MIDDLEBY Corp: Form 10-Q for the period ended Jul 4, 2026

Special Note 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 possibility that the company may not realize all or any of the expected benefits of the spin-off of Midera Food Processing, Inc.; volatility in earnings resulting from goodwill and trade name impairment losses, which may occur irregularly and in varying amounts; variability in financing costs and interest rates; quarterly variations in operating results; dependence on key customers; international exposure; risks associated with the company’s foreign operations, including foreign exchange, tariffs and political risks affecting international sales; unfavorable tax law changes and tax authority rulings; ability to protect trademarks, copyrights and other intellectual property; cybersecurity attacks and other breaches in security; changing market conditions, including inflation; the impact of competitive products and pricing; the impact of announced management and organizational changes; the state of the credit markets and consumer credit; intense competition in the company's business segments including the impact of both new and established global competitors; the timely development and market acceptance of the company’s products; the availability and cost of raw materials; the company's continued ability to realize profitable growth through the sourcing and completion of strategic acquisitions; and other risks detailed herein and from time-to-time in the company’s SEC filings, including the company’s 2025 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.

Residential Transaction

On February 2, 2026, the company completed a transaction selling a 51% stake in its Residential Kitchen Equipment Group to an affiliate of 26North Partners LP (the “Residential Transaction”). The company received net cash proceeds of $564.6 million and a promissory note in the principal amount of $135.0 million, and recorded a pre-tax loss on disposition of $94.9 million during the first quarter of 2026, subject to future closing adjustments. Following the close of the Residential Transaction, the company owns a 49% non-controlling equity interest in Composition Brands, a new standalone entity holding the Residential Kitchen Equipment business.

The results of the Residential Kitchen Equipment Group are presented as discontinued operations in the company’s Condensed Consolidated Financial Statements. The Residential Kitchen Equipment Group was historically presented as a reportable segment. See Notes 1 and 9 to the Condensed Consolidated Financial Statements for further details.

Midera Spin-off

On July 6, 2026, the company completed the previously announced separation of its food processing business, Midera Food Processing, Inc. (“Midera”), into a new, publicly traded company (the “Spin-off”). The Spin-off was achieved through the distribution by the company of 100% of the issued and outstanding shares of Midera common stock on a pro rata basis to the holders of the company’s common stock. The Spin-off is expected to qualify as a tax-free distribution for U.S. federal income tax purposes. Midera is now an independent public company trading under the symbol “MFP” on The Nasdaq Stock Market LLC.

After the Spin-off, the company will no longer consolidate Midera into its financial results. The Spin-off of Midera represents a strategic shift that will have a major effect on the company's operations and financial results. Due to this shift, the Food Processing business will be reflected in the company’s financial statements as a discontinued operation beginning in the third quarter of 2026, including for periods prior to the consummation of the Spin-off. The Food Processing business remains in continuing operations for all periods presented in this Form 10-Q.

Current Events

The current domestic and international political environment has contributed to uncertainty surrounding the future state of the global economy. Recent significant trade policy and tariff actions by the U.S. government and many other countries have created significant uncertainty and potential risks for the company. The tariffs imposed to date have increased the cost of certain raw materials and components, and while the company is actively exploring opportunities to mitigate these increased costs, there can be no assurance of the company’s ability to offset the impact of these tariffs fully. Furthermore, the imposition of retaliatory tariffs from other countries on the company's exported products could negatively affect demand and future sales volumes. The long-term effects of current and future tariffs and any future trade policy changes on the global economy and the industries in which the company operates remain uncertain and could have a material adverse effect on our financial statements in any particular reporting period. Even in light of such headwinds, we remain focused on delivering strong financial results and executing on our long-term strategy and profitability objectives, as well as continuing to identify operational efficiencies in all aspects of our business.

In addition to tariffs, the company has been negatively impacted by inflation in wages, logistics, energy, raw materials and component costs, including electronic controls and computer memory. Price increases and pricing strategies have been implemented to mitigate the impact of cost inflation on margins and the company continues to actively monitor costs. Consumer demand in the near term has and may continue to be impacted by higher inflation levels and uncertainty surrounding the Federal Reserve’s future interest rate policy decisions.

The company continues to actively monitor global supply chain, labor and logistics constraints, which have had a negative impact on the company's ability to source parts and complete and ship units. While the company is seeing improvement on certain supply chain and logistics constraints, supply chains for certain key components remain distressed and uncertain given trade policy and tariff actions. The decreased availability of resources and inflationary costs have resulted in heightened inventory levels. To combat these pressures, the company has evaluated alternative sourcing, dual sourcing and collaborated across the organization, where appropriate, without materially presenting new risks or increasing current risks around quality and reliability. Our capital resources have been and the company expects they will continue to be sufficient to address these challenges.

Net Sales Summary (dollars in thousands)

Results of Operations

The following table sets forth certain items in the Condensed Consolidated Statements of Comprehensive Income as a percentage of net sales for the periods presented:

23

Three Months Ended July 4, 2026 as compared to Three Months Ended June 28, 2025

Net Sales

Net sales for the three month period ended July 4, 2026 increased by $78.7 million or 9.9% to $875.5 million, as compared to $796.8 million in the three month period ended June 28, 2025. Net sales increased by $23.8 million, or 3.0%, from the fiscal 2025 acquisitions of Frigomeccanica and Oka. Excluding acquisitions, net sales increased $54.9 million, or 6.9%, from the prior year period. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the three month period ended July 4, 2026 increased net sales by approximately $3.9 million or 0.5%. Excluding the impact of foreign exchange and acquisitions, sales increased 6.4% for the three month period ended July 4, 2026 as compared to the prior year period, including a net sales increase of 8.3% at the Commercial Foodservice Equipment Group and a net sales increase of 1.3% at the Food Processing Equipment Group.

• Net sales of the Commercial Foodservice Equipment Group increased by $50.0 million, or 8.6%, to $630.6 million in the three month period ended July 4, 2026, as compared to $580.6 million in the prior year period. Excluding the impact of foreign exchange, net sales increased $48.2 million, or 8.3%. Domestically, the company realized a sales increase of $24.2 million, or 5.9%, to $436.8 million, as compared to $412.6 million in the prior year period. The increase in domestic sales is related to an inflection in demand and higher volumes. International sales increased $25.8 million, or 15.4%, to $193.8 million, as compared to $168.0 million in the prior year period. Excluding the impact of foreign exchange, the increase in international sales was $24.0 million, or 14.3%. The increase in international sales is related to improved market conditions, primarily in European and Latin American markets.
• Net sales of the Food Processing Equipment Group increased by $28.7 million, or 13.3%, to $244.9 million in the three month period ended July 4, 2026, as compared to $216.2 million in the prior year period. Net sales from the acquisitions of Frigomeccanica and Oka accounted for an increase of $23.8 million during the three month period ended July 4, 2026. Excluding the impact of foreign exchange and acquisitions, net sales increased $2.8 million, or 1.3%, at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $0.7 million, or 0.8%, to $126.0 million, as compared to $125.0 million in the prior year period. Excluding acquisitions, the increase in domestic sales was $0.3 million, or 0.2%. The increase in domestic sales is primarily driven by higher sales volumes of bakery and protein products, partially offset by lower sales volumes of snack products. International sales increased $27.7 million, or 30.4%, to $118.9 million, as compared to $91.2 million in the prior year period. Excluding the impact of foreign exchange and acquisitions, the increase in international sales was $2.5 million, or 2.7%. The increase in international sales is primarily related to higher sales volumes of protein and bakery products in the European market, partially offset by fewer projects in the Middle East.

Gross Profit

Gross profit increased to $335.1 million in the three month period ended July 4, 2026, as compared to $316.1 million in the prior year period, primarily driven by higher sales volumes. The impact of foreign exchange rates increased gross profit by approximately $1.4 million. The gross margin rate was 38.3% in the three month period ended July 4, 2026, as compared to 39.7% in the prior year period, primarily impacted by tariffs, input cost inflation and product mix.

• Gross profit at the Commercial Foodservice Equipment Group increased by $13.7 million, or 5.8%, to $247.9 million in the three month period ended July 4, 2026, as compared to $234.2 million in the prior year period. The impact of foreign exchange rates increased gross profit by approximately $0.8 million. The gross margin rate decreased to 39.3%, as compared to 40.3% in the prior year period, primarily driven by tariffs, input cost inflation and product mix. The gross margin rate, excluding the impact of foreign exchange, was 39.3%.
• Gross profit at the Food Processing Equipment Group increased by $5.8 million, or 7.2%, to $86.7 million in the three month period ended July 4, 2026, as compared to $80.9 million in the prior year period. Gross profit from the acquisitions of Frigomeccanica and Oka increased gross profit by $6.0 million. The impact of foreign exchange rates increased gross profit by approximately $0.6 million. Excluding the impact of foreign exchange rates and acquisitions, gross profit decreased by $0.8 million. The gross profit margin rate decreased to 35.4%, as compared to 37.4% in the prior year period, primarily related to tariffs, input cost inflation and product mix. The gross margin rate, excluding the impact of foreign exchange and acquisitions, was 36.6%.

Selling, General and Administrative Expenses

Combined selling, general and administrative expenses increased to $186.6 million in the three month period ended July 4, 2026, as compared to $167.6 million in the three month period ended June 28, 2025. As a percentage of net sales, selling, general and administrative expenses were 21.3% in the three month period ended July 4, 2026 as compared to 21.0% in the three month period ended June 28, 2025.

Selling, general and administrative expenses reflect increased costs of $3.0 million associated with acquisitions, including $0.1 million of intangible amortization expense. Selling, general and administrative expenses reflect increases in combined compensation costs and share-based compensation of $10.3 million and strategic transaction costs of $8.9 million, partially offset by a decrease in professional fees of $2.4 million and a decrease in contingent consideration of $2.3 million. Foreign exchange rates had an unfavorable impact of $1.1 million.

Restructuring Expenses

Restructuring expenses were $0.7 million for the three month period ended July 4, 2026 and $0.7 million for the three month period ended June 28, 2025. Restructuring expenses in the three month periods ended July 4, 2026 and June 28, 2025 related primarily to headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group.

Non-operating Income and Expenses

Interest and deferred financing amortization costs were $26.0 million in the three month period ended July 4, 2026, as compared to $20.3 million in the prior year period, primarily reflecting the increase in interest rates. Net periodic pension benefit increased $0.8 million to $2.4 million in the three month period ended July 4, 2026, as compared to $1.6 million in the prior year period, primarily due to a decrease in the discount rate used to calculate interest cost in the current year. Other income was $2.2 million in the three month period ended July 4, 2026, as compared to other expense of $2.1 million in the prior year period. The change was primarily driven by income of $2.7 million in the current period related to the change in fair value of the note receivable.

Income Taxes

A tax provision of $43.3 million, at an effective rate of 34.2%, was recorded during the three month period ended July 4, 2026, as compared to a tax provision of $25.4 million at an effective rate of 20.0% in the prior year period. During the three month period ended July 4, 2026, the effective tax rate was higher than the prior year period primarily due to discrete tax items related to certain internal restructurings associated with the Spin-off and other foreign discrete tax items. The effective tax rate was higher than the U.S. statutory tax rate of 21.0% primarily due to non-deductible expenses, state taxes and foreign rate differentials.

Equity in Losses of Affiliate, Net of Tax

Equity in losses of affiliate, net of tax, representing the company's share of Composition Brands' results, were $28.9 million for the three month period ended July 4, 2026, which included $17.0 million of expenses from preliminary purchase accounting adjustments, $6.2 million of interest expense and $5.0 million of non-recurring, transaction-related costs. The company has elected to report its share of Composition Brands' results of operations on a one-quarter lag. The results recognized during the three month period ended July 4, 2026 cover the period beginning on the date the Residential Transaction was completed, February 2, 2026, and ending on April 4, 2026. See Note 4 to the Condensed Consolidated Financial Statements for further details.

Earnings/(Loss) from Discontinued Operations, Net of Tax

Earnings from discontinued operations, net of tax, were $0.6 million in the three month period ended July 4, 2026, as compared to $4.3 million in the three month period ended June 28, 2025. Prior year results include activity for the entire Residential Kitchen Equipment Group, whereas current period results only include activity associated with limited distribution operations in certain international locations that have not yet transferred to Composition Brands as of July 4, 2026. See Note 9 to the Condensed Consolidated Financial Statements for further details.

Six Months Ended July 4, 2026 as compared to Six Months Ended June 28, 2025

Net Sales

Net sales for the six month period ended July 4, 2026 increased by $188.1 million, or 12.3%, to $1,715.5 million as compared to $1,527.4 million in the six month period ended June 28, 2025. Net sales increased by $31.4 million, or 2.1%, from the fiscal 2025 acquisitions of Frigomeccanica and Oka. Excluding acquisitions, net sales increased $156.7 million, or 10.3%, from the prior year period. The impact of foreign exchange rates on foreign sales translated into U.S. Dollars for the six month period ended July 4, 2026 increased net sales by approximately $18.5 million. Excluding the impact of foreign exchange and acquisitions, sales increased 9.0% for the six month period ended July 4, 2026 as compared to the prior year period, including a net sales increase of 8.2% at the Commercial Foodservice Equipment Group and a net sales increase of 11.6% at the Food Processing Equipment Group.

• Net sales of the Commercial Foodservice Equipment Group increased by $102.9 million, or 9.0%, to $1,246.2 million in the six month period ended July 4, 2026, as compared to $1,143.3 million in the prior year period. Excluding the impact of foreign exchange, net sales increased $93.7 million, or 8.2%, at the Commercial Foodservice Equipment Group. Domestically, the company realized a sales increase of $58.7 million, or 7.1%, to $885.1 million, as compared

to $826.4 million in the prior year period. The increase in domestic sales is related to an inflection in demand and higher volumes. International sales increased $44.2 million, or 13.9%, to $361.1 million, as compared to $316.9 million in the prior year period. Excluding the impact of foreign exchange, the net sales increase in international sales was $35.0 million, or 11.0%. The increase in international sales is related to improvements in market conditions, primarily in European and Latin American markets.

• Net sales of the Food Processing Equipment Group increased by $85.2 million, or 22.2%, to $469.3 million in the six month period ended July 4, 2026, as compared to $384.1 million in the prior year period. Net sales from the acquisitions of Frigomeccanica and Oka accounted for an increase of $31.4 million during the six month period ended July 4, 2026. Excluding the impact of acquisitions, net sales of the Food Processing Equipment Group increased $53.8 million, or 14.0%, as compared to the prior year period. Excluding the impact of foreign exchange and acquisitions, net sales increased $44.5 million, or 11.6%, at the Food Processing Equipment Group. Domestically, the company realized a sales increase of $22.9 million, or 10.5%, to $241.0 million, as compared to $218.1 million in the prior year period. This includes an increase of $1.0 million from recent acquisitions. Excluding acquisitions, the net increase in domestic sales was $21.9 million, or 10.0%, as compared to the prior year period. The increase in domestic sales is driven by higher sales volumes of protein, bakery and snack products. International sales increased $62.3 million, or 37.5%, to $228.3 million, as compared to $166.0 million in the prior year period. This includes an increase of $30.4 million from the recent acquisitions and an increase of $9.3 million related to the favorable impact of foreign exchange rates. Excluding the impact of foreign exchange and acquisitions, the net sales increase in international sales was $22.6 million, or 13.6%. The increase in international sales reflects growth driven primarily by protein and bakery products in the European markets.

Gross Profit

Gross profit increased to $658.3 million in the six month period ended July 4, 2026 as compared to $608.7 million in the prior year period, primarily driven by higher sales volumes. The impact of foreign exchange rates increased gross profit by approximately $7.1 million. The gross margin rate was 38.4% in the six month period ended July 4, 2026 as compared to 39.9% in the six month period ended June 28, 2025, primarily impacted by tariffs, input cost inflation and product mix.

• Gross profit at the Commercial Foodservice Equipment Group increased by $27.9 million, or 6.0%, to $494.3 million in the six month period ended July 4, 2026, as compared to $466.4 million in the prior year period. The impact of foreign exchange rates increased gross profit by approximately $3.9 million. The gross margin rate decreased to 39.7%, as compared to 40.8% in the prior year period, primarily driven by tariffs, input cost inflation and product mix. The gross margin rate, excluding the impact of foreign exchange, was 39.6%.
• Gross profit at the Food Processing Equipment Group increased by $22.2 million, or 15.6%, to $164.1 million in the six month period ended July 4, 2026, as compared to $141.9 million in the prior year period. Gross profit from the acquisitions of Frigomeccanica and Oka increased gross profit by $7.4 million. Excluding acquisitions, gross profit increased by $14.8 million. The impact of foreign exchange rates increased gross profit by approximately $3.2 million. The gross profit margin rate decreased to 35.0%, as compared to 36.9% in the prior year period, primarily related to tariffs, input cost inflation and product mix. The gross margin rate, excluding acquisitions and the impact of foreign exchange, was 35.8%.

Selling, General and Administrative Expenses

Combined selling, general and administrative expenses increased to $374.9 million in the six month period ended July 4, 2026, as compared to $329.4 million in the six month period ended June 28, 2025. As a percentage of net sales, selling, general and administrative expenses were 21.9% in the six month period ended July 4, 2026, as compared to 21.6% in the six month period ended June 28, 2025.

Selling, general and administrative expenses reflect increased costs of $6.0 million associated with acquisitions, including $0.7 million of intangible amortization expense. Selling, general and administrative expenses reflect increases in combined compensation costs and share-based compensation of $22.9 million, strategic transaction costs of $15.4 million, travel and entertainment expenses of $2.5 million. This was offset by lower intangible amortization expenses of $2.0 million. Foreign exchange rates had an unfavorable impact of $4.9 million.

Restructuring Expenses

Restructuring expenses increased $0.4 million to $2.3 million in the six month period ended July 4, 2026 from $1.9 million in the six month period ended June 28, 2025. Restructuring expenses in the six month periods ended July 4, 2026 and June 28, 2025 related primarily to headcount reductions and facility consolidations within the Commercial Foodservice Equipment Group.

Non-operating Income and Expenses

Interest and deferred financing amortization costs were $51.4 million in the six month period ended July 4, 2026, as compared to $39.1 million in the prior year period, primarily reflecting the increase in interest rates. Net periodic pension benefit increased $1.8 million to $4.9 million in the six month period ended July 4, 2026, as compared to $3.1 million in the prior year period related to the decrease in discount rate used to calculate the interest cost and increase in expected return on assets as a result of the higher asset value. Other income was $4.8 million in the six month period ended July 4, 2026, as compared to other expense of $3.1 million in the prior year period. The change was primarily driven by income of $4.5 million in the current period related to the change in fair value of the note receivable.

Income Taxes

A tax provision of $70.9 million, at an effective rate of 29.6%, was recorded during the six month period ended July 4, 2026, as compared to $51.6 million at an effective rate of 21.6% in the prior year period. During the six month period ended July 4, 2026, the effective tax rate was higher than the prior year period primarily due to discrete tax items related to certain internal restructurings associated with the Spin-off and other foreign discrete tax items. The effective tax rate was higher than the U.S. statutory tax rate of 21.0% primarily due to non-deductible expenses, state taxes and foreign rate differentials.

Equity in Losses of Affiliate, Net of Tax

Equity in losses of affiliate, net of tax, representing the company's share of Composition Brands' results, was $28.9 million for the six month period ended July 4, 2026, which included $17.0 million of expenses from preliminary purchase accounting adjustments, $6.2 million of interest expense and $5.0 million of non-recurring, transaction-related costs. The results recognized during the six month period ended July 4, 2026 cover the period beginning on the date the Residential Transaction was completed, February 2, 2026, and ending on April 4, 2026. See Note 4 to the Condensed Consolidated Financial Statements for further details.

Earnings/(Loss) from Discontinued Operations, Net of Tax

Loss from discontinued operations, net of tax, was $134.8 million in the six month period ended July 4, 2026, as compared to earnings from discontinued operations, net of tax, of $11.6 million in the six month period ended June 28, 2025. During the six month period ended July 4, 2026, the company recorded a pre-tax loss on disposition of $94.9 million. Prior year results include activity for the full reporting period, whereas current period results only include activity through the close of the Residential Transaction on February 2, 2026 and limited distribution operations in certain international locations that have not yet transferred to Composition Brands as of July 4, 2026. See Note 9 to the Condensed Consolidated Financial Statements for further details.

Financial Condition and Liquidity

Total cash and cash equivalents decreased by $63.0 million to $159.2 million at July 4, 2026 from $222.2 million at January 3, 2026. Total debt decreased to $2.0 billion at July 4, 2026 from $2.2 billion at January 3, 2026.

Operating Activities

Net cash provided by operating activities - continuing operations after changes in assets and liabilities amounted to $187.5 million as compared to $229.0 million in the prior year. During the six month period ended July 4, 2026, working capital changes impacted operating cash flows primarily driven by increased inventory levels of $51.7 million due to increased sales and inflationary increases in costs, an increase in prepaid expenses and other assets of $38.4 million due to impacts from the timing of tax payments and status of over-time revenue contracts, an increase in accounts receivable of $32.2 million due to higher sales volumes, an increase in accounts payable of $19.8 million and a decrease of $41.6 million in accrued expenses and other liabilities, including impacts from the timing of payments made for taxes, various customer programs and incentive programs.

Investing Activities

During the six month period ended July 4, 2026, net cash provided by investing activities - continuing operations amounted to $544.9 million. This included $564.6 million in proceeds received from the Residential Transaction, net of cash transferred. Cash used to fund acquisitions and investments amounted to $1.1 million, which included payment of $0.9 million for the finalization of the working capital provision provided by the purchase agreement for a prior year acquisition. Additionally, $18.6 million was expended, primarily to upgrade production equipment, manufacturing facilities, and investments in innovation centers.

Financing Activities

Net cash flows used for financing activities amounted to $787.5 million during the six month period ended July 4, 2026. The company’s borrowing activities during 2026 included $419.1 million of net repayments under its Credit Facility. Additionally, in 2026 the company repurchased $575.8 million of Middleby common stock shares. This was comprised of $565.9 million used to repurchase 3,793,467 shares of its common stock under a repurchase program and $9.9 million to repurchase 62,107 shares of Middleby common stock that were surrendered to the company for withholding taxes related to restricted stock vestings.

At July 4, 2026, 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 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.

Recently Issued Accounting Standards

See Note 1(n) to the Condensed Consolidated Financial Statements for further information on new accounting pronouncements.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations are based upon the company's Condensed 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 Condensed Consolidated Financial Statements. There have been no changes in the company's critical accounting policies, which include revenue recognition, inventories, goodwill and indefinite-life intangibles, convertible debt, pension benefits, and income taxes, as discussed in the company's Annual Report on Form 10-K for the year ended January 3, 2026 (the “2025 Annual Report on Form 10-K”), except for the adoption of new critical accounting policies pertaining to equity method investments and note receivables, which were implemented in connection with the Residential Transaction completed during the current year, as discussed in Note 4 to the Condensed Consolidated Financial Statements.

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 variable rate debt obligations (in thousands):

The company is exposed to interest rate risk on its floating-rate debt. The company has entered into interest rate swaps to fix the interest rate applicable to certain of its variable-rate debt. 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 July 4, 2026, the fair value of these instruments was an asset of $8.4 million. The change in fair value of these swap agreements in the first six months of 2026 was a loss of $2.2 million, net of taxes. The potential net loss on fair value for such instruments from a hypothetical 10% adverse change in quoted interest rates would not have a material impact on the company's financial position, results of operations and cash flows.

Foreign Exchange Derivative Financial Instruments

The company uses derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third-party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The potential 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 contracts was a loss of $0.2 million at the end of the second quarter of 2026.

Derivative financial instruments are recognized in the Condensed Consolidated Balance Sheets as either an asset or a liability measured at fair value. Changes in the market value and the related foreign exchange gains and losses are recorded in the Condensed Consolidated Statements of Comprehensive Income.

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 July 4, 2026, the company's management, with the participation of the company's Chief Executive Officer and Chief Financial Officer, evaluated 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 July 4, 2026, 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.

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 six months ended July 4, 2026, except as follows: