Chefs' Warehouse, Inc. annual report, FY2018

Chefs' Warehouse, Inc. — 2018 Form 10-K

Reporting period: Fiscal year ended December 28, 2018 (52 weeks). This is an annual report, not a standalone quarterly filing; the company also provides unaudited fourth-quarter results. The company distributes specialty foods and center-of-the-plate products to foodservice customers in the U.S. and Canada, and sells some protein products directly to consumers.

Financial performance

MetricFY 2018FY 2017Change / context
Net sales$1,444.6 million$1,301.5 millionUp 11.0%; organic growth contributed $62.2 million (4.8%) and acquisitions $80.9 million (6.2%).
Gross profit / margin$367.0 million / 25.4%$329.4 million / 25.3%Gross profit up 11.4%; margin up 10 basis points.
Operating income / margin$48.8 million / 3.4%$41.1 million / 3.2%Operating income up 18.6%.
Net income / diluted EPS$20.4 million / $0.70$14.4 million / $0.54Net income up $6.0 million.
Cash from operations$45.1 million$31.5 millionUp $13.6 million; growth in earnings was partly offset by working-capital use.
Capital expenditures$19.8 million$12.3 millionExcludes acquisition spending.

Fourth quarter: Net sales were $394.1 million versus $357.1 million in Q4 2017. Operating income was $17.8 million versus $15.3 million; net income was $8.9 million versus $9.5 million, and diluted EPS was $0.30 versus $0.35. The prior-year quarter included a $3.6 million tax benefit from the Tax Act, affecting comparability.

Cash, liquidity and debt: Year-end cash was $42.4 million; working capital was $203.2 million. Gross borrowings were approximately $283.9 million: $239.7 million under the term loan and $44.2 million under the ABL facility. The company reported $90.0 million of additional ABL availability and compliance with debt covenants. Term-loan and ABL rates were variable; year-end rates were 5.8% and 3.7%, respectively. Cash used in investing activities was $33.7 million and cash used in financing activities was $10.4 million.

Material changes and notable items

  • Revenue growth reflected both organic expansion and acquisitions. Specialty-category organic case volume rose approximately 6.2%; center-of-the-plate pounds sold rose 2.6%. Estimated specialty inflation was 1.9%, while center-of-the-plate deflation was 0.7%.
  • Operating expenses increased 10.4% in dollars but declined to 22.0% of sales from 22.1%. The 2018 amount included a $1.4 million non-cash increase in earn-out liabilities; 2017 included a $0.6 million credit.
  • Interest expense declined to $20.7 million from $22.7 million, primarily due to lower effective borrowing rates and conversion of subordinated notes, partly offset by a $1.1 million write-off of deferred financing fees.
  • In July 2018, holders converted $36.8 million of subordinated notes and accrued interest into 1.25 million common shares. The company also repriced its term loan and expanded its ABL facility commitment from $75 million to $150 million.
  • Acquisition cash spending was $13.9 million. The company paid $3.0 million for the Fells Point earn-out and recorded $1.4 million of earn-out liabilities for acquisitions.

Outlook, risks and contingencies

  • Management provided no specific revenue or earnings guidance in the filing. It expects fiscal 2019 capital expenditures, excluding acquisitions, of approximately $24–$26 million, for facility expansions, headquarters renovations and technology projects. The ERP rollout and Dallas facility buildout were expected to continue through 2019.
  • Management’s strategy emphasizes organic customer and product growth, operating efficiency, technology investment and selective acquisitions. It described expectations for margin improvement over time, but did not quantify a target.
  • Key risks include low margins and food-cost volatility; limited ability to pass through inflation or fuel and labor costs; dependence on restaurant discretionary spending; competition and customer purchasing-group pricing pressure; food safety, recalls and supply-chain disruption; acquisition integration; customer credit losses; and concentration in major culinary markets.
  • Debt is substantial, variable-rate and secured by substantially all assets. A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by approximately $2.1 million. The term loan matures in June 2022; the ABL facility matures in June 2023 or earlier under specified terms.
  • Operating lease commitments totaled $147.7 million at year-end. The company expected adoption of lease accounting to recognize approximately $120–$130 million of operating lease liabilities.
  • The company reported no pending legal proceeding it believed would have a material adverse effect and no off-balance-sheet arrangements. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
  • After year-end, on February 25, 2019, the company acquired a Northern California specialty protein business for approximately $31.7 million, including a $4.0 million convertible note, with potential earn-out consideration of approximately $9.0 million.

Important facts for investors to verify

  • How much of reported growth and future performance depends on acquisitions versus organic volume, and whether acquired businesses achieve expected integration benefits.
  • Whether operating cash flow can sustain planned capital spending, working-capital needs, debt service and any further acquisitions.
  • Debt covenant headroom, borrowing-base availability and sensitivity to variable interest rates as the term loan approaches maturity.
  • The effect of food-cost, product-mix, labor and fuel changes on gross margin, particularly across specialty and center-of-the-plate categories.
  • Potential dilution and future earn-out payments, including the subsequent 2019 acquisition and outstanding contingent consideration.
  • Lease obligations and related-party arrangements, including the facility leased from entities controlled by the Pappas family; review the proxy statement for additional governance and compensation detail.