Chefs’ Warehouse, Inc. — Form 10-Q Summary
Reporting period: 13 weeks ended September 27, 2013, with year-to-date results for the 39 weeks ended that date; comparisons are to the periods ended September 28, 2012. The company distributes specialty foods and related products to foodservice customers in the United States and Canada. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Revenue | $170.6 | $124.8 | $480.2 | $337.7 |
| Gross profit / margin | $44.0 / 25.8% | $32.4 / 25.9% | $123.1 / 25.6% | $88.9 / 26.3% |
| Operating income / margin | $9.4 / 5.6% | $7.3 / 5.9% | $26.4 / 5.5% | $20.9 / 6.2% |
| Net income | $4.2 | $3.8 | $12.2 | $10.9 |
| Diluted EPS | $0.20 | $0.18 | $0.58 | $0.52 |
- Q3 revenue grew 36.7%; management attributed $35.6 million of the $45.8 million increase to acquisitions and $10.2 million to organic growth. Year-to-date revenue grew 42.1%, with $117.5 million from acquisitions and $24.9 million from organic growth.
- Despite higher sales and earnings, gross and operating margins declined. Management cited acquisition-related product mix, higher amortization, Bronx facility duplicate occupancy costs, and compensation expense. Transportation efficiencies partly offset year-to-date expense increases.
- Interest expense rose to $2.3 million in Q3 and $5.6 million year to date, reflecting higher debt and the 5.9% senior notes. Effective tax rates were 41.5% for Q3 and year to date.
Cash flow, balance sheet, and financing
- For the 39 weeks, operating cash flow was $14.7 million, investing cash outflow was $60.0 million, and financing cash inflow was $99.7 million. Capital expenditures were $5.7 million and acquisition payments, net of cash acquired, were $54.4 million.
- At September 27, cash and cash equivalents were $54.6 million, versus $0.1 million at December 28, 2012; current assets were $188.2 million and current liabilities $54.8 million. Restricted cash was a further $6.2 million.
- Total debt obligations were $148.0 million, including $100 million of 5.9% senior secured notes due 2023, $34.5 million under the term loan, an $11 million New Markets Tax Credit loan, and $2.5 million of capital leases and financed software. The notes have $50 million installments due in 2018 and 2023. The company reported $136.2 million available under its $140 million revolving facility and compliance with debt covenants.
- A September public offering of 3.8 million shares generated approximately $75.1 million net proceeds. About $12.5 million was used to repay revolving borrowings; remaining proceeds were held for general corporate purposes. Shares outstanding increased to 25.0 million from 21.0 million at year-end 2012.
Acquisitions, outlook, and risks
- The company acquired Qzina, a pastry and dessert-products distributor, on May 1 for approximately $32.1 million net of acquired cash. The purchase-price allocation was preliminary. It also acquired Queensgate at year-end 2012; up to $2.4 million of additional consideration depends on performance milestones. Qzina, Queensgate, and Michael’s expanded geographic reach and product mix.
- Management expected fiscal 2013 capital expenditures, excluding acquisitions, of approximately $25 million, including about $21 million for the Bronx distribution facility and approximately $4 million for the JD Edwards ERP implementation. Both projects were expected to be operational during fiscal 2014. Management said available cash and revolving credit were sufficient for operations and planned capital expenditures over the next 12 months, while future acquisitions could require additional financing.
- Key disclosed risks include economic weakness and reduced dining-out spending; food-cost inflation or deflation, pricing and margin pressure; supply interruptions and the lack of long-term customer contracts; fuel costs; acquisition execution and integration; and the ability to deploy offering proceeds effectively. Management noted that actual results may differ from forward-looking expectations and that interim results are not necessarily indicative of full-year results.
- Ordinary-course legal matters were not expected by management to have a material adverse effect; no material amounts were accrued. A conditional guarantee associated with a related-party warehouse arrangement had a potential obligation of $10.1 million, though the filing states the guarantors were conditionally released while specified conditions remained satisfied.
Important facts for investors to verify
- Whether organic growth and acquisition contributions persist, and how acquisition-related mix affects gross margins.
- Whether the Bronx facility and ERP projects meet their expected fiscal 2014 operating timetable and budget.
- Use of remaining equity-offering proceeds, future acquisition financing needs, and compliance with leverage and fixed-charge covenants.
- Final Qzina purchase accounting, the Queensgate contingent earn-out, and the impact of acquisition-related amortization on earnings.
- Exposure to food-price, customer-retention, supply-chain, and interest-rate risks; the filing estimated that a 100-basis-point rate increase would reduce after-tax earnings by about $202,000 annually.