10-Q 1 middleby10-qq32017.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2017
or

o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 1-9973
THE MIDDLEBY CORPORATION
(Exact name of registrant as specified in its charter)

Delaware | 36-3352497
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number)

1400 Toastmaster Drive, Elgin, Illinois | 60120
(Address of principal executive offices) | (Zip Code)

Registrant's telephone number, including area code: | (847) 741-3300

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.
Yes x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, 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).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer, large accelerated filer, smaller reporting and emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x | Accelerated filer o | Non-accelerated filer o
Smaller reporting company o | Emerging growth company o |

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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 3, 2017, there were 55,912,876 shares of the registrant's common stock outstanding.

THE MIDDLEBY CORPORATION AND SUBSIDIARIES
QUARTER ENDED SEPTEMBER 30, 2017
INDEX

DESCRIPTION | PAGE
PART I. FINANCIAL INFORMATION |
Item 1. | Condensed Consolidated Financial Statements (unaudited) |
| CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2017 and DECEMBER 31, 2016 | 1
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME SEPTEMBER 30, 2017 and OCTOBER 1, 2016 | 2
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SEPTEMBER 30, 2017 and OCTOBER 1, 2016 | 3
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | 4
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 27
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 33
Item 4. | Controls and Procedures | 35
PART II. OTHER INFORMATION |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36
Item 6. | Exhibits | 37

PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)

ASSETS | Sep 30, 2017 |  |  | Dec 31, 2016 |
Current assets: |  |  |  |  |
Cash and cash equivalents | $ | 81,726 |  |  | $ | 68,485 |
Accounts receivable, net of reserve for doubtful accounts of $13,594 and $12,600 | 336,805 |  |  | 325,868 |
Inventories, net | 425,932 |  |  | 368,243 |
Prepaid expenses and other | 46,550 |  |  | 42,704 |
Prepaid taxes | 10,512 |  |  | 6,399 |
Total current assets | 901,525 |  |  | 811,699 |
Property, plant and equipment, net of accumulated depreciation of $135,922 and $119,435 | 275,365 |  |  | 221,571 |
Goodwill | 1,158,654 |  |  | 1,092,722 |
Other intangibles, net of amortization of $195,835 and $168,369 | 786,352 |  |  | 696,171 |
Long-term deferred tax assets | 45,225 |  |  | 51,699 |
Other assets | 34,022 |  |  | 43,274 |
Total assets | $ | 3,201,143 |  |  | $ | 2,917,136 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |
Current liabilities: |  |  |  |  |
Current maturities of long-term debt | $ | 5,192 |  |  | $ | 5,883 |
Accounts payable | 144,474 |  |  | 146,921 |
Accrued expenses | 316,983 |  |  | 335,605 |
Total current liabilities | 466,649 |  |  | 488,409 |
Long-term debt | 945,516 |  |  | 726,243 |
Long-term deferred tax liability | 108,190 |  |  | 77,760 |
Accrued pension benefits | 325,127 |  |  | 322,988 |
Other non-current liabilities | 44,159 |  |  | 36,418 |
Stockholders' equity: |  |  |  |  |
Preferred stock, $0.01 par value; nonvoting; 2,000,000 shares authorized; none issued | — |  |  | — |
Common stock, $0.01 par value; 95,000,000 shares authorized; 62,675,917 and 62,445,315 shares issued in 2017 and 2016, respectively | 145 |  |  | 144 |
Paid-in capital | 374,093 |  |  | 355,287 |
Treasury stock, at cost; 6,763,041 and 4,905,549 shares in 2017 and 2016, respectively | (430,275 | ) |  | (205,280 | )
Retained earnings | 1,622,432 |  |  | 1,399,490 |
Accumulated other comprehensive loss | (254,893 | ) |  | (284,323 | )
Total stockholders' equity | 1,311,502 |  |  | 1,265,318 |
Total liabilities and stockholders' equity | $ | 3,201,143 |  |  | $ | 2,917,136 |

See accompanying notes
1

THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
(Unaudited)

| Three Months Ended |  | Nine Months Ended
| Sep 30, 2017 |  |  | Oct 1, 2016 |  |  | Sep 30, 2017 |  |  | Oct 1, 2016 |
Net sales | $ | 593,043 |  |  | $ | 574,224 |  |  | $ | 1,702,683 |  |  | $ | 1,671,035 |
Cost of sales | 364,524 |  |  | 342,496 |  |  | 1,030,106 |  |  | 1,009,032 |
Gross profit | 228,519 |  |  | 231,728 |  |  | 672,577 |  |  | 662,003 |
Selling, general and administrative expenses | 106,044 |  |  | 109,140 |  |  | 325,710 |  |  | 334,131 |
Restructuring expenses | 4,218 |  |  | 1,149 |  |  | 17,437 |  |  | 8,145 |
Gain on sale of plant | — |  |  | — |  |  | (12,042 | ) |  | — |
Income from operations | 118,257 |  |  | 121,439 |  |  | 341,472 |  |  | 319,727 |
Interest expense and deferred financing amortization, net | 6,550 |  |  | 6,440 |  |  | 18,057 |  |  | 17,775 |
Other (income) expense, net | (1,068 | ) |  | 3,152 |  |  | 1,101 |  |  | (1,486 | )
Earnings before income taxes | 112,775 |  |  | 111,847 |  |  | 322,314 |  |  | 303,438 |
Provision for income taxes | 38,104 |  |  | 35,996 |  |  | 99,372 |  |  | 100,158 |
Net earnings | $ | 74,671 |  |  | $ | 75,851 |  |  | $ | 222,942 |  |  | $ | 203,280 |
Net earnings per share: |  |  |  |  |  |  |  |  |
Basic | $ | 1.31 |  |  | $ | 1.33 |  |  | $ | 3.91 |  |  | $ | 3.56 |
Diluted | $ | 1.31 |  |  | $ | 1.33 |  |  | $ | 3.91 |  |  | $ | 3.56 |
Weighted average number of shares |  |  |  |  |  |  |  |  |
Basic | 56,810 |  |  | 57,022 |  |  | 57,070 |  |  | 57,032 |
Dilutive common stock equivalents 1 | — |  |  | — |  |  | — |  |  | — |
Diluted | 56,810 |  |  | 57,022 |  |  | 57,070 |  |  | 57,032 |
Comprehensive income | $ | 84,320 |  |  | $ | 55,345 |  |  | $ | 252,372 |  |  | $ | 167,532 |

1 There were no anti-dilutive equity awards excluded from common stock equivalents for any period presented.
See accompanying notes
2

THE MIDDLEBY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

| Nine Months Ended
| Sep 30, 2017 |  |  | Oct 1, 2016 |
Cash flows from operating activities-- |  |  |  |  |
Net earnings | $ | 222,942 |  |  | $ | 203,280 |
Adjustments to reconcile net earnings to net cash provided by operating activities-- |  |  |  |  |
Depreciation and amortization | 49,276 |  |  | 44,409 |
Non-cash share-based compensation | 6,478 |  |  | 17,346 |
Deferred income taxes | 21,369 |  |  | 19,325 |
Gain on sale of plant | (12,042 | ) |  | — |
Impairment of equipment | 2,894 |  |  | — |
Changes in assets and liabilities, net of acquisitions |  |  |  |  |
Accounts receivable, net | 13,834 |  |  | (35,984 | )
Inventories, net | (19,967 | ) |  | (35,229 | )
Prepaid expenses and other assets | (3,359 | ) |  | (8,354 | )
Accounts payable | (17,639 | ) |  | (12,933 | )
Accrued expenses and other liabilities | (58,894 | ) |  | (16,763 | )
Net cash provided by operating activities | 204,892 |  |  | 175,097 |
Cash flows from investing activities-- |  |  |  |  |
Additions to property, plant and equipment | (42,434 | ) |  | (18,799 | )
Proceeds on sale of plant | 14,278 |  |  | — |
Acquisitions, net of cash acquired | (159,458 | ) |  | (210,921 | )
Net cash used in investing activities | (187,614 | ) |  | (229,720 | )
Cash flows from financing activities-- |  |  |  |  |
Net proceeds under Credit Facility | 217,299 |  |  | 100,362 |
Net (repayments) under international credit facilities | (1,062 | ) |  | (25,954 | )
Net (repayments) under other debt arrangement | (26 | ) |  | (26 | )
Repurchase of treasury stock | (224,996 | ) |  | (4,418 | )
Debt issuance costs | — |  |  | (6,254 | )
Excess tax (detriment) related to share-based compensation | — |  |  | (830 | )
Net cash (used in) provided by financing activities | (8,785 | ) |  | 62,880 |
Effect of exchange rates on cash and cash equivalents | 4,748 |  |  | (2,005 | )
Changes in cash and cash equivalents-- |  |  |  |  |
Net increase in cash and cash equivalents | 13,241 |  |  | 6,252 |
Cash and cash equivalents at beginning of year | 68,485 |  |  | 55,528 |
Cash and cash equivalents at end of period | $ | 81,726 |  |  | $ | 61,780 |
Non-cash investing and financing activities: |  |  |
Stock issuance related to the acquisition of CVP Systems | $ | 12,330 |  |  | $ | — |

See accompanying notes
3

THE MIDDLEBY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Unaudited)

1) | Summary of Significant Accounting Policies

A) | Basis of Presentation

The condensed consolidated financial statements have been prepared by The Middleby Corporation (the "company" or “Middleby”), pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements are unaudited and certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information not misleading. These financial statements should be read in conjunction with the financial statements and related notes contained in the company's 2016 Form 10-K. The company’s interim results are not necessarily indicative of future full year results for the fiscal year 2017.
In the opinion of management, the financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position of the company as of September 30, 2017 and December 31, 2016, the results of operations for the three and nine months ended September 30, 2017 and October 1, 2016 and cash flows for the nine months ended September 30, 2017 and October 1, 2016.
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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts, reserves for excess and obsolete inventories, long-lived and intangible assets, warranty reserves, insurance reserves, income tax reserves, non-cash share-based compensation and post-retirement obligations. Actual results could differ from the company's estimates.

B) | Non-Cash Share-Based Compensation

The company estimates the fair value of market-based stock awards and stock options at the time of grant and recognizes compensation cost over the vesting period of the awards and options. Non-cash share-based compensation expense was less than $0.1 million and $6.2 million for the third quarter periods ended September 30, 2017 and October 1, 2016, respectively. Non-cash share-based compensation expense was $6.5 million and $17.3 million for the nine months ended September 30, 2017 and October 1, 2016, respectively.
During the first quarter ended April 1, 2017, the company issued restricted shares under its 2011 Stock Incentive Plan. These amounts are contingent on the attainment of certain performance objectives. The aggregate grant-date fair value of these awards was $9.6 million, based on the closing share price of the company's stock at the date of the grant.

C) | Income Taxes

As of December 31, 2016, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $20.3 million (of which $20.0 million would impact the effective tax rate if recognized) plus approximately $2.7 million of accrued interest and $4.9 million of penalties. The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. As of September 30, 2017, the company recognized a tax expense of $3.9 million for unrecognized tax benefits related to current year tax exposures.
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 approximately $1.9 million of its remaining unrecognized tax benefits may be recognized over the next twelve months as a result of lapses of statutes of limitations.
4

The effective rate for the three months period ended September 30, 2017 was 33.8% as compared to 32.2% for the prior year quarter. In comparison to the prior year, the tax provision reflects a higher effective tax rate attributable to increased tax reserve and a reduction of tax credits. The effective rate for the nine months period ended September 30, 2017 was 30.8% as compared to 33.0% for the nine months period ended October 1, 2016. The tax rate in the nine months period ended September 30, 2017 was favorably impacted by a tax benefit from the adoption of ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting," which resulted in the recognition of excess tax benefits from share-based payments to be recognized as income tax benefit in the condensed consolidated statement of comprehensive income.
A summary of the tax years that remain subject to examination in the company’s major tax jurisdictions are:

United States - federal | 2013 – 2016
United States - states | 2007 – 2016
Australia | 2012 – 2016
Brazil | 2012 – 2016
Canada | 2007 – 2016
China | 2007 – 2016
Czech Republic | 2014 – 2016
Denmark | 2012 – 2016
Estonia | 2013 – 2016
France | 2014 – 2016
Germany | 2014 – 2016
India | 2013 – 2016
Ireland | 2011 – 2016
Italy | 2012 – 2016
Luxembourg | 2012 – 2016
Mexico | 2012 – 2016
Netherlands | 2005 – 2016
Philippines | 2014 – 2016
Poland | 2011 – 2016
Romania | 2007 – 2016
Spain | 2013 – 2016
Sweden | 2010 – 2016
Switzerland | 2008 – 2016
Taiwan | 2012 – 2012
United Kingdom | 2015 – 2016

5

D) | 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 liabilities that are measured at fair value and are categorized using the fair value hierarchy are as follows (in thousands):

| Fair Value Level 1 |  | Fair Value Level 2 |  | Fair Value Level 3 |  | Total
As of September 30, 2017 |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |
Interest rate swaps | $ | — |  |  | $ | 7,705 |  |  | $ | — |  |  | $ | 7,705 |
Financial Liabilities: |  |  |  |  |  |  |
Contingent consideration |  |  |  |  |  |  | $ | 2,864 |  |  | $ | 2,864 |
As of December 31, 2016 |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |
Interest rate swaps | $ | — |  |  | $ | 8,842 |  |  | $ | — |  |  | $ | 8,842 |
Financial Liabilities: |  |  |  |  |  |  |
Interest rate swaps | $ | — |  |  | $ | 100 |  |  | $ | — |  |  | $ | 100 |
Contingent consideration | $ | — |  |  | $ | — |  |  | $ | 6,612 |  |  | $ | 6,612 |

The contingent consideration as of September 30, 2017 relates to the earnout provisions recorded in conjunction with the acquisitions of Desmon and Induc.
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 acquired businesses in comparison to the earnout targets and adjusts the liability accordingly. During the nine months ended September 30, 2017, the change in contingent consideration is primarily related to payments on earnout provisions.
E) Consolidated Statements of Cash Flows
Cash paid for interest was $17.4 million and $15.7 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. Cash payments totaling $96.7 million and $80.3 million were made for income taxes for the nine months ended September 30, 2017 and October 1, 2016, respectively.
6

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.
Emico
On May 20, 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. Additional deferred payments of approximately $1.7 million in aggregate are also due to the seller during the two year period subsequent to the acquisition. During the second quarter of 2017, deferred payments of $1.0 million in aggregate were paid to the seller.
The final allocation of cash paid for the Emico acquisition is summarized as follows (in thousands):

| (as initially reported) May 20, 2016 |  | Measurement Period Adjustments |  | (as adjusted) May 20, 2016
Current assets | $ | 746 |  |  | (65 | ) |  | 681 |
Goodwill | 1,816 |  |  | 183 |  |  | 1,999 |
Current liabilities | (934 | ) |  | (62 | ) |  | (996 | )
Other non-current liabilities | (628 | ) |  | (56 | ) |  | (684 | )
Consideration paid at closing | $ | 1,000 |  |  | $ | — |  |  | $ | 1,000 |
Deferred payments | 1,559 |  |  | 118 |  |  | 1,677 |
Net assets acquired and liabilities assumed | $ | 2,559 |  |  | $ | 118 |  |  | $ | 2,677 |

The goodwill is subject to the non-amortization provisions of ASC 350 "Intangibles - Goodwill and Other", is allocated to the Food Processing Equipment Group for segment reporting purposes and is expected to be deductible for tax purposes.
7

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 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):

| (as initially reported) May 31, 2016 |  | Measurement Period Adjustments |  | (as adjusted) May 31, 2016
Cash | $ | 22,620 |  |  | $ | 2,888 |  |  | $ | 25,508 |
Current assets | 41,602 |  |  | (2,249 | ) |  | 39,353 |
Property, plant and equipment | 19,868 |  |  | 8,598 |  |  | 28,466 |
Goodwill | 76,220 |  |  | (35,656 | ) |  | 40,564 |
Other intangibles | 82,450 |  |  | 41,810 |  |  | 124,260 |
Other assets | 1,358 |  |  | 170 |  |  | 1,528 |
Current liabilities | (11,779 | ) |  | (10,801 | ) |  | (22,580 | )
Other non-current liabilities | (616 | ) |  | (4,064 | ) |  | (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. Other intangibles also include $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.
8

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 $15.2 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 fourth quarter of 2017.
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):

| (as initially reported) May 1, 2017 |  | Preliminary Measurement Period Adjustments |  | (as adjusted) May 1, 2017
Cash | $ | 2,514 |  |  | $ | — |  |  | $ | 2,514 |
Current assets | 6,424 |  |  | 36 |  |  | 6,460 |
Property, plant and equipment | 656 |  |  | (13 | ) |  | 643 |
Goodwill | 7,289 |  |  | (1,050 | ) |  | 6,239 |
Other intangibles | 4,900 |  |  | 1,840 |  |  | 6,740 |
Current liabilities | (2,254 | ) |  | (33 | ) |  | (2,287 | )
Long term deferred tax liability | (1,840 | ) |  | (780 | ) |  | (2,620 | )
Net assets acquired and liabilities assumed | $ | 17,689 |  |  | $ | — |  |  | $ | 17,689 |

The long term deferred tax liability amounted to $2.6 million. The net 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 $0.1 million of assets arising from the difference between the book and tax basis of 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.
9

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 $30.5 million, net of cash acquired. The purchase price included $18.2 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 by the purchase agreement. The company expects to finalize this in the fourth quarter of 2017.
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):

| (as initially reported) June 30, 2017 |  | Preliminary Measurement Period Adjustments |  | (as adjusted) June 30, 2017
Cash | $ | 621 |  |  | $ | — |  |  | $ | 621 |
Current assets | 5,973 |  |  | (1,435 | ) |  | 4,538 |
Property, plant and equipment | 238 |  |  | (91 | ) |  | 147 |
Goodwill | 20,297 |  |  | (853 | ) |  | 19,444 |
Other intangibles | 8,700 |  |  | 4,350 |  |  | 13,050 |
Current liabilities | (1,532 | ) |  | (187 | ) |  | (1,719 | )
Long term deferred tax liability | (3,168 | ) |  | (1,784 | ) |  | (4,952 | )
Net assets acquired and liabilities assumed | $ | 31,129 |  |  | $ | — |  |  | $ | 31,129 |

The long term deferred tax liability amounted to $5.0 million. The net liability is comprised of $5.1 million of deferred tax liability related to the difference between the book and tax basis of identifiable intangible assets, net of $0.1 million of assets arising from the difference between the book and tax basis of 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.
10

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):

| (as initially reported) June 30, 2017 |  | Preliminary Measurement Period Adjustments |  | (as adjusted) June 30, 2017
Cash | $ | 4,569 |  |  | $ | — |  |  | $ | 4,569 |
Current assets | 22,686 |  |  | (359 | ) |  | 22,327 |
Property, plant and equipment | 9,128 |  |  | (332 | ) |  | 8,796 |
Goodwill | 33,785 |  |  | 485 |  |  | 34,270 |
Other intangibles | 34,175 |  |  | — |  |  | 34,175 |
Other assets | 1,170 |  |  | (11 | ) |  | 1,159 |
Current portion of long-term debt | — |  |  | (14 | ) |  | (14 | )
Current liabilities | (11,782 | ) |  | 945 |  |  | (10,837 | )
Long-term debt | — |  |  | (140 | ) |  | (140 | )
Long term deferred tax liability | (7,751 | ) |  | (699 | ) |  | (8,450 | )
Other non-current liabilities | (42 | ) |  | 125 |  |  | 83 |
Net assets acquired and liabilities assumed | $ | 85,938 |  |  | $ | — |  |  | $ | 85,938 |

The long term deferred tax liability amounted to $8.5 million. The liability is comprised of $7.5 million of deferred tax liability related to the difference between the book and tax basis of identifiable assets and $1.0 million of liabilities arising from the difference between the book and tax basis of tangible asset and liability accounts.
The goodwill and $20.7 million of other intangibles associated with the trade name are subject to the non-amortization provisions of ASC 350. Other intangibles also include $12.0 million allocated to customer relationships, $1.2 million allocated to developed technology and $0.3 million allocated to backlog, which are to be amortized over periods of 7 years, 5 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.
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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):

| (as initially reported) August 31, 2017
Cash | $ | 1,130 |
Current assets | 18,031 |
Property, plant and equipment | 4,785 |
Goodwill | 14,590 |
Other intangibles | 9,600 |
Current liabilities | (6,810 | )
Net assets acquired and liabilities assumed | $ | 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.
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Pro Forma Financial Information
In accordance with ASC 805 “Business Combinations”, the following unaudited pro forma results of operations for the nine months ended September 30, 2017 and October 1, 2016, assumes the 2016 acquisition of Follett and the 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen and QualServ were completed on January 3, 2016 (first day of fiscal year 2016). The following pro forma results include adjustments to reflect additional interest expense to fund the acquisitions, amortization of intangibles associated with the acquisitions, and the effects of adjustments made to the carrying value of certain assets (in thousands, except per share data):

| Nine Months Ended
| September 30, 2017 |  | October 1, 2016
Net sales | $ | 1,803,636 |  |  | $ | 1,879,104 |
Net earnings | 225,987 |  |  | 211,785 |
Net earnings per share: |  |  |  |  |
Basic | 3.96 |  |  | 3.71 |
Diluted | 3.96 |  |  | 3.71 |

The supplemental pro forma financial information presented above has been prepared for comparative purposes and is not necessarily indicative of either the results of operations that would have occurred had the acquisitions of Follett, Burford, CVP Systems, Sveba Dahlen and QualServ been effective on January 3, 2016 nor are they indicative of any future results. Also, 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 and QualServ.

3) | 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 pending litigation will have a material effect on its financial condition, results of operations or cash flows.
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4) | Recently Issued Accounting Standards

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. The company established a global steering committee with a project plan to analyze the impact of this standard. The company has surveyed businesses within each reporting segment to validate the various revenue streams and identify potential differences in the timing of revenue recognition, which could result from applying the requirements of the new standard. The company also conducted workshops and initiated contract reviews to further corroborate information about the nature, magnitude, and frequency of the underlying transactions identified during the surveys as having a potential impact on revenue recognition. Based on the results, the company is reviewing and revising its accounting policies and formulating plans to address any variations from current practices (including additional disclosure requirements). The company will adopt this standard, as required, for fiscal year 2018 and expects to use the modified retrospective approach, with the cumulative effect, if any, recognized in the opening balance of retained earnings. The company is continuing to evaluate the impact the application of these ASU's will have, if any, on the company's financial position, results of operations or cash flows.
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 is 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 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 capital 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 company is currently evaluating the impact this standard will have on its policies and procedures pertaining to its existing and future lease arrangements, disclosure requirements and on the company's financial position, results of operations or cash flows.
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.
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In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting". 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 $7.9 million for the nine months period ended September 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.
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 prohibits 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 December 15, 2017. 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 does not expect the adoption of this ASU to have a material impact on its financial position, results of operations or cash flows.
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 to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after December 15, 2017. Early adoption is permitted. Net income will not change as a result of the adoption of this standard. The company is currently evaluating the remaining impacts the ASU will have on its condensed consolidated financial statements.
In 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.
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5) | Other Comprehensive Income

The company reports changes in equity during a period, except those resulting from investments by owners and distributions to owners, in accordance with ASC 220, "Comprehensive Income".
Changes in accumulated other comprehensive income(1) were as follows (in thousands):

| Currency Translation Adjustment |  | Pension Benefit Costs |  | Unrealized Gain/(Loss) Interest Rate Swap |  | Total
Balance as of December 31, 2016 | $ | (116,411 | ) |  | $ | (173,394 | ) |  | $ | 5,482 |  |  | $ | (284,323 | )
Other comprehensive income before reclassification | 44,897 |  |  | (14,838 | ) |  | 258 |  |  | 30,317 |
Amounts reclassified from accumulated other comprehensive income | — |  |  | — |  |  | (887 | ) |  | (887 | )
Net current-period other comprehensive income | $ | 44,897 |  |  | $ | (14,838 | ) |  | $ | (629 | ) |  | $ | 29,430 |
Balance as of September 30, 2017 | $ | (71,514 | ) |  | $ | (188,232 | ) |  | $ | 4,853 |  |  | $ | (254,893 | )

(1) As of September 30, 2017 pension and interest rate swap amounts are net of tax of $(41.1) million and $3.2 million, respectively.
Components of other comprehensive income were as follows (in thousands):

| Three Months Ended |  | Nine Months Ended
| Sep 30, 2017 |  | Oct 1, 2016 |  | Sep 30, 2017 |  | Oct 1, 2016
Net earnings | $ | 74,671 |  |  | $ | 75,851 |  |  | $ | 222,942 |  |  | $ | 203,280 |
Currency translation adjustment | 15,441 |  |  | (20,194 | ) |  | 44,897 |  |  | (40,169 | )
Pension liability adjustment, net of tax | (5,664 | ) |  | (505 | ) |  | (14,838 | ) |  | 4,351 |
Unrealized gain on interest rate swaps, net of tax | (128 | ) |  | 193 |  |  | (629 | ) |  | 70 |
Comprehensive income | $ | 84,320 |  |  | $ | 55,345 |  |  | $ | 252,372 |  |  | $ | 167,532 |

6) | 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 September 30, 2017 and December 31, 2016 are as follows:

| Sep 30, 2017 |  | Dec 31, 2016
| (in thousands)
Raw materials and parts | $ | 180,323 |  |  | $ | 154,647 |
Work-in-process | 41,743 |  |  | 35,975 |
Finished goods | 203,866 |  |  | 177,621 |
| $ | 425,932 |  |  | $ | 368,243 |

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7) | Goodwill

Changes in the carrying amount of goodwill for the nine months ended September 30, 2017 are as follows (in thousands):

| Commercial Foodservice |  | Food Processing |  | Residential Kitchen |  | Total
Balance as of December 31, 2016 | $ | 542,090 |  |  | $ | 134,680 |  |  | $ | 415,952 |  |  | $ | 1,092,722 |
Goodwill acquired during the year | 48,860 |  |  | 25,683 |  |  | — |  |  | 74,543 |
Measurement period adjustments to goodwill acquired in prior year | (36,408 | ) |  | 41 |  |  | — |  |  | (36,367 | )
Exchange effect | 7,175 |  |  | 3,779 |  |  | 16,802 |  |  | 27,756 |
Balance as of September 30, 2017 | $ | 561,717 |  |  | $ | 164,183 |  |  | $ | 432,754 |  |  | $ | 1,158,654 |

8) | Intangibles

Intangible assets consist of the following (in thousands):

| September 30, 2017 |  | December 31, 2016
| Estimated Weighted Avg Remaining Life |  | Gross Carrying Amount |  | Accumulated Amortization |  |  | Estimated Weighted Avg Remaining Life |  | Gross Carrying Amount |  | Accumulated Amortization |
Amortized intangible assets: |  |  |  |  |  |  |  |  |  |  |
Customer lists | 5.1 |  | $ | 307,502 |  |  | $ | (161,823 | ) |  | 5.5 |  | $ | 251,025 |  |  | $ | (136,895 | )
Backlog | 0.2 |  | 16,030 |  |  | (15,963 | ) |  | 0.0 |  | 13,550 |  |  | (13,550 | )
Developed technology | 4.2 |  | 22,805 |  |  | (18,049 | ) |  | 4.8 |  | 24,874 |  |  | (17,924 | )
|  |  | $ | 346,337 |  |  | $ | (195,835 | ) |  |  |  | $ | 289,449 |  |  | $ | (168,369 | )
Indefinite-lived assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Trademarks and tradenames |  |  | $ | 635,850 |  |  |  |  |  |  |  | $ | 575,091 |  |  |  |

The aggregate intangible amortization expense was $9.1 million and $5.1 million for the third quarter periods ended September 30, 2017 and October 1, 2016, respectively. The aggregate intangible amortization expense was $26.5 million and $23.1 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. The estimated future amortization expense of intangible assets is as follows (in thousands):

Twelve Month Period Ending |  | Amortization Expense
September 30, 2018 |  | $ | 33,402 |
September 30, 2019 |  | 27,243 |
September 30, 2020 |  | 25,054 |
September 30, 2021 |  | 21,566 |
September 30, 2022 |  | 18,919 |
September 30, 2023 and thereafter |  | 24,318 |
|  | $ | 150,502 |

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9) Accrued Expenses
Accrued expenses consist of the following:

| Sep 30, 2017 |  | Dec 31, 2016
| (in thousands)
Accrued payroll and related expenses | $ | 67,859 |  |  | $ | 74,505 |
Accrued warranty | 50,098 |  |  | 40,851 |
Advanced customer deposits | 40,039 |  |  | 41,735 |
Accrued customer rebates | 39,110 |  |  | 49,923 |
Accrued professional fees | 19,116 |  |  | 16,605 |
Accrued sales and other tax | 16,834 |  |  | 13,565 |
Accrued agent commission | 12,528 |  |  | 12,834 |
Accrued product liability and workers compensation | 12,138 |  |  | 11,417 |
Product recall | 6,046 |  |  | 7,003 |
Restructuring | 3,352 |  |  | 2,295 |
Other accrued expenses | 49,863 |  |  | 64,872 |
| $ | 316,983 |  |  | $ | 335,605 |

10) | 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, actual claims costs may differ from amounts provided. Adjustments to initial obligations for warranties are made as changes in the obligations become reasonably estimable.
A rollforward of the warranty reserve is as follows:

| Nine Months Ended
| Sep 30, 2017
| (in thousands)
Balance as of December 31, 2016 | $ | 40,851 |
Warranty reserve related to acquisitions | 6,474 |
Warranty expense | 41,699 |
Warranty claims | (38,926 | )
Balance as of September 30, 2017 | $ | 50,098 |

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11) | Financing Arrangements

| Sep 30, 2017 |  | Dec 31, 2016
| (in thousands)
Credit Facility | $ | 944,663 |  |  | $ | 725,500 |
Other international credit facilities | 5,858 |  |  | 6,413 |
Other debt arrangement | 187 |  |  | 213 |
Total debt | $ | 950,708 |  |  | $ | 732,126 |
Less: Current maturities of long-term debt | 5,192 |  |  | 5,883 |
Long-term debt | $ | 945,516 |  |  | $ | 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 September 30, 2017, the company had $944.7 million of borrowings outstanding under the Credit Facility, including $921.5 million of borrowings in U.S. Dollars and $23.2 million of borrowings denominated in British Pounds. The company also had $9.5 million in outstanding letters of credit as of September 30, 2017, which reduces the borrowing availability under the Credit Facility. Remaining borrowing availability under this facility was $1.5 billion at September 30, 2017.
At September 30, 2017, borrowings under the Credit Facility accrued interest at a rate of 1.13% above LIBOR per annum or 0.13% 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 2.33% 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 0.150% per annum as of September 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 September 30, 2017, these foreign credit facilities amounted to $5.9 million in U.S. Dollars with a weighted average per annum interest rate of approximately 6.79%.
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):

| Sep 30, 2017 |  | Dec 31, 2016
| Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Total debt | $ | 950,708 |  |  | $ | 950,708 |  |  | $ | 732,126 |  |  | $ | 732,126 |

The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the Credit Facility. At September 30, 2017, the company had outstanding floating-to-fixed interest rate swaps totaling $324.0 million notional amount carrying an average interest rate of 1.30% that mature in more than 12 months but less than 84 months.
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The company believes that its current capital resources, including cash and cash equivalents, cash expected to be generated from operations, funds available from its current lenders and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and expenditures for the foreseeable future.
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 EBIDTA (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 September 30, 2017, the company was in compliance with all covenants pursuant to its borrowing agreements.

12) | 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 a derivative does qualify as a hedge under ASC 815, changes in the fair value will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments or recognized in other accumulated comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a hedge's change in fair value will be immediately recognized in earnings.
Foreign Exchange: The company uses foreign currency forward, foreign exchange swaps and option purchase and sales contracts 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 fair value of the forward and option contracts was a loss of $4.1 million at the end of the third quarter of 2017.
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 September 30, 2017, the fair value of these instruments was an asset of $7.7 million. The change in fair value of these swap agreements in the first nine months of 2017 was a loss of $0.1 million, net of taxes.
The following table summarizes the company’s fair value of interest rate swaps (in thousands):

| Condensed Consolidated Balance Sheet Presentation |  | Sep 30, 2017 |  |  | Dec 31, 2016 |
Fair value | Other assets |  | $ | 7,705 |  |  | $ | 8,842 |
Fair value | Accrued expenses |  | $ | — |  |  | $ | (100 | )

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The impact on earnings from interest rate swaps was as follows (in thousands):

|  |  | Three Months Ended |  | Nine Months Ended
| Presentation of Gain/(loss) |  | Sep 30, 2017 |  | Oct 1, 2016 |  |  | Sep 30, 2017 |  | Oct 1, 2016 |
Gain/(loss) recognized in accumulated other comprehensive income | Other comprehensive income |  | $ | (294 | ) |  | $ | 141 |  |  | $ | (1,937 | ) |  | $ | (589 | )
Gain/(loss) reclassified from accumulated other comprehensive income (effective portion) | Interest expense |  | $ | (81 | ) |  | $ | (181 | ) |  | $ | (887 | ) |  | $ | (706 | )
Gain/(loss) recognized in income (ineffective portion) | Other expense |  | $ | 28 |  |  | $ | (7 | ) |  | $ | 13 |  |  | $ | — |

Interest rate swaps are subject to default risk to the extent the counterparties are unable to satisfy their 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 agreements.
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13) | 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 cooking equipment for the restaurant and institutional kitchen industry. This business segment has manufacturing facilities in Arkansas, California, Illinois, Michigan, New Hampshire, North Carolina, 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, ranges, steamers, convection ovens, combi-ovens, broilers and steam cooking equipment, induction cooking systems, baking and proofing ovens, charbroilers, catering equipment, fryers, toasters, hot food servers, food warming equipment, griddles, coffee and beverage dispensing equipment, professional refrigerators, coldrooms, ice machines, freezers and kitchen processing and ventilation 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, Goldstein, Holman, Houno, IMC, Induc, Jade, 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, France, Germany and the United Kingdom. Principal product lines of this group include batch ovens, belt ovens, continuous processing ovens, frying systems, automated thermal processing systems, automated loading and unloading systems, meat presses, breading, battering, mixing, seeding, water cutting systems, forming, grinding and slicing equipment, food suspension, reduction and emulsion systems, defrosting equipment, packaging and food safety 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, Glimek, Maurer-Atmos, MP Equipment, RapidPak, Spooner Vicars, Stewart Systems and Thurne.
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 include ranges, cookers, ovens, refrigerators, dishwashers, microwaves, cooktops and outdoor equipment. These products are sold and marketed under the brand names of 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.
Net Sales Summary
(dollars in thousands)

| Three Months Ended |  | Nine Months Ended
| Sep 30, 2017 |  | Oct 1, 2016 |  | Sep 30, 2017 |  | Oct 1, 2016
| Sales |  | Percent |  | Sales |  | Percent |  | Sales |  | Percent |  | Sales |  | Percent
Business Segments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial Foodservice | $ | 354,828 |  |  | 59.8 | % |  | $ | 331,571 |  |  | 57.7 | % |  | $ | 1,000,830 |  |  | 58.8 | % |  | $ | 931,585 |  |  | 55.8 | %
Food Processing | 86,871 |  |  | 14.7 |  |  | 82,196 |  |  | 14.3 |  |  | 256,515 |  |  | 15.1 |  |  | 244,307 |  |  | 14.6 |
Residential Kitchen | 151,344 |  |  | 25.5 |  |  | 160,457 |  |  | 28.0 |  |  | 445,338 |  |  | 26.1 |  |  | 495,143 |  |  | 29.6 |
Total | $ | 593,043 |  |  | 100.0 | % |  | $ | 574,224 |  |  | 100.0 | % |  | $ | 1,702,683 |  |  | 100.0 | % |  | $ | 1,671,035 |  |  | 100.0 | %

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The following table summarizes the results of operations for the company's business segments(1) (in thousands):

| Commercial Foodservice |  |  | Food Processing |  |  | Residential Kitchen |  |  | Corporate and Other(2) |  |  | Total |
Three Months Ended September 30, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |
Net sales | $ | 354,828 |  |  | $ | 86,871 |  |  | $ | 151,344 |  |  | $ | — |  |  | $ | 593,043 |
Income (loss) from operations (3) | 89,028 |  |  | 19,975 |  |  | 25,087 |  |  | (15,833 | ) |  | 118,257 |
Depreciation and amortization expense | 6,977 |  |  | 2,101 |  |  | 7,422 |  |  | 461 |  |  | 16,961 |
Net capital expenditures | 7,978 |  |  | 484 |  |  | 2,813 |  |  | 869 |  |  | 12,144 |
Nine Months Ended September 30, 2017 |  |  |  |  |  |  |  |  |
Net sales | $ | 1,000,830 |  |  | $ | 256,515 |  |  | $ | 445,338 |  |  | $ | — |  |  | $ | 1,702,683 |
Income (loss) from operations (3,4) | 264,576 |  |  | 62,163 |  |  | 66,005 |  |  | (51,272 | ) |  | 341,472 |
Depreciation and amortization expense | 20,455 |  |  | 5,145 |  |  | 22,256 |  |  | 1,420 |  |  | 49,276 |
Net capital expenditures | 34,727 |  |  | 2,430 |  |  | 5,756 |  |  | (479 | ) |  | 42,434 |
Total assets | $ | 1,559,757 |  |  | $ | 393,272 |  |  | $ | 1,211,388 |  |  | $ | 36,726 |  |  | $ | 3,201,143 |
Three Months Ended October 1, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |
Net sales | $ | 331,571 |  |  | $ | 82,196 |  |  | $ | 160,457 |  |  | $ | — |  |  | $ | 574,224 |
Income (loss) from operations (3) | 90,159 |  |  | 19,360 |  |  | 30,560 |  |  | (18,640 | ) |  | 121,439 |
Depreciation and amortization expense | 5,272 |  |  | 1,419 |  |  | 5,249 |  |  | 1,229 |  |  | 13,169 |
Net capital expenditures | 3,469 |  |  | 618 |  |  | 1,604 |  |  | — |  |  | 5,691 |
Nine Months Ended October 1, 2016 |  |  |  |  |  |  |  |  |
Net sales | $ | 931,585 |  |  | $ | 244,307 |  |  | $ | 495,143 |  |  | $ | — |  |  | $ | 1,671,035 |
Income (loss) from operations (3) | 260,460 |  |  | 56,409 |  |  | 62,775 |  |  | (59,917 | ) |  | 319,727 |
Depreciation and amortization expense | 15,218 |  |  | 4,377 |  |  | 22,191 |  |  | 2,623 |  |  | 44,409 |
Net capital expenditures | 10,975 |  |  | 3,300 |  |  | 4,393 |  |  | 131 |  |  | 18,799 |
Total assets | $ | 1,361,244 |  |  | $ | 333,056 |  |  | $ | 1,163,992 |  |  | $ | 57,176 |  |  | $ | 2,915,468 |

(1)Non-operating expenses are not allocated to the operating segments. Non-operating expenses consist of interest expense and deferred financing amortization, foreign exchange gains and losses and other income and expense items outside of income from operations.
(2)Includes corporate and other general company assets and operations.
(3)Restructuring expenses are allocated in operating income by segment. See note 15 for further details.
(4)Gain on sale of plant allocated to Commercial Foodservice.
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Geographic Information
Long-lived assets, not including goodwill and other intangibles (in thousands):

| Sep 30, 2017 |  | Oct 1, 2016
United States and Canada | $ | 212,033 |  |  | $ | 181,397 |
Asia | 15,705 |  |  | 15,188 |
Europe and Middle East | 125,892 |  |  | 76,498 |
Latin America | 982 |  |  | 1,193 |
Total international | $ | 142,579 |  |  | $ | 92,879 |
| $ | 354,612 |  |  | $ | 274,276 |

Net sales (in thousands):

| Three Months Ended |  | Nine Months Ended
| Sep 30, 2017 |  |  | Oct 1, 2016 |  |  | Sep 30, 2017 |  |  | Oct 1, 2016 |
United States and Canada | $ | 390,142 |  |  | $ | 383,634 |  |  | $ | 1,144,247 |  |  | $ | 1,090,944 |
Asia | 48,842 |  |  | 49,219 |  |  | 136,407 |  |  | 130,809 |
Europe and Middle East | 129,567 |  |  | 119,835 |  |  | 353,334 |  |  | 390,923 |
Latin America | 24,492 |  |  | 21,536 |  |  | 68,695 |  |  | 58,359 |
Total international | $ | 202,901 |  |  | $ | 190,590 |  |  | $ | 558,436 |  |  | $ | 580,091 |
| $ | 593,043 |  |  | $ | 574,224 |  |  | $ | 1,702,683 |  |  | $ | 1,671,035 |

14) | 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.
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.
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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.
The following table summarizes the company's net periodic pension benefit related to the AGA Group pension plans (in thousands):

|  | Three Months Ended |  | Nine Months Ended
|  | September 30, 2017 |  | October 1, 2016 |  | September 30, 2017 |  | October 1, 2016
Net Periodic Pension Benefit: |  |  |  |  |  |  |  |  |  |
Service cost |  | $ | 1,019 |  |  | $ | 824 |  |  | $ | 2,979 |  |  | $ | 2,601 |
Interest cost |  | 8,205 |  |  | 9,890 |  |  | 23,986 |  |  | 31,214 |
Expected return on assets |  | (17,728 | ) |  | (16,254 | ) |  | (51,825 | ) |  | (51,503 | )
Amortization of net loss (gain) |  | 761 |  |  | — |  |  | 2,224 |  |  | — |
Pension settlement |  | (51 | ) |  | — |  |  | (148 | ) |  | — |
|  | $ | (7,794 | ) |  | $ | (5,540 | ) |  | $ | (22,784 | ) |  | $ | (17,688 | )

The pension costs for all other plans of the company were not material during the period.

(b) | Defined Contribution Plans

The company maintains 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 maintains defined contribution plans for its U.K. based employees.

15) | Restructuring

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 $2.6 million and $4.6 million in the three and nine months ended September 30, 2017, respectively, primarily for severance related to headcount reductions and consolidation of manufacturing operations. These expenses are reflected in restructuring expenses in the consolidated statements of comprehensive income. The company estimates that these restructuring initiatives will result in future cost savings of approximately $10.0 million annually, beginning in 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 $0.3 million and $0.5 million in the three and nine months ended September 30, 2017, respectively, primarily for severance related to headcount reductions and is reflected in restructuring expenses in the consolidated statements of comprehensive income. The company estimates that these restructuring initiatives will result in future cost savings of approximately $4.0 million annually, beginning in fiscal year 2018 and no significant future costs related to this action are expected.
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Residential Kitchen Equipment Group:
During fiscal years 2015 and 2016, the company undertook acquisition integration initiatives related to the AGA Group within the Residential Kitchen Equipment Group. These initiatives included organizational restructuring and headcount reductions, consolidation and disposition of certain facilities and business operations. The company recorded additional expense of $1.3 million and $12.3 million in the three and nine months ended September 30, 2017, respectively, primarily related to the AGA Group. The initiatives primarily included additional headcount reductions and impairment of equipment in conjunction of the disposition of certain facilities and business operations. This expense is reflected in restructuring expenses in the consolidated statements of comprehensive income. The cumulative expenses incurred to date for these initiatives is approximately $40.0 million. The company estimated that these restructuring initiatives in 2017 will result in future cost savings of approximately $20.0 million annually, beginning in 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 satisfied by the end of fiscal of 2018. The lease obligations extend through November 2018.

|  | Severance/Benefits |  | Facilities/Operations |  | Other |  | Total
Balance as of December 31, 2016 |  | $ | 5,145 |  |  | $ | 2,032 |  |  | $ | 69 |  |  | $ | 7,246 |
Expenses |  | 6,938 |  |  | 4,979 |  |  | 374 |  |  | 12,291 |
Exchange |  | 476 |  |  | 343 |  |  | 14 |  |  | 833 |
Payments/Utilization |  | (5,857 | ) |  | (4,350 | ) |  | (457 | ) |  | (10,664 | )
Balance as of September 30, 2017 |  | $ | 6,702 |  |  | $ | 3,004 |  |  | $ | — |  |  | $ | 9,706 |

16) | Share Repurchases

In July 1998, the company's Board of Directors adopted a stock repurchase program and subsequently authorized the purchase of common shares in open market purchases. During 2013, the company's Board of Directors authorized the purchase of additional common shares in open market purchases. For the three months period ended September 30, 2017 the company repurchased 1,680,395 shares of its common stock under the program for $200.4 million, including applicable commissions, which represented an average price of $119.23. As of September 30, 2017, the total number of shares authorized for repurchase under the program is 4,570,266. As of September 30, 2017, 3,860,996 shares had been purchased under the 1998 stock repurchase program.

17) | Subsequent Event

On October 17, 2017, subsequent to the end of the third quarter, the company completed its acquisition of all of the capital stock of Globe Food Equipment Company ("Globe"). Globe is a leading brand in slicers and mixers for the commercial foodservice industry located in Dayton, Ohio, with annual revenues of approximately $50.0 million.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Informational Notes
This report contains forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The company cautions readers that these projections are based upon future results or events and are highly dependent upon a variety of important factors which could cause such results or events to differ materially from any forward-looking statements which may be deemed to have been made in this report, or which are otherwise made by or on behalf of the company. Such factors include, but are not limited to, 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; international exposure; foreign exchange and political risks affecting international sales; ability to protect trademarks, copyrights and other intellectual property; changing market conditions; the impact of competitive products and pricing; the timely development and market acceptance of the company’s products; the availability and cost of raw materials; and other risks detailed herein and from time-to-time in the company’s Securities and Exchange Commission (“SEC”) filings, including the company’s 2016 Annual Report on Form 10-K.
Net Sales Summary
(dollars in thousands)

| Three Months Ended |  | Nine Months Ended
| Sep 30, 2017 |  | Oct 1, 2016 |  | Sep 30, 2017 |  | Oct 1, 2016
| Sales |  | Percent |  | Sales |  | Percent |  | Sales |  | Percent |  | Sales |  | Percent
Business Segments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial Foodservice | $ | 354,828 |  |  | 59.8 | % |  | $ | 331,571 |  |  | 57.7 | % |  | $ | 1,000,830 |  |  | 58.8 | % |  | $ | 931,585 |  |  | 55.8 | %
Food Processing | 86,871 |  |  | 14.7 |  |  | 82,196 |  |  | 14.3 |  |  | 256,515 |  |  | 15.1 |  |  | 244,307 |  |  | 14.6 |
Residential Kitchen | 151,344 |  |  | 25.5 |  |  | 160,457 |  |  | 28.0 |  |  | 445,338 |  |  | 26.1 |  |  | 495,143 |  |  | 29.6 |
Total | $ | 593,043 |  |  | 100.0 | % |  | $ | 574,224 |  |  | 100.0 | % |  | $ | 1,702,683 |  |  | 100.0 | % |  | $ | 1,671,035 |  |  | 100.0 | %

Results of Operations
The following table sets forth certain consolidated statements of earnings items as a percentage of net sales for the periods:

| Three Months Ended |  | Nine Months Ended
| Sep 30, 2017 |  | Oct 1, 2016 |  | Sep 30, 2017 |  | Oct 1, 2016
Net sales | 100.0 | % |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %
Cost of sales | 61.5 |  |  | 59.6 |  |  | 60.5 |  |  | 60.4 |
Gross profit | 38.5 |  |  | 40.4 |  |  | 39.5 |  |  | 39.6 |
Selling, general and administrative expenses | 17.9 |  |  | 19.0 |  |  | 19.1 |  |  | 20.0 |
Restructuring expenses | 0.7 |  |  | 0.2 |  |  | 1.0 |  |  | 0.5 |
Gain on sale of plant | — |  |  | — |  |  | (0.7 | ) |  | — |
Income from operations | 19.9 |  |  | 21.1 |  |  | 20.1 |  |  | 19.1 |
Interest expense and deferred financing amortization, net | 1.1 |  |  | 1.1 |  |  | 1.1 |  |  | 1.1 |
Other (income) expense, net | (0.2 | ) |  | 0.5 |  |  | 0.1 |  |  | (0.1 | )
Earnings before income taxes | 19.0 |  |  | 19.5 |  |  | 18.9 |  |  | 18.2 |
Provision for income taxes | 6.4 |  |  | 6.3 |  |  | 5.8 |  |  | 6.0 |
Net earnings | 12.6 | % |  | 13.2 | % |  | 13.1 | % |  | 12.2 | %

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Three Months Ended September 30, 2017 as compared to Three Months Ended October 1, 2016
NET SALES. Net sales for the three months period ended September 30, 2017 increased 3.3% to $593.0 million as compared to $574.2 million in the three months period ended October 1, 2016. The $18.8 million increase in net sales included an increase of $28.6 million, or 5.0%, which was attributable to acquisition growth, resulting from the fiscal 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen, and QualServ. Excluding the acquisitions, net sales decreased $9.8 million, or 1.7%, from the prior year quarter. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the three months period ended September 30, 2017 increased net sales by approximately $2.3 million, or 0.4%. Excluding the impact of foreign exchange and acquisitions, sales decreased 2.1% for the quarter, including a net sales increase of 0.5% at the Commercial Foodservice Equipment Group, a 5.2% decrease at the Food Processing Equipment Group and a 6.0% decrease at the Residential Kitchen Equipment Group.

• | Net sales of the Commercial Foodservice Equipment Group increased by $23.2 million, or 7.0%, to $354.8 million in the three months period ended September 30, 2017, as compared to $331.6 million in the prior year quarter. Net sales resulting from the acquisitions of Sveba Dahlen and QualServ, which were acquired on June 30, 2017 and August 31, 2017, respectively, accounted for an increase of $20.3 million during the three months period ended September 30, 2017. Excluding the impact of these acquisitions, net sales of the Commercial Foodservice Equipment Group increased $2.9 million, or 0.9%, as compared to the prior year quarter. Excluding the impact of foreign exchange and acquisitions, net sales increased 0.5% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $8.1 million, or 3.6%, to $236.1 million, as compared to $228.0 million in the prior year quarter. This includes an increase of $7.2 million from the recent acquisitions. Excluding the acquisitions, the net increase in domestic sales was $0.9 million, or 0.4%. International sales increased $15.1 million, or 14.6%, to $118.7 million, as compared to $103.6 million in the prior year quarter. This includes an increase of $13.1 million from the recent acquisitions including a favorable impact of exchange rates in the amount of $1.2 million. Excluding the impact of acquisitions and foreign exchange, the net increase in international sales was $0.8 million, or 0.8%.

• | Net sales of the Food Processing Equipment Group increased by $4.7 million, or 5.7%, to $86.9 million in the three months period ended September 30, 2017, as compared to $82.2 million in the prior year quarter. Net sales resulting from the acquisitions of Burford and CVP Systems, which were acquired on May 1, 2017 and June 30, 2017, respectively, accounted for an increase of $8.3 million during the three months period ended September 30, 2017. Excluding the impact of these acquisitions, net sales of the Food Processing Equipment Group decreased $3.6 million, or 4.4%, as compared to the prior year quarter. Excluding the impact of foreign exchange and acquisitions, net sales decreased 5.2% at the Food Processing Equipment Group. Domestically, the company realized $62.7 million in net sales for the three months period ended September 30, 2017 and in the prior year quarter. This includes an increase of $7.2 million from the recent acquisitions. International sales increased $4.7 million, or 24.1%, to $24.2 million, as compared to $19.5 million in the prior year quarter. This includes an increase of $1.1 million from the recent acquisitions including a favorable impact of exchange rates in the amount of $0.7 million.

• | Net sales of the Residential Kitchen Equipment Group decreased by $9.2 million, or 5.7%, to $151.3 million in three months period ended September 30, 2017, as compared to $160.5 million in the prior year quarter. Excluding the impact of foreign exchange, net sales of the Residential Kitchen Equipment Group decreased $9.6 million, or 6.0%, as compared to the prior year quarter. 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 decrease of $2.2 million, or 2.4%, to $90.7 million, as compared to $92.9 million in the prior year quarter. International sales decreased $7.0 million, or 10.4% to $60.6 million, as compared to $67.6 million in the prior year quarter. This includes a favorable impact of exchange rates of $0.4 million. The international sales decrease reflects the impact of product rationalization at the AGA Group in connection with acquisition integration initiatives. Sales also continue to be affected domestically by the 2015 recall of certain Viking products manufactured prior to 2013 and Middleby's acquisition of Viking.

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GROSS PROFIT. Gross profit decreased to $228.5 million in the three months period ended September 30, 2017 from $231.7 million in the prior year quarter, reflecting the impact of lower margins at the recent acquisitions, offset by the impact of foreign exchange rates, which increased gross profit by $0.8 million. The gross margin rate decreased from 40.4% in the third quarter of 2016 to 38.5% in the third quarter of 2017.

• | Gross profit at the Commercial Foodservice Equipment Group increased by $1.9 million, or 1.4%, to $140.1 million in three months period ended September 30, 2017, as compared to $138.2 million in the prior year quarter. Gross profit from the acquisitions of Sveba Dahlen and QualServ accounted for approximately $4.2 million of the increase in gross profit during the period. Excluding the recent acquisitions, gross profit decreased by approximately $2.3 million due to product mix in comparison to prior year quarter. The impact of foreign exchange rates increased gross profit by approximately $0.4 million. The gross margin rate decreased to 39.5% as compared to 41.7% in the prior year quarter due to lower margins at recent acquisitions.

• | Gross profit at the Food Processing Equipment Group increased by $2.9 million, or 9.0%, to $35.2 million in the three months period ended September 30, 2017, as compared to $32.3 million in the prior year quarter. Gross profit from the acquisitions of Burford and CVP Systems accounted for approximately $3.5 million of the increase in gross profit during the period. The impact of foreign exchange rates increased gross profit by approximately $0.3 million. The gross margin rate increased to 40.5% as compared to 39.3% in the prior year quarter, reflecting the impact of cost reduction initiatives and more favorable sales mix.

• | Gross profit at the Residential Kitchen Equipment Group decreased by $7.9 million, or 12.8%, to $54.0 million in the three months period ended September 30, 2017, as compared to $61.9 million in the prior year quarter. The impact of foreign exchange rates increased gross profit by approximately $0.1 million. The gross margin rate decreased to 35.7% as compared to 38.6% in the prior year quarter, due to lower sales volume and costs associated with changes in domestic distribution activities and sales initiatives.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses decreased from $110.3 million in the three months period ended October 1, 2016 to $110.2 million in the three months period ended September 30, 2017. As a percentage of net sales, operating expenses were 19.2% in the three months period ended October 1, 2016, as compared to 18.6% in the three months period ended September 30, 2017.
Selling, general and administrative expenses reflect increased costs of $6.9 million associated with the Burford, CVP Systems, Sveba Dahlen and QualServ acquisitions, including $1.8 million of intangible amortization expense. The unfavorable impact of foreign exchange rates, increased selling, general and administrative expenses by approximately $0.5 million. Additionally, selling general and administrative expenses increased $2.2 million related to higher intangible amortization expense and $7.4 million related to professional fees including those associated with acquisition activities. This was offset by a decrease $6.2 million related to lower non-cash share based compensation and $7.8 million related to lower salaries and bonuses.
Restructuring expenses increased $3.1 million from $1.1 million in the three months period ended October 1, 2016 to $4.2 million in the three months period ended September 30, 2017 related to cost reduction initiatives related to the AGA Group. Additionally, restructuring charges included cost reduction initiatives primarily related to headcount reductions at the Commercial Foodservice Equipment Group, Food Processing Equipment Group and Residential Kitchen Equipment Group. In the prior year period restructuring charges of $1.1 million were related to the acquisition integration initiatives at AGA.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs increased to $6.6 million in the three months period ended September 30, 2017 as compared to $6.4 million in the prior year quarter. Other income amounted to $1.1 million in the three months period ended September 30, 2017, as compared to other expense of $3.2 million in the prior year quarter and consists mainly of foreign exchange gains and losses.
INCOME TAXES. A tax provision of $38.1 million, at an effective rate of 33.8%, was recorded during the three months period ended September 30, 2017, as compared to a $36.0 million provision at a 32.2% effective rate in the prior year quarter. In comparison to the prior year, the tax provision reflects a higher effective tax rate attributable to increased tax reserve and a reduction of tax credits.
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Nine Months Ended September 30, 2017 as compared to Nine Months Ended October 1, 2016
NET SALES. Net sales for the nine months period ended September 30, 2017 increased 1.9% to $1,702.7 million as compared to $1,671.0 million in the nine months period ended October 1, 2016. Of the $31.7 million increase in net sales, $102.4 million or 6.1%, was attributable to acquisition growth, resulting from the fiscal 2016 acquisition of Follett and the fiscal 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen, and QualServ. Excluding the acquisitions, net sales decreased $70.7 million, or 4.2%, from the prior year. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the nine months period ended September 30, 2017 reduced net sales by approximately $21.9 million, or 1.3%. Excluding the impact of foreign exchange and acquisitions, sales decrease was 2.9% for the year, including a net sales decrease of 1.7% at the Commercial Foodservice Equipment Group, a net sales increase of 0.9% at the Food Processing Equipment Group and a net sales decrease of 7.1% at the Residential Kitchen Equipment Group.

• | Net sales of the Commercial Foodservice Equipment Group increased by $69.2 million, or 7.4%, to $1,000.8 million in the nine months period ended September 30, 2017, as compared to $931.6 million in the prior year period. Net sales resulting from the acquisitions of Follett, Sveba Dahlen, and QualServ, which were acquired on May 31, 2016, June 30, 2017 and August 31, 2017, respectively, accounted for an increase of $91.9 million during the nine months period ended September 30, 2017. Excluding the impact of these acquisitions, net sales of the Commercial Foodservice Equipment Group decreased $22.7 million, or 2.4%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales decreased $16.1 million, or 1.7% at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $54.3 million, or 8.6%, to $684.4 million, as compared to $630.1 million in the prior year period. This includes an increase of $71.0 million from recent acquisitions. Excluding the acquisitions, the net decrease in domestic sales was $16.7 million, or 2.7%. Domestic sales decrease reflects the impact of several large rollouts with major restaurant chain customers in the prior year period. International sales increased $14.9 million, or 4.9%, to $316.4 million, as compared to $301.5 million in the prior year period. This includes an increase of $20.9 million from the recent acquisitions, offset by $6.6 million related to the unfavorable impact of exchange rates.

• | Net sales of the Food Processing Equipment Group increased by $12.2 million, or 5.0%, to $256.5 million in the nine months period ended September 30, 2017, as compared to $244.3 million in the prior year period. Net sales from the acquisitions of Burford and CVP Systems, which were acquired on May 1, 2017 and June 30, 2017, respectively, accounted for an increase of $10.5 million during the nine months period ended September 30, 2017. Excluding the impact of these acquisitions, net sales of the Food Processing Equipment Group increased $1.7 million, or 0.7%. Excluding the impact of foreign exchange and acquisitions, net sales increased 0.9% at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $9.2 million, or 5.0%, to $194.5 million, as compared to $185.3 million in the prior year period. This includes an increase of $9.1 million from the recent acquisitions. International sales increased $3.0 million, or 5.1%, to $62.0 million, as compared to $59.0 million in the prior year period. This includes an increase of $1.4 million from the recent acquisition offset by $0.5 million related to the unfavorable impact of exchange rates.

• | Net sales of the Residential Kitchen Equipment Group decreased by $49.8 million, or 10.1%, to $445.3 million in the nine months period ended September 30, 2017, as compared to $495.1 million in the prior year period. Excluding the impact of foreign exchange, net sales decreased 7.1% at the Residential Kitchen Equipment Group. Domestically, the company realized a sales decrease of $11.0 million, or 4.0%, to $264.6 million, as compared to $275.6 million in the prior year period. International sales decreased $38.8 million, or 17.7%, to $180.7 million, as compared to $219.5 million in the prior year quarter, including a reduction of $14.8 million related to the unfavorable impact of exchange rates. The sales decrease reflects the impact of product rationalization at the AGA Group in connection with prior year acquisition integration initiatives. Sales also continue 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 to $672.6 million in the nine months period ended September 30, 2017 from $662.0 million in the prior year period, reflecting the impact of increased sales from the acquisitions, offset by the impact of foreign exchange rates, which reduced gross profit by $8.1 million. The gross margin rate increased from 39.6% in the nine months period ended October 1, 2016 as compared to 39.5% in the current year period.
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• | Gross profit at the Commercial Foodservice Equipment Group increased by $11.1 million, or 2.8%, to $405.2 million in the nine months period ended September 30, 2017, as compared to $394.1 million in the prior year period. Gross profit from the acquisitions of Follett, Sveba Dahlen and QualServ accounted for approximately $30.7 million of the increase in gross profit during the period. Excluding the recent acquisitions, gross profit decreased by approximately $19.6 million due to lower sales volume and product mix in comparison to prior year period. The impact of foreign exchange rates reduced gross profit by approximately $1.8 million. The gross margin rate decreased to 40.5%, as compared to 42.3% in the prior year period, due to lower margins at recent acquisitions.

• | Gross profit at the Food Processing Equipment Group increased by $8.3 million, or 8.7%, to $104.1 million in the nine months period ended September 30, 2017, as compared to $95.8 million in the prior year period. Gross profit from the acquisitions of Burford and CVP Systems accounted for approximately $3.9 million of the increase in gross profit during the period. Excluding the recent acquisitions, gross profit increased by approximately $4.4 million on higher sales volume. The impact of foreign exchange rates reduced gross profit by approximately $0.8 million. The gross profit margin rate increased to 40.6%, as compared to 39.2% in the prior year period. The increase in the gross margin rate reflects higher sales volume and favorable sales mix.

• | Gross profit at the Residential Kitchen Equipment Group decreased by $7.0 million, or 4.0%, to $166.9 million in the nine months period ended September 30, 2017, as compared to $173.9 million in the prior year period. The impact of foreign exchange rates reduced gross profit by approximately $5.5 million. The gross margin rate increased to 37.5%, as compared to 35.1% in the prior year period, 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 from $342.2 million in the nine months period ended October 1, 2016 to $331.0 million in the nine months period ended September 30, 2017. As a percentage of net sales, operating expenses were 20.5% in the nine months period ended October 1, 2016, as compared to 19.4% in the nine months period ended September 30, 2017.
Selling, general and administrative expenses reflect increased costs of $21.9 million associated with the Follett, Burford, CVP Systems, Sveba Dahlen and QualServ acquisitions, including $3.9 million of intangible amortization expense. The favorable impact of foreign exchange rates, reduced selling, general and administrative expenses by approximately $2.6 million. Additionally, selling general and administrative expenses decreased $16.1 million related to lower salaries and bonuses and $10.8 million related to lower non-cash share based compensation.
Restructuring expenses increased $9.3 million from $8.1 million in the nine months period ended October 1, 2016 to $17.4 million in the nine months period ended September 30, 2017 related to cost reduction initiatives related to the AGA Group. Additionally, restructuring charges included cost reduction initiatives primarily related to headcount reductions at the Commercial Foodservice Equipment Group, Food Processing Equipment Group and Residential Kitchen Equipment Group. In the prior year period restructuring charges of $8.1 million were related to the acquisition integration initiatives at AGA.
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.
NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were $18.1 million in the nine months period ended September 30, 2017, as compared to $17.8 million in the prior year period. Other expense was $1.1 million in the nine months period ended September 30, 2017, as compared to other income of $1.5 million in the prior year period and consists mainly of foreign exchange gains and losses.
INCOME TAXES. A tax provision of $99.4 million, at an effective rate of 30.8%, was recorded during the nine months period ended September 30, 2017, as compared to $100.2 million at an effective rate of 33.0%, in the prior year period. In comparison to the prior year, the tax provision reflects a lower effective tax rate attributable to an excess tax benefit related to share based compensation and increased tax credits. The tax benefit recognized was a result of the adoption of ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Accounting," which requires all excess tax benefits or deficiencies from share-based payments to be recognized as income tax expense or benefit in the condensed consolidated statement of comprehensive income. The company recognized an income tax benefit of $7.9 million related to excess tax benefits as a reduction of income tax expense.
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Financial Condition and Liquidity
During the nine months ended September 30, 2017, cash and cash equivalents increased by $13.2 million to $81.7 million at September 30, 2017 from $68.5 million at December 31, 2016. Net borrowings increased from $732.1 million at December 31, 2016 to $950.7 million at September 30, 2017.
OPERATING ACTIVITIES. Net cash provided by operating activities was $204.9 million for the nine months ended September 30, 2017, compared to $175.1 million for the nine months ended October 1, 2016.
During the nine months ended September 30, 2017, changes in assets and liabilities reduced operating cash flows by $86.1 million. The changes included a $13.8 million decrease in accounts receivable due to the impact of lower sales volumes in the nine months ended September 30, 2017 and lower receivable balances at the Food Processing Equipment Group due to the timing of projects which are often paid in advance. Inventory increased $20.0 million and accounts payable decreased by $17.6 million due to several factors including normal business seasonality affecting working capital, the timing of orders for the Food Processing Equipment Group and the lower sales volumes in the nine months ended September 30, 2017. Changes also included a $58.9 million decrease in accrued expenses and other non-current liabilities primarily related to the payment of 2016 annual rebate programs at the Commercial Foodservice Equipment Group and Residential Kitchen Equipment Group, payment of 2016 incentive obligations, payment of taxes and funding of restructuring initiatives associated with AGA.
INVESTING ACTIVITIES. During the nine months ended September 30, 2017, net cash used for investing activities amounted to $187.6 million. This included $155.0 million for the 2017 acquisitions of Burford, CVP Systems, Sveba Dahlen and QualServ, $5.4 million related to contingent consideration payments from previous years' acquisitions and $42.4 million of additions and upgrades of production equipment and manufacturing facilities. During the nine months ended September 30, 2017 the company completed the sale of a manufacturing facility. The $14.3 million proceeds from the sale were used to purchase a larger manufacturing facility to gain efficiencies in workflow and allow for future manufacturing consolidation efforts, which is also included in the cash used for additions.
FINANCING ACTIVITIES. Net cash flows used by financing activities were $8.8 million during the nine months ended September 30, 2017. The company’s borrowing activities included $217.3 million of net proceeds under its $2.5 billion Credit Facility and $1.1 million of net repayments under its foreign banking facilities.
The company used $225.0 million to repurchase Middleby common shares during the nine months ended September 30, 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 the nine months ended September 30, 2017 and $200.4 million used to repurchase 1,680,395 shares of its common stock under a stock repurchase program.
At September 30, 2017, the company was in compliance with all covenants pursuant to its borrowing agreements. The company believes that its current capital resources, including cash and cash equivalents, cash generated from operations, funds available from its Credit Facility and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, acquisitions, product development and integration expenditures for the foreseeable future.
Recently Issued Accounting Standards
See Part 1, Notes to Condensed Consolidated Financial Statements, Note 4 - Recent Issued Accounting Standards.
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. There have been no material changes to the critical accounting policies and estimates, as disclosed in the company's 2016 Form 10-K, for the nine months period ended September 30, 2017.
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Item 3. Quantitative and Qualitative Disclosures 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:

Twelve Month Period Ending |  | Variable Rate Debt
September 30, 2018 |  | $ | 5,192 |
September 30, 2019 |  | 337 |
September 30, 2020 |  | 162 |
September 30, 2021 |  | 944,825 |
September 30, 2022 and thereafter |  | 192 |
|  | $ | 950,708 |

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 September 30, 2017, the company had $944.7 million of borrowings outstanding under the Credit Facility, including $921.5 million of borrowings in U.S. Dollars and $23.2 million of borrowings denominated in British Pounds. The company also had $9.5 million in outstanding letters of credit as of September 30, 2017, which reduces the borrowing availability under the Credit Facility. Remaining borrowing availability under this facility was $1.5 billion at September 30, 2017.
At September 30, 2017, borrowings under the Credit Facility accrued interest at a rate of 1.13% above LIBOR per annum or 0.13% 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 2.33% for the period. The interest rates on borrowings under the Credit Facility may be adjusted quarterly based on the company’s funded debtless 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 0.150% per annum as of September 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 September 30, 2017, these foreign credit facilities amounted to $5.9 million in U.S. Dollars with a weighted average per annum interest rate of approximately 6.79%.
The company believes that its current capital resources, including cash and cash equivalents, cash expected to be generated from operations, funds available from its current lenders and access to the credit and capital markets will be sufficient to finance its operations, debt service obligations, capital expenditures, product development and expenditures for the foreseeable future.
The company uses floating-to-fixed interest rate swap agreements to hedge variable interest rate risk associated with the revolving credit line. At September 30, 2017, the company had outstanding floating-to-fixed interest rate swaps totaling $324.0 million notional amount carrying an average interest rate of 1.30% that mature in more than 12 months but less than 84 months.
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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 Debtless Unrestricted Cash to Pro Forma EBIDTA (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 September 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 September 30, 2017, the fair value of these instruments was an asset of $7.7 million. The change in fair value of these swap agreements in the first nine months of 2017 was a loss of $0.1 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 foreign currency forward, foreign exchange swaps and option purchase and sales contracts 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 net 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 fair value of the forward and option contracts was a loss of $4.1 million at the end of the third quarter of 2017.
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Item 4. Controls and Procedures
The company maintains disclosure controls and procedures 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.
As of September 30, 2017, 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 company's disclosure controls and procedures. 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.
During the quarter ended September 30, 2017, there has been no change in the company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
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PART II. OTHER INFORMATION
The company was not required to report the information pursuant to Items 1 through 6 of Part II of Form 10-Q for the nine months ended September 30, 2017, except as follows:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
c) Issuer Purchases of Equity Securities

| Total Number of Shares Purchased |  |  | Average Price Paid per Share |  |  | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program |  |  | Maximum Number of Shares that May Yet be Purchased Under the Plan or Program (1) |
July 2 to July 29, 2017 | — |  |  | $ | — |  |  | — |  |  | 2,389,665 |
July 30 to August 26, 2017 | 518,150 |  |  | 117.77 |  |  | 518,150 |  |  | 1,871,515 |
August 27 to September 30, 2017 | 1,162,245 |  |  | 119.88 |  |  | 1,162,245 |  |  | 709,270 |
Quarter ended September 30, 2017 | 1,680,395 |  |  | $ | 119.23 |  |  | 1,680,395 |  |  | 709,270 |

(1) In July 1998, the company's Board of Directors adopted a stock repurchase program and subsequently authorized the purchase of common shares in open market purchases. During 2013, the company's Board of Directors authorized the purchase of additional common shares in open market purchases. As of September 30, 2017, the total number of shares authorized for repurchase under the program is 4,570,266. As of September 30, 2017, 3,860,996 shares had been purchased under the 1998 stock repurchase program.
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Item 6. Exhibits

Exhibits – The following exhibits are filed herewith:
Exhibit 31.1 – | Rule 13a-14(a)/15d -14(a) Certification of the Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 – | Rule 13a-14(a)/15d -14(a) Certification of the Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 – | 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 32.2 – | 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 101 – | Financial statements on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017, formatted in Extensive Business Reporting Language (XBRL); (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of earnings, (iii) condensed statements of cash flows, (iv) notes to the condensed consolidated financial statements.

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SIGNATURE
Pursuant to the requirements 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.

|  |  | THE MIDDLEBY CORPORATION
|  |  | (Registrant)
Date: | November 9, 2017 |  | By: | /s/ Timothy J. FitzGerald
|  |  |  | Timothy J. FitzGerald
|  |  |  | Vice President,
|  |  |  | Chief Financial Officer

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