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OFFON

THE MIDDLEBY CORPORATION

(MIDD)
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MIDDLEBY : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/12/2021 | 04:11pm EDT

Special Notes Regarding Forward-Looking Statements


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, the impact of COVID-19 pandemic and the response of governments, businesses
and other third parties; 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 SEC filings, including the company's 2020 Annual Report on Form 10-K.
All forward-looking statements are expressly qualified in their entirety by
these cautionary statements. The forward-looking statements included in this
report are made only as of the date hereof and, except as required by federal
securities laws and rules and regulations of the SEC, the company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.

Termination of Welbilt Merger


As previously disclosed, on April 20, 2021, Middleby, entered into a Merger
Agreement with Welbilt, Acquiror and Merger Sub, which provided that, upon the
terms and subject to the conditions set forth therein, Merger Sub would merge
with and into Welbilt, with Welbilt surviving as an indirect, wholly-owned
subsidiary of Middleby.

On July 13, 2021, Middleby announced that, under the terms of the Merger
Agreement, it would not exercise its right to propose any modifications to the
terms of the Merger Agreement and would allow the five-day match period to
expire. Accordingly, on July 14, 2021, Welbilt delivered to Middleby a written
notice terminating the Merger Agreement in accordance with Section 7.1(c)(iii)
of the Merger Agreement and, concurrently with Middleby's receipt of the
termination fee of $110 million in cash from Welbilt, the Merger Agreement was
terminated on July 14, 2021.


Net Sales Summary
                             (dollars in thousands)

                                                       Three Months Ended                                                               Six Months Ended
                                      Jul 3, 2021                             Jun 27, 2020                             Jul 3, 2021                            Jun 27, 2020
                                Sales             Percent               Sales              Percent              Sales              Percent              Sales              Percent
Business Segments:
Commercial Foodservice      $  508,778               62.9  %       $    267,500               56.7  %       $   989,933               63.2  %       $   710,624               61.8  %
Food Processing                130,008               16.1               101,563               21.5              242,502               15.5              205,829               17.9
Residential Kitchen            169,987               21.0               102,914               21.8              334,396               21.3              232,983               20.3
  Total                     $  808,773              100.0  %       $    471,977              100.0  %       $ 1,566,831              100.0  %       $ 1,149,436              100.0  %





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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                                Six Months Ended
                                                          Jul 3, 2021             Jun 27, 2020             Jul 3, 2021             Jun 27, 2020
Net sales                                                      100.0  %                   100.0  %              100.0  %                   100.0  %
Cost of sales                                                   62.4                       67.6                  63.0                       64.9
Gross profit                                                    37.6                       32.4                  37.0                       35.1
Selling, general and administrative expenses                    20.5                       23.7                  20.5                       22.3
Restructuring                                                    0.1                        0.5                   0.1                        0.3

Income from operations                                          17.0                        8.2                  16.4                       12.5

Interest expense and deferred financing amortization, net

                                                              1.8                        4.6                   1.9                        3.4

Net periodic pension benefit (other than service costs) (1.4)

               (2.1)                 (1.5)                      (1.7)
Other (income) expense, net                                     (0.1)                       0.1                  (0.1)                       0.3
Earnings before income taxes                                    16.7                        5.6                  16.1                       10.5
Provision for income taxes                                       1.7                        1.2                   2.7                        2.5
Net earnings                                                    15.0  %                     4.4  %               13.4  %                     8.0  %



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Three Months Ended July 3, 2021 as compared to Three Months Ended June 27, 2020


NET SALES. Net sales for the three months period ended July 3, 2021 increased by
$336.8 million or 71.4% to $808.8 million as compared to $472.0 million in the
three months period ended June 27, 2020. Net sales increased by $15.6 million,
or 3.3%, from the fiscal 2020 acquisitions of Wild Goose and United Foodservice
Equipment Zhuhai. Excluding acquisitions and a disposition, net sales increased
$324.2 million, or 69.1%, from the prior year period. The impact of foreign
exchange rates on foreign sales translated into U.S. Dollars for the three
months period ended July 3, 2021 increased net sales by approximately $20.5
million or 4.4%. Excluding the impact of foreign exchange, acquisitions and a
disposition, sales increased 64.8% for the three months period ended July 3,
2021 as compared to the prior year period, including a net sales increase of
80.4% at the Commercial Foodservice Equipment Group, a net sales increase of
25.1% at the Food Processing Equipment Group and a net sales increase of 63.1%
at the Residential Kitchen Equipment Group.

•Net sales of the Commercial Foodservice Equipment Group increased by $241.3
million, or 90.2%, to $508.8 million in the three months period ended July 3,
2021, as compared to $267.5 million in the prior year period. Net sales from the
acquisitions of Wild Goose and United Foodservice Equipment Zhuhai, which were
acquired on December 7, 2020, and December 18, 2020, respectively, accounted for
an increase of $15.6 million during the three months period ended July 3, 2021.
Excluding the impact of acquisitions, net sales of the Commercial Foodservice
Equipment Group increased $225.7 million, or 84.4%, as compared to the prior
year period. Excluding the impact of foreign exchange and acquisitions, net
sales increased $215.2 million or 80.4% at the Commercial Foodservice Equipment
Group. Domestically, the company realized a sales increase of $163.1 million, or
83.3%, to $359.0 million, as compared to $195.9 million in the prior year
period. This includes an increase of $11.6 million from recent acquisitions.
Excluding the acquisitions, the net increase in domestic sales was $151.5
million, or 77.3%. International sales increased $78.2 million, or 109.2%, to
$149.8 million, as compared to $71.6 million in the prior year period. This
includes an increase of $4.0 million from the recent acquisitions and an
increase of $10.5 million related to the favorable impact of exchange rates.
Excluding acquisitions and foreign exchange, the net sales increase in
international sales was $63.7 million, or 89.0%. The increase in domestic and
international sales is related to improvements in market conditions and consumer
demand, as the prior year period was significantly impacted by the COVID-19
pandemic.

•Net sales of the Food Processing Equipment Group increased by $28.4 million, or
28.0%, to $130.0 million in the three months period ended July 3, 2021, as
compared to $101.6 million in the prior year period. Excluding the impact of
foreign exchange, net sales increased $25.5 million, or 25.1% at the Food
Processing Equipment Group. Domestically, the company realized a sales increase
of $22.7 million, or 31.2%, to $95.5 million, as compared to $72.8 million in
the prior year period. The increase in domestic sales reflects growth primarily
driven by both protein and bakery products. International sales increased $5.7
million, or 19.8%, to $34.5 million, as compared to $28.8 million in the prior
year period. This includes an increase of $2.9 million related to the favorable
impact of exchange rates. Excluding foreign exchange, the net sales increase in
international sales was $2.8 million, or 9.7%. The increase in international
revenues is primarily driven by protein projects.

•Net sales of the Residential Kitchen Equipment Group increased by $67.1
million, or 65.2%, to $170.0 million in the three months period ended July 3,
2021, as compared to $102.9 million in the prior year period. Excluding the
impact of foreign exchange and a disposition, net sales increased $63.0 million,
or 63.1% at the Residential Kitchen Equipment Group. Domestically, the company
realized a sales increase of $31.6 million, or 38.7%, to $113.3 million, as
compared to $81.7 million in the prior year period. International sales
increased $35.5 million, or 167.5%, to $56.7 million, as compared to $21.2
million in the prior year period. This includes an increase of $7.1 million
related to the favorable impact of exchange rates. Excluding foreign exchange
and a disposition, the net sales increase in international sales was $31.4
million, or 172.5%. The increase in domestic and international sales reflects
the strong demand for our premium appliance brands.

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GROSS PROFIT. Gross profit increased to $303.7 million in the three months period ended July 3, 2021 from $153.1 million in the prior year period, primarily reflecting higher sales volumes related to improvements in market conditions and consumer demand and favorable impact of foreign exchanges rates of $7.7 million. The gross margin rate was 32.4% in the three months period ended June 27, 2020 as compared to 37.6% in the current year period.


•Gross profit at the Commercial Foodservice Equipment Group increased by $107.3
million, or 126.7%, to $192.0 million in the three months period ended July 3,
2021, as compared to $84.7 million in the prior year period. Gross profit from
the acquisitions of Wild Goose and United Foodservice Equipment Zhuhai increased
gross profit by $6.1 million. Excluding acquisitions, gross profit increased by
$101.2 million related to higher sales volumes. The impact of foreign exchange
rates increased gross profit by approximately $3.9 million. The gross margin
rate increased to 37.7%, as compared to 31.7% in the prior year period. The
gross margin rate, excluding acquisitions and the impact of foreign exchange,
was 37.7%.

•Gross profit at the Food Processing Equipment Group increased by $11.2 million,
or 31.1%, to $47.2 million in the three months period ended July 3, 2021, as
compared to $36.0 million in the prior year period. The impact of foreign
exchange rates increased gross profit by approximately $1.4 million. The gross
profit margin rate increased to 36.3%, as compared to 35.4% in the prior year
period primarily related to higher sales volumes and product mix. The gross
margin rate, excluding the impact of foreign exchange, was 36.0%.

•Gross profit at the Residential Kitchen Equipment Group increased by $31.6
million, or 94.9%, to $64.9 million in the three months period ended July 3,
2021, as compared to $33.3 million in the prior year period. The impact of
foreign exchange rates increased gross profit by approximately $2.4 million. The
gross margin rate increased to 38.2%, as compared to 32.4% in the prior year
period related to higher sales volumes. The gross margin rate, excluding the
impact of foreign exchange, was 38.4%.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and
administrative expenses increased from $111.8 million in the three months period
ended June 27, 2020 to $165.7 million in the three months period ended July 3,
2021.  As a percentage of net sales, selling, general, and administrative
expenses were 23.7% in the three months period ended June 27, 2020, as compared
to 20.5% in the three months period ended July 3, 2021.

Selling, general and administrative expenses reflect increased costs of $4.4
million associated with acquisitions, including $1.7 million of intangible
amortization expense. Selling, general and administrative expenses increased
$26.4 million related to compensation costs and $13.1 million related to
professional fees, including deal expenses. Higher sales volumes also resulted
in increased commission expense. Foreign exchange rates had an unfavorable
impact of $3.5 million.

RESTRUCTURING EXPENSES. Restructuring expenses were $2.2 million for the three
months period ended June 27, 2020 and $1.0 million for the three months period
ended July 3, 2021. Restructuring expenses in both periods related primarily to
headcount reductions and facility consolidations within the Commercial
Foodservice Equipment Group.

NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were
$14.2 million in the three months period ended July 3, 2021, as compared to
$21.8 million in the prior year period, reflecting the reduction in borrowing
levels, the reduction in average interest rates under the Credit Facility and
the benefit from the Convertible Notes. Net periodic pension benefit (other than
service costs) increased $1.7 million to $11.5 million in the three months
period ended July 3, 2021 from $9.8 million in the prior year period, related to
the decrease in discount rate used to calculate the interest cost. Other income
was $0.5 million in the three months period ended July 3, 2021, as compared to
other expense of $0.4 million in the prior year period and consists mainly of
foreign exchange gains and losses.

INCOME TAXES. A tax provision of $13.9 million, at an effective rate of 10.3%,
was recorded during the three months period ended July 3, 2021, as compared to
$5.6 million at an effective rate of 20.9%, in the prior year period. The lower
rate in the current year is primarily due to several discrete tax benefits,
including a deferred tax benefit for the enacted UK tax rate change from 19% to
25% and tax benefits from amended U.S. tax returns. When excluding the discrete
tax adjustments, the 2021 rate was approximately 24.5%.

                                       31
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Six Months Ended July 3, 2021 as compared to Six Months Ended June 27, 2020


NET SALES. Net sales for the six months period ended July 3, 2021 increased by
$417.4 million or 36.3% to $1,566.8 million as compared to $1,149.4 million in
the six months period ended June 27, 2020. Net sales increased by $34.2 million,
or 3.0%, from the fiscal 2020 acquisitions of Deutsche, Wild Goose and United
Foodservice Equipment Zhuhai. Excluding acquisitions and a disposition, net
sales increased $391.9 million, or 34.4%, from the prior year period. The impact
of foreign exchange rates on foreign sales translated into U.S. Dollars for the
six months period ended July 3, 2021 increased net sales by approximately $31.3
million or 2.7%. Excluding the impact of foreign exchange, acquisitions and a
disposition, sales increased 31.6% for six months period ended July 3, 2021 as
compared to the prior year period, including a net sales increase of 32.3% at
the Commercial Foodservice Equipment Group, a net sales increase of 15.8% at the
Food Processing Equipment Group and a net sales increase of 44.0% at the
Residential Kitchen Equipment Group.

•Net sales of the Commercial Foodservice Equipment Group increased by $279.3
million, or 39.3%, to $989.9 million in the six months period ended July 3,
2021, as compared to $710.6 million in the prior year period. Net sales from the
acquisitions of Deutsche, Wild Goose and United Foodservice Equipment Zhuhai,
which were acquired on March 2, 2020, December 7, 2020, and December 18, 2020,
respectively, accounted for an increase of $34.2 million during the six months
period ended July 3, 2021. Excluding the impact of acquisitions, net sales of
the Commercial Foodservice Equipment Group increased $245.1 million, or 34.5%,
as compared to the prior year period. Excluding the impact of foreign exchange
and acquisitions, net sales increased $229.4 million or 32.3% at the Commercial
Foodservice Equipment Group. Domestically, the company realized a sales increase
of $195.5 million, or 38.9%, to $697.9 million, as compared to $502.4 million in
the prior year period. This includes an increase of $25.6 million from recent
acquisitions. Excluding acquisitions, the net increase in domestic sales was
$169.9 million, or 33.8%. The increase in domestic sales is related to
improvements in market conditions and consumer demand. International sales
increased $83.8 million, or 40.2%, to $292.0 million, as compared to $208.2
million in the prior year period. This includes an increase of $8.6 million from
the recent acquisitions and a increase of $15.7 million related to the favorable
impact of exchange rates. Excluding acquisitions and foreign exchange, the net
sales increase in international sales was $59.5 million, or 28.6%. The increase
in international revenues is related to improvements in market conditions,
primarily in the European and Asian markets.

•Net sales of the Food Processing Equipment Group increased by $36.7 million, or
17.8%, to $242.5 million in the six months period ended July 3, 2021, as
compared to $205.8 million in the prior year period. Excluding the impact of
foreign exchange, net sales increased $32.5 million or 15.8% at the Food
Processing Equipment Group. Domestically, the company realized a sales increase
of $29.5 million, or 20.3%, to $175.1 million, as compared to $145.6 million in
the prior year period. The increase in domestic sales reflects growth primarily
driven by both protein and bakery products. International sales increased $7.2
million, or 12.0%, to $67.4 million, as compared to $60.2 million in the prior
year period. This includes an increase of $4.2 million related to the favorable
impact of exchange rates. Excluding the foreign exchange, the net sales increase
in international sales was $3.0 million, or 5.0%. The increase in international
revenues is primarily driven by protein projects.

•Net sales of the Residential Kitchen Equipment Group increased by $101.4
million or 43.5%, to $334.4 million in the six months period ended July 3, 2021,
as compared to $233.0 million in the prior year period. Excluding the impact of
foreign exchange and a disposition, net sales increased $98.7 million, or 44.0%,
at the Residential Kitchen Equipment Group. Domestically, the company realized a
sales increase of $55.1 million, or 33.0%, to $221.9 million, as compared to
$166.8 million in the prior year period. International sales increased $46.3
million, or 69.9%, to $112.5 million, as compared to $66.2 million in the prior
year period. This includes an increase of $11.4 million related to the favorable
impact of exchange rates. Excluding foreign exchange and a disposition, the net
sales increase in international sales was $43.6 million, or 75.8%. The increase
in domestic and international sales reflects the strong demand for our premium
appliance brands.




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GROSS PROFIT. Gross profit increased to $579.6 million in the six months period
ended July 3, 2021 from $403.3 million in the prior year period, primarily
reflecting higher sales volumes related to improvements in market conditions and
consumer demand and the favorable impact of foreign exchanges rates of $11.6
million. The gross margin rate was 35.1% in the six months period ended June 27,
2020 as compared to 37.0% in the current year period.

•Gross profit at the Commercial Foodservice Equipment Group increased by $117.1
million, or 46.8%, to $367.2 million in the six months period ended July 3,
2021, as compared to $250.1 million in the prior year period. Gross profit from
the acquisitions of Deutsche, Wild Goose and United Foodservice Equipment Zhuhai
increased gross profit by $11.8 million. Excluding acquisitions, gross profit
increased by $105.3 million related to higher sales volumes. The impact of
foreign exchange rates increased gross profit by approximately $5.8 million. The
gross margin rate increased to 37.1%, as compared to 35.2% in the prior year
period. The gross margin rate, excluding acquisitions and the impact of foreign
exchange, was 37.2%.

•Gross profit at the Food Processing Equipment Group increased by $14.1 million,
or 19.5%, to $86.3 million in the six months period ended July 3, 2021, as
compared to $72.2 million in the prior year period. The impact of foreign
exchange rates increased gross profit by approximately $2.0 million. The gross
profit margin rate increased to 35.6%, as compared to 35.1% in the prior year
period primarily related to higher sales volumes and product mix. The gross
margin rate, excluding the impact of foreign exchange, was 35.4%.

•Gross profit at the Residential Kitchen Equipment Group increased by $43.6
million, or 53.2%, to $125.6 million in the six months period ended July 3,
2021, as compared to $82.0 million in the prior year period. The impact of
foreign exchange rates increased gross profit by approximately $3.8 million. The
gross margin rate increased to 37.6%, as compared to 35.2% in the prior year
period, related to higher sales volumes. The gross margin rate, excluding the
impact of foreign exchange, was 37.7%.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and
administrative expenses increased from $255.8 million in the six months period
ended June 27, 2020 to $320.7 million in the six months period ended July 3,
2021. As a percentage of net sales, selling, general, and administrative
expenses were 22.3% in the six months period ended June 27, 2020, as compared to
20.5% in the six months period ended July 3, 2021.

Selling, general and administrative expenses reflect increased costs of
$9.8 million associated with acquisitions, including $4.3 million of intangible
amortization expense. Selling, general and administrative expenses increased
$39.9 million related to compensation costs and $16.1 million related to
professional fees, including deal expenses. Higher sales volumes also resulted
in increased commission expense, which was offset by decreases in bad debt
expense and travel and entertainment expenses. Foreign exchange rates had an
unfavorable impact of $5.6 million.

RESTRUCTURING EXPENSES. Restructuring expenses decreased $1.2 million from $3.0
million in the six months period ended June 27, 2020 to $1.8 million in the six
months period ended July 3, 2021. Restructuring expenses in both periods related
primarily to headcount reductions and facility consolidations within the
Commercial Foodservice Equipment Group.

NON-OPERATING EXPENSES. Interest and deferred financing amortization costs were
$30.3 million in the six months period ended July 3, 2021, as compared to $37.5
million in the prior year period, reflecting the reduction in borrowing levels,
the reduction in the average interest rates under the Credit Facility and the
benefit from the Convertible Notes. Net periodic pension benefit (other than
service costs) increased $3.0 million to $22.9 million in the six months period
ended July 3, 2021 from $19.9 million in the prior year period, related to the
decrease in discount rate used to calculate the interest cost. Other income
was $2.2 million in the six months period ended July 3, 2021, as compared to
other expense of $3.7 million in the prior year period and consists mainly of
foreign exchange gains and losses.

INCOME TAXES. A tax provision of $42.8 million, at an effective rate of 16.9%,
was recorded during the six months period ended July 3, 2021, as compared to
$28.3 million at an effective rate of 22.9%, in the prior year period. The lower
rate in the current year is primarily due to several discrete tax benefits,
including a deferred tax benefit for the enacted UK tax rate change from 19% to
25% and tax benefits from amended U.S. tax returns. When excluding the discrete
tax adjustments, the 2021 rate was approximately 24.5%.






                                       33
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Financial Condition and Liquidity
During the six months ended July 3, 2021, cash and cash equivalents increased by
$127.5 million to $395.6 million from $268.1 million at January 2, 2021. Total
debt increased to $1.8 billion at July 3, 2021 from $1.7 billion at January 2,
2021 primarily due to the adoption of ASU 2020-06 as discussed in Note 4,
Recently Issued Accounting Standards, in the Notes to the Condensed Consolidated
Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q.
OPERATING ACTIVITIES. Net cash provided by operating activities was $172.4
million for the six months ended July 3, 2021, compared to $164.8 million for
the six months ended June 27, 2020.

During six months period ended July 3, 2021, working capital changes
meaningfully impacted operating cash flows. These included an increase in
accounts receivable of $63.5 million due to improved market conditions and
increased sales volumes. Also, inventory increased $68.0 million and accounts
payable increased $41.5 million to support increased demand and to manage supply
chain risks.
INVESTING ACTIVITIES. During the six months ended July 3, 2021, net cash used
for investing activities amounted to $24.2 million. Cash used to fund
acquisitions and investments amounted to $10.9 million during the six months
ended July 3, 2021. Additionally, $19.3 million was expended, primarily for
additions and upgrades of production equipment, manufacturing facilities and
residential and commercial showrooms. Proceeds on the sale of property following
facility consolidation actions generated $5.9 million
FINANCING ACTIVITIES. Net cash flows used by financing activities were $18.7
million during the six months ended July 3, 2021. The company's borrowing
activities during the six months ended July 3, 2021 included $10.9 million of
net repayments under its Credit Facility. The company used $2.4 million to
repurchase 14,031 shares of Middleby common stock that were surrendered to the
company by employees in lieu of cash payment for withholding taxes related to
restricted stock vesting during the quarter. Additionally, the company settled
deferred purchase price obligations of $5.5 million during the six months ended
July 3, 2021.
At July 3, 2021, 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.

                                       34
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Recently Issued Accounting Standards


See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 4
- Recent Issued Accounting Standards, of this Quarterly Report on Form 10-Q.
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 the company's consolidated financial
statements. There have been no changes in the company's critical accounting
policies, which include revenue recognition, inventories, goodwill and other
intangibles, pensions benefits, and income taxes, as discussed in the company's
Annual Report on Form 10-K for the year ended January 2, 2021 (the "2020 Annual
Report on Form 10-K") other than those described below.

During the three months ended July 3, 2021, the company adopted ASU 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity."

                                       35

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