Business context and reporting period
The Chefs’ Warehouse, Inc. distributes specialty foods, center-of-the-plate proteins and broadline food products to foodservice customers in the U.S. and Canada, with a smaller direct-to-consumer business. This Form 10-K covers the fiscal year ended December 29, 2017 (52 weeks). The prior fiscal year ended December 30, 2016 had 53 weeks, which affects comparisons.
Unless noted otherwise, financial amounts below are in U.S. dollars; annual statement amounts are rounded to millions.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $1,301.5 million | $1,192.9 million |
| Gross profit / margin | $329.4 million / 25.3% | $301.2 million / 25.3% |
| Operating income / margin | $41.1 million / 3.2% | $47.2 million / 4.0% |
| Net income / diluted EPS | $14.4 million / $0.54 | $3.0 million / $0.12 |
| Cash from operations | $31.5 million | $38.9 million |
| Capital expenditures | $12.3 million | $16.6 million |
Fourth-quarter 2017 results: sales of $357.1 million, operating income of $15.3 million, net income of $9.5 million and diluted EPS of $0.35. Fourth-quarter net income included a $3.6 million tax benefit related to the Tax Act.
Year-end cash was $41.5 million; working capital was $188.6 million. Total debt obligations were $325.8 million before $8.0 million of deferred financing fees and original issue discount; the balance sheet reported $317.8 million of debt, including $36.8 million in convertible subordinated notes. The $288.4 million term loan bore interest at 5.57% at year-end and matures in 2022. No borrowings were outstanding under the ABL facility, with $64.8 million available (and $10.2 million reserved for letters of credit). The company reported compliance with debt covenants.
Operating cash flow declined year over year, with management citing greater cash use for inventory and receivables. Investing activities used $42.4 million, including acquisition spending; financing activities provided $19.4 million, including $34.0 million of net proceeds from a December stock offering. The company had $125.1 million in future operating lease payments. A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by about $2.3 million.
Material changes versus the prior period
- Sales grew 9.1% despite one fewer fiscal week. Organic growth contributed $86.9 million (7.3%); MT Food and Fells Point contributed $23.2 million and $22.6 million, respectively, partly offset by the prior-year extra week, which added about $24.1 million.
- Gross margin was essentially flat as reported. Specialty-division margin improved, while protein-division margin declined. Operating expenses rose 13.5% and increased to 22.1% of sales from 21.3%, reflecting prior-year earn-out gains and higher distribution costs. Operating income fell 12.9%.
- Net income increased from $3.0 million, but comparison is affected by the prior year’s $22.3 million debt-extinguishment loss and $8.3 million gain from revaluation of Del Monte earn-out liabilities. Fiscal 2017 also benefited from the $3.6 million Tax Act tax benefit; excluding it, the effective tax rate would have been 41.4%, versus the reported 22.0%.
- Fells Point was acquired in August 2017 for approximately $33.0 million, with up to approximately $12.0 million in contingent earn-out consideration. In December, the company repriced its term loan and issued 1.9 million shares, raising approximately $34.0 million net.
Outlook, commentary and risks
The filing provides no specific revenue or earnings guidance. Management expects fiscal 2018 capital expenditures of $14–$16 million, mainly for distribution-facility expansions and headquarters renovations. It describes plans to pursue organic growth, operating efficiencies, technology improvements and selective acquisitions.
Key risks include the company’s low-margin business model and exposure to food, protein, labor, fuel and interest-rate volatility; dependence on discretionary restaurant spending; concentrated geographic exposure (the New York market represented 27.8% of 2017 sales); customer credit and collection risk; food-safety and regulatory requirements; and the integration and performance of acquisitions. The company does not hedge food-cost exposure. Acquisition earn-outs are fair-value estimates and may cause earnings volatility. Management reported no pending legal matter it believed would have a material adverse effect; the filing notes ordinary-course claims and tax matters. The auditor issued an unqualified opinion on the financial statements and internal controls, and management concluded controls were effective.
Investor facts to verify
- Assess underlying sales and margin trends after adjusting for the extra week in 2016, acquisition contributions and food-cost inflation.
- Review protein-division profitability, distribution-cost growth and working-capital needs, especially inventory and receivables.
- Confirm debt repayment capacity, variable-rate exposure, covenant headroom and the potential dilution or repayment terms of the convertible notes.
- Track Fells Point integration, earn-out performance, and whether planned capital investments and acquisitions generate expected returns.
- Evaluate the sustainability of earnings excluding the one-time Tax Act benefit and prior-year debt and earn-out items.