The Chefs’ Warehouse, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 27, 2019 (52 weeks); fourth-quarter figures are also disclosed. The company distributes specialty foods and center-of-the-plate products to foodservice customers in the U.S. and Canada, with a direct-to-consumer business through Allen Brothers.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $1,591.8 million | $1,444.6 million | +10.2% |
| Gross profit | $406.4 million | $367.0 million | +10.7% |
| Gross margin | 25.5% | 25.4% | +12 basis points |
| Operating income | $50.8 million | $48.8 million | +4.1% |
| Net income | $24.2 million | $20.4 million | +18.6% |
| Diluted EPS | $0.81 | $0.70 | +15.7% |
| Cash from operations | $45.0 million | $45.1 million | Essentially unchanged |
Operating margin was approximately 3.2%, versus 3.4% in FY2018. Operating expenses rose 11.7% to $355.6 million, faster than sales; the increase included $5.9 million of non-cash expense from remeasurement of acquisition earn-out liabilities, versus $1.4 million in FY2018. Interest and other expense declined to $18.4 million from $20.9 million. The effective tax rate was 25.3%, compared with 26.7%.
Fourth quarter: Sales were $426.5 million, gross profit $107.7 million, operating income $18.4 million and net income $10.9 million. Compared with Q4 2018, sales increased from $394.1 million, operating income from $17.8 million and net income from $8.9 million. Diluted EPS was $0.36, versus $0.30.
Cash, debt and liquidity
- Cash and cash equivalents were $140.2 million at year-end, up from $42.4 million. Working capital was $303.0 million; excluding cash, it was $162.8 million.
- Operating cash flow was $45.0 million; investing cash outflow was $44.2 million, including $16.1 million of capital expenditures and $28.1 million for acquisitions. Financing cash inflow was $96.9 million, largely reflecting the convertible-note issuance.
- At year-end, the company had $238.1 million outstanding on its term loan, $150.0 million of convertible senior notes, a $4.0 million convertible unsecured note, and $3.9 million of finance lease and other financing obligations. It had no ABL borrowings and reported $133.4 million of ABL availability. The term loan matures in 2022; the unsecured note in 2023; and the senior notes in 2024.
- In November 2019, the company issued $150.0 million of 1.875% convertible senior notes due 2024. Net proceeds were used in part to repay $43.2 million of ABL borrowings; remaining proceeds were intended for working capital and general corporate purposes, potentially including acquisitions.
- Management stated that available cash, working capital and ABL capacity were sufficient for expected needs over the next 12 months. Planned FY2020 capital expenditures were approximately $38–$42 million, mainly for facility expansions and technology.
Changes, outlook and notable items
- Sales grew 10.2%; management attributed $65.0 million, or 4.5%, to organic growth and $82.2 million, or 5.7%, to acquisitions. Specialty case count grew approximately 5.2%; center-of-the-plate pounds sold rose 0.7%. Estimated inflation was 2.4% in specialty and 2.6% in center-of-the-plate products.
- Acquisition-related growth included Bassian, acquired in February 2019 for approximately $31.8 million, including a $4.0 million convertible note and contingent earn-out consideration. Bassian contributed $49.9 million of FY2019 sales; separate earnings were not disclosed because the business was integrated into the San Francisco operation.
- After year-end, the company acquired Sid Wainer & Son for approximately $46.5 million and Cambridge Packing Co. for approximately $17.0 million, each with possible additional earn-out payments. Purchase-price allocations were incomplete at filing.
- Management’s strategy emphasizes customer and market expansion, selective acquisitions, operating efficiencies and investment in facilities and technology. No full-year revenue or earnings guidance was provided; the filing’s stated FY2020 capital-spending estimate is $38–$42 million.
- Fiscal 2019 included adoption of the lease-accounting standard, adding $127.6 million of operating lease right-of-use assets and $138.0 million of operating lease liabilities to the year-end balance sheet. Adoption did not materially affect reported operations or debt covenants.
- Key risks include low distribution margins; food, protein, fuel and labor cost volatility; reliance on discretionary restaurant spending; customer credit and collections; food safety and supply interruptions; geographic concentration (New York represented approximately 24.9% of sales); acquisition integration; variable-rate debt and refinancing; and potential dilution from convertible notes. The company reported compliance with debt covenants and no material pending legal proceeding known to management.
- The company reported no goodwill impairment in FY2019. Earn-out liabilities were $14.7 million at year-end and their remeasurement can create earnings volatility. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether organic growth, case volumes and margins continue to hold up as acquisitions contribute less to reported growth.
- FY2020 capital spending, facility expansion costs and the returns from ERP and other technology investments.
- Cash conversion and working-capital needs, particularly receivables, inventory and allowance for doubtful accounts.
- Debt-service and refinancing capacity, interest-rate exposure, and potential share dilution if convertible notes convert.
- Acquisition integration, earn-out liabilities and the results of the Sid Wainer and Cambridge Packing acquisitions.
- Food cost inflation, labor availability and expense, customer credit quality, and performance in key regional markets.