The Chefs’ Warehouse, Inc. — Q1 2017 Form 10-Q
Business and period: Specialty food distributor serving primarily independent restaurants and other foodservice customers in the U.S. and Canada. The unaudited quarter covered 13 weeks ended March 31, 2017; comparisons are to the 13 weeks ended March 25, 2016. Amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $287.7 | $260.8 |
| Gross profit / margin | $73.9 / 25.7% | $66.0 / 25.3% |
| Operating expenses | $70.8 | $60.6 |
| Operating income / margin | $3.1 / 1.1% | $5.4 / 2.1% |
| Interest expense | $5.9 | $3.7 |
| Net income (loss) | $(1.6) | $1.0 |
| Diluted EPS | $(0.06) | $0.04 |
| Cash provided by operations | $8.1 | $8.9 |
| Capital expenditures | $3.8 | $3.2 |
Sales increased 10.3% ($26.9): organic growth contributed $14.9 million (5.7%) and the 2016 MT Food acquisition contributed $11.9 million (4.6%). Core specialty organic case count grew approximately 6.0%; protein pounds sold rose 1.3%. Internally calculated food-cost inflation was approximately 0.5% overall.
Gross margin improved 40 basis points, with increases in both specialty and protein. However, operating expenses grew faster than sales, increasing to 24.6% of sales from 23.2%. Higher warehouse and delivery labor, fleet costs, occupancy, and management investment contributed to the increase. Operating income fell 41.8%, and higher interest expense—principally following the June 2016 refinancing—contributed to the swing to a net loss. The reported effective tax rate was 41.6% in both periods.
Balance sheet, debt and liquidity
- At March 31, cash was $35.8 million; current assets were $261.0 million and current liabilities $104.4 million.
- Total debt obligations were $331.9 million, including $15.8 million current and $316.1 million long-term, net of deferred finance fees and original issue discount. Debt included a $290.8 million senior secured term loan and $36.8 million convertible subordinated notes.
- The term loan carried a 6.75% interest rate at quarter-end and matures June 22, 2022. The company reported compliance with debt covenants.
- The $75 million asset-based revolving facility had no borrowings outstanding; $66.1 million was available after $8.9 million reserved for letters of credit.
- The $11 million New Markets Tax Credit loan was repaid in full on April 26, 2017, after quarter-end, for $11.009 million including accrued interest.
- Cash from operations was $8.1 million versus $8.9 million a year earlier. Investing used $3.8 million, primarily capital expenditures; financing used $1.4 million. Cash increased by $2.9 million during the quarter.
Changes, outlook and risks
- Management expected fiscal 2017 capital expenditures, excluding acquisitions, of approximately $9.9 million. Spending was expected to support facilities and technology, including continued ERP implementation through fiscal 2017 and 2018.
- Management’s strategy emphasized sales and service expansion, operational efficiency, technology improvements, product growth and selective acquisitions. The filing gives no specific revenue or earnings guidance.
- The MT Food acquisition generated $11.9 million of Q1 2017 revenue; separate earnings disclosure was impracticable because the business had been integrated into Chicago operations. A purchase-accounting measurement-period adjustment increased goodwill by $2.8 million and reduced customer relationships by $2.7 million.
- Management noted exposure to economic conditions and discretionary food-away-from-home spending, food-cost inflation or deflation, labor and other operating costs, customer retention, supply interruptions, weather, competition, acquisition integration and execution, and the relatively low margins of distribution.
- Variable-rate debt creates interest-rate exposure: management estimated a 100-basis-point rate increase would reduce annual after-tax earnings by approximately $1.7 million, holding other factors constant.
- A guarantee related to a former related-party facility sublease had a potential obligation of $5.3 million at quarter-end. The company stated it believed the property value more than offset the exposure and that the counterparty was pursuing a release; no material amount was accrued for ordinary-course legal proceedings.
Investor verification points
- Whether sales growth and customer/case growth persist, and how much comes from organic activity versus acquisitions.
- Whether operating-expense growth moderates and operating margins recover, given Q1 margin contraction and higher labor, fleet and occupancy costs.
- The ongoing cost and execution impact of ERP implementation and facility investments, compared with the $9.9 million fiscal 2017 capital-expenditure expectation.
- Debt service, variable-rate sensitivity, covenant headroom and liquidity after repayment of the NMTC loan.
- Resolution of the former-facility guarantee, acquisition earn-outs and purchase-accounting estimates.