Chefs’ Warehouse, Inc. — Q2 2015 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 26, 2015; comparisons are to periods ended June 27, 2014. Unaudited. Unless stated otherwise, financial amounts below are in millions; the filing presents amounts in thousands.
Business context and reporting period
The company distributes specialty foods and protein products to foodservice customers, primarily independent restaurants and fine-dining establishments. Its April 6, 2015 acquisition of Del Monte added Northern California protein distribution. Results include Del Monte from the acquisition date, so reported growth reflects both acquisition and organic growth.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $282.9 | $213.1 | $481.8 | $400.3 |
| Gross profit | $71.8 | $52.4 | $122.1 | $98.5 |
| Gross margin | 25.4% | 24.6% | 25.4% | 24.6% |
| Operating income / margin | $9.3 / 3.3% | $8.6 / 4.0% | $12.5 / 2.6% | $12.3 / 3.1% |
| Net income | $3.4 | $3.8 | $4.3 | $4.8 |
| Diluted EPS | $0.13 | $0.15 | $0.17 | $0.19 |
Cash flow, first half: Operating cash flow was $6.5 million, versus $3.0 million a year earlier. Capital expenditures were $15.2 million; cash paid for acquisitions, net of cash acquired, was $123.9 million. Investing activities used $137.5 million, while financing activities provided $130.2 million. Cash declined $1.0 million to $2.4 million.
Balance sheet and liquidity at June 26: Total debt obligations were $312.7 million, including $112.9 million drawn on the revolving facility and $36.8 million of convertible subordinated notes; long-term debt, net of current portion, was $305.4 million. The company reported $22.2 million available under its revolver after reserving $4.8 million for letters of credit. It said it was in compliance with debt covenants. Total assets were $588.5 million and stockholders’ equity was $177.0 million.
Material changes versus prior comparable periods
- Q2 sales rose 32.7%; management attributed $56.9 million of the increase to acquisitions and $12.8 million to organic growth. First-half sales increased 20.3%, with $57.7 million from acquisitions and $23.7 million from organic growth.
- Gross margin improved 79 basis points in Q2 and 75 basis points for the first half, reflecting improved specialty margins and protein performance, including Allen Brothers.
- Operating expenses increased faster than sales. The operating expense ratio rose to 22.1% from 20.6% in Q2 and to 22.8% from 21.5% for the first half. Management cited Del Monte transaction costs and amortization, higher labor, infrastructure investment, and higher bad-debt expense; lower fuel and freight costs partly offset these items.
- Despite higher sales and gross profit, net income and diluted EPS declined in both comparisons. Higher operating expenses and acquisition-related interest costs contributed; operating margin contracted.
- Del Monte contributed $56.1 million in net revenue and $3.4 million in income before taxes in the reported period from acquisition through quarter-end.
- Center-of-the-plate products increased to 43.4% of first-half sales from 35.9% a year earlier, reflecting the expanded protein business.
Outlook, management commentary, risks and unusual items
- No specific revenue or earnings guidance was provided. Management described continued investment in sales expansion, service, purchasing, product offerings, operating efficiency, and acquisitions. It estimated fiscal 2015 capital expenditures, excluding acquisitions, at approximately $21 million.
- Management estimated food inflation at 3.3% for Q2 and 3.6% for the first half. Severe Northeast and Mid-Atlantic weather was estimated to have reduced first-half sales by $2–3 million; weather also reduced first-quarter 2014 sales by an estimated $2 million.
- Del Monte’s initial purchase price was approximately $185.3 million, including $123.9 million cash, $24.7 million in stock, and $36.8 million of six-year convertible notes bearing 2.5% interest. Additional contingent consideration of up to approximately $24.5 million depends on performance targets; the recorded fair value was $8.0 million at quarter-end. Purchase accounting remained preliminary.
- Q2 included approximately $3.3 million of transaction-related costs and $1.9 million of Del Monte amortization. First-half transaction costs were approximately $4.3 million. The filing also records $1.3 million of Del Monte professional fees and $3.0 million of transaction bonuses in first-half operating expenses.
- On June 30, after quarter-end, the company sold its Las Vegas distribution facility for $14.6 million, approximately its cost, and leased it back under an operating lease. July 1 credit amendments allow temporary covenant adjustments for qualifying acquisitions; the note interest rate increases by 0.25% during an adjustment period.
- Key risks include successful integration and realization of Del Monte synergies, acquisition financing and leverage, covenant compliance, variable-rate interest exposure, food and protein price volatility, supply and weather disruptions, food safety and regulatory obligations, labor costs, and dependence on discretionary food-away-from-home spending. The filing estimates that a 100-basis-point rate increase would reduce annual after-tax earnings by approximately $816,000, holding other factors constant.
- Ordinary-course legal proceedings were reported; management did not expect them to have a material adverse effect and recorded no material related accrual. Disclosure controls were assessed as effective, and the company reported no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether Del Monte integration, operating improvements, and contingent earn-out targets are being achieved, and whether preliminary purchase accounting changes.
- Debt, revolver availability, leverage and fixed-charge covenant headroom, and sensitivity to interest rates as acquisition-related borrowings affect results.
- Whether organic growth and gross-margin improvement persist as protein becomes a larger share of sales, and whether labor and other operating costs moderate.
- Actual capital spending versus the approximately $21 million estimate, and the ongoing cost and implications of the Las Vegas sale-leaseback.
- Whether acquisition-related and other unusual expenses, working-capital demands, and cash generation materially affect liquidity and earnings in subsequent periods.