Chefs’ Warehouse, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 25, 2015 (13 weeks), with year-to-date comparisons for the 39 weeks ended September 25, 2015. Comparative periods ended September 26, 2014. Financial amounts below are in millions of dollars unless stated otherwise.
Business context
The company distributes specialty foods and proteins to restaurants and other foodservice customers across the United States and Canada. It reported one combined food-product-distribution segment. The April 6, 2015 Del Monte acquisition substantially expanded its protein business and affected year-over-year comparisons.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Net sales | $277.5 | $208.1 | $759.3 | $608.4 |
| Gross profit | $70.5 | $50.7 | $192.6 | $149.2 |
| Gross margin | 25.4% | 24.4% | 25.4% | 24.5% |
| Operating income | $12.9 | $9.0 | $25.3 | $21.3 |
| Operating margin | 4.6% | 4.4% | 3.4% | 3.5% |
| Net income | $5.2 | $4.2 | $9.6 | $9.0 |
| Diluted EPS | $0.20 | $0.17 | $0.37 | $0.36 |
- Quarterly sales rose 33.4%; management attributed approximately $59.3 million of the increase to acquisitions and $10.2 million to organic growth. Year-to-date sales rose 24.8%, with approximately $117.1 million from acquisitions and $33.8 million from organic growth.
- Quarterly net income increased about 24%; year-to-date net income increased about 6%. For the first 39 weeks, higher gross margin was offset in part by higher operating expenses and interest expense.
- Net cash provided by operations was $16.7 million for the 39 weeks, versus $0.6 million in the prior-year period. Capital expenditures were $19.2 million; investing cash outflow was $126.9 million, including $123.8 million of net cash paid for acquisitions. Financing provided $108.5 million. Cash declined by $1.8 million to $1.5 million.
- At September 25, current assets were $226.6 million and current liabilities $88.5 million. Total debt was $291.9 million, including $7.6 million current; long-term debt was $284.4 million. Revolver availability was $40.6 million after $5.4 million reserved for letters of credit. The company reported compliance with debt covenants.
Material changes and unusual items
- Del Monte was acquired for an initial purchase price of approximately $185.3 million: $123.9 million cash, approximately $24.7 million in stock, and $36.8 million in convertible subordinated notes. Additional earn-out consideration could reach approximately $24.5 million; its estimated fair value was $13.6 million at quarter-end. Purchase-price allocation remained preliminary.
- Del Monte contributed $58.4 million in quarterly sales and $6.1 million in pretax income; year-to-date contribution was $114.6 million and $10.0 million, respectively.
- Debt increased substantially from year-end, from $143.5 million to $291.9 million, primarily in connection with the acquisition. The company issued $25 million of 5.8% senior secured notes and drew on its revolving facility. Del Monte also provided $36.75 million of six-year convertible subordinated notes at 2.5% interest.
- Year-to-date operating expenses included approximately $4.3 million of Del Monte transaction costs, in addition to acquisition-related amortization and contingent-consideration accretion. The quarter’s margin improvement reflected stronger gross margins, including improved Allen Brothers performance.
- The company completed a Las Vegas facility sale-leaseback for $14.6 million, approximately its cost; the continuing lease is treated as an operating lease. A $0.35 million gain on asset sales was reported year to date.
Outlook, risks and contingencies
- Management estimated fiscal 2015 capital expenditures, excluding acquisitions, at approximately $21 million, citing completion of major Bronx and Las Vegas facility work and expected ERP implementation completion. The filing provides no specific revenue or earnings guidance.
- Management’s growth priorities include expanding sales territories, improving operations and purchasing, introducing products, enhancing systems, and reducing overhead through centralization. Results are not necessarily indicative of full-year results, given seasonal and other factors.
- Risks include food-away-from-home demand and discretionary spending; food-price inflation or deflation and product mix; competitive pressure and margins in protein; supply interruptions; customer losses given the lack of customary long-term customer contracts; labor availability, wage and benefit costs, and union activity; acquisition integration and expected synergies; and interest-rate exposure. A 100-basis-point rate increase was estimated to reduce annual after-tax earnings by about $0.7 million, all else equal.
- The company reported ordinary-course legal matters and no material accrual, with management not expecting a material adverse effect. It identified no material off-balance-sheet arrangements and no impairment indicators for goodwill or finite-lived intangibles during the period. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether Del Monte integration, operational initiatives and expected synergies deliver the anticipated performance, and how final purchase accounting and working-capital adjustments affect reported results.
- Debt levels, interest costs, covenant headroom and the ability to maintain liquidity as leverage limits tighten under the credit agreements.
- Whether organic growth and gross-margin gains persist after separating acquisition contribution, food-price inflation and product-mix effects.
- Cash conversion and working-capital needs, including receivables, inventory and the low quarter-end cash balance.
- Potential earn-out payments, labor and union developments, and execution of the remaining capital and ERP projects.