The Chefs’ Warehouse, Inc. — Q1 2012 Form 10-Q
Reporting period: 13 weeks ended March 30, 2012; comparison is the 13 weeks ended March 25, 2011. Amounts below are in millions of dollars unless stated otherwise. The company distributes specialty foods, primarily to independent restaurants and other foodservice customers.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $98.069 | $83.183 | +17.9% |
| Gross profit / margin | $26.049 / 26.6% | $22.035 / 26.5% | +18.2%; +0.1 percentage point |
| Operating expenses | $20.991 | $16.976 | +23.7% |
| Operating income / margin | $5.058 / 5.2% | $5.059 / 6.1% | Income essentially flat; margin down 0.9 percentage point |
| Interest expense | $0.549 | $3.450 | Down $2.901 |
| Net income / diluted EPS | $2.633 / $0.13 | $1.020 / $0.06 | Net income +$1.613 |
| Cash from operations | $4.774 | $3.136 | +$1.638 |
| Capital expenditures | $0.712 | $0.389 | +$0.323 |
Revenue growth included approximately $8.822 million from the Harry Wils and Provvista acquisitions and $6.064 million of organic growth. Management said dairy deflation and product mix reduced revenue growth by about 173 basis points, or approximately $1.4 million. Gross margin improved slightly, but higher operating costs—including acquired-business costs, public-company expenses and stock compensation—kept operating income flat. Lower interest expense, following IPO-related debt repayment, was the main driver of higher pretax and net income. The effective tax rate was 41.6%, versus 39.0%.
Basic and diluted weighted-average shares increased to 20.5 million and 20.9 million, respectively, from 15.5 million and 16.0 million. The company’s 2011 conversion and IPO affect the share-count comparison.
Financial position and liquidity
- At March 30, 2012, cash was $2.045 million; current assets were $69.149 million and current liabilities were $40.518 million, for working capital of $28.631 million.
- Total debt was $41.647 million, including $6.111 million current; debt at December 30, 2011 was $45.697 million. Cash and cash equivalents increased by $0.012 million during the quarter.
- Operating cash flow of $4.774 million was offset by $0.712 million of capital expenditures and $4.050 million of net financing outflows.
- Management stated that cash on hand and available revolving credit were sufficient for operations and planned capital expenditures over the next 12 months.
Outlook, material developments and risks
- Post-quarter financing: On April 25, 2012, the company entered a new senior secured facility with up to $40 million in term loans and a $100 million revolving facility, maturing in 2017. It borrowed $40 million under the term facility and approximately $3 million under the revolver to refinance prior facility borrowings and related costs. The facilities carry financial covenants and are secured by substantially all borrower and guarantor assets, subject to stated exceptions.
- Acquisition: On April 27, 2012, the company acquired Praml International for approximately $19.5 million cash, subject to a working-capital adjustment; the purchase was financed under the new facilities.
- Bronx facility investment: A new 15-year lease began April 26 for a New York City distribution facility, with two optional ten-year extensions. The company expects redevelopment costs of $15–$20 million, including approximately $7.5 million of 2012 capital expenditures. It expects to fund the project with an $11 million New Markets Tax Credit construction loan, working capital and potentially the new credit facilities. The loan bears 1% interest if no default occurs and is due in 2017.
- Management estimated fiscal 2012 capital expenditures, excluding acquisitions, at approximately $8.5 million. It expected some quarter-over-quarter effects of higher operating costs to ease in Q2 and Q3 after the anniversary of the IPO; no full-year revenue or earnings guidance is provided in the filing.
- Key risks include economic conditions and food-away-from-home spending, food-price inflation or deflation, customer retention without long-term contracts, supply interruptions, product availability and cost, fuel costs, acquisition execution, and the ability to control costs. Management reported no material changes to the risk factors in the 2011 Form 10-K.
- The company disclosed a conditional guarantee associated with a related-party warehouse mortgage, with a potential obligation of $11.039 million at March 30, 2012; it said the guarantors remained in compliance with the conditions for release. Ordinary-course legal proceedings were not expected by management to have a material adverse effect; no material accrual was recorded.
- Management concluded disclosure controls were effective. The filing states there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic growth, acquired revenue and dairy deflation/mix effects continue at the rates described, and whether operating margins recover as management anticipated.
- Post-acquisition leverage, revolver availability, interest-rate exposure and ongoing compliance with the new credit facility’s covenants.
- Praml’s post-closing working-capital adjustment and integration results, along with the cost, timing and financing of the Bronx redevelopment.
- The terms and continuing status of the related-party mortgage guarantee and the company’s other commitments and contingencies.
- Cash-flow conversion and capital spending against management’s fiscal 2012 estimates; quarterly results may not predict full-year performance.