Chefs’ Warehouse, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 27, 2013 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing. Unless noted, amounts below are in millions of dollars.
Business context and results
The company distributes specialty foods, center-of-the-plate products and staples to foodservice customers in the United States and Canada. It reported more than 30,000 products, over 20,000 customer locations and 20 distribution centers. FY 2013 growth included acquisitions of Queensgate, Qzina and Allen Brothers, as well as the full-year contribution from Michael’s and Praml.
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net sales | $673.5 | $480.3 | +40.2% |
| Gross profit / margin | $172.4 / 25.6% | $125.0 / 26.0% | +37.9% gross profit; margin down 44 bps |
| Operating income / margin | $36.6 / 5.4% | $28.8 / 6.0% | +27.2% operating income; margin down 60 bps |
| Net income / diluted EPS | $17.0 / $0.77 | $14.5 / $0.69 | +17.1% net income |
| Operating cash flow | $10.6 | $8.4 | +$2.2 |
Acquisitions accounted for approximately $157.1 million of sales growth; food-price inflation was approximately 3.4%, or $16.5 million. Severe December weather reduced FY 2013 sales by an estimated $4 million. The New York market contributed approximately 42% of annual sales. Center-of-the-plate products rose to 32% of sales from 26% in 2012.
For the fourth quarter, unaudited revenue was $193.4 million versus $142.6 million a year earlier, and net income was $4.8 million versus $3.6 million. The filing reports a $900,000 Q4 cost-of-sales adjustment related to Michael’s inventory; elsewhere it describes a $469,000 adjustment, so the amount and relationship between the disclosures are not clear.
Cash, debt and liquidity
- Cash and cash equivalents were $20.0 million at year-end, versus $0.1 million a year earlier; working capital was $117.5 million, versus $57.8 million.
- Total debt obligations were $147.7 million, compared with $124.5 million in 2012. This included $100 million of 5.90% senior secured notes, $33 million on the term loan, an $11 million New Markets Tax Credit loan, and $3.7 million of capital leases and software financing. Revolver borrowings were zero; reported revolving availability was $136.2 million.
- The company generated $10.6 million in operating cash flow, used $89.7 million in investing activities (including $78.0 million for acquisitions), and received $98.7 million from financing activities, including a $75.0 million common-stock offering and $100 million in notes, offset by debt repayments.
- FY 2013 capital expenditures, excluding acquisitions, were approximately $15.0 million. Management expected FY 2014 capital expenditures of approximately $32.3 million, principally for Bronx and Las Vegas facilities and ERP implementation.
Changes, outlook and risks
- Growth was acquisition-led, while profitability ratios weakened: gross margin fell to 25.6% and operating margin to 5.4%. Management attributed pressure to product mix and Michael’s, acquisition-related amortization and infrastructure spending, duplicate Bronx rent, and investigation costs.
- Management stated cash on hand and available revolving credit were sufficient for operations and planned capital expenditures over the next 12 months. It gave no revenue or earnings guidance; it expected an approximately 41% effective tax rate for FY 2014.
- Management cited organic customer and product growth, operating efficiencies, technology investment and selective acquisitions as priorities. Acquisition integration, higher protein exposure, food-cost volatility, low industry margins, weather disruptions, customer credit risk and competition are material risks.
- Debt covenants tighten over time; the company reported compliance at December 27, 2013. Substantially all assets secure the credit facilities, and the notes and facilities restrict dividends. The company does not expect to pay dividends in the foreseeable future.
- BDO issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective controls, but Qzina and Allen Brothers were excluded from the internal-control assessment because of acquisition timing. The filing also discusses an investigation and inventory overstatement involving Michael’s.
Important facts for investors to verify
- Reconcile the Michael’s inventory adjustment disclosures: $469,000 in the annual discussion versus $900,000 in the quarterly footnote, and review the underlying investigation and any remaining exposure.
- Assess the acquired businesses’ contribution to growth and earnings, integration progress, contingent earn-outs and Allen Brothers’ direct-to-consumer performance.
- Track protein-category margins, overall gross-margin trends, and whether food, labor and fuel costs can be passed through to customers.
- Compare planned FY 2014 capital spending with cash generation and borrowing needs; monitor debt maturities, covenant headroom and variable-rate exposure.
- Review the acquired companies’ controls and the company’s progress integrating them; note that management’s internal-control assessment excluded Qzina and Allen Brothers.