Chefs’ Warehouse, Inc. — Q3 2012 Form 10-Q
Business context and period: The company distributes specialty and other food products to restaurants and related foodservice customers, primarily in eight U.S. markets. This unaudited report covers the 13 and 39 weeks ended September 28, 2012; comparisons are to the corresponding 2011 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Revenue | $124.8 | $101.7 | $337.7 | $284.1 |
| Gross profit | $32.4 | $26.6 | $88.9 | $74.9 |
| Gross margin | 25.9% | 26.2% | 26.3% | 26.4% |
| Operating profit / margin | $7.3 / 5.9% | $5.3 / 5.3% | $20.9 / 6.2% | $18.1 / 6.4% |
| Net income (loss) | $3.8 | $(1.2) | $10.9 | $2.5 |
| Diluted EPS | $0.18 | $(0.06) | $0.52 | $0.15 |
| Operating cash flow | Not separately presented for quarter | $9.3 | $6.5 |
- Growth and margins: Q3 revenue rose 22.7%; acquisitions contributed about 22.4 percentage points of growth. Year-to-date revenue rose 18.9%, with acquisitions contributing 15.7 percentage points and organic growth 3.2%. Q3 gross margin fell 25 basis points, mainly reflecting Michael’s acquisition mix; year-to-date gross margin declined 5 basis points. Year-to-date operating margin decreased from 6.4% to 6.2% as operating expenses grew faster than sales.
- Interest and earnings: Interest expense was $1.0 million in Q3 and $2.5 million year to date, versus $7.2 million and $14.0 million, respectively, in 2011. Comparability benefited from lower-cost post-IPO financing and the absence of substantial 2011 refinancing charges, including deferred financing fee and original issue discount write-offs and call premiums.
- Cash flows and investment: Year-to-date investing cash outflow was $76.0 million, including $73.3 million for acquisitions; financing provided $66.9 million. Capital expenditures were $2.7 million. Cash and cash equivalents were $2.2 million at September 28, 2012, versus $2.0 million at December 30, 2011.
- Balance sheet and liquidity: Total debt was $126.0 million, including $76.4 million on the revolving facility, $38.0 million of term loans, an $11.0 million NMTC loan and capital leases. Current debt was $5.2 million; long-term debt was $120.8 million. The revolving facility had $61.8 million of availability, after $1.8 million reserved for letters of credit. Restricted cash was $11.0 million, associated with the NMTC financing for the Bronx facility. Management stated that cash and available credit were sufficient for operations and planned capital spending over the next 12 months.
Material changes, outlook and risks
- The company acquired Praml International in April for approximately $19.5 million and Michael’s Finer Meats in August for approximately $54.3 million, funded with borrowings. Michael’s contributed $11.7 million of revenue and $0.9 million of pretax income in the period since acquisition. Its purchase-price valuation remained preliminary; goodwill and intangible-asset amounts may change. The company also reported the 2011 Provvista acquisition in its growth discussion.
- The new senior secured credit agreement matures April 25, 2017. On September 28, the company exercised a $40 million accordion, increasing revolving commitments to $140 million. Borrowings are variable-rate and secured by substantially all assets of the borrowers and guarantors, subject to stated exceptions. The company reported compliance with debt covenants at quarter-end.
- Management estimated fiscal 2012 capital expenditures, excluding acquisitions, at approximately $5 million. The Bronx facility renovation and expansion was expected to cost $15–$20 million overall, with about $3.5 million expected in fiscal 2012. The filing did not provide specific earnings guidance. Management expected approximately 41% full-year tax rate and anticipated moderate inflation in Q4; it also expected Q4 sales to be negatively affected by Hurricane Sandy.
- Hurricane Sandy struck after the reporting period and disrupted some customers and suppliers, particularly in the New York City metropolitan area. Management said the financial impact was not yet quantifiable and could be material. The filing also identifies exposure to economic conditions, food-price and other cost changes, supply disruptions, customer attrition, acquisition integration, fuel costs and variable interest rates.
- A 100-basis-point increase in market interest rates was estimated to reduce annual after-tax earnings by approximately $0.7 million, holding other factors constant. Q3 operating expenses included a $0.7 million noncash charge for accelerated vesting of a former COO’s restricted shares. The company reported ordinary-course legal proceedings with no material amount accrued and no expected material adverse effect, based on management’s assessment.
Important facts for investors to verify
- How Hurricane Sandy affected sales, operations, customers and suppliers after quarter-end, and whether the impact was material.
- Whether Michael’s preliminary purchase-price allocation changed, and how acquisition financing and integration affected subsequent results.
- Revolving-credit availability, variable-rate debt exposure, covenant headroom and compliance in later periods.
- Actual costs, timing and financing of the Bronx facility project compared with the stated estimates.
- Whether revenue growth and operating margins can be sustained as acquisition contributions, food-price trends and operating costs change.