Chefs’ Warehouse, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. The company distributes specialty foods, ingredients and proteins to foodservice customers, primarily in the U.S. and Canada. This unaudited filing covers the 13 weeks ended June 30, 2017, and the first 26 weeks of fiscal 2017; comparisons are with periods ended June 24, 2016. Amounts below are in millions unless stated otherwise.
Financial performance and liquidity
- Q2 revenue: $331.7, up 13.9% year over year. Organic growth contributed $29.1 million (10.0%); MT Food contributed $11.3 million (3.9%). Specialty-business organic case count rose 6.4%; protein pounds sold rose 1.2%.
- Q2 profitability: Gross profit was $82.6 million, up 15.0%; gross margin increased to 24.9% from 24.7%. Operating income was $12.2 million versus $11.2 million, but operating margin declined to 3.7% from 3.9%. Net income was $3.7 million ($0.14 per diluted share), versus a net loss of $8.5 million ($0.33 per share).
- First-half revenue and earnings: Revenue was $619.3 million, up 12.2%; organic growth contributed $44.1 million (8.0%) and MT Food $23.2 million (4.2%). Gross profit was $156.5 million and gross margin was 25.3%, up from 25.0%. Operating income declined to $15.3 million from $16.5 million; operating margin fell to 2.5% from 3.0%. Net income was $2.0 million ($0.08 per diluted share), compared with a net loss of $7.5 million ($0.29 per share).
- Cash flow: First-half operating cash flow was $21.7 million, versus $3.3 million in the prior-year period. Investing cash outflow was $6.4 million, including capital expenditures; financing cash outflow was $11.3 million. Cash increased $4.1 million to $37.0 million. Operating cash generation reflected working-capital changes, including higher payables and lower prepaid assets, partly offset by inventory and receivables investment.
- Balance sheet and liquidity: At June 30, cash was $37.0 million, current assets $274.3 million and current liabilities $109.2 million. Total debt obligations were $320.1 million, including $290.0 million under the senior secured term loan and $36.8 million of convertible notes; the balance includes capital leases/software financing and deferred financing fees and original issue discount. The company had no ABL borrowings and reported $65.5 million available, after reserving $9.5 million for letters of credit. It was in compliance with debt covenants.
Material changes and management commentary
- Sales growth reflected organic expansion and the acquired Chicago distributor MT Food, acquired in June 2016. The company reported 2.2% first-half internally calculated inflation, including 2.8% in specialty and 1.2% in protein.
- First-half operating expenses rose 16.5%, faster than sales, and increased to 22.8% of sales from 22.0%. Management cited higher warehouse and delivery labor, additional management investment, and the absence of prior-year gains from reductions in earn-out liabilities.
- Interest expense was $11.8 million for the first half, versus $29.3 million a year earlier. The prior-year period included a $22.3 million debt-refinancing prepayment penalty; excluding that item, the company said interest expense rose due to higher debt levels after refinancing.
- The company repaid its $11.0 million New Markets Tax Credit loan in April 2017, using $8.1 million cash and $2.9 million from a sinking fund. Term-loan interest was 6.79% at June 30, and the facility matures in June 2022.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. Management estimated fiscal 2017 capital expenditures, excluding acquisitions, at approximately $11 million and described continued investment in facilities, technology, service and operating efficiencies. ERP implementation was expected to continue through fiscal 2017 and 2018.
- Management noted sensitivity to economic conditions and restaurant spending, food-cost inflation or deflation, labor and fuel costs, product mix, weather and supply disruptions, and the ability to pass cost increases through to customers. The business generally lacks long-term customer contracts; protein margins face competitive pressure.
- A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by approximately $1.7 million, holding other factors constant. Most term-loan debt bears variable interest.
- A contingent guarantee related to a former related-party warehouse arrangement represented a potential obligation of $5.2 million. Management said the building’s fair value was believed to exceed the exposure and that TCW was pursuing a release of the guarantee.
- Ordinary-course legal matters were not considered likely to have a material adverse effect; no material amounts were accrued. The company reported no material changes to the risk factors in its prior Form 10-K.
- The company said the forthcoming lease accounting standard would materially affect its balance sheet and related disclosures. Revenue-recognition adoption was expected to use the modified retrospective method; management was assessing the timing impact for direct-to-consumer sales.
Investor verification points
- Track organic growth separately from MT Food contribution, and assess whether customer, placement and case-count trends persist.
- Monitor operating-expense growth and margins, particularly warehouse, delivery and management costs, against gross-margin gains.
- Review cash conversion and working-capital movements, as first-half operating cash flow benefited substantially from changes in payables and prepaid assets.
- Verify variable-rate debt exposure, interest costs, covenant compliance and ABL availability as rates and borrowing needs change.
- Follow ERP implementation costs and execution, the remaining MT Food purchase-price true-up, and the status of the $5.2 million guarantee exposure.