Chefs’ Warehouse, Inc. — FY2012 Form 10-K Summary
Reporting period: Fiscal year ended December 28, 2012 (52 weeks). The comparable year ended December 30, 2011 included 53 weeks. Amounts below are in U.S. dollars; financial statement figures are converted to millions unless otherwise noted.
Business context and reporting period
Chefs’ Warehouse distributes specialty foods, center-of-the-plate products and broadline staples to more than 12,500 customer locations, primarily independent restaurants and other foodservice customers. It reported one operating segment. Its New York market represented approximately 54% of FY2012 sales; its top ten customers represented less than 10% of revenue. The company reported an average delivery service level above 97%.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $480.3 million | $400.6 million |
| Gross profit / margin | $125.0 million / 26.0% | $105.9 million / 26.4% |
| Operating income / margin | $28.8 million / 6.0% | $27.8 million / 6.9% |
| Interest expense | $3.7 million | $14.6 million |
| Net income | $14.5 million | $7.7 million |
| Diluted EPS | $0.69 | $0.43 |
| Cash from operations | $8.4 million | $16.7 million |
- Revenue increased 19.9%, including approximately $76.1 million from acquisitions. Growth was partly offset by approximately $3.0 million of sales lost to Hurricane Sandy and the prior-year extra week, which contributed approximately $6.6 million of sales. Deflation for the year was approximately 0.2%.
- Gross margin fell about 41 basis points; management attributed the decline principally to acquisition-related sales mix and Hurricane Sandy. Operating expenses rose to 20.0% of sales from 19.5%, reflecting insurance and amortization costs, duplicate Bronx facility rent and storm effects.
- Net income increased despite lower operating margin, principally because interest expense declined after refinancing. FY2011 included substantial refinancing-related charges.
- Operating cash flow declined by $8.3 million, with working-capital changes a key factor. Cash used in investing was $75.7 million, including $72.5 million of acquisition spending; financing provided $65.4 million.
- Year-end cash was $0.1 million, restricted cash was $11.0 million, and working capital was $57.8 million. Debt obligations totaled $124.5 million: $75.0 million revolving borrowings, $38.0 million term debt, an $11.0 million construction loan and $0.5 million capital leases. Revolver availability was $63.2 million at year-end.
- The company’s credit facilities mature in 2017, carry variable rates and include leverage and fixed-charge covenants. The company reported compliance at year-end. A 100-basis-point rate increase was estimated to reduce annual after-tax earnings by about $0.7 million.
Fourth-quarter results
For the quarter ended December 28, 2012, revenue was $142.6 million, gross profit $36.1 million, operating income $7.9 million, net income $3.6 million and diluted EPS $0.17. The comparable 2011 quarter reported revenue of $116.5 million, gross profit $31.0 million, operating income $9.7 million, net income $5.2 million and diluted EPS $0.25. The comparison is affected by FY2011’s 53rd week and by acquisitions; the filing does not provide a quarter-only adjustment that makes the periods directly comparable.
Material changes, outlook and risks
- Acquisitions expanded product categories and geographic reach: Praml and Michael’s were acquired in 2012. Michael’s contributed $35.8 million of revenue and $2.5 million of pretax income from its acquisition date through year-end. Queensgate closed on December 31, 2012, after the reporting period, for an initial price of approximately $21.9 million, with up to $2.4 million additional consideration tied to performance.
- Management expected FY2013 capital expenditures of approximately $25 million, including about $21 million for the Bronx distribution facility expansion; $11 million was expected to be funded with restricted NMTC loan proceeds. Management expected the FY2013 effective tax rate to be approximately 41.5%.
- Management’s strategy emphasized organic customer and product growth, operating efficiencies, facility and technology investment, and selective acquisitions. The filing gives no specific FY2013 revenue or earnings guidance.
- Key risks include low margins and food-price volatility, limited ability to pass through cost increases, economic sensitivity of restaurant customers, supplier and distribution disruptions, customer credit losses, food safety/product liability, fuel and labor costs, and intense competition. Geographic concentration heightens exposure to regional downturns and severe weather.
- Acquisition integration, debt service and covenant compliance are important financial risks. Substantially all borrower and guarantor assets secure the senior credit facilities. The filing also discloses a potential $10.6 million conditional guarantee related to a founder-affiliated property lease; subsidiaries were reported as meeting the conditions for release from the guarantee.
- The company reported no material pending legal proceeding known to management and no off-balance-sheet arrangements. It leases facilities from entities affiliated with founders; related-party facility expense was $1.5 million in FY2012. The founders’ beneficial ownership was approximately 32.3% as of March 5, 2013. No cash dividend was expected in the foreseeable future.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded Michael’s internal controls from the year-end control assessment because of the timing of its acquisition.
Important facts for investors to verify
- How much of reported revenue growth and future growth is organic versus acquisition-driven, and how acquired operations perform after integration.
- Whether gross and operating margins recover, given acquisition mix, higher expenses and the company’s low-margin business model.
- Cash conversion and working-capital needs, particularly receivables, inventory and the low year-end unrestricted cash balance.
- Debt levels, revolver availability, variable-rate exposure, covenant headroom and funding needs for the Bronx project and further acquisitions.
- Execution, cost and timing of the Bronx facility expansion and expected operating benefits.
- Impact of the 53-week FY2011 comparison and Hurricane Sandy when assessing trends, including fourth-quarter performance.
- Potential exposure from customer credit, food safety, supply interruptions, regional concentration and related-party arrangements.