Chefs’ Warehouse, Inc. — Q1 2016 Form 10-Q
Business context and period. The company distributes specialty foods and proteins to foodservice customers, primarily in the U.S. and Canada. This unaudited report covers the 13 weeks ended March 25, 2016, compared with the 13 weeks ended March 27, 2015. Fiscal 2016 includes a 14th week in the fourth quarter. Figures below are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $262.4 | $197.9 | +32.6% |
| Gross profit / margin | $66.0 / 25.1% | $49.8 / 25.1% | Gross profit +32.6%; margin flat |
| Operating income / margin | $5.4 / 2.0% | $3.1 / 1.6% | Operating income +70.7% |
| Interest expense | $3.7 | $1.8 | +$1.8 |
| Net income / diluted EPS | $1.0 / $0.04 | $1.0 / $0.04 | Net income +$0.03 |
| Cash from operations | $8.9 | $7.2 | +$1.7 |
| Capital expenditures | $3.2 | $9.1 | -$5.9 |
Del Monte, acquired in April 2015, contributed $52.1 million of Q1 2016 sales; management attributed the remaining $12.4 million of sales growth to organic growth. Internally calculated inflation was approximately 0.7%. Center-of-the-plate sales rose to 49% of sales from 36%, reflecting the protein business mix. Specialty-division gross margin declined 52 basis points, while protein-division margin improved 417 basis points.
Balance sheet, debt and liquidity
- At March 25, 2016, cash was $2.7 million, total assets $570.5 million, and stockholders’ equity $189.8 million.
- Total debt obligations were $267.3 million, including $125.0 million of senior secured notes, $90.0 million drawn on the revolving facility, and $36.8 million of convertible subordinated notes. Debt was $272.2 million at December 25, 2015.
- The company reported $43.5 million available under the revolving facility in the debt note; MD&A reports $43.4 million. It also had $6.5 million reserved for letters of credit. The facility and term loans mature in April 2017; the NMTC loan matures in April 2017.
- The company said it complied with debt covenants at quarter-end. It estimated that a 100-basis-point increase in interest rates would reduce annual after-tax earnings by approximately $0.6 million.
- Operating cash flow increased to $8.9 million. Investing used $3.2 million and financing used $5.6 million, including $3.4 million net repayments on the revolver. Cash ended the quarter at $2.7 million.
Management commentary, outlook and risks
Management cited operating expense leverage, favorable transportation costs, and the absence of prior-year Del Monte transaction costs as contributors to improved operating income. Higher occupancy costs at new facilities and increased amortization partially offset these benefits. Interest expense rose substantially because of debt used to finance Del Monte. Net income remained nearly unchanged despite higher sales and operating income.
Management expected fiscal 2016 capital expenditures, excluding acquisitions, of approximately $14 million, down from $21.7 million in fiscal 2015, principally because Bronx and Las Vegas facility construction was completed. Planned investments include facilities and technology; the ERP rollout was expected to continue through fiscal 2016 and 2017. The filing provides no earnings or revenue guidance and cautions that quarterly results may not indicate full-year results.
Key risks include food-away-from-home demand and discretionary spending, food-cost inflation or deflation and the ability to pass costs through, competition and low industry margins, supply interruptions and weather, customer concentration/retention risks given the lack of customary long-term customer contracts, integration and synergy execution at Del Monte, and costs and execution of new facilities and systems. Management said there were no material changes to the risk factors in the 2015 Form 10-K.
Contingencies and unusual items
- Del Monte acquisition consideration included $36.8 million of convertible notes and potential earn-out payments of up to approximately $24.5 million. The fair value of the Del Monte earn-out was $13.4 million at quarter-end; total Del Monte and Allen Brothers earn-out liabilities were $17.8 million.
- After exiting a related-party facility sublease on February 29, 2016, the company’s guarantee of the landlord’s mortgage was triggered; the potential obligation was $5.5 million. Management believed the building’s value more than offset the potential obligation and expected a refinancing to release the company from the guarantee.
- The company disclosed related-party warehouse leases and purchases from a supplier in which certain company insiders held an ownership interest. Management did not expect ordinary-course legal proceedings to have a material adverse effect; no material amounts were accrued.
- Prior-period operating expense presentation was reclassified so certain amounts are included in net sales and cost of sales. The company adopted debt-issuance-cost presentation guidance retrospectively, reducing reported December 2015 assets and liabilities by $2.5 million.
Important facts for investors to verify
- Whether organic growth and Del Monte integration are translating into durable earnings and cash generation, given that net income was nearly flat year over year.
- Revolver availability: the filing cites both $43.5 million and $43.4 million; confirm the precise amount and applicable borrowing conditions.
- Near-term refinancing and repayment requirements, especially the April 2017 credit-facility and NMTC maturities, covenant headroom, and floating-rate exposure.
- Del Monte earn-out performance conditions, the potential maximum payment, and the status of the $5.5 million mortgage guarantee and expected release.
- Execution, costs, and expected benefits of the ERP rollout and facility investments, alongside the related-party arrangements disclosed in the filing.