Chefs’ Warehouse, Inc. — FY 2016 Form 10-K
Business context and reporting period. The company distributes specialty foods, proteins and broadline food products to foodservice customers in the U.S. and Canada, and also sells certain proteins directly to consumers. Fiscal 2016 ended December 30, 2016 and included 53 weeks, versus 52 weeks in fiscal 2015. Unless noted, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $1,192.9 | $1,046.9 |
| Gross profit / gross margin | $301.2 / 25.3% | $268.7 / 25.7% |
| Operating income / operating margin | $47.2 / 4.0% | $40.4 / 3.9% |
| Interest expense | $41.6 | $13.0 |
| Net income / diluted EPS | $3.0 / $0.12 | $16.2 / $0.63 |
| Cash from operations | $38.9 | $37.7 |
| Capital expenditures | $16.6 | $21.7 |
- Annual sales rose 13.9%; reported growth included Del Monte ($48.6 million), MT Food ($31.6 million), the extra week ($24.1 million) and organic growth ($41.7 million). Management reported 1.2% internally calculated deflation for 2016.
- Gross profit increased 12.1%, but gross margin declined about 42 basis points, primarily from a higher protein sales mix and the performance of Del Monte and Allen Brothers. Operating expenses rose 11.2%, while declining as a share of sales to 21.3% from 21.8%.
- Net income fell chiefly because the June 2016 debt refinancing generated a $22.3 million extinguishment loss, including make-whole payments and deferred financing fee write-offs. Excluding that loss, management said the effective tax rate would have been about 41.3%, versus the reported 46.7%.
- In the fourth quarter, sales were $342.9 million, operating income $22.4 million and net income $9.1 million; prior-year fourth-quarter figures were $293.1 million, $15.1 million and $6.7 million, respectively.
- At year-end, cash was $32.9 million and working capital was $157.1 million. Gross contractual debt was approximately $341.5 million, including a $291.6 million term loan, $36.75 million of convertible subordinated notes, an $11.0 million New Markets Tax Credit loan and other financing. The term loan carried a 6.75% rate at year-end and matures in 2022.
- The $75 million asset-based revolver had no borrowings outstanding; $66.7 million was available after letters of credit. The company reported compliance with debt covenants. A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by approximately $1.6 million.
Material changes, outlook and risks
- The company refinanced its prior debt facilities in June 2016, repaying the previous revolver, term loan and senior secured notes. It later repaid $25 million of the new term loan and terminated the remaining delayed-draw commitment.
- MT Food was acquired in June 2016 for $21.5 million, including $21.0 million paid at closing; it contributed $31.6 million of reported 2016 revenue. Del Monte’s remaining earn-out liability was remeasured to $1.4 million at year-end; MT Food’s earn-out liability was $0.5 million.
- Management expected approximately $9.9 million of capital expenditures in fiscal 2017, down from $16.6 million in 2016, following completion of major Bronx and Las Vegas facility work. ERP implementation was expected to continue through fiscal 2017 and into 2018, with approximately $5 million of remaining cost. The filing provides no specific revenue or earnings guidance.
- Management’s strategy emphasizes organic customer growth, margin improvement through operating efficiencies and selective acquisitions. Principal risks include low distribution margins, food and protein price/supply volatility, ability to pass through costs, customer credit and discretionary restaurant demand, acquisition integration, regional concentration, food safety and regulation, labor costs, and variable-rate debt.
- Other items to monitor include a $5.3 million potential guarantee tied to a related-party facility mortgage, which the company believes is more than offset by the property’s value; a collective bargaining agreement covering about 10.8% of employees that expires in August 2017; and substantial operating lease commitments. Management reported no known legal proceeding expected to have a material adverse effect.
- The company reported an unqualified audit opinion and effective internal control over financial reporting. It does not anticipate paying cash dividends in the foreseeable future.
Important facts for investors to verify
- How much of reported growth was sustained organic volume growth versus acquisitions, the extra fiscal week, pricing and product mix.
- Whether protein margins and Del Monte/Allen Brothers performance improve, and whether management achieves stated efficiency and integration benefits.
- Debt repayment capacity, variable-rate exposure, covenant headroom and refinancing needs, including the $11 million NMTC loan due April 2017 as described in the filing.
- Actual fiscal 2017 capital spending and ERP implementation costs, and whether systems investments deliver expected savings.
- Potential contingent acquisition payments, the mortgage guarantee, self-insurance exposures and other commitments; the filing text does not provide a clear estimate of total possible losses for all contingencies.