Business context and reporting period
The Chefs’ Warehouse, Inc. distributes specialty foods and related products to restaurants and other foodservice customers in the U.S. and Canada. This unaudited Form 10-Q covers the 13 and 26 weeks ended June 28, 2013, compared with the corresponding periods ended June 29, 2012. Amounts below are in millions unless stated otherwise.
Financial performance and position
- Second quarter: Net sales were $170.2 million, up 48.2%; gross profit was $44.0 million; operating income was $11.1 million; and net income was $5.3 million, versus $4.5 million. Diluted EPS was $0.25 versus $0.21.
- First half: Net sales were $309.6 million, up 45.4%; gross profit was $79.2 million; operating income was $17.0 million; and net income was $8.0 million, versus $7.1 million. Diluted EPS was $0.38 versus $0.34.
- Margins: Second-quarter gross margin fell to 25.9% from 26.5%, and operating margin to 6.5% from 7.4%. First-half gross margin fell to 25.6% from approximately 26.6%; operating margin declined to 5.5% from 6.3%. Management cited acquisition-related product mix, amortization, compensation and Bronx facility occupancy costs; transportation efficiencies partly offset expenses.
- Cash flow: First-half operating cash flow was $20.8 million, up from $7.5 million. Investing used $57.3 million, including $54.0 million for acquisitions and $3.3 million in capital expenditures. Financing provided $38.6 million. Cash ended at $2.3 million.
- Debt and liquidity: Total debt obligations were $162.0 million at June 28, versus $124.5 million at December 28, 2012. Debt included $100 million of 5.9% senior secured notes, $15 million drawn on the revolver, a $34.5 million term loan, an $11 million New Markets Tax Credit loan and $1.5 million of capital leases. Revolver availability was $123.2 million; the company reported compliance with debt covenants. Current assets were $133.4 million and current liabilities $63.4 million.
Material changes versus the prior comparable period
- Acquisitions materially increased reported sales. For Q2, management attributed approximately $45.6 million of the $55.3 million sales increase to acquisitions and $9.8 million to organic growth. For the first half, it attributed $81.2 million of the $96.7 million increase to acquisitions and $15.4 million to organic growth.
- Qzina, a pastry and dessert-products distributor, was acquired May 1, 2013 for approximately $32.1 million, funded with revolver borrowings. Queensgate was acquired at the end of 2012; the prior-year comparison also reflects the 2012 acquisitions of Michael’s Finer Meats and Praml. Qzina purchase accounting remained preliminary.
- Interest expense increased to $1.9 million in Q2 from $0.9 million, and to $3.3 million for the first half from $1.4 million, reflecting acquisition-related debt and the new notes. The notes’ proceeds were used to repay revolving-credit borrowings.
Outlook, commentary, risks and unusual items
- Management estimated fiscal 2013 capital expenditures, excluding acquisitions, at approximately $25 million, including about $21 million for the Bronx distribution facility; $11 million was expected to be funded with restricted NMTC loan cash. The company expected cash and available revolver capacity to support operations and planned capital expenditures for the next 12 months, but noted that additional financing might be needed for acquisitions.
- No earnings or revenue guidance was provided. Management cited growth plans including territory expansion, operational efficiency, product development and selective acquisitions. Results are not necessarily indicative of full-year performance.
- Key risks include economic conditions and consumer spending on food away from home; food-cost inflation or deflation and the ability to pass costs through; low industry margins; supply interruptions and customer attrition; acquisition financing and integration; fuel costs; and growth-related demands on infrastructure. Management reported food inflation of approximately 4.1% in Q2 and 3.6% for the first half.
- Queensgate’s contingent consideration could increase by up to $2.4 million based on EBITDA milestones; its fair-value liability was $2.1 million at June 28. Routine legal proceedings were not considered likely to have a material adverse effect, and no material amounts were accrued. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- How much of reported growth is sustainable organic growth versus acquired revenue, and how the acquisitions perform after integration.
- Whether gross-margin pressure from product mix and food-cost movements persists, and whether operating efficiencies can offset acquisition and facility costs.
- Debt levels, variable-rate exposure, covenant headroom and the impact of acquisition funding; a 100-basis-point rate increase was estimated to reduce annual after-tax earnings by about $0.29 million.
- Bronx facility completion costs and timing, planned capital spending, and operating cash flow after working-capital effects.
- Final Qzina purchase-price allocation, future amortization, and the outcome of the Queensgate earn-out.