Chefs’ Warehouse, Inc. — Q1 2013 Form 10-Q
Reporting period: The 13 weeks ended March 29, 2013. Unaudited consolidated results; dollar amounts below are in U.S. dollars. The company distributes specialty food products to restaurants and other foodservice customers.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $139.4 million | $98.1 million | Up 42.2% |
| Gross profit | $35.2 million | $26.0 million | Up 35.0% |
| Gross margin | 25.2% | 26.6% | Down 135 basis points |
| Operating income | $5.9 million | $5.1 million | Up 16.6% |
| Operating margin | 4.2% | 5.2% | Down 100 basis points |
| Interest expense | $1.4 million | $0.5 million | Higher by $0.8 million |
| Net income | $2.6 million | $2.6 million | Nearly unchanged |
| Diluted EPS | $0.13 | $0.13 | Unchanged |
| Operating cash flow | $13.5 million | $4.8 million | Up $8.7 million |
Acquisitions contributed approximately $35.7 million of the $41.4 million sales increase; organic growth contributed approximately $5.7 million and was aided by about 3.1% inflation, principally in dairy and cheese. Management attributed lower gross margin largely to the sales mix of acquired businesses. Operating expenses rose 39.4% in dollars but declined as a share of sales, to 21.0% from 21.4%, reflecting transportation efficiencies partly offset by acquisition-related amortization and duplicate Bronx facility rent. The effective tax rate was 41.6% in both periods.
Liquidity, debt and investment
At March 29, 2013, cash and cash equivalents were $1.2 million, restricted cash was $8.4 million, total current assets were $101.2 million and current liabilities were $48.5 million. Total debt was $133.0 million, including $6.2 million current; debt at December 28, 2012 was $124.5 million. The company reported $52.7 million available under its revolving facility and compliance with its debt covenants at quarter-end.
Operating cash flow was $13.5 million; investing activities used $23.3 million, including $21.9 million for Queensgate and $1.4 million of capital expenditures. Financing activities provided $10.9 million. The increase in operating cash flow versus the prior-year quarter primarily reflected a $5.9 million improvement from working capital.
Material developments, outlook and risks
- Acquisitions: Queensgate was acquired on December 31, 2012 for approximately $21.9 million, with potential additional consideration of up to $2.4 million tied to performance milestones. Its contingent earn-out liability was valued at $2.1 million at quarter-end. Michael’s contributed $21.1 million of Q1 sales. Praml, Michael’s and Queensgate acquisitions increased borrowing and interest expense.
- Subsequent financing: On April 17, 2013, the company issued $100 million of guaranteed senior secured notes at 5.9%, due in 2023, and used the proceeds to repay revolving borrowings. Its amended credit facilities retain a $140 million revolver and $36 million term loan, with maturity in 2017 and leverage and fixed-charge covenants.
- Subsequent acquisition: On May 1, 2013, the company acquired Qzina Specialty Foods for approximately $32.7 million, funded with revolving-credit borrowings. Qzina supplies dessert, chocolate and pastry products in the U.S. and Canada.
- Capital plans: Management estimated fiscal 2013 capital expenditures, excluding acquisitions, at approximately $25 million, including about $21 million for the Bronx distribution facility. The company expected to complete the build-out and move into the facility during fiscal 2014; approximately $11 million of projected capital expenditures was expected to be funded with restricted NMTC proceeds.
- Risks and contingencies: Results are exposed to economic conditions and food-away-from-home spending, food-cost inflation or deflation, product mix, supplier and supply-chain disruptions, customer losses, fuel costs, and acquisition execution and integration. The company cited no material change to previously disclosed risk factors other than common-stock price volatility. Ordinary-course legal proceedings were not expected by management to have a material adverse effect; no material amounts were accrued. A potential $10.4 million guarantee related to a leased distribution facility is disclosed, subject to stated conditions.
- Other: Management gave no specific revenue or earnings guidance in the filing. It cautioned that quarterly results may not indicate full-year results. A 100-basis-point rise in market rates was estimated to reduce annual after-tax earnings by approximately $711,000, all else equal. Disclosure controls were reported effective, and no material internal-control changes were reported.
Important facts for investors to verify
- Whether organic sales growth and acquired revenue translate into sustained earnings, particularly given the 135-basis-point gross-margin decline.
- Post-quarter debt balances and interest costs after the $100 million notes issuance, revolver repayment and Qzina acquisition; also monitor covenant headroom.
- Qzina’s actual purchase-price adjustments, integration costs and contribution to sales and profit, and the Queensgate earn-out outcome.
- Progress, total cost and funding of the Bronx facility project relative to management’s fiscal 2013 spending estimate and fiscal 2014 move-in expectation.
- Exposure to variable-rate debt, food-price changes and the disclosed conditional facility guarantee.