Chefs’ Warehouse, Inc. — Q2 2016 Form 10-Q
Reporting period: Thirteen weeks ended June 24, 2016; year-to-date figures cover twenty-six weeks. Financial amounts below are in millions unless noted. The company distributes specialty foods and proteins to foodservice customers, primarily in the United States and Canada. Interim results are unaudited.
Financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $291.2 | $280.9 | $552.0 | $477.6 |
| Gross profit / margin | $71.8 / 24.7% | $71.7 / 25.5% | $137.8 / 25.0% | $121.5 / 25.4% |
| Operating expenses | $60.6 | $62.4 | $121.2 | $109.0 |
| Operating income / margin | $11.2 / 3.9% | $9.3 / 3.3% | $16.5 / 3.0% | $12.5 / 2.6% |
| Interest expense | $25.7 | $3.6 | $29.3 | $5.4 |
| Net income (loss) | $(8.5) | $3.4 | $(7.5) | $4.3 |
| Diluted EPS | $(0.33) | $0.13 | $(0.29) | $0.17 |
- Q2 sales rose 3.7%; organic growth contributed $6.3 million (2.3%) and the additional comparison-period coverage of Del Monte contributed $4.0 million (1.4%). First-half sales rose 15.6%, including $55.9 million from Del Monte and $18.5 million of organic growth.
- Gross margin contracted 87 basis points in Q2. Management cited difficulty passing through beef costs and continuing Del Monte integration challenges; specialty division margins also declined. First-half gross margin fell 48 basis points.
- Operating expenses declined year over year in Q2 and as a share of sales, principally because prior-year Del Monte transaction costs were lower in the comparison. Lower estimated earn-out obligations also helped, partly offset by higher labor and occupancy costs at new warehouses.
- Operating cash flow was $3.3 million for the first half, versus $6.5 million a year earlier. Capital expenditures were $8.0 million, compared with $15.2 million. Cash and cash equivalents were $48.3 million at June 24, up from $2.5 million at year-end.
Balance sheet, debt and liquidity
- Total debt obligations were $345.9 million at June 24, including $305.0 million of term loans, $36.8 million of convertible subordinated notes and other debt, net of financing fees. Current debt installments were $13.3 million; long-term debt, net of current installments, was $332.6 million. Debt was $272.2 million at December 25, 2015.
- On June 22, the company refinanced its prior term loan, revolving facility and senior secured notes with a $305 million senior secured term loan, maturing in June 2022. Its stated interest rate was 5.8% at quarter-end. The refinancing generated a $22.3 million debt-extinguishment loss, including $21.1 million in make-whole payments and $1.1 million of written-off financing fees, substantially driving the reported net loss.
- A new asset-based lending facility provides commitments of up to $75 million and matures in June 2021. No balance was drawn at June 24; $68.0 million was available after $7.0 million reserved for letters of credit. The company reported compliance with debt covenants at quarter-end.
- After quarter-end, the company drew $14 million under the delayed-draw term loan to help fund its June 27 acquisition of M.T. Foodservice. It paid $21 million of the $21.5 million purchase price in cash; the balance is payable later, with potential additional consideration and a working-capital adjustment.
Outlook, risks and unusual items
- Management estimated fiscal 2016 capital expenditures, excluding acquisitions, at approximately $14 million. The filing provides no specific full-year sales or earnings guidance and cautions that interim results may not indicate full-year performance.
- Management’s growth priorities include expanding sales territories, improving operations and customer service, investing in facilities and technology, pursuing selective acquisitions, and reducing expenses through centralization. The company operated 22 distribution facilities with approximately 1.2 million square feet of capacity.
- The company identified sensitivity to food-cost inflation and deflation, product mix, labor and fuel costs, economic conditions and food-away-from-home spending. Risks also include customer losses (customers generally have no long-term contracts), supply interruptions, competitive pressure and integration or synergy execution, including for Del Monte and new facilities. Management noted that Brexit could affect European suppliers and cause disruption or price increases.
- At June 24, the Del Monte contingent earn-out liability was $13.7 million and remained subject to estimates of future results. In July, the company settled the Allen Brothers earn-out for $2.7 million; the filing says a $1.7 million gain was recorded in Q2 operating expenses. It also received $1.3 million from escrow for Del Monte working-capital adjustments.
- A guarantee related to a former related-party facility was triggered when the company exited its sublease in February; the potential obligation was $5.4 million. Management believes the building’s value more than offsets the exposure and expected a refinancing to release the company from the guarantee. The filing reports no material accrued amounts for ordinary-course legal proceedings.
Important facts for investors to verify
- Whether operating performance and margins improve as Del Monte integration progresses, particularly in the protein business.
- The recurring earnings and cash-flow picture after excluding the $22.3 million debt-extinguishment loss and other earn-out valuation or settlement effects.
- Debt levels, interest-rate exposure and liquidity after the post-quarter $14 million draw and M.T. Foodservice acquisition; management estimated a 100-basis-point rate increase would reduce annual after-tax earnings by approximately $1.8 million.
- Progress and cost of the Chicago acquisition, new facilities and ERP rollout; management expected the ERP transition to continue through fiscal 2016.
- The eventual Del Monte earn-out obligation and release or resolution of the $5.4 million facility guarantee.