Chefs’ Warehouse, Inc. — FY2014 Form 10-K Summary
Business context and reporting period
The company distributes specialty foods, proteins and broadline staples to foodservice customers in the United States and Canada, with a direct-to-consumer meat business through Allen Brothers. Fiscal 2014 was the 52 weeks ended December 26, 2014; fiscal 2013 was the 52 weeks ended December 27, 2013. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $836.6 million | $673.5 million |
| Gross profit / margin | $206.1 million / 24.6% | $172.4 million / 25.6% |
| Operating income / margin | $33.0 million / 3.9% | $36.6 million / 5.4% |
| Net income | $14.2 million | $17.0 million |
| Diluted EPS | $0.57 | $0.77 |
| Operating cash flow | $9.8 million | $10.6 million |
| Capital expenditures | $24.2 million cash-flow statement; management cites approximately $27.1 million including financed software costs and NMTC-funded amounts | $11.7 million cash-flow statement |
FY2014 sales rose 24.2%, while gross profit rose 19.5%. Cost of sales increased to 75.4% of sales from 74.4%. Cash and cash equivalents were $3.3 million at year-end, down from $20.0 million; working capital was $111.9 million. Current assets were $189.0 million and current liabilities $77.1 million.
Total debt obligations were $143.5 million, including $100.0 million of 5.9% senior secured notes, $27.0 million of term loans, an $11.0 million New Markets Tax Credit loan, and $5.5 million of capital leases and financed software. No revolving-credit borrowings were outstanding at year-end; $135.2 million was available under the $140 million revolving facility, net of letters of credit. The company reported compliance with debt covenants. Substantially all assets secure the credit facilities.
FY2014 fourth-quarter net sales were $228.2 million, gross profit $56.9 million, operating income $11.7 million and net income $5.2 million; diluted EPS was $0.21.
Changes versus the prior comparable period
- Sales growth reflected organic growth, Euro Gourmet (acquired October 2014), and the full-year contribution of Allen Brothers and Qzina, acquired in 2013. Acquisitions accounted for approximately $99.0 million of FY2014 sales growth. Internally calculated inflation was approximately 5.9%.
- Gross margin declined by 96 basis points, principally from a greater protein mix and Allen Brothers’ performance, plus dairy inflation that the company could not fully pass through.
- Operating expenses increased 27.4% and rose to 20.7% of sales from 20.2%. Higher shipping and catalog promotion costs at Allen Brothers and technology investment contributed; a $1.5 million Michael’s inventory-related settlement recovery partly offset costs.
- Operating income fell 9.8% and net income fell 16.3%, despite higher sales. Interest expense increased to $8.2 million from $7.8 million, primarily reflecting acquisition-related debt and the senior notes’ interest cost.
- Operating cash flow decreased $0.8 million. Higher receivables and inventory used cash; net cash used in investing fell to $23.7 million from $89.7 million, mainly because acquisition spending was lower.
Outlook, significant items and risks
- Management expected FY2015 capital expenditures of approximately $21 million, as Bronx and Las Vegas facility work and the JD Edwards ERP implementation neared completion. It expected a FY2015 effective tax rate of approximately 41.5%. The filing does not provide specific sales or earnings guidance.
- On January 11, 2015, after fiscal year-end, the company agreed to acquire Del Monte for approximately $191.2 million, subject to adjustments, plus expected contingent consideration of approximately $25.5 million. Consideration includes $127.5 million cash, 1.2 million shares and $38.3 million of convertible subordinated notes. At filing, closing was expected near the end of Q1 or early Q2 2015, subject to customary conditions; antitrust waiting-period early termination had been received.
- Major risks include low distribution margins, protein and food-cost volatility, inability to pass costs through, food-safety and supply interruptions, customer credit and discretionary-spending exposure, acquisition integration, and geographic concentration. New York represented approximately 37% of FY2014 sales. Protein margin compression had continued through 2014.
- The New York tax audit concerned tax-credit treatment for 2010–2012. The company recorded an estimated final assessment of $511,000 net of federal tax benefit; it said the amount could be $725,000 if its proposals were rejected. Negotiations were expected in FY2015.
- Management expected to be released from a potential $9.3 million guarantee related to a founders-controlled entity’s mortgage following a planned 2015 refinancing. The company disclosed related-party facility leases and other related-party dealings.
- BDO issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of December 26, 2014.
Important facts for investors to verify
- Whether Del Monte closed on the expected terms, and the resulting debt, dilution, contingent payments and integration performance.
- Whether gross-margin pressure—especially in proteins and dairy—stabilized and whether sales growth translated into improved operating income and cash generation.
- The final New York tax-audit outcome and any change in tax reserves.
- Post-acquisition leverage, covenant headroom, revolving-credit availability and the funding of planned capital expenditures.
- Cash conversion and working-capital trends, particularly receivables, inventory and customer credit losses.