the company’s Non-U.S. Plans. The company made minimum contributions required by the Employee Retirement Income Security Act of 1974 (“ERISA”) of $1.5 million and $0.8 million in 2017 and 2016, respectively, to the company’s U.S. Plans. The company expects to continue to make minimum contributions to the U.S. Plans as required by ERISA, of $0.9 million in 2018. The company expects to contribute $5.4 million to the Non-U.S. Plans in 2018. The company places purchase orders with its suppliers in the ordinary course of business. These purchase orders are generally to fulfill short-term manufacturing requirements of less than 90 days and most are cancelable with a restocking penalty. The company has no long-term purchase contracts or minimum purchase obligations with any supplier. The company has no activities, obligations or exposures associated with off-balance sheet arrangements. Related Party Transactions From January 1, 2017 through the date hereof, there were no transactions between the company, its directors and executive officers that are required to be disclosed pursuant to Item 404 of Regulation S-K, promulgated under the Securities and Exchange Act of 1934, as amended. 33 Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations are based upon the company's consolidated financial statements, which 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 significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the company evaluates its estimates and judgments 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 and any such differences could be material to our consolidated financial statements. Revenue Recognition. At the Commercial Foodservice Equipment Group and the Residential Kitchen Equipment Group, the company recognizes revenue on the sale of its products where title transfers and when risk of loss has passed to the customer, which occurs at the time of shipment, and collectibility is reasonably assured. The sale prices of the products sold are fixed and determinable at the time of shipment. Sales are reported net of sales returns, sales incentives and cash discounts based on prior experience and other quantitative and qualitative factors. At the Food Processing Equipment Group, the company enters into long-term sales contracts for certain products that are often significant relative to the business. Revenue under these long-term sales contracts is recognized using the percentage of completion method defined within ASC 605-35 “Construction-Type and Production-Type Contracts” due to the length of time to fully manufacture and assemble the equipment. The company measures revenue recognized based on the ratio of actual labor hours incurred in relation to the total estimated labor hours to be incurred related to the contract. Because estimated labor hours to complete a project are based upon forecasts using the best available information, the actual hours may differ from original estimates. The percentage of completion method of accounting for these contracts most accurately reflects the status of these uncompleted contracts in the company's financial statements and most accurately measures the matching of revenues with expenses. At the time a loss on a contract becomes known, the amount of the estimated loss is recognized in the consolidated financial statements. Revenue for sales of products and services not covered by long-term sales contracts is recognized when risk of loss has passed to the customer, which occurs at the time of shipment, and collectibility is reasonably assured. The sale prices of the products sold are fixed and determinable at the time of shipment. Sales are reported net of sales returns, sales incentives and cash discounts based on prior experience and other quantitative and qualitative factors. Inventories. Inventories are stated at the lower of cost or market using the first-in, first-out method for the majority of the company’s inventories. The company evaluates the need to record valuation adjustments for inventory on a regular basis. The company’s policy is to evaluate all inventories including raw material, work-in-process, finished goods, and spare parts. Inventory in excess of estimated usage requirements is written down to its estimated net realizable value. Inherent in the estimates of net realizable value are estimates related to our future manufacturing schedules, customer demand, possible alternative uses, and ultimate realization of potentially excess inventory. 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. The company recognizes goodwill and other intangible assets under the guidance of ASC Topic 350-10, “Intangibles — Goodwill and Other.” Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. 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. On an annual basis, or more frequently if triggering events occur, the company compares the estimated fair value to the carrying value to determine if a potential goodwill impairment exists. If the fair value is less than its carrying value, an impairment loss, if any, is recorded for the difference between the implied fair value and the carrying value of goodwill. In estimating the fair value of specific intangible assets, management relies on a number of factors, including operating results, business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and management’s judgment in applying them in the impairment tests of goodwill and other intangible assets. Pension Benefits. The company provides pension benefits to certain employees and accounts for these benefits in accordance with ASC 715, "Compensation-Retirement Benefits". For financial reporting purposes, long-term assumptions are developed through consultations with actuaries. Such assumptions include the expected long-term rate of return on plan assets and discount rates. 34 The amount of unrecognized actuarial gains and losses recognized in the current year’s operations is based on amortizing the unrecognized gains or losses for each plan that exceed the larger of 10% of the projected benefit obligation or the fair value of plan assets, also known as the corridor. The amount of unrecognized gain or loss that exceeds the corridor is amortized over the average future service of the plan participants or the average life expectancy of inactive plan participants for plans where all or almost all of the plan participants are inactive. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension obligations and our future expense. Income taxes. The company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The company’s deferred and other tax balances are based on management’s interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Income tax expense and liabilities recognized by the company also reflect its best estimates and assumptions regarding, among other things, the level of future taxable income, the effect of the company’s various tax planning strategies and uncertain tax positions. Future tax authority rulings and changes in tax laws, changes in projected levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the company. The company follows the provisions under ASC 740-10-25 that provides a recognition threshold and measurement criteria for the financial statement recognition of a tax benefit taken or expected to be taken in a tax return. Tax benefits are recognized only when it is more likely than not, based on the technical merits, that the benefits will be sustained on examination. Tax benefits that meet the more-likely-than-not recognition threshold are measured using a probability weighting of the largest amount of tax benefit that has greater than 50% likelihood of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a particular tax benefit is a matter of judgment based on the individual facts and circumstances evaluated in light of all available evidence as of the balance sheet date. New Accounting Pronouncements See Note 3 to the Consolidated Financial Statements for further information on the new accounting pronouncements. Certain Risk Factors That May Affect Future Results An investment in shares of the company's common stock involves risks. The company believes the risks and uncertainties described in "Item 1A. Risk Factors" and in "Special Note Regarding Forward-Looking Statements" are the material risks it faces. Additional risks and uncertainties not currently known to the company or that it currently deems immaterial may impair its business operations. If any of the risks identified in "Item 1A. Risk Factors" actually occurs, the company's business, results of operations and financial condition could be materially adversely affected, and the trading price of the company's common stock could decline. 35 Item 7A. Quantitative and Qualitative Disclosure about Market Risk Interest Rate Risk The company is exposed to market risk related to changes in interest rates. The following table summarizes the maturity of the company's debt obligations: 2018 2019 2020 2021 2022 and thereafter Variable Rate Debt $ 5,149 338 163 1,023,098 133 $ 1,028,881 On July 28, 2016, the company entered into an amended and restated five-year $2.5 billion multi-currency senior secured revolving credit agreement (the "Credit Facility"), with the potential under certain circumstances to increase the amount of the Credit Facility to $3.0 billion. As of December 30, 2017, the company had $1,022.9 million of borrowings outstanding under the Credit Facility, including $1,015.5 million of borrowings in U.S. Dollars and $7.4 million of borrowings denominated in British Pounds. The company also has $7.5 million in outstanding letters of credit as of December 30, 2017, which reduces the borrowing availability under the Credit Facility. Remaining borrowing availability under the Credit Facility was $1.5 billion at December 30, 2017. At December 30, 2017, borrowings under the Credit Facility accrued interest at a rate of 1.25% above LIBOR per annum or 0.25% above the highest of the prime rate, the federal funds rate plus 0.50% and one month LIBOR plus 1.00%. The average interest rate per annum on the debt under the Credit Facility was equal to 2.72% for the period. 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. This variable commitment fee was equal to 0.20% per annum as of December 30, 2017. In addition, the company has other international credit facilities to fund working capital needs outside the United States and the United Kingdom. At December 30, 2017, these foreign credit facilities amounted to $5.8 million in U.S. Dollars with a weighted average per annum interest rate of approximately 6.06%. The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At December 30, 2017, the company had outstanding floating-to-fixed interest rate swaps totaling $399.0 million notional amount carrying an average interest rate of 1.47% that mature in more than 12 months but less than 84 months. The Credit Facility matures on July 28, 2021, and accordingly has been classified as a long-term liability on the consolidated balance sheet. 36 The terms of the Credit Facility 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 and (ii) a maximum Leverage Ratio of Funded Debt less Unrestricted Cash to Pro Forma EBITDA (each as defined in the Credit Facility) of 3.50 to 1.00, which may be adjusted to 4.00 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 30, 2017, the company was in compliance with all covenants pursuant to its borrowing agreements. Financing Derivative Instruments 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. 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. As of December 30, 2017, the fair value of these instruments was an asset of $10.3 million. The change in fair value of these swap agreements in fiscal 2017 was a gain of $1.5 million, net of taxes. The potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted interest rates would not have a material impact on the company's financial position, results of operations and cash flows. Foreign Exchange Derivative Financial Instruments The company uses derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The potential loss on fair value for such instruments from a hypothetical 10% adverse change in quoted foreign exchange rates would not have a material impact on the company's financial position, results of operations and cash flows. The company accounts for its derivative financial instruments in accordance with ASC 815, "Derivatives and Hedging." In accordance with ASC 815, these instruments are recognized on the balance sheet as either an asset or a liability measured at fair value. Changes in the market value and the related foreign exchange gains and losses are recorded in the statement of earnings. 37 Item 8. Financial Statements and Supplementary Data Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Earnings Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements The following consolidated financial statement schedule is included in response to Item 15 Schedule II - Valuation and Qualifying Accounts and Reserves Page 39 41 42 43 44 45 46 84 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. 38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders 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 30, 2017, 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 30, 2017, 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 Globe, Qualserv, L2F, Burford, Sveba Dahlen, Scanico, and CVP Systems which are included in the 2017 consolidated financial statements of the Company and constituted 11.9% and 0.1% of total and net assets, respectively, as of December 30, 2017 and 3.9% and (0.7%) of revenues and net income, 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 Globe, Qualserv, L2F, Burford, Sveba Dahlen, Scanico, and CVP Systems. 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 30, 2017 and December 31, 2016, the related consolidated statements of earnings, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 30, 2017, and the related notes and financial statement schedule and our report dated February 28, 2018 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 Controls 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 February 28, 2018 39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders 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 30, 2017 and December 31, 2016, the related consolidated statements of earnings, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 30, 2017, and the related notes and financial statement schedule listed in the Index at Item 8, (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 30, 2017 and December 31, 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 30, 2017, 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 30, 2017, 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 February 28, 2018 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. /s/ Ernst & Young LLP We have served as the Company's auditor since 2012. Chicago, Illinois February 28, 2018 40 THE MIDDLEBY CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 30, 2017 AND DECEMBER 31, 2016 (amounts in thousands, except share data) ASSETS Current assets: Cash and cash equivalents Accounts receivable, net of reserve of doubtful accounts of $13,182 and $12,600 Inventories, net Prepaid expenses and other Prepaid taxes Total current assets Property, plant and equipment, net of accumulated depreciation of $142,278 and $119,435 Goodwill Other intangibles, net of amortization of $207,334 and $168,369 Long-term deferred tax assets Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt Accounts payable Accrued expenses Total current liabilities Long-term debt Long-term deferred tax liability Accrued pension benefits Other non-current liabilities Stockholders' equity: Preferred stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none issued Common stock, $0.01 par value, 62,619,865 and 62,445,315 shares issued in 2017 and 2016, respectively Paid-in capital Treasury stock at cost; 6,889,241 and 4,905,549 shares in 2017 and 2016, respectively Retained earnings Accumulated other comprehensive loss Total stockholders' equity 2017 2016 $ 89,654 328,421 424,639 55,427 33,748 931,889 281,915 1,264,810 780,426 44,565 36,108 $ 3,339,713 $ 68,485 325,868 368,243 42,704 6,399 811,699 221,571 1,092,722 696,171 51,699 43,274 $ 2,917,136 $ $ 5,149 146,333 322,171 473,653 1,023,732 87,815 334,511 58,854 5,883 146,921 335,605 488,409 726,243 77,760 322,988 36,418 — — 145 374,922 (445,118) 1,697,618 (266,419) 144 355,287 (205,280) 1,399,490 (284,323) 1,361,148 1,265,318 Total liabilities and stockholders' equity $ 3,339,713 $ 2,917,136 The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. 41 THE MIDDLEBY CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FOR THE FISCAL YEARS ENDED DECEMBER 30, 2017, DECEMBER 31, 2016 AND JANUARY 2, 2016 (amounts in thousands, except per share data) Net sales Cost of sales Gross profit Selling, general, and administrative expenses Restructuring expenses Gain on sale of plant Impairment of intangible asset Income from operations Interest expense and deferred financing amortization, net Other expense, net Earnings before income taxes Provision for income taxes Net earnings Net earnings per share: Basic Diluted Weighted average number of shares Basic Dilutive common stock equivalents Diluted 2017 $ 2,335,542 1,422,801 912,741 436,491 19,951 (12,042) 58,000 410,341 25,983 829 383,529 85,401 298,128 $ 2016 $ 2,267,852 1,366,672 901,180 444,431 10,524 — — 446,225 23,880 1,040 421,305 137,089 284,216 $ 2015 $ 1,826,598 1,120,093 706,505 375,148 28,754 — — 302,603 16,967 4,469 281,167 89,557 191,610 $ $ $ 5.26 5.26 $ $ 4.98 4.98 $ $ 3.36 3.36 56,715 4 56,719 57,030 55 57,085 56,951 22 56,973 The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. 42 THE MIDDLEBY CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE FISCAL YEARS ENDED DECEMBER 30, 2017, DECEMBER 31, 2016 AND JANUARY 2, 2016 (amounts in thousands) Net earnings Other comprehensive income: Foreign currency translation adjustments Pension liability adjustment, net of tax Unrealized gain on interest rate swaps, net of tax Comprehensive income $ $ 2017 2016 2015 298,128 $ 284,216 $ 191,610 46,690 (29,669) 883 (63,569) (149,815) 5,473 316,032 $ 76,305 $ (28,187) (17,039) 245 146,629 The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. 43 THE MIDDLEBY CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED DECEMBER 30, 2017, DECEMBER 31, 2016 AND JANUARY 2, 2016 (amounts in thousands) Balance, January 3, 2015 Net earnings Currency translation adjustments Change in unrecognized pension benefit costs, net of tax of $(3,740) Unrealized gain on interest rate swap, net of tax of $163 Stock compensation Tax benefit on stock compensation Purchase of treasury stock Balance, January 2, 2016 Net earnings Currency translation adjustments Change in unrecognized pension benefit costs, net of tax of $(30,717) Unrealized gain on interest rate swap, net of tax of $3,649 Stock compensation Tax benefit on stock compensation Purchase of treasury stock Balance, December 31, 2016 Net earnings Currency translation adjustments Change in unrecognized pension benefit costs, net of tax of $(5,588) Unrealized gain on interest rate swap, net of tax of $588 Stock compensation Stock issuance Purchase of treasury stock Balance, December 30, 2017 Common Stock Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income/(loss) Total Stockholders' Equity $ 144 $ 310,409 $ (196,026) $ 923,664 $ (31,431) $ 1,006,760 — — — — — — — — — — — 15,863 2,414 — — — — — — — (4,836) 191,610 — — — — — — — (28,187) 191,610 (28,187) (17,039) (17,039) 245 — — — 245 15,863 2,414 (4,836) $ 144 $ 328,686 $ (200,862) $ 1,115,274 $ (76,412) $ 1,166,830 — — — — — — — — — — — 27,905 (1,304) — — — — — — (4,418) 284,216 — — — — — — — (63,569) 284,216 (63,569) (149,815) (149,815) 5,473 — — — 5,473 27,905 (1,304) (4,418) $ 144 $ 355,287 $ (205,280) $ 1,399,490 $ (284,323) $ 1,265,318 — — — — — 1 — — — — — 6,237 13,398 — — — — — — — (239,838) 298,128 — — — — — — — 46,690 298,128 46,690 (29,669) (29,669) 883 — — — 883 6,237 13,399 (239,838) $ 145 $ 374,922 $ (445,118) $ 1,697,618 $ (266,419) $ 1,361,148 The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. 44 THE MIDDLEBY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED DECEMBER 30, 2017, DECEMBER 31, 2016 AND JANUARY 2, 2016 (amounts in thousands) Cash flows from operating activities— Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities 2017 2016 2015 $ 298,128 $ 284,216 $ 191,610 Depreciation and amortization Non-cash share-based compensation Deferred income taxes Gain on sale of plant Impairment of equipment Impairment of intangible asset Changes in assets and liabilities, net of acquisitions Accounts receivable, net Inventories, net Prepaid expenses and other assets Accounts payable Accrued expenses and other liabilities Net cash provided by operating activities Cash flows from investing activities— Additions to property and equipment Proceeds on sale of plant Acquisitions, net of cash acquired Net cash used in investing activities Cash flows from financing activities— Net proceeds (repayments) under revolving credit facilities Net repayments under foreign bank loan Net repayments under other debt arrangement Repurchase of treasury stock Debt issuance costs Excess tax benefit related to share-based compensation Net cash provided by (used in) financing activities 69,774 6,237 (14,492) (12,042) 3,114 58,000 26,180 (9,744) (34,122) (21,631) (64,947) 304,455 (54,493) 14,278 (305,251) (345,466) 296,771 (1,062) (35) (239,838) — — 58,234 27,905 21,363 — — — (33,908) (22,246) (11,550) (7,730) (22,174) 294,110 54,074 15,864 1,919 — — — 17,112 7,826 (5,685) (18,036) (15,092) 249,592 (24,817) (22,362) — (210,921) (235,738) (2,482) (26,821) (35) (4,418) (6,310) (1,304) — (348,625) (370,987) 145,500 (6,058) (262) (4,836) — 2,414 55,836 (41,370) 136,758 Effect of exchange rates on cash and cash equivalents 6,344 (4,045) (3,780) Changes in cash and cash equivalents— Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Non-cash investing and financing activities: Stock issuance related to acquisitions 21,169 68,485 12,957 55,528 11,583 43,945 89,654 $ 68,485 $ 55,528 13,399 $ — $ — $ $ The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. 45 THE MIDDLEBY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED DECEMBER 30, 2017, DECEMBER 31, 2016 AND JANUARY 2, 2016 (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 thirty- one U.S. and twenty-six 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 cooking and warming equipment, which enables it to serve virtually any cooking or warming application within a commercial kitchen or foodservice operation. This cooking and warming 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, professional mixers, stainless steel fabrication, custom millwork, professional refrigerators, blast chillers, coldrooms, ice machines, freezers and coffee and beverage dispensing equipment. 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 grinders, slicers, reduction and emulsion systems, mixers, blenders, battering equipment, breading equipment, seeding equipment, water cutting systems, food presses, food suspension equipment, and forming equipment, as well as a variety of automated loading and unloading systems, 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, ovens, refrigerators, dishwashers, microwaves, cooktops, refrigerators, wine coolers, ice machines, ventilation equipment and outdoor equipment. 46 (2) ACQUISITIONS AND PURCHASE ACCOUNTING The company operates in a highly fragmented industry and has completed numerous acquisitions over the past several years as a component of its growth strategy. The company has acquired industry leading brands and technologies to position itself as a leader in the commercial foodservice equipment, food processing equipment and residential kitchen equipment industries. The company has accounted for all business combinations using the acquisition method to record a new cost basis for the assets acquired and liabilities assumed. The difference between the purchase price and the fair value of the assets acquired and liabilities assumed has been recorded as goodwill in the financial statements. The results of operations are reflected in the consolidated financial statements of the company from the dates of acquisition. The following represents the company's more significant acquisitions in 2017 and 2016. The company also made smaller acquisitions not listed below which are individually and collectively immaterial. Follett On May 31, 2016, the company completed its acquisition of substantially all of the assets of Follett Corporation ("Follett"), a leading manufacturer of ice machines, ice and water dispensing equipment, ice storage and transport products and medical grade refrigeration products for the foodservice and healthcare industries headquartered in Easton, Pennsylvania, for a purchase price of approximately $206.9 million, net of cash acquired. During the first quarter of 2017, the company finalized the working capital provision provided for by the purchase agreement resulting in an additional payment to the seller of $0.7 million. The final allocation of cash paid for the Follett acquisition is summarized as follows (in thousands): Cash Current assets Property, plant and equipment Goodwill Other intangibles Other assets Current liabilities Other non-current liabilities (as initially reported) May 31, 2016 Measurement Period Adjustments (as adjusted) May 31, 2016 $ 22,620 $ 41,602 19,868 76,220 82,450 1,358 (11,779) (616) $ 2,888 (2,249) 8,598 (35,656) 41,810 170 (10,801) (4,064) 25,508 39,353 28,466 40,564 124,260 1,528 (22,580) (4,680) Net assets acquired and liabilities assumed $ 231,723 $ 696 $ 232,419 The goodwill and $67.8 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350 "Intangibles - Goodwill and Other". Other intangibles also includes $55.2 million allocated to customer relationships and $1.3 million allocated to backlog, which are to be amortized over periods of 8 years and 3 months, respectively. Goodwill and other intangibles of Follett are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes. 47 Burford On May 1, 2017, the company completed its acquisition of all of the capital stock of Burford Corp. ("Burford"). Burford is a leading manufacturer of industrial baking equipment for the food processing industry located in Maysville, Oklahoma, for a purchase price of approximately $14.8 million, net of cash acquired. During the fourth quarter of 2017, the company finalized the working capital provision provided for by the purchase agreement resulting in a refund from the seller of $0.3 million. The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands): Cash Current assets Property, plant and equipment Goodwill Other intangibles Current liabilities Long term deferred tax liability Other non-current liabilities $ (as initially reported) May 1, 2017 2,514 6,424 656 7,289 4,900 (2,254) (1,840) — Preliminary Measurement Period Adjustments $ — $ 126 (13) 808 1,840 (961) 612 (2,761) (as adjusted) May 1, 2017 2,514 6,550 643 8,097 6,740 (3,215) (1,228) (2,761) Net assets acquired and liabilities assumed $ 17,689 $ (349) $ 17,340 The long term deferred tax liability amounted to $1.2 million. The net deferred tax liability is comprised of $2.7 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets, net of $0.7 million related to federal and state net operating loss carryforwards and $0.8 million of deferred tax asset arising from the difference between the book and tax basis of identifiable tangible asset and liability accounts. The goodwill and $2.7 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $3.1 million allocated to customer relationships, $0.7 million allocated to developed technology and $0.3 million allocated to backlog, which are to be amortized over periods of 6 years, 7 years and 3 months, respectively. Goodwill and other intangibles of Burford are allocated to the Food Processing Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes. 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. Thus, the provisional measurements of fair value 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. 48 CVP Systems On June 30, 2017, the company completed its acquisition of all of the capital stock of CVP Systems, Inc. ("CVP Systems"), a leading manufacturer of high-speed packaging systems for the meat processing industry located in Downers Grove, Illinois, for a purchase price of approximately $30.3 million, net of cash acquired. The purchase price included $17.9 million in cash and 106,254 shares of Middleby common stock valued at $12.3 million. The purchase price is subject to adjustment based upon a working capital provision provided for by the purchase agreement. The company expects to finalize this in the first quarter of 2018. The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands): Cash Current assets Property, plant and equipment Goodwill Other intangibles Current liabilities Long term deferred tax liability Other non-current liabilities (as initially reported) June 30, 2017 Preliminary Measurement Period Adjustments $ 621 $ — $ 5,973 238 20,297 8,700 (1,532) (3,168) — (1,435) (91) 432 4,350 (514) (633) (2,362) (as adjusted) June 30, 2017 621 4,538 147 20,729 13,050 (2,046) (3,801) (2,362) Net assets acquired and liabilities assumed $ 31,129 $ (253) $ 30,876 The long term deferred tax liability amounted to $3.8 million. The net liability is comprised of $5.0 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets, net of $0.4 million related to federal and state net operating loss carryforwards and $0.8 million of deferred tax assets arising from the difference between the book and tax basis of identifiable tangible asset and liability accounts. The goodwill and $6.2 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $5.7 million allocated to customer relationships, $0.8 million allocated to developed technology and $0.3 million allocated to backlog, which are to be amortized over periods of 5 years, 7 years and 3 months, respectively. Goodwill and other intangibles of CVP Systems are allocated to the Food Processing Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes. 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. Thus, the provisional measurements of fair value 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. 49 Sveba Dahlen On June 30, 2017, the company completed its acquisition of all of the capital stock of Sveba Dahlen Group ("Sveba Dahlen"), a developer and manufacturer of ovens and baking equipment for the commercial foodservice and industrial baking industries headquartered in Fristad, Sweden, for a purchase price of $81.4 million, net of cash acquired. The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands): Cash Current assets Property, plant and equipment Goodwill Other intangibles Other assets Current portion of long-term debt Current liabilities Long term debt Long term deferred tax liability Other non-current liabilities (as initially reported) June 30, 2017 Preliminary Measurement Period Adjustments $ 4,569 $ — $ 22,686 9,128 33,785 34,175 1,170 — (11,782) — (7,751) (42) (767) (332) (2,843) 7,775 (3) (14) 649 (140) (2,600) (1,725) (as adjusted) June 30, 2017 4,569 21,919 8,796 30,942 41,950 1,167 (14) (11,133) (140) (10,351) (1,767) Net assets acquired and liabilities assumed $ 85,938 $ — $ 85,938 The long term deferred tax liability amounted to $10.4 million. The liability is comprised of $9.2 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets and $1.2 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 $22.2 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $18.1 million allocated to customer relationships and $1.6 million allocated to backlog, which are to be amortized over periods of 6 years and 3 months, respectively. Goodwill and other intangibles of Sveba Dahlen are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes. 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. Thus, the provisional measurements of fair value 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. 50 QualServ On August 31, 2017, the company completed its acquisition of substantially all of the assets of QualServ Solutions LLC ("QualServ"), a global commercial kitchen design, manufacturing, engineering, project management and equipment solutions provider located in Fort Smith, Arkansas, for a purchase price of $40.2 million, net of cash acquired. The purchase price is subject to adjustment based upon a working capital provision provided by the purchase agreement. The company expects to finalize this in the first quarter of 2018. The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands): Cash Current assets Property, plant and equipment Goodwill Other intangibles Current liabilities (as initially reported) August 31, 2017 $ 1,130 $ 18,031 4,785 14,590 9,600 (6,810) Preliminary Measurement Period Adjustments (as adjusted) August 31, 2017 — $ (64) — 195 — (131) 1,130 17,967 4,785 14,785 9,600 (6,941) Net assets acquired and liabilities assumed $ 41,326 $ — $ 41,326 The goodwill and $6.2 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $3.3 million allocated to customer relationships and $0.1 million allocated to backlog, which are to be amortized over periods of 6 years and 3 months, respectively. Goodwill and other intangibles of QualServ are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are expected to be deductible for tax purposes. 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. Thus, the provisional measurements of fair value 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. 51 Globe On October 17, 2017, the company completed its acquisition of all of the capital stock of Globe Food Equipment Company ("Globe"), a leading brand in slicers and mixers for the commercial foodservice industry located in Dayton, Ohio, for a purchase price of $104.6 million, net of cash acquired. The purchase price is subject to adjustment based upon a working capital provision provided by the purchase agreement. The company expects to finalize this in the first quarter of 2018. The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands): Cash Current assets Property, plant and equipment Goodwill Other intangibles Current liabilities Long term deferred tax liability Other non-current liabilities (as initially reported) October 17, 2017 $ 3,420 17,197 1,120 67,176 43,444 (5,994) (16,456) (1,907) Net assets acquired and liabilities assumed $ 108,000 The long term deferred tax liability amounted to $16.5 million. The net liability is comprised of $16.3 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets 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 $28.2 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $14.9 million allocated to customer relationships and $0.3 million allocated to backlog, which are to be amortized over periods of 5 years and 3 months, respectively. Goodwill and other intangibles of Globe are allocated to the Commercial Foodservice Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes. 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. Thus, the provisional measurements of fair value 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. 52 Scanico On December 7, 2017, the company completed its acquisition of all of the capital stock of Scanico A/S ("Scanico"), a leading manufacturer of industrial cooling and freezing equipment for the food processing industry located in Aalborg, Denmark, for a purchase price of $34.9 million, net of cash acquired. The purchase price is subject to adjustment based upon a working capital provision provided for by the purchase agreement. The company expects to finalize this in the first quarter of 2018. An additional payment is also due upon the achievement of certain financial targets. The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed (in thousands): Cash Current assets Property, plant and equipment Goodwill Other intangibles Current liabilities Long term deferred tax liability Consideration paid at closing Contingent consideration Net assets acquired and liabilities assumed (as initially reported) December 7, 2017 $ $ $ 6,766 3,428 447 30,072 11,491 (7,236) (3,305) 41,663 (751) 40,912 The long term deferred tax liability amounted to $3.3 million. The net liability is comprised of $2.5 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets and $0.8 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 $6.6 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $2.0 million allocated to customer relationships, $0.9 million allocated to developed technology and $2.0 million allocated to backlog, which are to be amortized over periods of 5 years, 5 years and 3 months, respectively. Goodwill and other intangibles of Scanico are allocated to the Food Processing Equipment Group for segment reporting purposes. These assets are not expected to be deductible for tax purposes. The Scanico purchase agreement includes an earnout provision providing for a contingent payment due to the sellers to the extent certain financial targets are exceeded. This earnout is payable during the third quarter of 2018, if Scanico exceeds certain sales and earnings targets for the twelve months ended June 30, 2018. The contractual obligation associated with this contingent earnout provision recognized on the acquisition date is $0.8 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. Thus, the provisional measurements of fair value 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. 53 Pro forma financial information In accordance with ASC 805 “Business Combinations”, the following unaudited pro forma results of operations for the years ended December 30, 2017 and December 31, 2016, assumes the 2016 acquisition of Follett and the 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen, QualServ, L2F, Globe and Scanico were completed on January 3, 2016 (first day of fiscal 2016). The following pro forma results include adjustments to reflect additional interest expense to fund the acquisition, amortization of intangibles associated with the acquisition, and the effects of adjustments made to the carrying value of certain assets (in thousands, except per share data): Net sales Net earnings Net earnings per share: Basic Diluted December 30, 2017 December 31, 2016 2,606,379 $ 281,680 2,500,434 305,770 $ 5.39 5.39 4.94 4.93 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 Follett, Burford, CVP Systems, Sveba Dahlen, QualServ, L2F, Globe and Scanico. 54 (3) (a) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 2017, 2016, and 2015 ended on December 30, 2017, December 31, 2016 and January 2, 2016, respectively, with each year including 52 weeks. Certain prior year amounts have been reclassified to be consistent with current year presentation, including combining selling and distribution expenses with general and administrative expenses. (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. (c) Accounts Receivable Accounts receivable, as shown in the consolidated balance sheets, are net of allowances for doubtful accounts of $13.2 million and $12.6 million at December 30, 2017 and December 31, 2016, respectively. At December 30, 2017, 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 market. 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 30, 2017 and December 31, 2016 are as follows: Raw materials and parts Work in process Finished goods 2017 2016 (dollars in thousands) $ $ 180,559 38,917 205,163 424,639 $ $ 154,647 35,975 177,621 368,243 55 (e) Property, Plant and Equipment Property, plant and equipment are carried at cost as follows: Land Building and improvements Furniture and fixtures Machinery and equipment Less accumulated depreciation 2017 2016 (dollars in thousands) 28,996 175,678 54,362 165,157 424,193 (142,278) 281,915 $ $ 21,309 134,158 56,851 128,688 341,006 (119,435) 221,571 $ $ 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 Building and improvements Furniture and fixtures Machinery and equipment Life 20 to 40 years 3 to 7 years 3 to 10 years Depreciation expense amounted to $29.7 million, $26.2 million and $25.5 million in fiscal 2017, 2016 and 2015, 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. (f) Goodwill and Other Intangibles In accordance with ASC 350 “Goodwill-Intangibles and Other”, the company’s goodwill and other indefinite lived intangibles are reviewed for impairment annually on the first day of the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of goodwill and other indefinite lived intangibles, the company considers changes in economic conditions and makes assumptions regarding estimated future cash flows and other factors. Estimates of future cash flows are judgments based on the company’s experience and knowledge of operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If the company’s estimates or the underlying assumptions change in the future, the company may be required to record impairment charges. Any such charge could have a material adverse effect on the company’s reported net earnings. 56 Goodwill is allocated to the business segments as follows (in thousands): Balance as of January 2, 2016 Commercial Foodservice 473,127 $ Food Processing $ 134,092 Residential Kitchen $ 376,120 Total $ 983,339 Goodwill acquired during the year Measurement period adjustments to goodwill acquired in prior year Exchange effect 76,972 (503) (7,506) 1,958 — (1,370) — 86,822 (46,990) 78,930 86,319 (55,866) Balance as of December 31, 2016 $ 542,090 $ 134,680 $ 415,952 $ 1,092,722 Goodwill acquired during the year Measurement period adjustments to goodwill acquired in prior year Exchange effect 118,419 (36,408) 7,350 58,899 41 4,658 — — 19,129 177,318 (36,367) 31,137 Balance as of December 30, 2017 $ 631,451 $ 198,278 $ 435,081 $ 1,264,810 The company has not recognized any goodwill impairments and therefore no accumulated impairment loss. Intangible assets consist of the following (in thousands): Estimated Weighted Avg Remaining Life 5.2 0.8 4.2 December 30, 2017 December 31, 2016 Gross Carrying Amount Accumulated Amortization $ $ $ 330,496 $ (171,005) 19,689 22,485 (18,081) (18,248) 372,670 $ (207,334) 615,090 Estimated Weighted Avg Remaining Life 5.5 0.0 4.8 Gross Carrying Amount Accumulated Amortization $ $ $ 251,025 $ (136,895) 13,550 24,874 (13,550) (17,924) 289,449 $ (168,369) 575,091 Amortized intangible assets: Customer lists Backlog Developed technology Indefinite-lived assets: Trademarks and tradenames The company performed its annual impairment for trademarks and tradenames (indefinite-lived intangible assets) on the first day of the fourth quarter and based on the results the company determined that the Viking tradename within the Residential Kitchen Equipment Group was impaired. The company estimated the fair value of tradenames using a relief from royalty method under the income approach. The decline in fair value of the Viking tradename was primarily the result of weaker than expected revenue performance in the current year and a corresponding reduction of future revenue expectations. The impairment resulted from the decline in revenues attributable, in part, to the product recall announced in 2015 related to products manufactured prior to the acquisition of Viking. The fair value of the Viking tradename was estimated to be $93.0 million as compared to the carrying value of $151.0 million and resulted in a $58.0 million indefinite-lived intangible asset impairment charge. The aggregate intangible amortization expense was $38.6 million, $29.9 million and $27.4 million in 2017, 2016 and 2015, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands): 2018 2019 2020 2021 2022 2023 and thereafter $ $ 39,017 29,423 28,560 25,153 21,056 22,127 165,336 57 (g) Accrued Expenses Accrued expenses consist of the following at December 30, 2017 and December 31, 2016, respectively: Accrued payroll and related expenses Accrued warranty Accrued customer rebates Advanced customer deposits Accrued sales and other tax Accrued professional fees Accrued product liability and workers compensation Accrued agent commission Product recall Restructuring Other accrued expenses $ 2017 2016 (dollars in thousands) $ 67,935 52,834 48,590 31,069 20,881 18,250 11,976 11,035 6,068 1,715 51,818 74,505 40,851 49,923 41,735 13,565 16,605 11,417 12,834 7,003 2,295 64,872 $ 322,171 $ 335,605 (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. (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: Unrecognized pension benefit costs, net of tax of ($43,592) and ($38,004) Unrealized gain on interest rate swap, net of tax of $4,243 and $3,655 Currency translation adjustments $ 2016 2017 (dollars in thousands) (203,063) $ 6,365 (69,721) (173,394) 5,482 (116,411) $ (266,419) $ (284,323) 58 Changes in accumulated other comprehensive income (loss) were as follows (in thousands): Balance as of January 2, 2016 Other comprehensive income before reclassification Amounts reclassified from accumulated other comprehensive income Net current-period other comprehensive income Balance as of December 31, 2016 Other comprehensive income before reclassification Amounts reclassified from accumulated other comprehensive income Net current-period other comprehensive income Balance as of December 30, 2017 Currency Translation Adjustment Pension Benefit Costs(1) Unrealized Gain/(Loss) Interest Rate Swap(1) $ $ $ $ $ (52,842) $ (63,569) (23,579) $ (149,907) — (63,569) $ (116,411) $ 46,690 92 (149,815) $ (173,394) $ (31,683) — 46,690 $ (69,721) $ 2,014 (29,669) $ (203,063) $ 9 $ 6,703 (1,230) 5,473 5,482 1,822 (939) 883 6,365 $ $ $ $ Total (76,412) (206,773) (1,138) (207,911) (284,323) 16,829 1,075 17,904 (266,419) (1) Pension and interest rate swap amounts are net of tax. (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, that 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 30, 2017 and December 31, 2016 are as follows (in thousands): Fair Value Level 1 Fair Value Level 2 Fair Value Level 3 Total As of December 30, 2017 Financial Assets: Interest rate swaps Financial Liabilities: Interest rate swaps Contingent consideration As of December 31, 2016 Financial Assets: Interest rate swaps Financial Liabilities: Interest rate swaps Contingent consideration — $ 10,266 $ — $ 10,266 — $ — $ — $ — $ — $ $ 1,780 — 1,780 — $ 8,842 $ — $ 8,842 — $ — $ 100 $ — $ — $ $ 6,612 100 6,612 $ $ $ $ $ $ 59 The contingent consideration as of December 30, 2017 relates to the earnout provisions recorded in conjunction with the acquisitions of Desmon and Scanico. The contingent consideration as of December 31, 2016 relates to the earnout provisions recorded in conjunction with the acquisitions of PES, Desmon, Goldstein Eswood and Induc. 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. (k) Foreign Currency Foreign currency transactions are accounted for in accordance with ASC 830 “Foreign Currency Translation”. 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 $2.4 million, $1.9 million and $6.8 million in 2017, 2016 and 2015, respectively, and are included in other expense on the statements of earnings. (l) Revenue Recognition At the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group, the company recognizes revenue on the sale of its products where title transfers and when risk of loss has passed to the customer, which occurs at the time of shipment, and collectibility is reasonably assured. The sale prices of the products sold are fixed and determinable at the time of shipment. Sales are reported net of sales returns, sales incentives and cash discounts based on prior experience and other quantitative and qualitative factors. At the Food Processing Equipment Group, the company enters into long-term sales contracts for certain products. Revenue under these long-term sales contracts is recognized using the percentage of completion method defined within ASC 605-35 “Construction-Type and Production-Type Contracts” due to the length of time to fully manufacture and assemble the equipment. The company measures revenue recognized based on the ratio of actual labor hours incurred in relation to the total estimated labor hours to be incurred related to the contract. Because estimated labor hours to complete a project are based upon forecasts using the best available information, the actual hours may differ from original estimates. Under ASC 605, the company records the asset for revenue recognized but not yet billed on contracts accounted for under the percentage of completion method in Prepaid Expenses and Other on the consolidated balance sheets. For 2017 and 2016, the amount of this asset was $19.5 million and $12.2 million, respectively. The percentage of completion method of accounting for these contracts most accurately reflects the status of these uncompleted contracts in the company's financial statements and most accurately measures the matching of revenues with expenses. At the time a loss on a contract becomes known, the amount of the estimated loss is recognized in the consolidated financial statements. (m) 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. (n) 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. 60 A rollforward of the warranty reserve for the fiscal years 2017 and 2016 are as follows: Beginning balance Warranty reserve related to acquisitions Warranty expense Warranty claims paid Ending balance (o) Research and Development Costs 2017 2016 (dollars in thousands) $ $ 40,851 7,769 58,398 (54,184) 52,834 $ $ 37,901 2,446 48,975 (48,471) 40,851 Research and development costs, included in cost of sales in the consolidated statements of earnings, are charged to expense when incurred. These costs were $29.1 million, $26.3 million and $22.4 million in fiscal 2017, 2016 and 2015, respectively. (p) Non-Cash Share-Based Compensation The company estimates the fair value of restricted share grants and stock options at the time of grant and recognizes compensation costs over the vesting period of the awards and options. Non-cash share-based compensation expense of $6.2 million, $27.9 million and $15.9 million was recognized for fiscal 2017, 2016 and 2015, respectively, associated with restricted share grants. The company recorded a related tax benefit of $2.4 million, $10.5 million and $6.0 million in fiscal 2017, 2016 and 2015, respectively. As of December 30, 2017, there was $6.8 million of total unrecognized compensation cost related to nonvested restricted share grant compensation arrangements, which will be recognized over a weighted average life of 1.2 years. Share grant awards not subject to market conditions for vesting are valued at the closing share price of the company’s stock as of the date of the grant. The company issued 76,788 and 382,125 restricted share grant awards in 2017 and 2016, respectively with a fair value of $10.5 million and $36.0 million, respectively. Share grant awards issued in 2017 and 2016 are performance based and were not subject to market conditions. The fair value of $136.29 and $94.19 per share for the awards for 2017 and 2016, respectively, represent the closing share price of the company’s stock as of the date of grant. (q) 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 exercise of outstanding options and vesting of restricted stock grants computed using the treasury method and amounted to 4,000, 55,000, and 22,000 for fiscal 2017, 2016 and 2015, respectively. There were no anti-dilutive equity awards excluded from common stock equivalents for 2017, 2016 or 2015. (r) Consolidated Statements of Cash Flows Cash paid for interest was $25.9 million, $21.0 million and $14.8 million in fiscal 2017, 2016 and 2015, respectively. Cash payments totaling $123.3 million, $89.0 million, and $94.6 million were made for income taxes during fiscal 2017, 2016 and 2015, respectively. 61 (s) New Accounting Pronouncements Accounting Pronouncements - Recently Adopted In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which is intended to simplify the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first- out and the retail inventory method. Application of the standard, which should be applied prospectively, is required for the annual and interim periods beginning after December 15, 2016. Early adoption was permitted. We adopted this guidance on January 1, 2017 and it did not have an impact on the company's financial position, results of operations or cash flows. In November 2015, the FASB issued ASU 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes". The amendments in ASU 2015-17 simplify the accounting for, and presentation of, deferred taxes by eliminating the need to separately classify the current amount of deferred tax assets or liabilities. Instead, aggregated deferred tax assets and liabilities are classified and reported as non-current assets or liabilities. The update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2016. The company early adopted ASU 2015-17 effective April 3, 2016 on a prospective basis. Adoption of this ASU resulted in a reclassification of the company's net current deferred tax asset to the net non-current deferred tax liability in the company's Consolidated Balance Sheet as of July 2, 2016. In March 2016, the FASB issued ASU No. 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships". The amendments in ASU 2016-05 clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of the hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this update may be applied on either a prospective basis or a modified retrospective basis. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2016. We adopted this guidance on January 1, 2017 and it did not have an impact on the company's financial position, results of operations or cash flows. In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718)". The amendments in ASU-09 simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2016. The company adopted ASU No. 2016-09 effective January 1, 2017 on a prospective basis. The adoption of this guidance resulted in the recognition of excess tax benefits in the company's provision for income taxes within the Condensed Consolidated Statements of Comprehensive Income rather than paid-in-capital of approximately $8.1 million for the twelve months period ended December 30, 2017. Additionally, the company's Condensed Consolidated Statement of Cash Flows now presents excess tax benefits as an operating activity rather than a financing activity. Accounting Pronouncements - To be adopted In May 2014, the Financial Accounts Standards Board ("FASB") issued ASU No. 2014-09, “Revenue from Contracts with Customers”. This update amends the current guidance on revenue recognition related to contracts with customers. Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In early 2016, the FASB issued additional updates: ASU No. 2016-10, 2016-11 and 2016-12. These updates provide further guidance and clarification on specific items within the previously issued update. In July 2015, the FASB decided to delay the effective date of the new revenue standard to be effective for interim and annual periods beginning on or after December 15, 2017 for public companies. The guidance can be applied using one of two retrospective application methods. 62 The company has substantially completed its evaluation of significant contracts and the review of its current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to the company's revenue contracts. The company has also identified and implemented appropriate changes to business processes, systems and controls to support recognition and disclosure under the new standard. While the company continues to assess all potential impacts of the new standard, the company will adopt the new revenue standard in the first quarter of 2018 applying the modified retrospective transition method. Under the modified retrospective method, we will recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The company estimates this adjustments to be approximately $4.0 million to $6.0 million. The main impact is related to the deferral of equipment revenue associated with long term contracts for the Food Processing Equipment Group when the contract does not specifically provide for an enforceable right to payment for performance completed to date. We do not expect other significant changes to our business processes, systems or internal controls as a result of the standard. The company is finalizing updates to the accounting policies and processes to address the variations from current practices, inclusive of the required additional disclosures in the period subsequent to adoption. In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". The amendments under this pronouncement will change the way all leases with a duration of one year of more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or operating lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases are under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. This update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2018. The ASU requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial adoption. The company is currently in process of identifying the population of leases, evaluating technology solutions and collecting lease data. We expect most of our operating lease commitments as disclosed in Note 8 Lease Commitments will be subject to the new standard and recognized as lease liabilities and right-of-use assets upon adoption, increasing our total assets and liabilities reported. The company is evaluating the overall impact this standard will have on its policies and procedures pertaining to its existing and future lease arrangements, disclosure requirements and the company's financial position, results of operations and cash flows. In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments". The amendments in ASU-15 address eight specific cash flow classification issues to reduce current and potential future diversity in practice. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2017. The company is evaluating the impact the application of this ASU will have, if any, on the company's cash flows. In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory". The amendments in ASU-16 prohibit the recognition of current and deferred income taxes for an intra-entity asset transfer other than inventory until the asset has been sold to an outside party. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2017. The company is evaluating the impact the application of this ASU will have, if any, on the company's financial position, results of operations or cash flows. In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business". The amendments in ASU-01 clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December15, 2017. The company is evaluating the impact the application of this ASU. The company does not expect the adoption of this ASU to have a material impact on its financial position, results of operations or cash flows. In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in ASU-04 simplify the subsequent measurement of goodwill, by removing the second step of the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This ASU is effective for annual reporting periods, and interim reporting periods, beginning after December 15, 2019. Early adoption is permitted for testing dates after January 1, 2017. The company is evaluating the application of this ASU on the company's annual impairment test. The company does not expect the adoption of this ASU to have a material impact on its financial position, results of operations or cash flows. 63 In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". The amendments in ASU-07 require that an employer report the service costs component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic pension cost and net periodic postretirement benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. In addition, the new standard will allow only the service cost component to be eligible for capitalization, when applicable. Application of the standard, which should be applied retrospectively for the income statement presentation changes and prospectively for the capitalization changes, is required for the annual and interim reporting periods beginning after December 15, 2017. As reported in Note 10 - Employee Retirement Plans the 2017 and 2016 net periodic pension benefit were $27.3 million and $23.4 million, respectively, and the 2015 net periodic pension costs were $1.5 million. The service cost component of these amounts in 2017, 2016 and 2015, which will remain as a component of operating profit, was $4.4 million, $3.8 million and $1.7 million, respectively. Net income will not change as a result of the adoption of this standard. The company will adopt the standard in the first quarter of 2018. In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". The amendments in ASU-12 provide new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (OCI) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2018 with early adoption permitted. The company is currently evaluating the impacts the ASU will have on its condensed consolidated financial statements. In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". The amendments in ASU-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and require certain disclosures about stranded tax effects. This ASU is effective for annual reporting periods, and interim periods with those reporting periods beginning after December 15, 2018 with early adoption permitted. The company will be adopting the standard in fiscal 2018 retrospectively for the effects recognized in 2017 related to the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act. 64 (4) FINANCING ARRANGEMENTS The following is a summary of long-term debt at December 30, 2017 and December 31, 2016: Senior secured revolving credit line Foreign loans Other debt arrangement Total debt 2017 2016 (dollars in thousands) $ 1,022,935 5,768 178 $ 1,028,881 $ $ 725,500 6,413 213 732,126 Less current maturities of long-term debt 5,149 5,883 Long-term debt $ 1,023,732 $ 726,243 On July 28, 2016, the company entered into an amended and restated five year $2.5 billion multi-currency senior secured revolving credit agreement (the "Credit Facility"), with the potential under certain circumstances to increase the amount of the Credit Facility to $3.0 billion. As of December 30, 2017, the company had $1,022.9 million of borrowings outstanding under the Credit Facility, including $1,015.5 million of borrowings in U.S. Dollars and $7.4 million of borrowings denominated in British Pounds. The company also has $7.5 million in outstanding letters of credit as of December 30, 2017, which reduces the borrowing availability under the Credit Facility. Remaining borrowing availability under this facility was $1.5 billion at December 30, 2017. At December 30, 2017, borrowings under the Credit Facility accrued interest at a rate of 1.25% above LIBOR per annum or 0.25% above the highest of the prime rate, the federal funds rate plus 0.50% and one month LIBOR plus 1.00%. The average interest rate per annum on the debt under the Credit Facility was equal to 2.72% for the period. 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. This variable commitment fee was equal to 0.20% per annum as of December 30, 2017. In addition, the company has other international credit facilities to fund working capital needs outside the United States and the United Kingdom. At December 30, 2017, these foreign credit facilities amounted to $5.8 million in U.S. Dollars with a weighted average per annum interest rate of approximately 6.06%. The company’s debt is reflected on the balance sheet at cost. 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 company estimated the fair value of its loans by calculating the upfront cash payment a market participant would require to assume the company’s obligations. The upfront cash payment is the amount that a market participant would be able to lend to achieve sufficient cash inflows to cover the cash outflows under the company’s senior secured revolving credit facility assuming the facility was outstanding in its entirety until maturity. Since the company maintains its borrowings under a revolving credit facility and there is no predetermined borrowing or repayment schedule, for purposes of this calculation the company calculated the fair value of its obligations assuming the current amount of debt at the end of the period was outstanding until the maturity of the company’s Credit Facility in July 2021. Although borrowings could be materially greater or less than the current amount of borrowings outstanding at the end of the period, it is not practical to estimate the amounts that may be outstanding during future periods. The carrying value and estimated aggregate fair value, a level 2 measurement, based primarily on market prices, of debt is as follows (in thousands): Total debt December 30, 2017 December 31, 2016 Carrying Value 1,028,881 $ Fair Value $ 1,028,881 Carrying Value 732,126 $ Fair Value $ 732,126 65 The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At December 30, 2017, the company had outstanding floating-to-fixed interest rate swaps totaling $399.0 million notional amount carrying an average interest rate of 1.47% that mature in more than 12 months but less than 84 months. The terms of the Credit Facility 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 and (ii) a maximum Leverage Ratio of Funded Debt less Unrestricted Cash to Pro Forma EBITDA (each as defined in the Credit Facility) of 3.50 to 1.00, which may be adjusted to 4.00 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 30, 2017, the company was in compliance with all covenants pursuant to its borrowing agreements. The aggregate amount of debt payable during each of the next five years is as follows (in thousands): 2018 2019 2020 2021 2022 and thereafter $ $ 5,149 338 163 1,023,098 133 1,028,881 (5) (a) COMMON AND PREFERRED STOCK Shares Authorized and Issued At December 30, 2017 and December 31, 2016, the company had 95,000,000 authorized shares of common stock and 2,000,000 authorized shares of non-voting preferred stock. At December 30, 2017 and December 31, 2016, there were 55,730,624 and 57,539,766, respectively, issued and outstanding shares of common stock. (b) Treasury Stock On November 7, 2017, the company's Board of Directors resolved to terminate the company's existing share repurchase program, effective as of such date, which was originally approved in 1998, and approved a new stock repurchase program. This program authorizes the company to repurchase in the aggregate up to 2,500,000 shares of its outstanding common stock. During fiscal year 2017, the company repurchased 1,680,395 shares of its common stock under the 1998 program for $200.4 million, including applicable commissions, which represented an average price of $119.23. Additionally, during fiscal year 2017, the company repurchased 126,200 shares of its common stock under the 2017 program for $14.8 million, including applicable commissions, which represented an average price of $117.61. As of December 30, 2017, 126,200 shares had been purchased under the 2017 stock repurchase program and 2,373,800 remain authorized for repurchase. At December 30, 2017, the company had a total of 6,889,241 shares in treasury amounting to $445.1 million. 66 (c) Share-Based Awards The company maintains several stock incentive plans under which the company's Board of Directors issues stock options and makes restricted share grants to key employees. Stock options issued under the plans provided key employees with rights to purchase shares of common stock at specified exercise prices. Options were exercised upon certain vesting requirements being met, but expired to the extent unexercised within a maximum of ten years from the date of grant. Restricted share grants issued to employees are transferable upon certain vesting requirements being met. • • 2007 Stock Incentive Plan (the "2007 Plan"), as amended on May 7, 2009. Effective August 11, 2011 and in accordance with plan parameters, the company is no longer permitted to make grants under the 2007 Plan. Accordingly, zero additional shares are available for issuance under the 2007 Plan. As of December 30, 2017, a total of 2,683,554 share-based awards have been issued under the 2007 Plan. This includes 2,672,667 restricted share grants, all of which have vested. This also includes 10,887 stock options, of which 2,124 have been exercised, 7,791 have been forfeited and zero remain outstanding. 2011 Stock Incentive Plan (the "2011 Plan"), was adopted on April 1, 2011, under which the company's Board of Directors issues stock grants to key employees. On July 11, 2017 the company increased the maximum amount of shares reserved for issuance under the 2011 Plan by 1,000,000. A maximum amount of 2,650,000 shares can be issued under the 2011 Plan. Stock grants issued to employees are transferable upon certain vesting requirements. As of December 30, 2017, a total of 929,424 share-based awards have been issued under the 2011 Plan. This includes 929,424 restricted share grants, of which 159,203 remain outstanding and unvested. A summary of the company’s nonvested restricted share grant activity for fiscal years ended December 30, 2017 and December 31, 2016 is as follows: Nonvested shares at January 2, 2016 Granted Vested Forfeited Nonvested shares at December 31, 2016 Granted Vested Forfeited Nonvested shares at December 30, 2017 Weighted Average Grant-Date Fair Value 94.86 Shares 340,904 $ 382,125 (100,511) (6,393) 94.19 101.17 107.81 616,125 $ 91.76 76,788 (418,125) (115,585) 136.29 86.70 121.65 159,203 $ 104.44 67 (6) INCOME TAXES Earnings before taxes is summarized as follows (in thousands): Domestic Foreign Total 2017 290,866 92,663 383,529 $ $ 2016 336,625 84,680 421,305 $ $ 2015 266,831 14,336 281,167 $ $ The provision for income taxes is summarized as follows (in thousands): Federal State and local Foreign Total Current Deferred Total 2017 2016 2015 $ $ $ $ 48,688 9,076 27,637 85,401 99,893 (14,492) 85,401 $ $ $ $ 94,621 13,107 29,361 137,089 115,726 21,363 137,089 $ $ $ $ 78,617 9,515 1,425 89,557 87,638 1,919 89,557 Reconciliation of the differences between income taxes computed at the federal statutory rate to the effective rate are as follows: U.S. federal statutory tax rate State taxes, net of federal benefit U.S. domestic manufacturers deduction Permanent differences Foreign income tax rate at rates other than 35% Tax Cuts and Jobs Act of 2017 deferred tax changes Tax Cuts and Jobs Act of 2017 transition tax Change in valuation allowances Tax on unremitted earnings Other Consolidated effective tax 2017 2016 2015 35.0% 35.0% 35.0% 1.5 (2.1) (0.7) (1.6) (10.0) 2.0 (2.0) 1.5 (1.3) 22.3% 2.3 (2.4) (1.6) (1.1) — — — — 0.3 32.5% 2.1 (2.6) (1.1) (2.1) — — — — 0.6 31.9% The company’s effective tax rate for 2017 was 22.3% as compared to 32.5% in 2016. The effective tax rate for 2017 reflects the impact of complying with the Tax Cuts and Job Act of 2017 (the Tax Act or tax reform), signed into law on December 22, 2017 and the adoption of ASU 2016-09 "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share- Based Payment Accounting" on January 1, 2017. The tax impact of these items in addition to the reversal of a valuation allowance are the primary causes of the 2017 tax rate being lower than the federal statutory tax rate of 35.0% and lower than the effective tax rate for 2016. 68 The company is still evaluating the impact of the Tax Act and how it will affect the company’s capital structure and permanent reinvestment assertions for its foreign subsidiaries as the United States international taxation moves from a worldwide tax system to a territorial tax system. Prior to the Tax Act the company largely asserted its foreign earnings where permanently reinvested, while there were several entities whose earnings were only partially reinvested. As result of the Tax Act and the transition tax the foreign earnings are being currently taxed, resulting in a net transition tax liability of approximately $7.5 million. The company has accordingly modified its partial reinvestment assertions for several foreign subsidiaries to provide funds to help cover the transition tax liability. This is reflected as an increase in tax on unremitted earnings in the effective tax rate reconciliation and increase in other deferred tax liabilities as shown in the components of deferred taxes. The company’s impact of tax reform is based on current information and guidance available at this time and reflects our best provisional estimates in accordance with Staff Accounting Bulletin No. 118. The provisional estimates will be subject to refinement in 2018. At December 30, 2017 and December 31, 2016, the company had recorded the following deferred tax assets and liabilities: Deferred tax assets: Compensation related Pension and post-retirement benefits Inventory reserves Accrued liabilities and reserves Warranty reserves Net operating loss carryforwards Other Gross deferred tax assets Valuation allowance Deferred tax assets Deferred tax liabilities: Intangible assets Depreciable assets Other Deferred tax liabilities Net deferred tax assets (liabilities) Long-term deferred asset Long-term deferred liability Net deferred tax assets (liabilities) 2017 2016 (dollars in thousands) 3,129 56,502 11,342 9,813 7,232 37,911 19,826 145,755 (23,190) 122,565 $ 25,650 60,986 14,379 4,550 10,141 35,591 41,198 192,495 (29,893) 162,602 (137,871) $ (10,426) (17,518) (173,673) (2,957) (12,033) (165,815) $ (188,663) (43,250) $ (26,061) 44,565 (87,815) (43,250) $ 51,699 (77,760) (26,061) $ $ $ $ $ The company recorded a transition tax on undistributed foreign earnings as required by the Tax Act. Additional the company provided $3.9 million on undistributed earnings not permanently reinvested. 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 $197.0 million on December 30, 2017. 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 $37.9 million as of December 30, 2017. These net operating losses are available to reduce future taxable earnings of certain domestic and foreign subsidiaries. United States federal loss carryforwards total $37.9 million and expire through 2037, state loss carryforwards total $124.2 million and expire through 2037 and international loss carryforwards total $86.1 million and expire through 2030; however, some have no expiration date. Of these carryforwards, $80.4 million is subject to full valuation allowance. 69 As of December 30, 2017, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $29.9 million (of which $29.5 million would impact the effective tax rate if recognized) plus approximately $4.5 million of accrued interest and $7.5 million of penalties. The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. Interest recognized in fiscal years 2017, 2016 and 2015 was $0.7 million, $0.3 million and $0.3 million, respectively. Penalties recognized in fiscal years 2017, 2016 and 2015 was $1.3 million, $1.0 million and $0.8 million, respectively. 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. The following table summarizes the activity related to the unrecognized tax benefits for the fiscal years ended January 2, 2016, December 31, 2016 and December 30, 2017 (in thousands): Balance at January 2, 2016 $ 14,419 Increases to current year tax positions Increase to prior year tax positions Decrease to prior year tax positions Settlements Lapse of statute of limitations 6,367 601 (233) — (865) Balance at December 31, 2016 $ 20,289 Increases to current year tax positions Increase to prior year tax positions Decrease to prior year tax positions Settlements Lapse of statute of limitations 11,843 201 (9) (439) (1,955) Balance at December 30, 2017 $ 29,930 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 $4.3 million of its remaining unrecognized tax benefits may be recognized by the end of 2018 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 2014 through the current year for the United States federal jurisdiction. Income tax years open for our other major jurisdictions range from 2013 through the current year. 70 (7) FINANCIAL INSTRUMENTS ASC 815 “Derivatives and Hedging” requires an entity to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Derivatives that do not qualify as a hedge must be adjusted to fair value in earnings. If the derivative does qualify as a hedge under ASC 815, changes in the fair value will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments or recognized in other accumulated other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a hedge's change in fair value will be immediately 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 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. 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. As of December 30, 2017, the fair value of these instruments was an asset of $10.3 million. The change in fair value of these swap agreements in 2017 was a gain of $1.5 million, net of taxes. A summary of the company’s interest rate swaps is as follows (in thousands): Fair value Fair value Location Other assets Other liabilities Amount of gain/(loss) recognized in other comprehensive income Other comprehensive income Gain/(loss) reclassified from accumulated other comprehensive income (effective portion) Gain/(loss) recognized in income (ineffective portion) Interest expense Other expense Twelve Months Ended Dec 30, 2017 Dec 31, 2016 10,266 $ — $ 8,842 (100) 531 $ 7,892 (939) $ (1,230) 54 $ 32 $ $ $ $ $ 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. 71 (8) LEASE COMMITMENTS The company leases warehouse space, office facilities and equipment under operating leases, which expire in fiscal 2018 and thereafter. Future minimum payment obligations under these leases are as follows: 2018 2019 2020 2021 2022 2023 and thereafter Total Operating Lease Commitments $ 25,689 20,953 16,993 14,828 11,600 19,815 $ 109,878 Rental expense pertaining to the operating leases was $27.1 million, $23.5 million and $17.6 million in fiscal 2017, 2016 and 2015 respectively. (9) 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. This business segment has manufacturing facilities in Arkansas, California, Illinois, Michigan, New Hampshire, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Vermont, Washington, Australia, China, Denmark, Estonia, Italy, the Philippines, Poland, Sweden and the United Kingdom. Principal product lines of 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, professional mixers, stainless steel fabrication, custom millwork, professional refrigerators, blast chillers, coldrooms, ice machines, freezers and coffee and beverage dispensing equipment. These products are sold and marketed under the brand names: Anets, Bear Varimixer, Beech, Blodgett, Blodgett Combi, Blodgett Range, Bloomfield, Britannia, CTX, Carter-Hoffmann, Celfrost, Concordia, CookTek, Desmon, Doyon, Eswood, Follett, Frifri, Giga, Globe, Goldstein, Holman, Houno, IMC, Induc, Jade, L2F, Lang, Lincat, MagiKitch’n, Market Forge, Marsal, Middleby Marshall, MPC, Nieco, Nu-Vu, PerfectFry, Pitco, QualServ, Southbend, Star, Sveba Dahlen, Toastmaster, TurboChef, Wells and Wunder- Bar. The Food Processing Equipment Group manufactures preparation, cooking, packaging food handling and food safety equipment for the food processing industry. This business segment has manufacturing operations in Georgia, Illinois, Iowa, North Carolina, Oklahoma, Texas, Virginia, Wisconsin, Denmark, France, Germany, India and the United Kingdom. Principal product lines of this group include batch ovens, baking ovens, proofing ovens, conveyor belt ovens, continuous processing ovens, frying systems and automated thermal processing systems, grinders, slicers, reduction and emulsion systems, mixers, blenders, battering equipment, breading equipment, seeding equipment, water cutting systems, food presses, food suspension equipment, forming equipment, automated loading and unloading systems, food safety, food handling, freezing, defrosting and packaging equipment. These products are sold and marketed under the brand names: Alkar, Armor Inox, Auto-Bake, Baker Thermal Solutions, Burford, Cozzini, CVP Systems, Danfotech, Drake, Emico, Glimek, Maurer-Atmos, MP Equipment, RapidPak, Scanico, Spooner Vicars, Stewart Systems and Thurne. 72 The Residential Kitchen Equipment Group manufactures, sells and distributes kitchen equipment for the residential market. This business segment has manufacturing facilities in California, Michigan, Mississippi, Wisconsin, France, Ireland, Romania and the United Kingdom. Principal product lines of this group are ranges, cookers, stoves, ovens, refrigerators, dishwashers, microwaves, cooktops, refrigerators, wine coolers, ice machines, ventilation equipment and outdoor equipment. These products are sold and marketed under the brand names: AGA, AGA Cookshop, Brigade, Fired Earth, Grange, Heartland, La Cornue, Leisure Sinks, Lynx, Marvel, Mercury, Rangemaster, Rayburn, Redfyre, Sedona, Stanley, TurboChef, U-Line and Viking. 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): 2017 Net sales Operating income (4,5,6) Depreciation and amortization expense Net capital expenditures Total assets Long-lived assets (2) 2016 Net sales Operating income (4) Depreciation and amortization expense Net capital expenditures Total assets Long-lived assets (2) 2015 Net sales Operating income (4) Depreciation and amortization expense Net capital expenditures Total assets Long-lived assets (2) Commercial Foodservice Food Processing Residential Kitchen Corporate and Other(3) Total $ $ $ $ $ $ 1,382,108 356,776 29,981 41,457 1,693,820 148,565 1,266,955 350,315 19,548 11,958 1,347,441 84,475 1,121,046 296,061 17,117 12,123 1,115,840 61,835 $ $ $ 352,717 88,121 7,357 5,519 450,932 25,346 342,235 87,039 5,696 5,667 340,088 21,763 297,712 64,650 5,839 2,164 308,677 20,307 $ $ $ 600,717 30,972 30,551 7,637 1,140,668 167,486 658,662 89,435 29,897 6,961 1,179,640 175,206 407,840 4,653 29,515 7,935 1,250,503 129,751 — $ 2,335,542 410,341 69,774 54,493 3,339,713 362,588 (65,528) 1,885 (120) 54,293 21,191 — $ 2,267,852 446,225 58,234 24,817 2,917,136 316,544 (80,564) 3,093 231 49,967 35,100 — $ 1,826,598 302,603 54,074 22,362 2,761,151 233,220 (62,761) 1,603 140 86,131 21,327 (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) Long-lived assets consist of property, plant and equipment, long-term deferred tax assets and other assets. (3) Includes corporate and other general company assets and operations. (4) Restructuring expenses are allocated in operating income by segment. See note 12 for further details. (5) Gain on sale of plant allocated to Commercial Foodservice. (6) Impairment of intangible assets allocated to Residential Kitchen. 73 Long-lived assets, not including goodwill and other intangibles (in thousands): Geographic Information United States and Canada Asia Europe and Middle East Latin America Total international Net sales (in thousands): United States and Canada Asia Europe and Middle East Latin America Total international 2017 221,479 $ 2016 181,317 $ 2015 149,299 $ 14,033 126,264 812 141,109 14,729 119,511 987 135,227 17,336 65,581 1,004 83,921 $ 362,588 $ 316,544 $ 233,220 2017 $ 1,549,876 2016 $ 1,470,566 2015 $ 1,274,907 192,638 501,247 91,781 785,666 190,548 522,819 83,919 797,286 165,541 319,387 66,763 551,691 $ 2,335,542 $ 2,267,852 $ 1,826,598 (10) 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, which was acquired as part of the Star acquisition. 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 Chairman ("Chairman Plan"). The retirement benefits are based upon a percentage of the Chairman’s final base salary with no expected future increase in compensation. Non-U.S. Plans: The company maintains a defined benefit plan for its employees at the Wrexham, the United Kingdom facility, which was acquired as part of the Lincat acquisition. Benefits are determined based upon retirement age and years of service with the company. This defined benefit plan was frozen on April 30, 2010 prior to Middleby’s acquisition of the company. 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. 74 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, which covers the majority of employees 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. The other, much smaller, defined benefit pension plans operating within the AGA Group cover employees in France, Ireland 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. 75 A summary of the plans’ net periodic pension cost, benefit obligations, funded status, and net balance sheet position is as follows (dollars in thousands): Net Periodic Pension Benefit: Service cost Interest cost Expected return on assets Amortization of net (gain) loss Curtailment loss (gain) Pension settlement gain Change in Benefit Obligation: Benefit obligation – beginning of year Service cost Interest on benefit obligations Employee contributions Actuarial (gain) loss Pension settlement gain Net benefit payments Curtailment loss (gain) Exchange effect Benefit obligation – end of year Change in Plan Assets: Plan assets at fair value – beginning of year Company contributions Investment gain Employee contributions Pension settlement loss Benefit payments and plan expenses Exchange effect Plan assets at fair value – end of year Funded Status: Unfunded benefit obligation Amounts recognized in balance sheet at year end: Accrued pension benefits Pre-tax components in accumulated other comprehensive income at period end: Net actuarial loss Pre-tax components in recognized in other comprehensive income for the period: Current year actuarial (gain) loss Actuarial gain (loss) recognized Pension settlement gain Pension settlement gain recognized Total amount recognized Accumulated Benefit Obligation Salary growth rate Assumed discount rate Expected return on assets Fiscal 2017 Fiscal 2016 U.S. Plans Non-U.S. Plans U.S. Plans Non-U.S. Plans $ $ $ $ $ $ $ $ $ $ $ $ 402 1,240 (821) (330) — — 491 $ $ 4,013 32,748 (70,630) 3,073 3,305 (313) (27,804) 31,949 402 1,240 — (760) — (923) — — 31,908 13,589 1,476 1,960 — — (923) — 16,102 $ 1,478,493 4,013 32,748 345 21,058 (4,017) (65,160) 3,305 144,459 $ 1,615,244 $ 1,173,865 3,062 72,342 345 (3,254) (65,160) 115,339 $ 1,296,539 (15,806) $ (318,705) (15,806) $ (318,705) 3,340 $ 243,315 (1,898) 330 — — (1,568) $ $ 44,316 (7,041) (763) 313 36,825 31,908 $ 1,615,157 $ $ $ $ $ $ $ $ $ $ $ $ 456 1,280 (777) 126 — — 1,085 31,830 456 1,280 — (722) — (895) — — 31,949 12,987 754 743 — — (895) — 13,589 $ $ 3,364 41,606 (68,845) 35 (632) — (24,472) $ 1,476,370 3,364 41,606 404 297,754 — (64,466) (706) (275,833) $ 1,478,493 $ 1,287,723 17,758 161,405 404 — (64,466) (228,959) $ 1,173,865 (18,360) $ (304,628) (18,360) $ (304,628) 4,908 $ 206,490 (691) (126) — — (817) $ $ 181,384 (35) — — 181,349 31,041 $ 1,478,435 n/a 3.5% 6.0% 0.6% 2.3% 6.2% n/a 3.9% 6.0% 1.6% 2.5% 6.2% 76 The company has engaged non-affiliated third party professional investment advisors to assist the company to develop its investment policy and establish 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: Equity Fixed income Money market Other (real estate investment trusts & commodities contracts) Non-U.S. Plans: Equity Fixed income Alternatives/Other Real Estate Cash and cash equivalents Target Allocation Percentage of Plan Assets 48% 40 4 8 2017 55% 35 3 7 2016 51% 39 3 7 100% 100% 100% Target Allocation Percentage of Plan Assets 17% 38 32 13 — 2017 26% 48 12 11 3 2016 20% 55 8 12 5 100% 100% 100% 77 In accordance with ASC 820 “Fair Value Measurements and Disclosures”, the company has measured its defined benefit pension plans at fair value. The following tables summarize the basis used to measure the pension plans’ assets at fair value as of December 30, 2017 and December 31, 2016 (in thousands): U.S. Plans: Asset Category Total Fiscal 2017 Quoted Prices in Active Markets for Identical Assets (Level 1) Fiscal 2016 Quoted Prices in Active Markets for Identical Assets (Level 1) Net Asset Value Net Asset Value Total Short Term Investment Fund (a) $ 486 $ — $ 486 $ 368 $ — $ 368 Equity Securities: Large Cap Mid Cap Small Cap International Fixed Income: Government/Corporate High Yield Alternative: Global Real Estate Investment Trust Commodities Contracts 3,485 474 475 4,507 4,744 809 469 653 3,485 474 475 4,507 4,744 809 469 653 — — — — — — — — 3,055 512 455 2,917 4,367 971 539 405 3,055 512 455 2,917 4,367 971 539 405 — — — — — — — — Total $ 16,102 $ 15,616 $ 486 $ 13,589 $ 13,221 $ 368 (a) Represents collective short term investment fund, composed of high-grade money market instruments with short maturities. 78 Non-U.S. Plans: Asset Category Total Fiscal 2017 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 $ 42,857 $ 8,135 $ 15,851 $ — $ 18,871 Equity Securities: UK International: Developed Emerging Unquoted/Private Equity Fixed Income: Government/Corporate: UK International Index Linked Other Convertible Bonds Real Estate: Direct Indirect Hedge Fund Strategy: Equity Long/Short Arbitrage & Event Directional Trading & Fixed Income Cash & Other Direct Sourcing Leveraged Loans 178,093 98,408 145,295 16,627 7,261 3,687 385 — 347,840 46,065 228,699 3,750 187 135,238 11,128 79,035 83,814 34,107 48,440 1,675 30,755 12,247 — 4,055 — — — 191 — — — — — — Alternative/Other (131,387) (4) — — — — 14,417 — — — — 135,238 — — — — — — — — — — — — — — — — — — — — — — — — — 79,685 128,668 6,876 3,687 321,176 46,065 224,644 3,750 187 — 10,937 79,035 83,814 34,107 48,440 1,675 30,755 101 (131,484) Total $ 1,296,539 $ 140,044 $ 165,506 $ 101 $ 990,888 79 Asset Category Total Fiscal 2016 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 $ 58,131 $ 4,730 $ 2,886 $ — $ 50,515 Equity Securities: UK International: Developed Emerging Unquoted/Private Equity Fixed Income: Government/Corporate: UK International Index Linked Other Convertible Bonds Real Estate: Direct Indirect Hedge Fund Strategy: Equity Long/Short Arbitrage & Event Directional Trading & Fixed Income Cash & Other Direct Sourcing Leveraged Loans Alternative/Other 87,828 135,186 6,803 3,189 317,621 107,882 212,327 3,812 160 121,612 10,693 61,612 64,961 30,430 38,099 1,379 11,025 (98,885) 2,098 3,547 79 — 11,203 — 4,205 — — — 138 — — — — — — — — — — — 14,009 103 — — — 121,612 — — — — — — — — — — — — — — — — — — — — — — — — — 95 85,730 131,639 6,724 3,189 292,409 107,779 208,122 3,812 160 — 10,555 61,612 64,961 30,430 38,099 1,379 11,025 (98,980) Total $ 1,173,865 $ 26,000 $ 138,610 $ 95 $ 1,009,160 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. 80 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. Estimated future benefit payments under the plans are as follows (dollars in thousands): 2018 2019 2020 2021 2022 through 2027 $ U.S. Plans Non-U.S. Plans $ 998 1,003 1,023 1,685 10,574 63,250 63,197 65,375 66,161 411,011 Expected contributions to the U.S. Plans and Non-U.S. Plans to be made in 2018 are $0.9 million and $5.4 million, respectively. (b) Defined Contribution Plans As of December 30, 2017, the company maintained two separate defined contribution 401K 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. (11) QUARTERLY DATA (UNAUDITED) 2017 Net sales Gross profit Income from operations Net earnings Basic earnings per share (1) Diluted earnings per share (1) 2016 Net sales Gross profit Income from operations Net earnings Basic earnings per share (1) Diluted earnings per share (1) 1st 2nd 3rd 4th Total Year (dollars in thousands, except per share data) $ $ $ $ $ $ $ $ 530,297 209,450 101,079 70,702 1.24 1.24 516,355 196,773 86,375 54,538 0.96 0.96 $ $ $ $ $ $ $ $ 579,343 234,608 122,136 77,569 1.35 1.35 580,456 233,502 111,913 72,891 1.28 1.28 $ $ $ $ $ $ $ $ 593,043 228,519 118,257 74,671 1.31 1.31 574,224 231,728 121,439 75,851 1.33 1.33 $ $ $ $ $ $ $ $ 632,859 240,164 68,869 75,186 $ 2,335,542 912,741 410,341 298,128 $ 1.35 1.35 $ $ 5.26 5.26 596,817 239,177 126,498 80,936 $ 2,267,852 901,180 446,225 284,216 $ 1.42 1.41 $ $ 4.98 4.98 (1) Sum of quarters may not equal the total for the year due to changes in the number of shares outstanding during the year. 81 (12) RESTRUCTURING AND ACQUISITION INTEGRATION INITIATIVES During the fiscal year 2017, the company incurred restructuring charges relative to each of its business segments. The costs and corresponding reserve balances (by segment) are summarized as follows (in thousands): Commercial Foodservice Equipment Group: During the fiscal year 2017, the company undertook cost reduction initiatives related to the entire Commercial Foodservice Equipment Group. This action, which is not material to the company's operations, resulted in a charge of $6.2 million in the twelve months ended December 30, 2017, primarily for severance related to headcount reductions and consolidation of manufacturing operations. These expenses are reflected in restructuring expenses in the consolidated statements of earnings. The company estimates that these 2017 restructuring initiatives will result in future cost savings of approximately $10.0 million annually. The realization of the saving began in 2017 and will continue into the first six months of fiscal year 2018 and the restructuring costs in the future are not expected to be significant related to these actions. Food Processing Equipment Group: During the fiscal year 2017, the company undertook cost reduction initiatives related to the entire Food Processing Equipment Group. This action, which is not material to the company's operations, resulted in a charge of $0.6 million in the twelve months ended December 30, 2017, primarily for severance related to headcount reductions and is reflected in restructuring expenses in the consolidated statements of earnings. The company estimates that these 2017 restructuring initiatives will result in future cost savings of approximately $4.0 million annually. The realization of the savings began in 2017 and will continue into the first six months of fiscal year 2018 and no significant future costs related to this action are expected. Residential Kitchen Equipment Group: During the fiscal years 2016 and 2015, the company undertook acquisition integration initiatives primarily related to AGA within the Residential Kitchen Equipment Group. These initiatives included organizational restructuring and headcount reductions, consolidation and disposition of certain facilities and business operations. During fiscal year 2017, the company continued initiatives, primarily related the AGA Group, including additional headcount reductions and the impairment of equipment in conjunction of the disposition of certain facilities and business operations. The company recorded expense in the amount of $13.1 million, $11.0 million and $25.5 million, respectively in the years ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively. This expense is reflected in restructuring expenses in the consolidated statements of earnings for such periods. The cumulative expenses incurred to date for these initiatives is approximately $40.6 million. The company estimated that these restructuring initiatives in 2017 would result in future cost savings of approximately $20.0 million annually. The realization of the savings began in 2017 and will continue into the first six months of fiscal year 2018, primarily related to compensation and facility costs. The company anticipates that all severance obligations for the Residential Kitchen Equipment Group will be paid by the end of fiscal of 2018. The lease obligations extend through December 2019. The costs and corresponding reserve balances for the Residential Kitchen Equipment Group are summarized as follows (in thousands): Balance as of January 3, 2015 $ 147 $ — $ 37 $ 184 Severance/ Benefits Facilities/ Operations Other Total 7,248 (2,606) 4,642 1,160 (73) $ $ Expenses Payments 18,142 (2,628) Balance as of January 2, 2016 $ 15,661 $ Expenses Exchange Effect Payments Balance as of December 31, 2016 $ Expenses Exchange Effect Payments/Utilization 9,816 (749) (19,583) (3,697) $ 5,145 8,662 533 2,032 3,872 358 (10,642) (4,795) Balance as of December 30, 2017 $ 3,698 $ 1,467 $ 82 108 (25) 120 10 (32) (29) 69 601 11 (524) 157 25,498 (5,259) 20,423 10,986 (854) (23,309) 7,246 13,135 902 (15,961) 5,322 $ $ $ (13) SUBSEQUENT EVENT On February 16, 2018, subsequent to the company's fiscal 2017 year end, the company completed its acquisition of the stock of Hinds-Bock Corporation ("Hinds-Bock"), a leading manufacturer of solutions for filling and depositing bakery and food product for the food processing industry for a purchase price of approximately $26.5 million. The product offerings of Hinds- Bock include depositing and filling machines. Hinds-Bock is located in Bothell, Washington and has annual revenues of approximately $15.0 million. 83 THE MIDDLEBY CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS ENDED DECEMBER 30, 2017, DECEMBER 31, 2016 AND JANUARY 2, 2016 Balance Beginning Of Period Additions/ (Recoveries) Charged to Expense Other Adjustments (1) Write-Offs During the the Period Balance At End Of Period Allowance for doubtful accounts; deducted from accounts receivable on the balance sheets- 2017 2016 2015 $ 12,600,200 $ $ 8,838,500 9,091,000 $ $ $ 2,083,500 45,900 121,800 $ $ $ 478,000 $ (1,979,400) $ 13,182,300 4,886,500 $ (1,170,700) $ 12,600,200 1,103,400 $ (1,477,700) $ 8,838,500 (1) Amounts consist primarily of valuation allowances assumed from acquired companies. Balance Beginning Of Period Additions/ (Recoveries) Charged to Expense Write-Offs During the the Period Balance At End Of Period Valuation allowance - Deferred tax assets 2017 2016 2015 $ 29,893,000 $ (6,703,000) $ — $ 23,190,000 $ 20,395,200 $ 9,497,800 $ — $ 20,395,200 $ $ — $ 29,893,000 — $ 20,395,200 84 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures Disclosure Controls and Procedures The company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report that are designed to ensure that information required to be disclosed in the company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the company's management, including its Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. The company carried out an evaluation, under the supervision and with the participation of the company's management, including the company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures as of December 30, 2017. Based on the foregoing, the company's Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of this period. Changes in Internal Control Over Financial Reporting During the quarter ended December 30, 2017, there have been no changes in the company's internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting. 85 Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our 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. Our internal control over financial reporting includes those policies and procedures that: (i) (ii) pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; 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 our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our 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. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Our assessment of the internal control structure excluded Burford (acquired May 1, 2017) CVP Systems (acquired June 30, 2017), Sveba Dahlen (acquired June 30, 2017), QualServ (acquired August 31, 2017), L2F (acquired October 6, 2017), Globe (acquired October 17, 2017), and Scanico (acquired December 7, 2017). These acquisitions constitute 0.1% and 11.9% of net and total assets, respectively, 3.9% of net sales and (0.7)% of net income of the consolidated financial statements of the Company as of and for the year ended December 30, 2017. These acquisitions are included in the consolidated financial statements of the company as of and for the year ended December 30, 2017. Under guidelines established by the Securities Exchange Commission, companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired companies. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 30, 2017. Ernst & Young LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of the company included in this report, has issued an attestation report on the effectiveness of the company's internal control over financial reporting as of December 30, 2017. The Middleby Corporation February 28, 2018 86 Item 9B. Other Information Not applicable. 87 PART III Pursuant to General Instruction G (3), of Form 10-K, the information called for by Part III (Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence) and Item 14 (Principal Accountant Fees and Services), is incorporated herein by reference from the registrant’s definitive proxy statement filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K. 88 Item 15. Exhibits and Financial Statement Schedules (a) 1. Financial Statements PART IV The financial statements listed on Page 48 are filed as part of this Form 10-K. 3. Exhibits 3.1 3.2 3.3 3.4 4.1 10.1 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* Restated Certificate of Incorporation of The Middleby Corporation (effective as of May 13, 2005), incorporated by reference to the company's Form 8-K, Exhibit 3.1, dated April 29, 2005, filed on May 17, 2005. Third Amended and Restated Bylaws of The Middleby Corporation (effective as of May 14, 2013), incorporated by reference to the company's Form 8-K, Exhibit 3.1, dated May 14, 2013, filed on May 17, 2013. Certificate of Amendment to the Restated Certificate of Incorporation of The Middleby Corporation (effective as of May 3, 2007), incorporated by reference to the company’s Form 8-K, Exhibit 3.1, dated May 3, 2007, filed on May 3, 2007. Certificate of Amendment to the Restated Certificate of Incorporation of The Middleby Corporation (effective as of May 8, 2014), incorporated by reference to the company's Form 8-K, Exhibit 3.1, dated May 6, 2014, filed on May 8, 2014. Certificate of Designations dated October 30, 1987, and specimen stock certificate relating to the company Preferred Stock, incorporated by reference from the company’s Form 10-K, Exhibit (4), for the fiscal year ended December 31, 1988, filed on March 15, 1989. Sixth Amended and Restated Credit Agreement, dated as of July 28, 2016, among Middleby Marshall Inc, The Middleby Corporation, the Initial Subsidiary Borrowers named therein, the lenders named therein and Bank of America, N.A., as administrative agent for the lenders, incorporated by reference to Middleby's Form 8-K, Exhibit 10.1, filed on August 3, 2016. Amended 1998 Stock Incentive Plan, dated December 15, 2003, incorporated by reference to the company’s Form 10-K, Exhibit 10.21, for the fiscal year ended January 3, 2004, filed on April 2, 2004. Employment Agreement of Selim A. Bassoul dated December 23, 2004, incorporated by reference to the company's Form 8-K Exhibit 10.1, dated December 23, 2004, filed on December 28, 2004. Employment Agreement by and between The Middleby Corporation and Timothy J. FitzGerald, dated March 21, 2013, incorporated by reference to the company's Form 8-K Exhibit 10.1, dated March 21, 2013, filed on March 25, 2013. Form of The Middleby Corporation 1998 Stock Incentive Plan Restricted Stock Agreement, incorporated by reference to the company's Form 8-K Exhibit 10.2, dated March 7, 2005, filed on March 8, 2005. Amendment to The Middleby Corporation 1998 Stock Incentive Plan, effective as of January 1, 2005, incorporated by reference to the company's Form 8-K Exhibit 10.2, dated April 29, 2005, filed on May 17, 2005. Revised Form of Restricted Stock Agreement for The Middleby Corporation 1998 Stock Incentive Plan, , incorporated by reference to the company’s Form 8-K, Exhibit 10.1, dated March 8, 2007, filed on March 14, 2007. 89 10.8* 10.9* 10.10* 10.11* 21 23.1 31.1 31.2 32.1 32.2 101 Employment Agreement by and between The Middleby Corporation and Selim A. Bassoul, dated as of January 25, 2013, incorporated by reference to the company's Form 8-K Exhibit 10.1, dated January 25, 2013, filed on January 28, 2013. The Middleby Corporation 2011 Long-Term Incentive Plan, incorporated by reference to Appendix A to the company’s definitive proxy statement filed with the Securities and Exchange Commission on April 1, 2011. The Middleby Corporation Value Creation Incentive Plan, incorporated by reference to Appendix B to the company’s definitive proxy statement filed with the Securities and Exchange Commission on April 1, 2011. Form of Restricted Performance Stock Agreement for The Middleby Corporation 2011 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.1 to the company's Form 8-K, dated February 24, 2014, filed on March 3, 2014. List of subsidiaries. Consent of Ernst & Young LLP. Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Financial statements on Form 10-K for the year ended December 30, 2017, filed on February 28, 2018, formatted in Extensive Business Reporting Language (XBRL); (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of earnings, (iii) consolidated statements of cash flows, (iv) notes to the consolidated financial statements. * Designates management contract or compensation plan. (c) See the financial statement schedule included under Item 8. Item 16. Form 10-K Summary None 90 Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 1st day of March 2017. SIGNATURES THE MIDDLEBY CORPORATION BY: /s/ Timothy J. FitzGerald Timothy J. FitzGerald Vice President, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 28, 2018. Signatures Title PRINCIPAL EXECUTIVE OFFICER /s/ Selim A. Bassoul Selim A. Bassoul PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER /s/ Timothy J. FitzGerald Timothy J. FitzGerald DIRECTORS /s/ Robert Lamb Robert Lamb /s/ John R. Miller, III John R. Miller, III /s/ Gordon O'Brien Gordon O'Brien /s/ Nassem Ziyad Nassem Ziyad /s/ Cathy L. McCarthy Cathy L. McCarthy /s/ Sarah Palisi Chapin Sarah Palisi Chapin Chairman of the Board, President, Chief Executive Officer and Director Vice President, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer Director Director Director Director Director Director 91 Subsidiaries of The Middleby Corporation(1) EXHIBIT 21 Name of Subsidiary State/Country of Incorporation/Organization AGA Rangemaster Group PLC AGA Rangemaster Ltd AGA Rangemaster Properties Ltd AGA Rayburn Ltd Alkar Holdings, Inc. Alkar-RapidPak, Inc. Anetsberger, LLC ARG Corporate Services Ltd Armor Inox Holding France S.A.S. Armor Inox Production S.a.r.l. Armor Inox S.A. Armor Inox Services S.A.S. Armor Inox UK Ltd Armor Inox USA LLC A/S Wodschow & Co. Auto-Bake Acquisition Pty. Ltd Auto-Bake Pty Ltd Automatic Bar Controls, Inc. Baker Thermal Solutions LLC Beech Ovens LLC Beech Ovens Pty Ltd Blodgett Holdings, Inc. Britannia Kitchen Ventilation Burford Bakery Solutions Limited Burford Corp Carter-Hoffmann LLC Catering Equipment Industry srl Cloverleaf Properties, Inc. Concordia Coffee Company, Inc. CookTek Induction Systems, LLC Cozzini do Brasil Ltda Cozzini Middleby de Mexico, S. de R.L.de C.V. Cozzini Middleby Europe, S.r.l. Cozzini, LLC Cranmore Property Ltd CVP Systems LLC Danfotech Holdings, LLC Danfotech Inc. Desmon S.p.A. United Kingdom United Kingdom United Kingdom United Kingdom Wisconsin Wisconsin Delaware United Kingdom France France France France United Kingdom Delaware Denmark Australia Australia Delaware Delaware Delaware Australia Delaware United Kingdom United Kingdom Oklahoma Delaware Italy Vermont Washington Delaware Brazil Mexico Italy Delaware United Kingdom Illinois Delaware Missouri Italy Doyon Acquisition Company, LLC Doyon Equipment Inc. Eswood Australia Pty Ltd F.R. Drake Company Fab-Asia Inc. Field Service Solutions Fired Earth Ltd Follett Europe Polska sp. z.o.o. Follett International sp. z.o.o. Follett LLC G.S. Blodgett Corporation Giga Grandi Cucine S.r.l. Globe Food Equipment Company Globe Food Equipment Holding Company Goldstein Eswood Commercial Cooking Pty Ltd Goldstein Properties Pty Ltd Grange Eastern Europe Inc. Grange Furniture Canada (1989) Ltd Grange Furniture Inc. Grange Luxembourg SARL Grange SAS Heartland Appliances Inc. Holman Cooking Equipment Inc. Houno A/S Houno Holdings LLC Imperial Machine Company Ltd J. Goldstein & Co. Pty Ltd Jade Range LLC Johs. Lassen Fjellebroen A/S L2F Inc. LA Cornue SAS Lincat Group PLC Lincat Limited. Lynx Grills Inc Lynx Holdco Inc MagiKitch'n Inc. Maurer-Atmos Middleby GmbH Middleby Advantage, LLC Middleby Asia Ltd Middleby Australia Pty Ltd Middleby Canada Company Middleby Celfrost Innovations Pvt Ltd Middleby China Corporation Middleby Cooking System Manufacturing (Shanghai) Corporation Middleby Cozzini Brasil Equipamentos, Ltda Middleby Denmark Holdings ApS Delaware Canada Australia Delaware Philippines Arkansas United Kingdom Poland Poland Pennsylvania Vermont Italy Ohio Delaware Australia Australia Romania Canada Delaware Luxembourg France Canada Delaware Denmark Delaware United Kingdom Australia Delaware Denmark Delaware France United Kingdom United Kingdom Delaware Delaware Pennsylvania Germany Delaware Hong Kong Australia Canada India Peoples Republic of China Peoples Republic of China Brazil Denmark Middleby Espana SLU Middleby Europe SL Middleby Holding UK Ltd Middleby India Engineering Pvt Ltd Middleby Induction China Corporation Middleby Lux Holdings SCS Middleby Luxembourg S.a.r.l. Middleby Marshall Holding, LLC Middleby Marshall, Inc. Middleby Nationals Sales LLC Middleby Philippines Corporation Middleby Sweden Holdings SB Middleby UK Ltd Middleby UK Residential Holdings Middleby Worldwide Mexico SA de CV Middleby Worldwide Philippines Middleby Worldwide Services SA de CV Middleby Worldwide, Inc. Middleby XME S.L.U. MP Equipment LLC New Star International Holdings, Inc. Nieco Corporation Northland Corporation Peak Drink Dispense Ltd Perfect Fry LLC Pitco Frialator, Inc. QualServ Solutions LLC Scanico A/S SD Asia Pacific Ltd SD Group Intressenter (SDGI) SDG Russia AB Star International Holdings, Inc. Star Manufacturing International Inc. Stewart Systems Baking, LLC Sveba Dahlen Rus. Ltd. Sveba-Dahlen Aktiebolag SvebaDahlen Baltic OÜ Sveba-Dahlen España Sveba-Dahlen Group AB The Alluvian Spa, LLC The Alluvian, LLC The Piper Doyon Group, Inc. Thurne-Middleby Ltd TMC Lux Holdings Sarl TMC Lux Sarl TMC Scots Holdings LP Spain Spain United Kingdom India Peoples Republic of China Luxembourg Luxembourg Delaware Delaware Delaware Philippines Sweden United Kingdom United Kingdom Mexico Philippines Mexico Florida Spain Delaware Delaware California Michigan United Kingdom Delaware New Hampshire Delaware Denmark Hong Kong Sweden Sweden Delaware Delaware Delaware Russia Sweden Estonia Spain Sweden Mississippi Mississippi Wisconsin United Kingdom Luxembourg Luxembourg United Kingdom TMC Scottish Private Ltd TurboChef Technologies Europe, Ltd TurboChef Technologies Inc. ULC Holding Company U-Line Corporation Viking Cooking Schools, LLC Viking Culinary Group, LLC Viking Range Brasil Participacoes Ltda Viking Range Corporation do Brasil Importacao e Comercio Ltda Viking Range, LLC Waterford Stanley Ltd Wells Bloomfield LLC Wunder-Bar Europe S.r.o. Wunder-Bar Holdings, Inc. Wunder-Bar International, Inc. (1) Certain subsidiaries have been omitted as allowed. United Kingdom United Kingdom Delaware Delaware Wisconsin Mississippi Mississippi Brazil Brazil Delaware Ireland Delaware Czech Republic Delaware California Consent of Independent Registered Public Accounting Firm Exhibit 23.1 We consent to the incorporation by reference in the following Registration Statements: (1) Registration Statement (Form S-8 No. 333-176233) pertaining to the 2011 Long-Term Incentive Plan of The Middleby Corporation, (2) Registration Statement (Form S-8 No. 333-162957) pertaining to the Turbochef Technologies 1994 Stock Option Plan, (3) Registration Statement (Form S-8 No. 333-142588) pertaining to the 2007 Stock Incentive Plan of The Middleby Corporation and (4) Registration Statement (Form S-8 No. 333-128304) pertaining to the 1998 Stock Incentive Plan, 1989 Stock Incentive Plan, 2003 Directors’ Option Plan, 2000 Directors Option Plan, and 1996 Directors’ Option Plan of The Middleby Corporation; of our reports dated February 28, 2018, with respect to the consolidated financial statements and schedule of the The Middleby Corporation and the effectiveness of internal control over financial reporting of the The Middleby Corporation, included in this Annual Report on Form 10-K of The Middleby Corporation for the year ended December 30, 2017. /s/ Ernst & Young LLP Chicago, Illinois February 28, 2018 EXHIBIT 31.1 I, Selim A. Bassoul, certify that: CERTIFICATIONS 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of The Middleby Corporation; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) (b) (c) (d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): (a) (b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. Date: February 28, 2018 /s/ Selim A. Bassoul Selim A. Bassoul Chairman, President and Chief Executive Officer of The Middleby Corporation EXHIBIT 31.2 I, Timothy J. FitzGerald, certify that: CERTIFICATIONS 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of The Middleby Corporation; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) (b) (c) (d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): (a) (b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. Date: February 28, 2018 /s/ Timothy J. FitzGerald Timothy J. FitzGerald Chief Financial Officer of The Middleby Corporation CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER OF THE MIDDLEBY CORPORATION PURSUANT TO RULE 13A-14(b) UNDER THE EXCHANGE ACT AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) EXHIBIT 32.1 This certification is being furnished pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. I, Selim A. Bassoul, Chairman, President and Chief Executive Officer (principal executive officer) of The Middleby Corporation (the “Registrant”), certify, to the best of my knowledge, based upon a review of the Annual Report on Form 10-K for the period ended December 30, 2017 of the Registrant (the “Report”), that: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Registrant. Date: February 28, 2018 /s/ Selim A. Bassoul Selim A. Bassoul CERTIFICATION BY THE PRINCIPAL FINANCIAL OFFICER OF THE MIDDLEBY CORPORATION PURSUANT TO RULE 13A-14(b) UNDER THE EXCHANGE ACT AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) EXHIBIT 32.2 This certification is being furnished pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. I, Timothy J. FitzGerald, Vice President and Chief Financial Officer (principal financial officer) of The Middleby Corporation (the “Registrant”), certify, to the best of my knowledge, based upon a review of the Annual Report on Form 10-K for the period ended December 30, 2017 of the Registrant (the “Report”), that: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Registrant. Date: February 28, 2018 /s/ Timothy J. FitzGerald Timothy J. FitzGerald CORPORATE INFORMATION BOARD OF DIRECTORS EXECUTIVE OFFICERS Selim A. Bassoul Chairman of the Board and Chief Executive Officer Sarah Palisi Chapin 4, 6, 7 Chief Executive Officer Chapin Creative Robert Lamb, Ph.D.2 Professor NYU Graduate School of Business Cathy L. McCarthy 2, 3, 6 Chief Executive Officer CrossTack, Inc. John R. Miller III 4, 5, 6 Former President E.O.P., Inc. Gordon O’Brien 1, 2, 4 Managing Partner Cannon Capital Nassem Ziyad 2 Chief Operating Officer Ziyad Brothers Importing STOCK PRICE PERFORMANCE Selim A. Bassoul Chairman of the Board and Chief Executive Officer Timothy J. FitzGerald Vice President and Chief Financial Officer TRANSFER AGENT AND REGISTRAR Computershare Trust Company, N.A. 250 Royall Street Canton, MA 02021 CORPORATE HEADQUARTERS The Middleby Corporation 1400 Toastmaster Drive Elgin, Illinois 60120 847 741 3300 FAX 847 741 0015 INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS Ernst & Young LLP Chicago, Illinois 500 450 400 350 300 250 200 150 100 50 0 STOCK MARKET INFORMATION The Middleby Corporation is traded on The NASDAQ Stock Market LLC under the symbol “MIDD.” INVESTOR RELATIONS For additional information please contact: The Middleby Corporation 1400 Toastmaster Drive Elgin, IL 60120 investors@middleby.com 847 741 3300 or visit www.middleby.com 1 Lead Independent Director 2 Audit Committee Member 3 Chair of Audit Committee 4 Compensation Committee Member 5 Chair of Compensation Committee 6 Nominating Committee Member 7 Chair of Nominating Committee Middleby NASDAQ Composite Index NASDAQ 100 index 2012 2013 2014 2015 2016 2017 COMMERCIAL FOODSERVICE EQUIPMENT FOOD PROCESSING EQUIPMENT RESIDENTIAL KITCHEN EQUIPMENT 1400 Toastmaster Drive | Elgin, Illinois 60120 www.middleby.com www.middlebyresidential.com www.middprocessing.com 

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