Chefs’ Warehouse, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended September 23, 2011 (13 weeks), with year-to-date results for the 39 weeks ended September 23, 2011. Comparisons are to the periods ended September 24, 2010. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context
The company distributes specialty and other food products, primarily to independent restaurants and other foodservice customers, in six U.S. markets. It reported more than 11,500 products and over 7,000 customer locations. The quarter included the June 2011 acquisition of selected assets of Harry Wils & Co.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 39 weeks 2011 | 39 weeks 2010 |
|---|---|---|---|---|
| Revenue | $101.7 | $84.9 | $284.1 | $238.5 |
| Gross profit | $26.6 | $22.1 | $74.9 | $62.0 |
| Gross margin | 26.2% | 26.0% | 26.4% | 26.0% |
| Operating income | $5.3 | $6.3 | $18.1 | $14.9 |
| Operating margin | 5.3% | 7.4% | 6.4% | 6.3% |
| Net income (loss) | $(1.2) | $4.4 | $2.5 | $10.2 |
| EPS, diluted | $(0.06) | $0.13 | $0.15 | $0.28 |
- Cash flow: For the first 39 weeks, operating activities generated $6.5 million, down from $8.1 million. Investing used $10.4 million, including $8.9 million for the Harry Wils acquisition; capital expenditures were $1.5 million. Financing provided $3.5 million. Cash declined $0.4 million to $1.5 million.
- Balance sheet and liquidity: At September 23, cash was $1.5 million, current assets $69.0 million, and current liabilities $38.3 million. Total debt was $45.3 million, compared with $99.5 million at December 24, 2010. Management said cash and available revolving credit were sufficient for operations and planned capital spending over the next 12 months.
- Margins and costs: Gross margin improved year over year, attributed mainly to customer and product mix, including higher-margin protein products. Operating expenses rose 34.7% in Q3, including increased staffing and delivery costs, and a $1.9 million noncash stock-compensation charge.
Material changes and unusual items
- Revenue increased 19.7% in Q3 and 19.1% year to date. Management attributed growth to organic sales, acquisitions, food-cost inflation, higher case volume and product mix. Q3 organic growth contributed approximately $9.0 million of the revenue increase; the filing estimates inflation and product-mix changes contributed about 3.6% of year-to-date sales improvement.
- Q3 operating income fell 14.6% despite revenue growth. Management cited the stock-compensation charge, higher operating costs, and Hurricane Irene, which it estimated reduced revenue by $1.6 million and operating income by $0.4 million.
- Interest expense was $7.2 million in Q3 versus $0.5 million a year earlier, and $14.0 million year to date versus $1.6 million. The increase included debt-service costs and refinancing-related write-offs and charges, including $2.9 million of deferred financing fees, $1.7 million of original issue discount, and an $0.8 million call premium in Q3.
- The August 2011 IPO generated approximately $63.5 million of net proceeds for the company. Together with new credit-facility borrowings, proceeds were used to repay prior loans and subordinated notes. The company issued 4.7 million IPO shares; existing shareholders also sold shares, for which the company received no proceeds.
- The new senior secured facilities provide a $30 million term loan and a $50 million revolving facility, with stated maturity in August 2015. At quarter-end, $29.5 million was outstanding on the term loan and $15.8 million on the revolver. The facilities are secured by substantially all borrower and guarantor assets and include financial and other covenants. The company reported compliance with debt covenants at September 23.
Outlook, risks and contingencies
- Management projected fiscal 2011 capital expenditures of $1.5–$2.0 million and fiscal 2012 spending of $7.5–$10.0 million, driven largely by a planned New York-area warehouse retrofit. It expected to finance $6.5–$8.0 million of the retrofit through additional long-term debt.
- Management identified economic conditions and food-away-from-home spending, food and operating-cost inflation, supply interruptions, fuel costs, pricing and margin pressure, acquisition execution, and growth-related strain on infrastructure as key risks. The company noted it may not be able to pass all cost increases to customers.
- Contractual obligations totaled $88.8 million, including $45.3 million of debt, $26.9 million of non-capitalized leases and $16.5 million of inventory commitments; stated amounts exclude debt interest. Subsidiaries also had a conditional guarantee exposure of approximately $11.4 million related to a related-party warehouse mortgage. The company said it remained in compliance with conditions for its conditional release from that guarantee.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect; no material amounts were accrued. The filing reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, providing reasonable assurance.
- Derivative exposures included a foreign-exchange collar for euro purchases; the company also had $45.3 million of variable-rate debt. Management estimated a 100-basis-point increase in rates would reduce annual after-tax earnings by approximately $0.3 million.
Important facts for investors to verify
- Whether organic growth, acquisition contributions, inflation and product mix continue to support revenue and gross-margin trends.
- How operating expenses, staffing, fuel and delivery costs affect operating margins after the one-time stock-compensation and hurricane impacts.
- The ongoing interest burden, refinancing-related charges, revolver utilization, debt-covenant headroom and sensitivity to variable interest rates.
- Funding and timing for the planned warehouse retrofit and fiscal 2012 capital expenditures, including whether additional long-term debt is obtained.
- Integration and returns from the Harry Wils acquisition, and the status of the conditional warehouse-mortgage guarantee and related-party lease arrangements.