The Chefs’ Warehouse, Inc. — Q1 2015 Form 10-Q
Business context and period: The company distributes specialty foods and proteins to foodservice customers, primarily independent restaurants and fine-dining establishments. This unaudited report covers the 13 weeks ended March 27, 2015; comparisons are with the 13 weeks ended March 28, 2014. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $198.876 | $187.183 | +6.3% |
| Gross profit / margin | $50.339 / 25.3% | $46.068 / 24.6% | +9.3%; margin +0.7 percentage point |
| Operating expenses | $47.199 / 23.7% of sales | $42.317 / 22.6% | +11.5% |
| Operating income / margin | $3.140 / 1.6% | $3.751 / 2.0% | -16.2% |
| Net income | $0.967 | $0.989 | -2.2% |
| Diluted earnings per share | $0.04 | $0.04 | Unchanged as reported |
| Cash from operations | $7.207 | $10.463 | Down $3.256 |
| Capital expenditures | $9.053 | $5.817 | Up $3.236 |
- Interest expense was $1.836 million, compared with $2.059 million. A $0.349 million gain on sale of a building also contributed to lower total other expense.
- At March 27, 2015, cash was $1.960 million and total current assets were $177.844 million, against current liabilities of $71.111 million. Total debt was $144.252 million, including $100 million of senior secured notes, $25.5 million of term loans, $2.6 million drawn on the revolving facility, an $11 million New Markets Tax Credit loan, and $5.152 million of capital lease and software-financing obligations.
- The company reported $132.555 million available under its revolving credit facility, after reserving $4.845 million for letters of credit, and said it was in compliance with debt covenants. Debt maturities, variable-rate exposure and covenant requirements remain relevant to liquidity.
- Cash fell by $1.368 million during the quarter, to $1.960 million. Investing activities used $7.537 million; financing activities used $0.926 million. Operating cash flow less capital expenditures was negative $1.846 million.
Changes versus the prior comparable period
- Sales growth reflected organic growth and approximately $0.8 million from the Euro Gourmet acquisition. Management estimated severe Northeast and Mid-Atlantic weather reduced current-quarter sales by $2.5–$3.0 million; weather had reduced prior-year-quarter sales by approximately $2.0 million. Food inflation was approximately 4.0%.
- Gross margin improved primarily from stronger margins in the core specialty business, partly offset by weaker pastry and Allen Brothers margins.
- Operating expenses grew faster than sales, reflecting higher labor costs, investment in management and IT infrastructure, higher bad-debt expense, and Del Monte transaction costs. Lower fuel and freight delivery costs partly offset these increases.
- Operating cash flow declined mainly because working-capital cash contribution fell. Capital spending increased, while cash balances were also affected by revolving-credit activity and a $1.5 million Allen Brothers earn-out payment.
Outlook, risks and unusual items
- Management forecast approximately $21 million of fiscal 2015 capital expenditures, excluding acquisitions, as Bronx and Las Vegas facility work and ERP implementation were expected to approach completion. It said cash on hand and available credit were sufficient for operations and planned capital expenditures over the following 12 months. No specific revenue or earnings guidance was provided.
- On April 6, 2015, after quarter-end, the company completed the Del Monte acquisition for an initial purchase price of approximately $185.1 million, subject to customary adjustments. Consideration included $123.9 million cash, approximately 1.1 million shares valued at about $24.5 million, and $36.75 million of six-year convertible subordinated notes bearing 2.50% interest. The cash portion was funded with revolving borrowings and an additional $25 million of senior secured notes bearing 5.80% and due in 2020. Additional contingent consideration of up to $24.5 million may be payable over six years. The acquisition was not reflected in the quarter’s results, and purchase accounting was incomplete when the filing was issued.
- The company identified risks including economic conditions and discretionary food-away-from-home spending; severe weather and supply interruptions; food-cost inflation or deflation and pricing pressures; customer and supplier concentration/retention risks; integration and synergy execution, including Del Monte; new-facility and systems costs; and interest-rate exposure. A 100-basis-point rate increase was estimated to reduce annual after-tax earnings by approximately $0.193 million, all else equal.
- Management reported an ongoing New York state tax audit and negotiations over any final assessment. The filing does not provide a clear value for a potential assessment. Ordinary-course legal proceedings were not expected by management to have a material adverse effect, and no material amounts were accrued for them.
- Related-party warehouse leases cost $0.412 million in the quarter. A subsidiary’s guarantee connected to a related party’s mortgage was stated at $9.173 million; the filing said the subsidiaries remained released from the guarantee while the sublease remained in force and expected a planned refinancing to result in full release.
- Del Monte-related transaction bonuses of $1.35 million cash and $1.65 million in restricted stock were to be expensed in Q2 2015. The filing also reported a $0.040 million increase in the Allen Brothers contingent earn-out liability during Q1.
Important facts for investors to verify
- Del Monte’s final purchase price, purchase-price allocation, contingent consideration and post-acquisition operating performance.
- Whether the expected Del Monte integration benefits materialize and whether acquisition-related costs, including the Q2 transaction bonuses, affect subsequent margins.
- Progress against the $21 million fiscal 2015 capital-spending estimate and completion of the Bronx, Las Vegas and ERP projects.
- Cash conversion, working-capital trends, capital requirements and use of revolving-credit availability after the acquisition.
- Debt covenant headroom, interest-rate exposure, debt repayment schedule and any changes in borrowing costs or leverage following the acquisition.
- Outcome of the New York state tax audit and any resulting assessment, as well as the status of the related-party mortgage guarantee release.