Business context and reporting period
The Chefs’ Warehouse, Inc. distributes specialty and broadline food products to restaurants and other foodservice customers. This Form 10-K covers the fiscal year ended December 30, 2011, including the fourth quarter; 2011 had 53 weeks versus 52 weeks in 2010. The company completed its IPO and converted from an LLC to a corporation in July–August 2011. Financial figures below are in U.S. dollars; “million” is abbreviated as “m.”
Financial performance and liquidity
- FY 2011: Revenue was $400.6m, up 21.4% from $330.1m. Gross profit was $105.9m (gross margin 26.4%, versus 26.0%); operating income was $27.8m (6.9% margin, versus 6.6%). Net income was $7.7m, down from $15.9m; diluted EPS was $0.43.
- Management attributed revenue growth to $37.7m of organic growth, $18.9m from acquisitions, $7.3m from inflation/product mix, and $6.6m from the extra fiscal week. The price-optimization initiative and product mix supported gross margin; a $0.4m customs-duty refund also reduced cost of sales.
- Interest expense rose to $14.6m from $4.0m. The 2011 figure included $5.4m of call premiums and write-offs of deferred financing fees and original issue discount associated with the IPO refinancing. The effective tax rate was 42.1%, versus 13.9% in 2010; management cited the unusual 2010 tax benefit from the change to corporate tax status. Fiscal 2011 net income also included $2.1m of stock-based compensation expense.
- Fourth quarter: Revenue was $116.5m, gross profit $31.0m, operating income $9.7m, and net income $5.2m. In Q4 2010, these were $91.6m, $23.8m, $6.7m, and $5.6m, respectively. Quarterly results are unaudited.
- Cash flow: Operating cash flow was $16.7m, compared with $13.5m in 2010. Investing used $19.8m, including $17.8m for acquisitions; financing provided $3.2m, including IPO proceeds and refinancing activity. Year-end cash was $2.0m.
- Balance sheet and debt: Working capital was $29.8m; total assets were $107.9m. Total debt obligations were $45.7m, including $28.0m term debt, $17.4m revolving borrowings and $0.3m capital lease. The new secured facilities mature in August 2015; substantially all assets secure the facilities. Revolver capacity is $50m, subject to the credit agreement and borrowing conditions.
- Debt covenants include a minimum fixed-charge coverage ratio of 1.15:1 and leverage limits that tighten over time. The company reported compliance at year-end. All $45.4m of debt excluding the capital lease was variable-rate; management estimated a 100-basis-point rate increase would reduce after-tax earnings by approximately $268,000 annually.
Material changes, outlook and risks
- Debt fell from $99.5m at year-end 2010 to $45.7m after the IPO and refinancing. The $63.3m IPO net proceeds, together with new borrowings, funded repayment of prior facilities and subordinated notes.
- 2011 acquisitions included Harry Wils & Co. and Provvista Specialty Foods, with purchase prices of approximately $8.9m each. Provvista expanded the company into Portland and Seattle. Integration, customer retention and realizing acquisition benefits remain execution risks.
- Management expected fiscal 2012 capital expenditures of approximately $12.2m, including about $11m to retrofit a New York-area warehouse, expected to be financed with additional long-term debt. Management expected a fiscal 2012 effective tax rate of approximately 41%. No specific revenue or earnings guidance is provided.
- Management said cash on hand and available revolving credit were expected to be sufficient for operations and planned capital expenditures over the next 12 months. It also cited growth plans involving existing-market penetration, operational efficiencies, technology investment and selective acquisitions.
- Key risks include the low-margin nature of distribution; food, fuel, labor and other cost changes that may not be passed through; supply interruptions and food-safety regulation; customer credit and lack of long-term purchase commitments; and competition. New York generated approximately 63% of 2011 revenue, increasing regional concentration risk. The company does not hedge food-price exposure.
- Related-party matters include warehouse leases with founder-affiliated entities and a conditional guarantee tied to a related-party facility mortgage, with a potential obligation of $11.2m. Management reported no currently known legal proceedings expected to have a material adverse effect. No cash dividend is expected in the foreseeable future, and the credit facilities restrict dividends.
- The financial statements received an unqualified audit opinion. The auditor was not engaged to audit internal controls; management’s internal-control assessment and auditor attestation were omitted under the transition period for newly public companies. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether organic growth, pricing initiatives and gross-margin gains continue after adjusting for the extra fiscal week, inflation and acquisition contributions.
- Actual 2012 warehouse retrofit costs, financing terms and resulting debt, capacity and operating benefits.
- Compliance with debt covenants, refinancing flexibility, revolver availability and exposure to variable interest rates.
- Integration and performance of Provvista and Harry Wils, including customer retention and acquisition-related returns.
- Accounts-receivable quality, food and fuel cost pass-through, and exposure to the New York market and related-party arrangements.