Business context and reporting period
The Chefs’ Warehouse, Inc. (Nasdaq: CHEF) filed this Form 10-K for the 52-week fiscal year ended December 25, 2015. It distributes specialty foods, proteins and broadline staples to foodservice customers in the U.S. and Canada, with a smaller direct-to-consumer business. Its April 2015 acquisition of Del Monte expanded its protein operations, particularly in Northern California.
Financial performance and liquidity
Amounts below are in millions of dollars unless stated otherwise.
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $1,059.0 | $836.6 |
| Gross profit / margin | $269.5 / 25.4% | $206.1 / 24.6% |
| Operating income / margin | $40.4 / 3.8% | $33.0 / 3.9% |
| Net income / diluted EPS | $16.2 / $0.63 | $14.2 / $0.57 |
| Cash from operations | $37.7 | $9.8 |
| Capital expenditures | $21.7 | $24.2 |
| Total debt | $274.8 | $143.5 |
| Cash and working capital | $2.5 / $130.6 | $3.3 / $111.9 |
Sales rose 26.6%; management attributed 20.9 percentage points of growth to acquisitions and 5.7 points to organic growth. Gross margin improved 82 basis points, reflecting stronger core specialty margins and improved Allen Brothers performance. Operating expenses grew faster than sales, partly due to Del Monte amortization and contingent-consideration costs; operating margin edged down. Net income increased 14.0% year over year.
Operating cash flow improved substantially, with management citing higher earnings and better working-capital control. Investing activities used $129.3 million, primarily for Del Monte. The company had $40.7 million available under its revolving facility at year-end and reported compliance with its debt covenants. Its $36.75 million Del Monte convertible subordinated notes bear 2.5% interest, mature in six years and are convertible at $29.70 per share. Cash from operations less capital expenditures was approximately $16.1 million, before acquisitions and other investing items.
Fourth-quarter results and changes versus prior periods
Unaudited fourth-quarter results were: sales of $299.7 million versus $228.2 million in Q4 2014; gross profit of $76.9 million versus $56.9 million; operating income of $15.1 million versus $11.7 million; and net income of $6.7 million versus $5.2 million. Diluted EPS was $0.25 versus $0.21. Del Monte contributed to 2015 results beginning in the second quarter.
In FY2014, operating income and net income declined from FY2013 as operating expenses rose and gross margin compressed, including from a shift toward proteins and dairy inflation that was not fully passed through. FY2015 gross margin recovered, but operating margin remained below FY2013’s 5.4%. Center-of-plate products reached 47% of sales in 2015, up from 37% in 2014.
Outlook, risks and unusual items
- Management expects FY2016 capital expenditures, excluding acquisitions, of approximately $14 million, down from $21.7 million in 2015 following completion of Bronx and Las Vegas facility work. The San Francisco facility build-out and ERP implementation were expected to continue into 2016; the filing gives no specific revenue or earnings guidance.
- Management’s strategy emphasizes organic customer and product growth, operating efficiencies, technology investment and selective acquisitions. It expects scale and efficiency initiatives to support margin improvement over time, but provides no quantified target.
- Del Monte’s initial purchase price was approximately $185.3 million, funded with cash, stock and convertible notes. Additional contingent consideration could reach $24.5 million, subject to performance targets. FY2015 included $1.5 million of acquisition professional fees and $3.0 million of transaction bonuses. Integration, retention, synergies and contingent payments remain risks.
- Debt increased materially to fund acquisitions. The revolving facility and term loan mature in April 2017; the company also faces scheduled debt maturities and significant lease commitments. Variable-rate exposure includes approximately $98.1 million of facility and term-loan borrowings; a 100-basis-point rate increase was estimated to reduce annual after-tax earnings by about $0.6 million.
- Key business risks include low margins, volatile food and fuel costs, protein-price and food-safety risks, customer credit losses, competition, labor costs and economic or weather shocks in concentrated markets. New York represented about 31% of FY2015 sales. Customers generally have no long-term purchase commitments.
- Management reported no pending legal matter it believed would have a material adverse effect. The filing describes a $5.6 million potential guarantee related to a founder-controlled entity’s mortgage, conditionally released while a sublease remains in force; management expected full release following planned 2016 actions. Related-party leases and other transactions are disclosed.
- The external auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Del Monte was excluded from management’s and the auditor’s internal-control assessment because of the timing of the acquisition. No goodwill impairment was identified.
Important facts for investors to verify
- How much of subsequent growth and profitability is organic versus attributable to Del Monte and other acquisitions, and whether acquired operations deliver expected synergies.
- Whether protein mix, commodity inflation or deflation, and pricing actions sustain or erode gross margin and operating margin.
- Debt maturities, covenant headroom, revolving-facility availability and refinancing plans ahead of the April 2017 facility maturity.
- Del Monte earn-out exposure, final purchase-accounting adjustments, integration costs and potential dilution from convertible notes.
- Cash conversion and working-capital trends, including receivables, inventory and allowance levels; year-end cash was low relative to debt.
- Progress on ERP and facility projects, the related capital-spending outlook, and the planned resolution of the conditional mortgage guarantee and related-party arrangements.