Chefs’ Warehouse, Inc. — Q1 2014 Form 10-Q
Business context and period: The company distributes specialty and other food products to restaurants and related customers in the U.S. and Canada. This filing covers the 13 weeks ended March 28, 2014; comparisons are to the 13 weeks ended March 29, 2013. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Net sales | $187.2 million | $139.4 million | Up 34.3%; acquisitions contributed about $36.4 million of growth and organic growth about $11.4 million. |
| Gross profit / margin | $46.1 million / 24.6% | $35.2 million / 25.2% | Gross profit up 31.0%; margin down 60 basis points. |
| Operating expenses | $42.3 million | $29.3 million | Up 44.6%; 22.6% of sales versus 21.0%. |
| Operating income / margin | $3.8 million / 2.0% | $5.9 million / 4.2% | Operating income down 36.4%. |
| Interest expense | $2.1 million | $1.4 million | Increase attributed to acquisition-related debt and the senior notes. |
| Net income / diluted EPS | $1.0 million / $0.04 | $2.6 million / $0.13 | Net income down $1.7 million. |
| Operating cash flow | $10.5 million | $13.5 million | Down $3.0 million. |
| Capital expenditures | $5.8 million | $1.4 million | Increased as distribution facilities and systems were developed. |
Liquidity and debt: At March 28, 2014, cash and cash equivalents were $26.1 million, current assets $173.6 million, and current liabilities $60.7 million. Total debt obligations were $147.1 million, including $100.0 million of 5.9% senior secured notes; $7.1 million was current. The company reported $136.2 million available under its revolving facility after letters of credit. It was in compliance with its debt covenants.
Balance sheet highlights: Total assets were $350.1 million and stockholders’ equity was $132.9 million. Goodwill was $78.8 million and net intangible assets were $55.9 million.
Material changes and management commentary
- Sales growth reflected the Qzina and Allen Brothers acquisitions, along with organic growth. Management estimated severe weather in the Northeast and Mid-Atlantic reduced quarterly sales by about $2.0 million.
- Food inflation was approximately 5.3%, compared with 3.1% in the prior-year quarter, particularly in dairy and cheese. Management noted inflation may raise sales dollars but can pressure margins where costs cannot be passed through.
- Gross margin declined largely because of product mix associated with Allen Brothers, partly offset by Qzina. Operating expense growth reflected higher Allen Brothers shipping and catalog costs, delivery labor, investment in management and software, and investigation costs related to an accounting issue at Michael’s Finer Meats.
- The company acquired Allen Brothers in December 2013 for an expected purchase price of about $33.4 million, including assumed liabilities and contingent consideration. Its earnout liability was $6.5 million at quarter-end. Qzina was acquired in May 2013.
- Investing cash outflow was $5.8 million, versus $23.3 million a year earlier, when the company made acquisition payments. Financing cash flow was $1.5 million, compared with $10.9 million in the prior-year quarter.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management estimated fiscal 2014 capital expenditures, excluding acquisitions, at approximately $32.3 million, supported in part by restricted cash and software financing. Spending includes Bronx and Las Vegas facility work, the JD Edwards ERP system, and a new Chicago distribution facility; the company expected to spend about $24 million to complete these projects over the remainder of fiscal 2014.
- 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, while noting acquisitions could require additional debt or equity financing.
- Principal risks include economic conditions and restaurant spending, severe weather and supply interruptions, food and labor cost changes, low industry margins, customer concentration or loss despite generally having no long-term customer contracts, acquisition integration and execution, and the ability to pass through cost increases.
- The company continued investigating the Michael’s Finer Meats accounting issue and identified recovery of related losses from former owners as a risk. The filing text does not provide a clear value for the potential loss or recovery.
- Other items include contingent acquisition earnouts valued using significant unobservable assumptions and a related-party facility guarantee with a potential obligation of $9.8 million. Management said ordinary-course legal matters were not expected to have a material adverse effect; no material amounts were accrued.
Important facts for investors to verify
- Updates on the Michael’s Finer Meats accounting investigation, quantified losses, and potential recovery from former owners.
- Whether Allen Brothers integration, sales growth, and product mix improve margins, and whether the earnout assumptions remain appropriate.
- Progress, cost, and completion timing for the Bronx, Las Vegas, Chicago, and ERP projects against the fiscal 2014 capital expenditure plan.
- Future operating cash generation, debt levels, covenant headroom, and the availability of revolving credit as acquisition and investment plans proceed.
- Effects of food inflation, severe weather, and customer demand on sales, gross margin, and the ability to pass costs through.