Chefs’ Warehouse, Inc. — Q3 2016 Form 10-Q
Business context and period. The company distributes specialty foods and center-of-the-plate products to foodservice customers, primarily in the U.S. and Canada, and reports one segment. The quarter was the 13 weeks ended September 23, 2016; year-to-date figures cover 39 weeks. Fiscal 2016 includes an extra week in the fourth quarter. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Net sales | $297.9 | $276.3 | $850.0 | $753.8 |
| Gross profit / margin | $74.4 / 25.0% | $70.2 / 25.4% | $212.2 / 25.0% | $191.6 / 25.4% |
| Operating income / margin | $8.3 / 2.8% | $12.9 / 4.7% | $24.8 / 3.0% | $25.3 / 3.4% |
| Interest expense | $5.9 | $3.9 | $35.3 | $9.3 |
| Net income (loss) | $1.3 | $5.2 | $(6.1) | $9.6 |
| EPS, diluted | $0.05 | $0.20 | $(0.24) | $0.37 |
- Revenue and margins: Q3 sales grew 7.8%; organic growth contributed 2.2 percentage points and MT Food contributed 5.7 points. For the 39 weeks, sales rose 12.8%, including contributions from Del Monte ($48.2), MT Food ($15.6), and organic growth ($32.3). Gross margin fell 43 basis points in Q3 and 46 basis points year to date.
- Cash flow: Operating cash flow was $21.2 for the 39 weeks, versus $16.7 a year earlier. Investing used $31.3, including $19.7 for acquisitions and $11.5 for capital expenditures. Financing provided $33.7. Cash increased to $26.2 from $2.5 at fiscal year-end 2015.
- Liquidity and debt: At September 23, cash was $26.2; current assets were $265.3 and current liabilities $102.8. Total debt obligations were $332.6, including $13.6 current and $319.0 long-term. The company had no ABL borrowings and reported $67.3 available, after $7.7 reserved for letters of credit. It reported compliance with debt covenants.
Material changes and management commentary
- Q3 operating income fell to $8.3 from $12.9 as operating expenses rose 15.3%, outpacing gross-profit growth. Management cited MT Food expenses, expanded warehouse capacity, delivery and fleet costs, and higher amortization.
- Protein gross margin was pressured by difficulty passing through beef prices and continuing Del Monte integration challenges. Protein pounds sold declined 1.8% in Q3; internally calculated food-cost deflation was approximately 2.2% overall.
- Year-to-date net loss primarily reflects a $22.3 debt-extinguishment loss included in interest expense. The June 2016 refinancing replaced prior debt with a senior secured term loan; the company cited $21.1 in make-whole payments and $1.1 in written-off financing fees. The new term loan’s stated rate was 6.75% at quarter-end and maturity is June 2022.
- MT Food was acquired in June 2016 for $21.5, including $21.0 paid at closing; it contributed $15.6 of Q3 revenue and $1.0 of pretax income. The company planned to combine its operations with its existing Chicago facility and transition its ERP system in early 2017.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management estimated fiscal 2016 capital expenditures, excluding acquisitions, at approximately $14.0.
- Management’s growth priorities include expanding sales territories, improving service and operating efficiency, enhancing systems, and pursuing selective acquisitions. It cautioned that interim results may not predict full-year results.
- Key risks include economic conditions and food-away-from-home demand; food-price inflation or deflation and ability to pass costs through; customer and supplier concentration or loss; supply interruptions and weather; competitive pressures and low industry margins; and execution of acquisitions and Del Monte integration.
- Del Monte contingent consideration was valued at $13.9 at September 23, with another $0.5 recorded for MT Food. A $4.1 Del Monte earn-out payment was made September 30, after quarter-end. The company also disclosed a potential $5.4 guarantee tied to a former related-party facility mortgage; it believes the property value offsets the exposure and expects release after refinancing.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. It reported no material change to previously disclosed risk factors.
Investor verification points
- Assess whether organic sales growth and customer activity can continue, separately from acquisition-driven growth.
- Track gross-margin recovery, particularly protein pricing and Del Monte integration, alongside increased operating costs.
- Review the refinancing’s ongoing interest burden, leverage, covenant headroom, and actual ABL borrowing availability.
- Verify acquisition earn-out payments, MT Food integration results, and the status of the related-party mortgage guarantee.
- Compare actual capital spending and cash generation with management’s approximately $14.0 fiscal 2016 capex estimate.
Comparability note: the company reclassified certain prior-period sales and cost-of-sales items to conform to current presentation.