THE CHEFS’ WAREHOUSE, INC.
THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Amounts in thousands, except share and per share amounts)
|
| | | | | | | |
| Thirty-nine Weeks Ended |
| September 29, 2017 | | September 23, 2016 |
Net sales | $ | 944,422 |
| | $ | 849,962 |
|
Cost of sales | 707,017 |
| | 637,809 |
|
Gross profit | 237,405 |
| | 212,153 |
|
Operating expenses | 211,627 |
| | 187,318 |
|
Operating income | 25,778 |
| | 24,835 |
|
Interest expense | 17,406 |
| | 35,271 |
|
Loss on asset disposal | 10 |
| | 43 |
|
Income (loss) before income taxes | 8,362 |
| | (10,479 | ) |
Provision for income tax expense (benefit) | 3,479 |
| | (4,360 | ) |
Net income (loss) | $ | 4,883 |
| | $ | (6,119 | ) |
Other comprehensive income: | |
| | |
|
Foreign currency translation adjustments | 605 |
| | 1,034 |
|
Comprehensive income (loss) | $ | 5,488 |
| | $ | (5,085 | ) |
Net income (loss) per share: | |
| | |
|
Basic | $ | 0.19 |
| | $ | (0.24 | ) |
Diluted | $ | 0.19 |
| | $ | (0.24 | ) |
Weighted average common shares outstanding: | |
| | |
|
Basic | 26,011,913 |
| | 25,911,278 |
|
Diluted | 26,063,655 |
| | 25,911,278 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
| Shares | | Amount | | | | |
Balance December 27, 2019 | 30,341,941 |
| | $ | 304 |
| | $ | 212,240 |
| | $ | (2,048 | ) | | $ | 125,437 |
| | $ | 335,933 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (14,085 | ) | | (14,085 | ) |
Stock compensation | 807,433 |
| | 8 |
| | 843 |
| | — |
| | — |
| | 851 |
|
Cumulative translation adjustment | — |
| | — |
| | — |
| | (378 | ) | | — |
| | (378 | ) |
Shares surrendered to pay tax withholding | (159,632 | ) | | (2 | ) | | (2,702 | ) | | — |
| | — |
| | (2,704 | ) |
Balance March 27, 2020 | 30,989,742 |
| | $ | 310 |
| | $ | 210,381 |
| | $ | (2,426 | ) | | $ | 111,352 |
| | $ | 319,617 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
Balance December 28, 2018 | 29,968,483 |
| | $ | 300 |
| | $ | 207,326 |
| | $ | (2,221 | ) | | $ | 103,271 |
| | $ | 308,676 |
|
Cumulative effect adjustment due to adoption of new accounting standard | — |
| | — |
| | — |
| | — |
| | (2,027 | ) | | (2,027 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 1,134 |
| | 1,134 |
|
Stock compensation | (23,680 | ) | | — |
| | 915 |
| | — |
| | — |
| | 915 |
|
Exercise of stock options | 20,383 |
| | — |
| | 412 |
| | — |
| | — |
| | 412 |
|
Cumulative translation adjustment | — |
| | — |
| | — |
| | 55 |
| | — |
| | 55 |
|
Shares surrendered to pay tax withholding | (24,002 | ) | | — |
| | (742 | ) | | — |
| | — |
| | (742 | ) |
Balance March 29, 2019 | 29,941,184 |
| | $ | 300 |
| | $ | 207,911 |
| | $ | (2,166 | ) | | $ | 102,378 |
| | $ | 308,423 |
|
See accompanying notes to the consolidated financial statements.
THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
| | | Thirty-nine Weeks Ended | Thirteen Weeks Ended |
| September 29, 2017 | | September 23, 2016 | March 27, 2020 | | March 29, 2019 |
Cash flows from operating activities: | |
| | |
| |
| | |
|
Net income (loss) | $ | 4,883 |
| | $ | (6,119 | ) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
| |
Depreciation | 6,322 |
| | 4,966 |
| |
Amortization | 8,712 |
| | 8,704 |
| |
Net (loss) income | | $ | (14,085 | ) | | $ | 1,134 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
| | |
|
Depreciation and amortization | | 4,762 |
| | 2,881 |
|
Amortization of intangible assets | | 3,298 |
| | 2,877 |
|
Provision for allowance for doubtful accounts | 2,841 |
| | 2,674 |
| 18,431 |
| | 851 |
|
Deferred rent | 254 |
| | 1,340 |
| |
Non-cash operating lease expense | | 244 |
| | 537 |
|
Deferred taxes | 1,755 |
| | 1,169 |
| (1,900 | ) | | 1,131 |
|
Amortization of deferred financing fees | 1,574 |
| | 1,209 |
| 762 |
| | 522 |
|
Loss on debt extinguishment | — |
| | 22,310 |
| |
Stock compensation | 2,384 |
| | 1,909 |
| 851 |
| | 915 |
|
Change in fair value of contingent earn-out liability | 72 |
| | (1,601 | ) | |
Loss on sale of assets | 10 |
| | 43 |
| |
Change in fair value of contingent earn-out liabilities | | (6,812 | ) | | 107 |
|
Loss on asset disposal | | 42 |
| | 34 |
|
Changes in assets and liabilities, net of acquisitions: | |
| | |
| |
| | |
|
Accounts receivable | (5,760 | ) | | 4,627 |
| 33,141 |
| | 13,778 |
|
Inventories | (19,731 | ) | | 5,638 |
| 2,501 |
| | 677 |
|
Prepaid expenses and other current assets | 1,668 |
| | (15,612 | ) | (8,855 | ) | | (207 | ) |
Accounts payable, accrued liabilities and accrued compensation | 20,430 |
| | (8,424 | ) | (14,311 | ) | | (18,010 | ) |
Other liabilities | (1,997 | ) | | (1,186 | ) | |
Other assets | (214 | ) | | (439 | ) | |
Other assets and liabilities | | 3,916 |
| | 164 |
|
Net cash provided by operating activities | 23,203 |
| | 21,208 |
| 21,985 |
| | 7,391 |
|
| | | | |
Cash flows from investing activities: | |
| | |
| |
| | |
|
Capital expenditures | (9,860 | ) | | (11,532 | ) | (3,093 | ) | | (4,125 | ) |
Cash paid for acquisitions, net of cash received | (29,722 | ) | | (19,742 | ) | (63,450 | ) | | (27,990 | ) |
Net cash used in investing activities | (39,582 | ) | | (31,274 | ) | (66,543 | ) | | (32,115 | ) |
| | | | |
Cash flows from financing activities: | |
| | |
| |
| | |
|
Payment of debt | (11,641 | ) | | (156,655 | ) | |
Proceeds from issuance of debt | — |
| | 315,810 |
| |
Debt prepayment penalty and other fees | — |
| | (21,219 | ) | |
Cash paid for deferred financing fees | — |
| | (7,691 | ) | |
Payment of debt, finance lease and other financing obligations | | (687 | ) | | (37 | ) |
Proceeds from exercise of stock options | | — |
| | 412 |
|
Surrender of shares to pay withholding taxes | (455 | ) | | (552 | ) | (838 | ) | | (742 | ) |
Cash paid for contingent earn-out liability | (500 | ) | | (2,660 | ) | (500 | ) | | — |
|
Borrowings under revolving credit facility | — |
| | 33,200 |
| |
Payments under revolving credit facility | — |
| | (126,582 | ) | |
Net cash (used in) provided by financing activities | (12,596 | ) | | 33,651 |
| |
Effect of foreign currency translation on cash and cash equivalents | 184 |
| | 152 |
| |
Net (decrease) increase in cash and cash equivalents | (28,791 | ) | | 23,737 |
| |
Borrowings under asset-based loan facility | | 100,000 |
| | — |
|
Net cash provided by (used in) financing activities | | 97,975 |
| | (367 | ) |
| | | | |
Effect of foreign currency on cash and cash equivalents | | (133 | ) | | (2 | ) |
Net change in cash and cash equivalents | | 53,284 |
| | (25,093 | ) |
Cash and cash equivalents-beginning of period | 32,862 |
| | 2,454 |
| 140,233 |
| | 42,410 |
|
Cash and cash equivalents-end of period | $ | 4,071 |
| | $ | 26,191 |
| $ | 193,517 |
| | $ | 17,317 |
|
See accompanying notes to the consolidated financial statements.
THE CHEFS’ WAREHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts and per share data)amounts)
Note 1 - Operations and Basis of Presentation
Description of Business and Basis of Presentation
The financial statements include the consolidated accounts of The Chefs’ Warehouse, Inc. (the “Company”), and its wholly-owned subsidiaries. The Company’s quarterly periods end on the thirteenth Friday of each quarter. Every six to seven years, the Company will add a fourteenth week to its fourth quarter to more closely align its year endyear-end to the calendar year. The fiscal year ended December 30, 2016 consistedCompany’s business consists of 53 weeks. The Company operates in one3 operating segments: East Coast, Midwest and West Coast that aggregate into 1 reportable segment, food productfoodservice distribution, which is concentrated primarily on the East and West Coasts ofin the United States. The Company’s customer base consists primarily of menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolatiers,chocolateries, cruise lines, casinos and specialty food stores.
The COVID-19 Pandemic
The COVID-19 pandemic (“COVID-19”) has had a material impact on the Company’s business and operations and those of its customers. In an effort to limit the spread of the virus, federal, state and local governments have implemented measures that have resulted in the closure of non-essential businesses in many of the markets the Company serves, which has forced its customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. Due to COVID-19, the Company incurred estimated non-cash charges of approximately $15,800 related to incremental bad debt expense and approximately $3,300 related to incremental inventory obsolescence. The adverse impact to the Company’s customer base and its market capitalization were triggering events and, accordingly, the Company performed interim goodwill and long-lived asset quantitative impairment tests as described in Note 8 to these financial statements.
Consolidation
The consolidated financial statements include all the accounts of the Company and its direct and indirect wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial statements and the related interim information contained within the notes to such unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules of the Securities and Exchange Commission (“SEC”) for interim information and quarterly reports on Form 10-Q. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 30, 201627, 2019 filed as part of the Company’s Annual Report on Form 10-K, as filed with the SEC on March 10, 2017.February 24, 2020.
The unaudited consolidated financial statements appearing in this Form 10-Q have been prepared on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 10, 2017,February 24, 2020, and in the opinion of management, include all normal recurring adjustments that are necessary for the fair statement of the Company’s interim period results. The year-end consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by GAAP. Due to seasonal fluctuations, COVID-19 and other factors, the results of operations for the thirteen and thirty-nine weeks ended September 29, 2017weeks ended March 27, 2020 are not necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from management’s estimates.
Note 2 Recently Issued Accounting Pronouncements
Guidance Adopted in 2017Fiscal 2020
Subsequent Measurement of Inventory:Credit Losses on Financial Instruments: In July 2015,June 2016 and as further amended in November 2018, the Financial Accounting Standards Board (“FASB”(the “FASB”) issued guidance which requires entities to simplify the subsequent measurementuse a forward-looking expected loss model to estimate credit losses. It also requires additional disclosure related to credit quality of inventory. This guidance requires that inventory be measured at the lowertrade and other receivables, including information related to management’s estimate of cost or net realizable value.credit allowances. The Company adopted this guidance prospectively. Adoptionon December 28, 2019. The Company analyzes customer creditworthiness, accounts receivable balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of this guidance did notits allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are either conducted using cash-on-delivery terms or the account is closely monitored so that agreed-upon payments are received prior to orders being released. A failure to pay results in held or cancelled orders. The Company also estimates receivables that will ultimately be uncollectible based upon historical write-off experience. Management incorporates current macro-economic factors in existence as of the balance sheet date that may impact the Company's consolidated financial statements.
Improvements to Employee Share-Based Payment Accounting: In March 2016, the FASB issued guidance to simplify the accounting for employee share-based payments. The main provisions are to recognize excess tax benefitsfood-away-from-home industry and/or its customers, and specifically in the income statement rather than to additional paid-in capital, allow an entity to account for forfeitures as they occur, allow an entity to
withhold employee shares up tofirst quarter of fiscal 2020, the individual's maximum statutory tax rate without triggering liability classificationimpact of the award, present excess tax benefits as an operating cash flow and to present cash payments for employee tax withholding on vested stock awards as a financing cash flow. The guidance also requires that any unrecognized tax benefits that were not previously recognized be recorded through a cumulative-effect adjustment to retained earnings in the period in which the guidance is adopted. Upon adoption, the Company made an accounting policy election to account for forfeitures as they occur and there were no unrecognized tax benefits.COVID-19. Adoption of this guidance did not have a material impacteffect on the Company'sCompany’s consolidated financial statements.
Restricted Cash: In November 2016, the FASB issued guidance which includes guidance to clarify how companies present and classify restricted cash or restricted cash equivalents in the statement of cash flows. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Adoption of this guidance did not impact the consolidated financial statements as the Company does not have restricted cash.
Simplifying the Test for Goodwill Impairment: In January 2017, the FASB issued guidance which simplifies goodwill impairment testing by removing Step 2 from the goodwill impairment test which required companies to assign the fair value of a reporting unit to its underlying assets and liabilities. Instead, an entity should recognize an impairment charge for the amount by which the carry amount of a reporting unit exceeds its fair value. Adoption of this guidance did not impact the Company's consolidated financial statements.
Scope of Modification Accounting: In May 2017, the FASB issued guidance which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. Adoption of this guidance did not impact the consolidated financial statements as the Company did not have any share-based payment award modifications.
Guidance Not Yet Adopted
Simplifying the Accounting for Income Taxes: In May 2014,December 2019, the FASB issued guidance that eliminates certain exceptions related to clarify the principlesapproach for recognizing revenue. This guidance includesintraperiod tax allocations, the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customersmethodology for calculating income taxes in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On August 12, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim period and annual reporting periods beginning after that date. Early adoption is permitted but not before the original effective date (annual periods beginning after December 15, 2016).
other simplifications and clarifications. The Company has performed a preliminary analysis on the impact this guidance has on its customer contracts, sales incentive programs, gift card programs, information systems, business processes, and financial statement disclosures. The analysis will be finalized during the fourth quarter. The new revenue recognition model provides guidance on the identification of multiple performance obligations embedded within customer contracts. Based on the preliminary analysis, the Company's customer contracts appear to include one performance obligation which is satisfied once each product is delivered to the customer. Thus revenues will be recognized at a point in time. Under the new standard such performance obligations are satisfied at the point at which the Company transfers control to the customer. This is consistent with the Company's current practice of recognizing revenue upon delivery to the customer, with the exception of the Company's current practice of recognizing revenue at shipping point on direct-to-consumer sales. The Company is in the process of quantifying the impact that the change in revenue recognition timing of its direct-to-consumer sales will have on its financial statements.
The new standard includes the concept of variable consideration and requires companies to include variable consideration in the transaction price to the extent it is probable that there will not be a significant reversal in the amount of cumulative revenue recognized when the uncertainty is resolved. Although the Company's sales incentive programs fall under the scope of this new guidance, it is not expected to have a significant impact on the amount or timing of revenue recognition.
The new standard addresses current diversity in practice in regards to the derecognition of unredeemed gift card liabilities that are not subject to unclaimed property laws. The new guidance requires companies to recognize revenue on such liabilities through breakage or when the likelihood of customer redemption becomes remote. This is consistent with the Company's existing method of recognizing breakage revenue on these liabilities.
The Company expects to adopt this guidance when effective using the modified retrospective approach. Under this approach, prior financial statements would not be restated and a cumulative effect adjustment, if any, will be recorded as an adjustment to
retained earnings. Adoption will result in expanded disclosures on revenue recognition policies, disaggregated revenues and contract liabilities.
In February 2016, the FASB issued guidance to increase the transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Current GAAP does not require lessees to recognize assets and liabilities arising from operating leases on the balance sheet. This new guidance is effective for fiscal years beginning after December 15, 2018.2020. Early adoption is permitted. The Company expects to adopt this guidance when effective and is evaluating the impact of adoption on its consolidated financial statements.
Note 2 – Revenue Recognition
Revenues from product sales are recognized at the point at which control of each product is transferred to the customer. The Company’s contracts contain performance obligations which are satisfied when customers have physical possession of each product. The majority of customer orders are fulfilled within a day and customer payment terms are typically 20 to 60 days from delivery. Shipping and handling activities are costs to fulfill the Company’s performance obligations. These costs are expensed as incurred and presented within operating expenses on the consolidated statements of operations. The Company offers certain sales incentives to customers in the early stagesform of implementation. Adoption will have a material impactrebates or discounts. These sales incentives are accounted as variable consideration. The Company estimates these amounts based on the Company'sexpected amount to be provided to customers and records a corresponding reduction in revenue. The Company does not expect a significant reversal in the amount of cumulative revenue recognized. Sales tax billed to customers is not included in revenue but rather recorded as a liability owed to the respective taxing authorities at the time the sale is recognized.
The following table presents the Company’s net sales disaggregated by principal product category:
|
| | | | | | | | | | | | | |
| Thirteen Weeks Ended |
| March 27, 2020 | | March 29, 2019 |
Center-of-the-Plate | $ | 163,820 |
| | 43.6 | % | | $ | 156,616 |
| | 43.9 | % |
Dry Goods | 67,654 |
| | 18.0 | % | | 63,754 |
| | 17.9 | % |
Pastry | 54,904 |
| | 14.6 | % | | 50,205 |
| | 14.1 | % |
Cheese and Charcuterie | 38,130 |
| | 10.2 | % | | 35,355 |
| | 9.9 | % |
Dairy and Eggs | 24,716 |
| | 6.6 | % | | 25,614 |
| | 7.2 | % |
Oils and Vinegars | 18,190 |
| | 4.8 | % | | 18,693 |
| | 5.2 | % |
Kitchen Supplies | 8,017 |
| | 2.2 | % | | 6,790 |
| | 1.8 | % |
Total | $ | 375,431 |
| | 100 | % | | $ | 357,027 |
| | 100 | % |
The Company determines its product category classification based on how the Company currently markets its products to its customers. The Company’s definition of its principal product categories may differ from the way in which other companies present similar information.
Deferred Revenue
Certain customer arrangements in the Company’s direct-to-consumer business, prepaid gift plans and gift card purchases, result in deferred revenues when cash payments are received in advance of performance. The Company recognizes revenue on its prepaid gift plans when control of each product is transferred to the customer. Performance obligations under the Company’s prepaid gift plans are satisfied within a period of twelve months or less. Gift cards issued by the Company do not have expiration dates. The Company records a liability for unredeemed gift cards at the time gift cards are sold and the liability is relieved when the card is redeemed, the value of the card is escheated to the appropriate government agency, or through breakage. Gift card breakage is estimated based on the Company’s historical redemption experience and expected trends in redemption patterns. Amounts recognized through breakage represent the portion of the gift card liability that is not subject to unclaimed property laws and for which the likelihood of redemption is remote. The Company recorded deferred revenues, reflected as accrued liabilities on the Company’s consolidated financial statements, primarily tobalance sheets, of $1,351 and $1,345 as of March 27, 2020 and December 27, 2019, respectively.
Right of Return
The Company’s standard terms and conditions provide customers with a right of return if the goods received are not merchantable. Customers are either issued a replacement order at no cost, or are issued a credit for the returned goods. The Company recorded a refund liability of $245 and $314 as of March 27, 2020 and December 27, 2019, respectively. Refund liabilities are reflected as accrued liabilities on the consolidated balance sheets and related disclosures.
In January 2017, the FASB issued guidance which clarifies whether transactions should be accounted for as acquisitions of assets or businesses. The guidance requires an entity to determine if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this criterion is met, the new guidance would define this as an asset acquisition. Furthermore, the guidance requires a business to include, at a minimum, an input and substantive process that together significantly contribute to the ability to create outputs. The guidance is effective for fiscal years beginning after December 15, 2017.sheets. The Company expectsrecognized a corresponding asset of $151 and $194 as of March 27, 2020 and December 27, 2019, respectively, for its right to adopt this guidancerecover products from customers on settling its refund liabilities. This asset is reflected as inventories, net on the consolidated balance sheets.
Contract Costs
Sales commissions are expensed when effective and adoptionincurred because the amortization period is not expected to have a material effectone year or less. These costs are presented within operating expenses on its financial statements.the Company’s consolidated statements of operations.
Note 3 Earnings– Net (Loss) PerIncome per Share
The following table sets forth the computation of basic and diluted net (loss) income (loss) per common share:
|
| | | | | | | |
| Thirteen Weeks Ended |
| March 27, 2020 | | March 29, 2019 |
Net (loss) income per share: | | | |
|
Basic | $ | (0.48 | ) | | $ | 0.04 |
|
Diluted | $ | (0.48 | ) | | $ | 0.04 |
|
Weighted average common shares: | | | |
|
Basic | 29,621,433 |
| | 29,457,257 |
|
Diluted | 29,621,433 |
| | 29,840,979 |
|
|
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
| September 29, 2017 | | September 23, 2016 | | September 29, 2017 | | September 23, 2016 |
Net income (loss) per share: | | | | | | | |
Basic | $ | 0.11 |
| | $ | 0.05 |
| | $ | 0.19 |
| | $ | (0.24 | ) |
Diluted | $ | 0.11 |
| | $ | 0.05 |
| | $ | 0.19 |
| | $ | (0.24 | ) |
Weighted average common shares: | |
| | |
| | |
| | |
|
Basic | 26,092,387 |
| | 25,936,832 |
| | 26,011,913 |
| | 25,911,278 |
|
Diluted | 27,387,619 |
| | 25,977,171 |
| | 26,063,655 |
| | 25,911,278 |
|
Reconciliation of net (loss) income (loss) per common share:
|
| | | | | | | |
| Thirteen Weeks Ended |
| March 27, 2020 | | March 29, 2019 |
Numerator: | | | |
|
Net (loss) income | $ | (14,085 | ) | | $ | 1,134 |
|
Denominator: | | | |
|
Weighted average basic common shares outstanding | 29,621,433 |
| | 29,457,257 |
|
Dilutive effect of stock options and unvested common shares | — |
| | 383,722 |
|
Weighted average diluted common shares outstanding | 29,621,433 |
| | 29,840,979 |
|
|
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
| September 29, 2017 | | September 23, 2016 | | September 29, 2017 | | September 23, 2016 |
Numerator: | | | | | | | |
Net income (loss) | $ | 2,851 |
| | $ | 1,343 |
| | $ | 4,883 |
| | $ | (6,119 | ) |
Add effect of dilutive securities: | |
| | |
| | |
| | |
|
Interest on convertible notes, net of tax | 134 |
| | — |
| | — |
| | — |
|
Adjusted net income (loss) | $ | 2,985 |
| | $ | 1,343 |
| | $ | 4,883 |
| | $ | (6,119 | ) |
Denominator: | |
| | |
| | |
| | |
|
Weighted average basic common shares outstanding | 26,092,387 |
| | 25,936,832 |
| | 26,011,913 |
| | 25,911,278 |
|
Dilutive effect of unvested common shares | 57,858 |
| | 40,339 |
| | 51,742 |
| | — |
|
Dilutive effect of convertible notes | 1,237,374 |
| | — |
| | — |
| | — |
|
Weighted average diluted common shares outstanding | 27,387,619 |
| | 25,977,171 |
| | 26,063,655 |
| | 25,911,278 |
|
Potentially dilutive securities that have been excluded from the calculation of diluted net (loss) income (loss) per common share because the effect is anti-dilutive:anti-dilutive are as follows:
|
| | | | | |
| Thirteen Weeks Ended |
| March 27, 2020 | | March 29, 2019 |
Restricted share awards (“RSAs”) | 27,649 |
| | — |
|
Convertible notes | 3,484,788 |
| | 91,053 |
|
|
| | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
| September 29, 2017 | | September 23, 2016 | | September 29, 2017 | | September 23, 2016 |
Restricted Share Awards (RSAs) | 104,053 |
| | 158,539 |
| | 134,139 |
| | 309,922 |
|
Stock options | 201,878 |
| | 209,071 |
| | 203,617 |
| | 209,071 |
|
Convertible subordinated notes | — |
| | 1,237,374 |
| | 1,237,374 |
| | 1,237,374 |
|
Note 4 – Fair Value Measurements; Fair Value of Financial InstrumentsMeasurements
Assets and Liabilities Measured at Fair Value
As of September 29, 2017, theThe Company’s only assets orcontingent earn-out liabilities are measured at fair value were the contingent earn-out liabilities from the acquisition of Del Monte Capitol Meat Co. and certain related entities (“Del Monte”) and Fells Point Wholesale Meats Inc. (“Fells Point”).value. These liabilities were estimated using Level 3 inputsinputs. Long-term earn-out liabilities were $7,478 and had a fair value$7,957 as of $5,934March 27, 2020 and December 27, 2019, respectively, and are reflected as other liabilities and deferred credits on the consolidated balance sheets. The remaining short-term earn-out liabilities are reflected as accrued liabilities on the consolidated balance sheets. The fair value of contingent consideration was determined based on a probability-based approach which includes projected results, percentage probability of occurrence and the application of a discount rate to present value the payments. A significant change in projected results, discount rate, or probabilities of occurrence could result in a significantly higher or lower fair value measurement. Changes in the fair value of contingent earn-out liabilities are reflected in operating expenses on the consolidated statements of operations.
The following table presents the changes in Level 3 contingent consideration liability:earn-out liabilities:
|
| | | | | | | | | | | | | | | | | | | |
| Fells Point | | Bassian | | Sid Wainer | | Other Acquisitions | | Total |
Balance December 27, 2019 | $ | 4,544 |
| | $ | 7,957 |
| | $ | — |
| | $ | 2,197 |
| | $ | 14,698 |
|
Acquisition value | — |
| | — |
| | 2,081 |
| | 1,383 |
| | 3,464 |
|
Cash payments | — |
| | — |
| | — |
| | (500 | ) | | (500 | ) |
Changes in fair value | (2,583 | ) | | (1,777 | ) | | (1,602 | ) | | (850 | ) | | (6,812 | ) |
Balance March 27, 2020 | $ | 1,961 |
| | $ | 6,180 |
| | $ | 479 |
| | $ | 2,230 |
| | $ | 10,850 |
|
|
| | | | | | | | | | | | | | | |
| Del Monte | | MT Food | | Fells Point | | Total |
Balance December 30, 2016 | $ | 1,362 |
| | $ | 500 |
| | $ | — |
| | $ | 1,862 |
|
Acquisition | — |
| | — |
| | 4,500 |
| | 4,500 |
|
Cash payments | — |
| | (500 | ) | | — |
| | (500 | ) |
Changes in fair value | 72 |
| | — |
| | — |
| | 72 |
|
Balance September 29, 2017 | $ | 1,434 |
| | $ | — |
| | $ | 4,500 |
| | $ | 5,934 |
|
Fair Value of Financial Instruments
The carrying amounts reported in the Company’s consolidated balance sheets for accounts receivable and accounts payable approximate fair value, due to the immediate to short-term nature of these financial instruments. The fair values of the revolving credit facility and term loans approximated their book values as of September 29, 2017 and December 30, 2016, as these instruments had variable interest rates that reflected current market rates available to the Company. The fair value of these debt instruments were estimated using Level 3 inputs.
The following table presents the carrying value and fair value of the Company’s convertible subordinated notes (more fully described in Note 9).notes. In estimating the fair value of thesethe convertible secured notes, the Company utilized Level 3 inputs including prevailing market interest rates to estimate the debt portion of the instrument and a Black Scholes valuation model to estimate the fair value of the conversion option. The Black Scholes model utilizes the market price of the Company’s common stock, estimates of the stock’s volatility and the prevailing risk freerisk-free interest rate in calculating the fair value estimate.
|
| | | | | | | | | | | | | | | | |
| | September 29, 2017 | | December 30, 2016 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Convertible Secured Notes | | $ | 36,750 |
| | $ | 37,632 |
| | $ | 36,750 |
| | $ | 35,557 |
|
|
| | | | | | | | | | | | | | | |
| March 27, 2020 | | December 27, 2019 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Convertible Senior Notes | $ | 150,000 |
| | $ | 130,977 |
| | $ | 150,000 |
| | $ | 165,000 |
|
Convertible Unsecured Note | $ | 4,000 |
| | $ | 3,595 |
| | $ | 4,000 |
| | $ | 4,282 |
|
Note 5 – Acquisitions
Fells PointSid Wainer
On August 25, 2017, the Company entered intoJanuary 27, 2020, pursuant to an asset purchase agreement, to acquirethe Company acquired substantially all of the assets, including certain real-estate assets, of Fells Point,Sid Wainer & Son (“Sid Wainer”), a specialty protein manufacturerfood and produce distributor based in the metro Baltimore and Washington DC area.New England. The aggregate purchase price for the transaction at acquisition date was approximately $33,022, including the impact of an initial net working capital adjustment which is subject to a post-closing working capital adjustment true up. Approximately $29,722 was$46,450 paid in cash at closing and the remaining $3,300 consisted of 185,442 shares of the Company's common stock.
is subject to a customary working capital true-up. The Company will also pay additional contingent consideration, if earned, in the form of an earn-out amount which could total approximately $12,000.$4,000 over a two-year period. The payment of the earn-out liability is subject to the successful achievement of annual Adjusted EBITDA targets for the Fells Point business over a period of four years following closing. At September 29, 2017 and August 25, 2017, thecertain gross profit targets. The Company estimated the fair value of this contingent earn-out liability to be $4,500. $2,081 and $479 as of January 27, 2020 and March 27, 2020, respectively.
The Company is in the process of finalizing a valuation of the earn-out liability, and tangible and intangible assets of Fells PointSid Wainer as of the acquisition date. These assets will be valued at fair value usingWhen applicable, these valuations require the use of Level 3 inputs. Customer lists, trademarks, and non-compete agreements are expected to be amortized over 15, 20 and 6 years, respectively. Goodwill for the Fells PointSid Wainer acquisition will be amortized over 15 years for tax purposes. The goodwill recorded primarily reflects the value of acquiring an established meat processorspecialty food and produce distributor to growleverage the Company's protein businessCompany’s existing products in the Northeastmarkets served by Sid Wainer, to supply Sid Wainer’s produce offerings to our New York market and Mid Atlantic regions, as well as any intangible assets that do not qualify for separate recognition. On August 25, 2017, the Company entered into a five-year lease for a warehouse facility located in Baltimore, MD that is owned by the former owners of Fells Point, some of whom are current employees. The Company paid rent of $22 during the thirteen weeks ended September 29, 2017. For the thirty-nine weeks ended September 29, 2017, the Company reflected net sales of $25,751 and income before taxesan operating loss of $5,815 and $380, respectively,$1,105 for Fells PointSid Wainer in its consolidated statement of operations.operations for the thirteen weeks ended March 27, 2020.
The table below presents unaudited pro forma consolidated income statement information of the Company for the thirteen and thirty-nine weeks ended September 29, 2017 and September 23, 2016 as if Fells Pointthe Sid Wainer acquisition had occurred at the beginning of each year presented.on December 29, 2018. The pro forma results were prepared from financial information obtained from the sellers of the business, as well as information obtained during the due diligence process associated with the acquisition. The pro forma information is not necessarily indicative of the Company’s results of operations had the Fells Point acquisition been completed on the above dates,date, nor is it necessarily indicative of the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the Fells Point acquisition, any incremental costs for Fells PointSid Wainer transitioning to become a public company, and also does not reflect additional revenue opportunities following the acquisition. The pro forma information reflects amortization and depreciation of the Fells PointSid Wainer acquisition at their respective fair values based on available information andvalues.
|
| | | | | | | | |
| Thirteen Weeks Ended |
| March 27, 2020 | — |
| March 29, 2019 |
Net sales | $ | 388,209 |
| | $ | 402,074 |
|
Loss before income taxes | (23,187 | ) | | (439 | ) |
Additionally, during the
estimated change in the fair value of the earn-out liability due to accretion. |
| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
| September 29, 2017 | | September 23, 2016 | | September 29, 2017 | | September 23, 2016 |
Net sales | $ | 334,007 |
| | $ | 307,060 |
| | $ | 983,722 |
| | $ | 888,742 |
|
Income before income taxes | 5,447 |
| | 2,753 |
| | 10,084 |
| | (8,132 | ) |
MT Food
On Junequarter ended March 27, 2016,2020, the Company acquired substantially all of the assets of M.T. Food Service, Inc. (“MT Food”), basedpaid approximately $17,000 for a specialty center-of-the plate distributor in Chicago, Illinois. Founded in the mid 1990's, MT Food was a wholesale distributor of dairy, produce, specialty and grocery items in the metro Chicago area. The aggregate purchase price for the transaction at acquisition date was $22,000, including an additional $500 payable eighteen months after the closing date and an earn-out of $500 paid during the second quarter of fiscal 2017. The aggregate purchase price paid by the Company was paid through cash-on-hand and the proceeds from a draw down on its delayed draw term loan facility.New England.
During the second quarter of 2017, the Company obtained additional information related to the fair value of intangible assets, deferred taxes, inventories, accounts receivable acquired and liabilities owed. As a result, the Company recorded a measurement period adjustment resulting in a net increase in goodwill of $3,418 and a decrease in customer relationships of $2,700. The Company has finalized a valuation of the tangible and intangible assets of MT Food as of the acquisition date. These assets are valued at fair value using Level 3 inputs. Customer relationships are to be amortized over 15 years. Goodwill will be amortized over 15 years for tax purposes. The goodwill recorded primarily reflects the value of acquiring an established distributor to leverage the Company’s existing products and distribution center in the markets served by MT Food, as well as any intangible assets that do not qualify for separate recognition.
The table below sets forth the cash purchase price allocation of these acquisitions: |
| | | | | | |
| Sid Wainer | Other Acquisitions |
Current assets | $ | 24,735 |
| $ | 6,790 |
|
Customer relationships | — |
| 6,200 |
|
Trademarks | 3,500 |
| 700 |
|
Goodwill | 9,645 |
| 5,131 |
|
Fixed assets | 21,055 |
| 503 |
|
Right-of-use assets | 8,259 |
| 1,019 |
|
Lease liabilities | (8,259 | ) | (1,019 | ) |
Current liabilities | (10,404 | ) | (941 | ) |
Earn-out liability | (2,081 | ) | (1,383 | ) |
Total consideration | $ | 46,450 |
| $ | 17,000 |
|
The Company recognized professional fees of $435 in operating expenses related to the Fells Point and MT Food acquisitions:acquisitions in the first quarter of fiscal 2020.
|
| | | | | | | |
| MT Food |
| | Fells Point |
|
Current assets (includes cash acquired) | $ | 6,132 |
| | $ | 6,971 |
|
Customer relationships | 7,600 |
| | 14,700 |
|
Trademarks | — |
| | 8,100 |
|
Non-compete agreement | — |
| | 900 |
|
Goodwill | 11,976 |
| | 5,687 |
|
Fixed assets | 261 |
| | 2,459 |
|
Current liabilities | (3,969 | ) | | (1,295 | ) |
Earn-out liability | (500 | ) | | (4,500 | ) |
Other long-term liabilities | (500 | ) | | — |
|
Issuance of common shares |
|
| | (3,300 | ) |
Cash purchase price | $ | 21,000 |
| | $ | 29,722 |
|
Note 6 Inventory– Inventories
Inventory consistsInventories consist primarily of finished product. Our different entities record inventory using a mixture of first-in, first-outproduct and average cost, which we believe approximates first-in, first-out. Inventory isare reflected net of reservesadjustments for shrinkage, excess and obsolescence totaling $1,930$5,268 and $2,122$1,937 at September 29, 2017March 27, 2020 and December 30, 2016,27, 2019, respectively. The Company incurred estimated inventory valuation adjustments of approximately $3,300 related to inventory obsolescence due to COVID-19.
Note 7 – Equipment, and Leasehold Improvements and Software
Equipment, and leasehold improvements and software as of September 29, 2017March 27, 2020 and December 30, 201627, 2019 consisted of the following:
|
| | | | | | | | | | |
| | Useful Lives | | March 27, 2020 | | December 27, 2019 |
Land | | Indefinite | | $ | 5,020 |
| | $ | 1,170 |
|
Buildings | | 20 years | | 15,871 |
| | 1,360 |
|
Machinery and equipment | | 5-10 years | | 25,881 |
| | 21,718 |
|
Computers, data processing and other equipment | | 3-7 years | | 13,653 |
| | 12,686 |
|
Software | | 3-7 years | | 29,331 |
| | 29,305 |
|
Leasehold improvements | | 1-40 years | | 71,297 |
| | 70,903 |
|
Furniture and fixtures | | 7 years | | 3,322 |
| | 3,309 |
|
Vehicles | | 5-7 years | | 19,464 |
| | 6,410 |
|
Other | | 7 years | | 95 |
| | 95 |
|
Construction-in-process | | | | 9,772 |
| | 9,200 |
|
| | | | 193,706 |
| | 156,156 |
|
Less: accumulated depreciation and amortization | | | | (68,071 | ) | | (63,310 | ) |
Equipment, leasehold improvements and software, net | | | | $ | 125,635 |
| | $ | 92,846 |
|
|
| | | | | | | | | | |
| | Useful Lives | | September 29, 2017 | | December 30, 2016 |
Land | | Indefinite | | $ | 1,170 |
| | $ | 1,170 |
|
Buildings | | 20 years | | 1,292 |
| | 1,292 |
|
Machinery and equipment | | 5-10 years | | 15,688 |
| | 13,404 |
|
Computers, data processing and other equipment | | 3-7 years | | 9,883 |
| | 9,367 |
|
Leasehold improvements | | 7-22 years | | 53,479 |
| | 47,971 |
|
Furniture and fixtures | | 7 years | | 3,100 |
| | 3,011 |
|
Vehicles | | 5-7 years | | 2,570 |
| | 2,445 |
|
Other | | 7 years | | 95 |
| | 95 |
|
Construction-in-process | | | | 14,711 |
| | 11,359 |
|
| | | | 101,988 |
| | 90,114 |
|
Less: accumulated depreciation and amortization | | | | (32,947 | ) | | (27,931 | ) |
Equipment and leasehold improvements, net | | | | $ | 69,041 |
| | $ | 62,183 |
|
Construction-in-process at September 29, 2017March 27, 2020 and December 30, 201627, 2019 related primarily to the implementation of the Company’s Enterprise Resource Planning (“ERP”) system.
The rolloutcomponents of its ERP system will continue throughout fiscal 2017depreciation and 2018.amortization expense were as follows:
|
| | | | | | | |
| Thirteen Weeks Ended |
| March 27, 2020 | | March 29, 2019 |
Depreciation expense | $ | 3,568 |
| | $ | 1,973 |
|
Software amortization | $ | 1,194 |
| | $ | 908 |
|
| $ | 4,762 |
| | $ | 2,881 |
|
At September 29, 2017
The net book value of equipment financed under finance leases at March 27, 2020 and December 30, 2016, the Company had $506 of equipment27, 2019 was $16,337 and vehicles financed by capital leases. The Company recorded depreciation on equipment under capital leases of $15 and $15 on these assets during the thirteen weeks ended September 29, 2017 and September 23, 2016, respectively, and $45 and $58 during the thirty-nine weeks ended September 29, 2017 and September 23, 2016,$3,905, respectively.
Depreciation expense, excluding capital leases, was $1,678 and $1,577 for the thirteen weeks ended September 29, 2017 and September 23, 2016, respectively, and $4,970 and $3,753 during the thirty-nine weeks ended September 29, 2017 and September 23, 2016, respectively.
Capitalized software has an estimated useful life of three to seven years. Amortization expense on software was $402 and $437 for the thirteen weeks ended September 29, 2017 and September 23, 2016, respectively, and $1,307 and $1,155 during the thirty-nine weeks ended September 29, 2017 and September 23, 2016, respectively.
Note 8 – Goodwill and Other Intangible Assets
COVID-19 has had a material impact on the Company’s customers. In an effort to limit the spread of the virus, federal, state and local governments have implemented measures that have resulted in the closure of non-essential businesses in many of the markets the Company serves, which has forced its customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. These actions have led to a significant decrease in demand for the Company’s products. The adverse impact to the Company’s customer base and its market capitalization were triggering events and accordingly, the Company performed interim goodwill and long-lived asset quantitative impairment tests as of March 27, 2020.
Goodwill Impairment Test
The Company estimated the fair value of its reporting units using an income approach that incorporates the use of a discounted cash flow model that involves many management assumptions that are based upon future growth projections which include estimates of COVID-19’s impact on our business. Assumptions include estimates of future revenues, growth rates which take into account estimated inflation rates, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses. On the basis of these assumptions, the Company determined that the fair values of its reporting units exceeded the net carry values of their assets and liabilities by approximately $400,000, $19,000 and $14,000 for the East Coast, Midwest and West Coast reporting units, respectively. As such, goodwill was not impaired.
Long-lived Impairment Test
Long-lived assets, including other intangible assets, were tested for recoverability at the asset group level. The Company estimated the net undiscounted cash flows expected to be generated from the asset group over the expected useful of the asset group’s primary asset. Key assumptions include future revenues, growth rates, estimates of future levels of gross profit and operating profit and projected capital expenditures necessary to maintain the operating capacity of each asset group. On the basis of these assumptions, the Company determined that the undiscounted cash flows for each of the Company’s asset groups exceeded their respective carry values and therefore long-lived assets were not impaired.
Although the interim quantitative goodwill and long-lived asset impairment tests indicated no impairment existed as of March 27, 2020, the impacts of COVID-19 on our business are uncertain and will depend on future developments, and as such, it is possible that another triggering event could occur that under certain circumstances could cause us to recognize an impairment charge in the future.
The changes in the carrying amount of goodwill are presented as follows:
|
| | | |
Carrying amount as of December 27, 2019 | $ | 197,743 |
|
Acquisitions | 14,776 |
|
Foreign currency translation | (9 | ) |
Carrying amount as of March 27, 2020 | $ | 212,510 |
|
|
| | | |
Carrying amount as of December 30, 2016 | $ | 163,784 |
|
Goodwill adjustments | 3,418 |
|
Fells Point acquisition | 5,687 |
|
Foreign currency translation | 54 |
|
Carrying amount as of September 29, 2017 | $ | 172,943 |
|
The goodwill adjustments relate to the MT Food acquisition (see Note 5).
Other intangible assets consist of customer relationships being amortized over a period ranging from four to twenty years, trademarks being amortized over a period of one to forty years, and non-compete agreements being amortized over a period of two to six years.
Other intangible assets as of September 29, 2017March 27, 2020 and December 30, 201627, 2019 consisted of the following:
| | September 29, 2017: | Gross Carrying Amount | | Accumulated Amortization | | Net Amount | |
March 27, 2020 | | Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
Customer relationships | $ | 116,381 |
| | $ | (25,465 | ) | | $ | 90,916 |
| $ | 141,384 |
| | $ | (47,889 | ) | | $ | 93,495 |
|
Non-compete agreements | 8,066 |
| | (6,605 | ) | | 1,461 |
| 8,579 |
| | (7,552 | ) | | 1,027 |
|
Trademarks | 60,674 |
| | (9,518 | ) | | 51,156 |
| 68,646 |
| | (17,416 | ) | | 51,230 |
|
Total | $ | 185,121 |
| | $ | (41,588 | ) | | $ | 143,533 |
| $ | 218,609 |
| | $ | (72,857 | ) | | $ | 145,752 |
|
|
| | | | | | | | | | | |
December 27, 2019 | | | | | |
Customer relationships | $ | 135,226 |
| | $ | (45,454 | ) | | $ | 89,772 |
|
Non-compete agreements | 8,579 |
| | (7,479 | ) | | 1,100 |
|
Trademarks | 64,505 |
| | (16,626 | ) | | 47,879 |
|
Total | $ | 208,310 |
| | $ | (69,559 | ) | | $ | 138,751 |
|
|
| | | | | | | | | | | |
December 30, 2016: | |
| | |
| | |
|
Customer relationships | $ | 104,381 |
| | $ | (19,981 | ) | | $ | 84,400 |
|
Non-compete agreements | 7,166 |
| | (5,587 | ) | | 1,579 |
|
Trademarks | 52,574 |
| | (7,422 | ) | | 45,152 |
|
Total | $ | 164,121 |
| | $ | (32,990 | ) | | $ | 131,131 |
|
The Company occasionally makes small, tuck-in acquisitions that are immaterial, both individually and in the aggregate. Therefore, increases in goodwill and gross intangible assets per the above tables may not agree to the increases of these assets as shown for specific acquisitions in Note 5 “Acquisitions.”
Amortization expense for other intangiblesintangible assets was $2,981$3,298 and $3,137$2,877 for the thirteen weeks ended SeptemberMarch 27, 2020 and March 29, 2017 and September 23, 2016, respectively, and $8,712 and $8,704 for the thirty-nine weeks ended September 29, 2017 and September 23, 2016.2019, respectively.
Estimated amortization expense for other intangiblesintangible assets for the remainder of the fiscal year ending December 29, 201725, 2020 and each of the next fivefour fiscal years and thereafter is as follows:
|
| | | |
2020 | $ | 9,956 |
|
2021 | 13,270 |
|
2022 | 12,490 |
|
2023 | 11,463 |
|
2024 | 11,119 |
|
Thereafter | 87,454 |
|
Total | $ | 145,752 |
|
|
| | | |
2017 | $ | 3,187 |
|
2018 | 11,669 |
|
2019 | 11,392 |
|
2020 | 11,119 |
|
2021 | 11,119 |
|
2022 | 10,391 |
|
Thereafter | 84,656 |
|
Total | $ | 143,533 |
|
Note 9 – Debt Obligations
Debt obligations as of September 29, 2017March 27, 2020 and December 30, 201627, 2019 consisted of the following:
|
| | | | | | | | |
| | March 27, 2020 | | December 27, 2019 |
Senior secured term loan | | $ | 238,129 |
| | $ | 238,129 |
|
Convertible senior notes | | 150,000 |
| | 150,000 |
|
Asset-based loan facility | | 100,000 |
| | — |
|
Convertible unsecured note | | 4,000 |
| | 4,000 |
|
Finance lease and other financing obligations | | 16,337 |
| | 3,905 |
|
Deferred finance fees and original issue discount | | (8,537 | ) | | (9,207 | ) |
Total debt obligations | | 499,929 |
| | 386,827 |
|
Less: current installments | | (4,069 | ) | | (721 | ) |
Total debt obligations excluding current installments | | $ | 495,860 |
| | $ | 386,106 |
|
|
| | | | | | | |
| September 29, 2017 | | December 30, 2016 |
Senior secured term loan | $ | 289,229 |
| | $ | 291,613 |
|
Convertible subordinated notes | 36,750 |
| | 36,750 |
|
New Markets Tax Credit loan | — |
| | 11,000 |
|
Capital leases and financed software | 1,042 |
| | 2,136 |
|
Deferred finance fees and original issue discount | (7,682 | ) | | (8,979 | ) |
Total debt obligations | 319,339 |
| | 332,520 |
|
Less: current installments | (4,224 | ) | | (14,795 | ) |
Total debt obligations excluding current installments | $ | 315,115 |
| | $ | 317,725 |
|
On April 26, 2012, Dairyland HP LLC (“DHP”), an indirectly wholly-owned subsidiary of the Company's, entered into a financing arrangement under the New Markets Tax Credit (“NMTC”) program under the Internal Revenue Code of 1986, as amended, pursuant to which a subsidiary of Chase, provided to DHP an $11,000 construction loan (the “NMTC Loan” ) with an interest rate of 1.00% per annum to help fund DHP’s expansion and build-out of the Bronx, New York facility and the rail shed located at that facility. Borrowings under the NMTC Loan were secured by a first priority secured lien on DHPs leasehold interest in the Bronx, New York facility, including all improvements made on the premises, as well as, among other things, a lien on all fixtures incorporated into the project improvements. The loan matured on April 26, 2017 and was repaid in full, including all accrued interest, for $11,009, of which, $8,070 was paid in cash and $2,939 was paid from the associated sinking fund.
As of September 29, 2017,March 27, 2020, the Company was in compliance with all debt covenants and the Company had reserved $9,545$16,641 of the asset-based loan facility (“ABL facilityFacility”) for the issuance of letters of credit. As of September 29, 2017,March 27, 2020, funds totaling $65,455$33,359 were available for borrowing under the ABL facility.Facility. The interest rates on the Company’s senior secured term loan and ABL Facility were 5.1% and 1.9%, respectively, at March 27, 2020.
Note 10 Stockholders'– Stockholders’ Equity
Preferred Stock Purchase Rights
On March 22, 2020, the Company’s board of directors approved a limited duration Preferred Stock Purchase Rights Agreement (the “Rights Agreement”). Under the Rights Agreement, the board of directors approved a dividend of one preferred share purchase right (a “Right”) for each share outstanding share of the Company’s common stock to purchase one one-thousandth of a share of Series A Preferred Stock of the Company at a price of $40.00 per Unit of Preferred Stock, subject to adjustment as provided in the Rights Agreement. The Rights will expire on March 21, 2021, unless the Rights are earlier redeemed or exchanged by the Company or upon the occurrence of certain transactions.
Equity Awards
The following table reflects the activity of
restricted share awards (“RSAs”)RSAs during the
thirty-ninethirteen weeks ended
September 29, 2017:March 27, 2020: | | | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
Unvested at December 30, 2016 | | 334,053 |
| | 18.69 |
| |
Unvested at December 27, 2019 | | | 740,609 |
| | $ | 27.68 |
|
Granted | | 206,081 |
| | 14.79 |
| | 822,134 |
| | 18.57 |
|
Vested | | (109,442 | ) | | 18.55 |
| | (192,357 | ) | | 23.89 |
|
Forfeited | | (74,262 | ) | | 18.39 |
| | (14,701 | ) | | 22.06 |
|
Unvested at September 29, 2017 | | 356,430 |
| | 16.57 |
| |
Unvested at March 27, 2020 | | | 1,355,685 |
| | $ | 22.76 |
|
The Company granted 206,081822,134 RSAs to its employees and directors at a weighted average grant date fair value of $14.79 each$18.57 during the thirty-ninethirteen weeks ended September 29, 2017.March 27, 2020. These awards are a mix of timetime-, market- and performance basedperformance-based grants which willthat generally vest over a range of periods of oneup to fourthree years. The Company recognized expense totaling $612$851 and $420$801 on its RSAs during the thirteen weeks ended SeptemberMarch 27, 2020 and March 29, 2017 and September 23, 2016, respectively, and $1,928 and $1,517 during the thirty-nine weeks ended September 29, 2017 and September 23, 2016,2019, respectively.
At September 29, 2017, the Company had 356,430 unvested RSAs outstanding. At September 29, 2017,March 27, 2020, the total unrecognized compensation cost for these unvested RSAs was $4,641$19,556 and the weighted-average remaining useful lifeperiod was approximately 27 months.2.8 years. Of this total, $3,151$12,869 related to RSAs with time-based vesting provisions and $1,490$6,687 related to RSAs with performance-based vesting provisions. At September 29, 2017,March 27, 2020, the weighted-average remaining useful livesperiod for time-based vesting and performance-based vesting RSAs were approximately 27 months.2.8 years and 3.0 years, respectively.
The following table summarizesCompany’s stock option activityoptions fully vested during the thirty-nine weeks ended September 29, 2017:
|
| | | | | | | | | | | | | |
| | Shares | | Weighted
Average
Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average
Remaining
Contractual Term
(in years) |
Outstanding at December 30, 2016 | | 209,071 |
| | $ | 20.23 |
| | $ | — |
| | 9.2 |
Granted | | — |
| | — |
| | | | |
Exercised | | — |
| | — |
| | | | |
Canceled/Forfeited | | (7,193 | ) | | 20.23 |
| | | | |
Outstanding at September 29, 2017 | | 201,878 |
| | $ | 20.23 |
| | $ | — |
| | 8.4 |
Exercisable at September 29, 2017 | | — |
| | $ | — |
| | $ | — |
| | 0.0 |
first quarter of fiscal 2019. The Company recognized expense of $158 and $120$114 on stock options during the thirteen weeks ended SeptemberMarch 29, 2017 and September 23, 2016, respectively, and $456 and $392 during2019. NaN share-based compensation expense related to the thirty-nine weeks ended September 29, 2017 and September 23, 2016. At September 29, 2017, the total unrecognized compensation cost for theseCompany’s RSAs or stock options was $911 to be recognized over a weighted-average period of approximately 17 months.has been capitalized.
As of September 29, 2017,March 27, 2020, there were 523,9691,414,655 shares available for grant under the Company’s 20112019 Omnibus Equity Incentive Plan. No share-based compensation expense has been capitalized.
Note 11 – Income Taxes
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. The legislation provides temporary changes to the extent to which companies can carryback net operating losses, changes to interest expense deduction limitations and other tax relief provisions.
The Company’s effective income tax rate was 36.5% and 27.5% for the thirteen weeks ended March 27, 2020 and March 29, 2019, respectively. The higher effective tax rate in the current period is primarily related to the Company’s current net loss forecast for fiscal 2020 which, under the CARES Act, allows the Company to claim tax refunds against taxes paid in fiscal 2015 and 2017, both of which were at statutory tax rates of 35%. The Company recorded an income tax refund receivable of $8,762 as of March 27, 2020 which is reflected in prepaid expenses and other current assets on the Company’s consolidated balance sheet.
Note 12 – Related Parties
The Chefs’ Warehouse Mid-Atlantic, LLC, a subsidiary of the Company, leased two warehouse facilities from related parties. These facilities areleases a distribution facility that is 100% owned by entities controlled by Christopher Pappas, the Company’s chairman, president and chief executive officer, and John Pappas, the Company’s vice chairman and one of its directors, and Dean Facatselis, a former non-employee director of the Company and the brother-in-law of Messrs. Pappas, and are deemed to be affiliates of these individuals. Expense related to these facilitiesthis facility totaled $134$118 and $133, respectively,$108 during the thirteen weeks ended SeptemberMarch 27, 2020 and March 29, 2017 and September 23, 2016 and $400 and $481, respectively,2019, respectively. This lease was amended during the thirty-nine weeks ended September 29, 2017 and September 23, 2016. One of the facilities is a distribution facility leased by Chefs’ Warehouse Mid-Atlantic, LLC for which the Company recently extended the lease expiration date to September 30, 2019. The other facility is a distribution facility which one of the Company’s subsidiaries, Dairyland, sublet from TCW Leasing Co., LLC (“TCW”), an entity controlled by the Company’s founders. The Company exited this facility on February 29, 2016 and is no longer required to pay rent.
Each of Christopher Pappas, CEO, John Pappas, Vice Chairman and Dean Facatselis owns 8.33% of a New York City-based restaurant customer of the Company and its subsidiaries that purchased approximately $26 and $22, respectively, of products from the Company during the thirteen weeks ended September 29, 2017 and September 23, 2016 and $88 and $77, respectively, during the thirty-nine weeks ended September 29, 2017 and September 23, 2016. Messrs. Pappas and Facatselis have no other interest in the restaurant other than these equity interests and are not involved in the day-to-day operation or management of this restaurant.
The Company paid $29 and $67 to Architexture Studios, Inc. for interior decorating and design including the purchase of furniture and leasehold improvements primarily for its Las Vegas, San Francisco and Chicago facilities during the thirteen weeks ended September 29, 2017 and September 23, 2016, respectively, and paid $97 and $214, respectively, during the thirty-nine weeks ended September 29, 2017 and September 23, 2016. This entity is owned by Julie Hardridge, the sister-in-law of Christopher Pappas.
The Company purchases products from ConAgra Foods, Inc. of which Steve Goldstone, a Director of the Company, is the Chairman. Mr. Goldstone became a director of the Company on March 7, 2016. The Company purchased approximately $191 and $249 worth of products from ConAgra Foods, Inc. during the thirteen weeks ended September 29, 2017 and September 23, 2016, respectively, and $545 and $249, respectively, during the thirty-nine weeks ended September 29, 2017 and September 23, 2016.
With the acquisition of Del Monte, the Company acquired two warehouse facility leases that the Company leases from certain prior owners of Del Monte. Two of the owners are current employees, one of whom, John DeBenedetti, serves on the Company’s board of directors. The first property is located in American Canyon, CA and is owned by TJ Management Co. LLC, an entity owned 50% by John DeBenedetti. The Company paid rent on this facility totaling $54 and $53, respectively, for the thirteen weeks ended September 29, 2017 and September 23, 2016 and $161 and $158, respectively, during the thirty-nine
weeks ended September 29, 2017 and September 23, 2016. The second property is located in West Sacramento, CA and is owned by David DeBenedetti and Victoria DeBenedetti, the parents of John DeBenedetti. The Company paid rent on this facility totaling $58 and $57, respectively, for the thirteen weeks ended September 29, 2017 and September 23, 2016 and $172 and $169, respectively, during the thirty-nine weeks September 29, 2017 and September 23, 2016. John DeBenedetti and Victoria DeBenedetti are employees of a subsidiary of the Company.
John DeBenedetti, indirectly through TJ Investments, LLC, owns a 8.33% ownership interest in Old World Provisions, which supplies products to the Company since the Del Monte acquisition. The Company purchased approximately $208 and $169, respectively, of products during the thirteen weeks ended September 29, 2017 and September 23, 2016 and $636 and $306, respectively, during the thirty-nine weeks ended September 29, 2017 and September 23, 2016. Mr. J. DeBenedetti is not involved in the day-to-day management of Old World Provisions.
John Pappas’s brother-in-law, Constantine Papataros, is one of the Company’s employees. The Company paid him approximately $48 and $37 in total compensation, respectively, for the thirteen weeks ended September 29, 2017 and September 23, 2016 and $140 and $125, respectively, during the thirty-nine weeks ended September 29, 2017 and September 23, 2016. Christopher Pappas’s brother, John Pappas, is one of the Company’s employees and a member of the Company’s Board of Directors. The Company paid John Pappas approximately $99 and $99 in total compensation, respectively, for the thirteen weeks ended September 29, 2017 and September 23, 2016 and $494 and $454, respectively, during the thirty-nine weeks ended September 29, 2017 and September 23, 2016. John Pappas did not receive any compensation during the thirty-nine weeks ended September 29, 2017 or September 23, 2016 for his service on the Company’s Board of Directors. Tara Brennan, the domestic partner of John DeBennedetti, is an employee of the Company and was paid approximately $45 for the thirteen weeks ended September 29, 2017 and September 23, 2016 and $135 during the thirty-nine weeks ended September 29, 2017 and September 23, 2016.
An entity owned 50% by John Couri, a director of the Company, and of which Messrs. C. Pappas and S. Hanson (also directors of the Company) previously held ownership interests, owns an interest in an aircraft that the Company uses for business purposes in the course of its operations. Mr. Couri paid for his ownership interest in the aircraft himself and bears his share of all operating, personnel and maintenance costs associated with the operation of this aircraft. This related party relationship ended during the fourth quarter of fiscal 2016. The Company made no payments during the thirteen weeks ended2020 and expires on September 29, 2017 and September 23, 2016 and $36 during the thirty-nine weeks ended September 29, 2017 for use of such aircraft in the fourth quarter of fiscal 2016. The Company paid $7 during the thirty-nine weeks ended September 23, 2016 for the use of such aircraft.30, 2023.
Note 1213 – Supplemental Disclosures of Cash Flow Information
|
| | | | | | | |
| Thirteen Weeks Ended |
| March 27, 2020 | | March 29, 2019 |
Supplemental cash flow disclosures: | | | |
Cash paid for income taxes, net of cash received | $ | 334 |
| | $ | 964 |
|
Cash paid for interest, net of cash received | $ | 2,883 |
| | $ | 5,271 |
|
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 6,700 |
| | $ | 5,890 |
|
Operating cash flows from finance leases | $ | 111 |
| | $ | 17 |
|
ROU assets obtained in exchange for lease liabilities: | | | |
Operating leases | $ | 4,989 |
| | $ | 131,819 |
|
Finance leases | $ | 13,208 |
| | $ | 854 |
|
Other non-cash investing and financing activities: | | | |
Convertible notes issued for acquisitions | $ | — |
| | $ | 4,000 |
|
Contingent earn-out liabilities for acquisitions | $ | 3,464 |
| | $ | 4,080 |
|
|
| | | | | | | |
| Thirty-nine Weeks Ended |
| September 29, 2017 | | September 23, 2016 |
Supplemental cash flow disclosures: | |
| | |
|
Cash paid for income taxes, net of cash received | $ | 500 |
| | $ | 7,976 |
|
Cash paid for interest | $ | 14,664 |
| | $ | 10,759 |
|
Non cash financing activities: | | | |
Sinking funds used to retire debt | $ | 2,939 |
| | $ | — |
|
Non-cash investing activity: | |
| | |
|
Contingent earn-out liabilities for acquisitions | $ | 4,500 |
| | $ | 500 |
|
Acquisition purchase price payable | $ | — |
| | $ | 500 |
|
Common stock issued for acquisitions | $ | 3,300 |
| | $ | — |
|
Note 13 Commitments and Contingencies14 – Subsequent Events
Until February 29, 2016,On April 27, 2020, the Company subletpaid $2,250 to the former owners of Bassian related to their successful attainment of the gross profit targets in their earn-out agreement.
On April 16, 2020, the White House Coronavirus Task Force released guidelines for a distribution facility from TCW (an entity controlled bythree-phased approach to reopening the Company’s founders). TCW leasesU.S. economy. The guidelines were issued to help state and local governments plan for a responsible reopening of their economies along with certain health and safety precautions. Certain state governors, including those of Florida, Ohio and Texas, markets in which we operate, announced phased reopenings of their economies in May 2020. The timing of a broad reopening of the distribution center from the New York City Industrial Development Agency. In connection withU.S. economy cannot be predicted at this sublease arrangement and TCW's obligations under a related mortgagetime nor can COVID-19’s impact on future consumer spending behavior. The Company continues to support its mortgage lender,customer base as they serve their communities while managing its liquidity effectively during this time of demand uncertainty. As of April 30, 2020, the Company Dairylandhad cash and anothercash equivalents of the Company’s subsidiaries initially were required to act as guarantorsapproximately $200,000 and availability on its asset-based loan facility of TCW’s mortgage obligation on the$33,359.
distribution center. The mortgage payoff date is December 2029 and the potential obligation under this guarantee totaled $5,120 at September 29, 2017. By agreement dated July 1, 2005, the lender released the Company and its subsidiaries from their guaranty obligations, provided the sublease between Dairyland and TCW remained in full force and effect. As of February 29, 2016, Dairyland exited the sublease arrangement with TCW, triggering the guarantee obligation. The Company believes that the fair value of the building securing the mortgage more than offsets any potential obligation. In addition, TCW is actively pursuing business strategies that upon completion will unconditionally and fully release the Company from any guaranty of TCW’s mortgage loan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The following discussion should be read in conjunction with information included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 10, 2017.February 24, 2020. Unless otherwise indicated, the terms Company, Chefs’ Warehouse, we, us“Company”, “Chefs’ Warehouse”, “we”, “us” and our“our” refer to The Chefs’ Warehouse, Inc. and its subsidiaries. All dollar amounts are in thousands.
OVERVIEWBusiness Overview
We are a premier distributor of specialty foods in eightnine of the leading culinary markets in the United States. We offer more than 43,000 SKUs,55,000 stock-keeping units (“SKUs”), ranging from high-quality specialty foods and ingredients to basic ingredients and staples and center-of-the-plate proteins. We serve more than 28,00034,000 customer locations, primarily located in our 15sixteen geographic markets across the United States and Canada, and the majority of our customers are independent restaurants and fine dining establishments. As a result of our acquisition of Allen Brothers, Inc. (“Allen Brothers”), we also sell certain of our center-of-the-plate products directly to consumers.
We believe several key differentiating factors
Effect of the COVID-19 Pandemic on our Business and Operations
The COVID-19 pandemic (“COVID-19”) has had a material impact on our business and operations and those of our customers. In an effort to limit the spread of the virus, federal, state and local governments have implemented measures that have resulted in the closure of non-essential businesses in many of the markets we serve, which has forced our customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. These developments have resulted in a $23.5 million decline in organic sales compared to the prior year quarter. Due to COVID-19, we incurred estimated non-cash charges of $15.8 million related to incremental bad debt expense and approximately $3.3 million related to estimated inventory obsolescence.
Our management team is responding rapidly to the changing landscape and pursuing alternate sources of revenue to mitigate the extent of sales declines in our core customer base. Our sales force is working closely with our core customers and developing solutions to help them fulfill the demand in their communities whilst complying with health and safety restrictions. We are actively entering into new business modelrelationships with retail food outlets as they experience a sharp increase in demand. As we develop these new sales channels, we are negotiating favorable credit terms given the nature of the underlying customer base and the current market environment. In addition, our purchasing teams have enabledworked diligently to shift our product purchases to SKUs that are in high demand. Thus far, we have not experienced difficulties in procuring products from our suppliers.
In response to the pandemic, we expanded our direct-to-consumer product offerings by launching our “Shop Like a Chef” online home delivery platform in several of the markets we serve. We now offer products directly to consumers through our Allen Brothers and “Shop Like a Chef” online platforms.
We have implemented cost control measures during this time of demand volatility. Our variable cost structure naturally decreases as our sales decrease, however, we are also reducing our fixed cost structure. Among other actions, we have postponed planned capital expenditures, returned certain equipment on short-term rental agreements, and reduced compensation expense through salary reductions, furloughs and lay-offs as we right-size our organization to current levels of demand.
Management determined COVID-19’s adverse impact on our operations and our market capitalization were triggering events that required us to executetest goodwill and long-lived assets for impairment as of March 27, 2020. No impairments were recorded as a result of these tests. However, the impacts of COVID-19 on our strategy consistentlybusiness are uncertain and profitably across our expanding customer base. These factors consistwill depend on future developments, and as such, it is possible that another triggering event could occur that under certain circumstances could cause us to recognize an impairment charge in the future.
We closed the quarter with total cash and cash equivalents of $193.5 million, inclusive of a portfolio$100.0 million draw on our asset-based loan facility on March 18, 2020. Subsequent to this draw, we had approximately $33.4 million of distinctiveremaining availability under our asset-based loan facility as of March 27, 2020. We are actively monitoring our working capital to effectively manage our liquidity during this time of uncertainty and hard-to-find specialty food products, an extensive selectionexpect to use the proceeds of center-of-the-plate proteins, athe draw, if any, to rescale our business when demand returns.
The future impact of COVID-19 on our business, operations and liquidity is difficult to predict at this time and is highly traineddependent upon decisions made by federal, state and motivated sales force, strong sourcing capabilities, a fully integrated warehouse management system, a highly sophisticated distributionlocal governments and logistics platform and a focused, seasoned management team.future consumer spending behavior.
In recent years, our sales to existing and new customers have increased through the continued growth in demand for specialty food products and center-of-the-plate products in general; increased market share driven by our large percentage of sophisticated and experienced sales professionals, our high-quality customer service and our extensive breadth and depth of product offerings; the acquisition of other specialty food and center-of-the-plate distributors; the expansion of our existing distribution centers; our entry into new distribution centers, including the construction of a new distribution center and our acquisition of MT Food in Chicago; and the import and sale of our proprietary brands. Through these efforts, we believe that we have been able to expand our customer base, enhance and diversify our product selections, broaden our geographic penetration and increase our market share.
RECENT ACQUISITIONSRecent Acquisitions
On August 25, 2017,February 3, 2020, the Company entered into an asset purchase agreement to acquire substantially all of the assets of Fells Point,Cambridge Packing Co, Inc., a specialty protein manufacturercenter-of-the-plate producer and distributor based in the metro Baltimore and Washington DC area.New England. The aggregate purchase price for the transaction at acquisition date was approximately $33,022, including the impact of an initial net working capital adjustment which is subject to a post-closing working capital adjustment true up. Approximately $29,722 was$17.0 million paid in cash at closing and is subject to a customary working capital true-up. The Company is required to pay additional contingent consideration, if earned, of up to $3.0 million over a two-year period upon successful attainment of certain gross profit targets.
On January 27, 2020, the remaining $3,300 consisted of 185,442 sharesCompany entered into an asset purchase agreement to acquire substantially all of the Company's common stock.
On June 27, 2016, the Company acquired substantially all theassets, including certain real-estate assets, of MT Food,Sid Wainer & Son, a specialty food and produce distributor based out of Chicago, IL.in New England. The aggregate purchase price for the transactionwas approximately $46.5 million paid in cash at acquisition date was $22,000, including an additional $500 payable eighteen months after the closing date and an earn-out of $500, paid during the second quarter of fiscal 2017. The final aggregate purchase price is subject to the impact of a customary net working capital true-up.
Our Growth Strategies and Outlook
We continue The Company is required to invest in our people, facilities and technology in an effortpay additional contingent consideration, if earned, of up to achieve the following objectives and maintain our premier position within the specialty foodservice distribution market:
sales and service territory expansion;
operational excellence and high customer service levels;
expanded purchasing programs and improved buying power;
product innovation and new product category introduction;
operational efficiencies through system enhancements; and
operating expense reduction through the centralization$4.0 million over a two-year period upon successful attainment of general and administrative functions.
Our growth has allowed us to improve upon our organization’s infrastructure, open new distribution facilities and pursue selective acquisitions. Over the last several years, we have increased our distribution capacity to approximately 1.3 million square feet in 25 distribution facilities at September 29, 2017. From the second half of fiscal 2013 through the third quarter of fiscal 2017, we have invested significantly in acquisitions, infrastructure and management.
Key Factors Affecting Our Performance
Due to our focus on menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolatiers, cruise lines, casinos and specialty food stores, our results of operations are materially impacted by the success of the food-away-from-home industry in the United States and Canada, which is materially impacted by general economic conditions, weather, discretionary spending levels and consumer confidence. When economic conditions deteriorate, our customers businesses are negatively impacted as fewer people eat away-from-home and those who do spend less money. As economic conditions begin to improve, our customers’ businesses historically have likewise improved, which contributes to improvements in our business. Likewise, the direct-to-consumer business of our Allen Brothers subsidiary is significantly dependent on consumers’ discretionary spending habits, and weakness or uncertainty in the economy could lead to consumers buying less from Allen Brothers.
Volatile food costs may have a direct impact upon our profitability. Prolonged periods of product cost inflation may have a negative impact on our profit margins and results of operations to the extent we are unable to pass on all or a portion of such product cost increases to our customers. In addition, product cost inflation may negatively impact consumer discretionary spending decisions within our customers’ establishments, which could adversely impact our sales. Conversely, our profit levels may be negatively impacted during periods of product cost deflation even though ourcertain gross profit as a percentage of sales may remain relatively constant. However, some of our products, particularly certain of our protein items, are priced on a cost plus a dollar markup, which helps mitigate the negative impact of deflation.targets.
Given our wide selection of product categories, as well as the continuous introduction of new products, we can experience shifts in product sales mix that have an impact on net sales and gross profit margins. This mix shift is most significantly impacted by the introduction of new categories of products in markets that we have more recently entered, the shift in product mix resulting from acquisitions, as well as the continued growth in item penetration on higher velocity items such as dairy products.
The foodservice distribution industry is fragmented but consolidating, and we have supplemented our internal growth through selective strategic acquisitions. We believe that the consolidation trends in the foodservice distribution industry will continue to present acquisition opportunities for us, which may allow us to grow our business at a faster pace than we would otherwise be able to grow the business organically.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:
| | | | Thirteen Weeks Ended | | Thirty-nine Weeks Ended | Thirteen Weeks Ended |
| | September 29, 2017 | | September 23, 2016 | | September 29, 2017 | | September 23, 2016 | March 27, 2020 | | March 29, 2019 |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | $ | 375,431 |
| | $ | 357,027 |
|
Cost of sales | | 75.1 | % | | 75.0 | % | | 74.9 | % | | 75.0 | % | 284,530 |
| | 266,838 |
|
Gross profit | | 24.9 | % | | 25.0 | % | | 25.1 | % | | 25.0 | % | 90,901 |
| | 90,189 |
|
Operating expenses | | 21.7 | % | | 22.2 | % | | 22.4 | % | | 22.0 | % | 107,917 |
| | 84,039 |
|
Operating income | | 3.2 | % | | 2.8 | % | | 2.7 | % | | 3.0 | % | |
Other expense | | 1.7 | % | | 2.0 | % | | 1.8 | % | | 4.2 | % | |
Income (loss) before income tax expense | | 1.5 | % | | 0.8 | % | | 0.9 | % | | (1.2 | )% | |
Operating (loss) income | | (17,016 | ) | | 6,150 |
|
Interest and other expense | | 5,166 |
| | 4,585 |
|
(Loss) income before income taxes | | (22,182 | ) | | 1,565 |
|
Provision for income taxes | | 0.6 | % | | 0.3 | % | | 0.4 | % | | (0.5 | )% | (8,097 | ) | | 431 |
|
Net income (loss) | | 0.9 | % | | 0.5 | % | | 0.5 | % | | (0.7 | )% | |
Net (loss) income | | $ | (14,085 | ) | | $ | 1,134 |
|
Management evaluates the results of operations and cash flows using a variety of key performance indicators, including net sales compared to prior periods and internal forecasts, costs of our products and results of our cost-control initiatives, and use of operating cash. These indicators are discussed throughout the Results“Results of OperationsOperations” and Liquidity“Liquidity and Capital ResourcesResources” sections of this MD&A.
Thirteen Weeks Ended September 29, 2017March 27, 2020 Compared to Thirteen Weeks Ended September 23, 2016March 29, 2019
Net Sales
Our net sales for the thirteen weeks ended September 29, 2017 increased approximately 9.1%, |
| | | | | | | | | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
Net sales | $ | 375,431 |
| | $ | 357,027 |
| | $ | 18,404 |
| | 5.2 | % |
Sales growth from acquisitions contributed $41.9 million, or $27,159, to $325,076 from $297,917 for the thirteen weeks ended September 23, 2016. Organic growth contributed $21,344, or 7.2%11.8%, to sales growth ingrowth. Organic sales declined $23.5 million, or 6.6%, versus the quarter. The remaining sales growthprior year period primarily due to impacts of $5,815, or 1.9% resulted from the acquisition of Fells Point on August 25, 2017.COVID-19. Organic case count grewdeclined approximately 3.6%,5.0% in our specialty division, which net of the expected attrition from our MT Food fold-in acquisition in Chicago was 5.2%.category. In addition, adjusted growth inspecialty unique customers and placements grew 4.4%declined 1.9% and 5.4%9.6%, respectively, compared to the prior year quarter.period. Pounds sold in our protein division declined 1.2%center-of-the-plate category decreased 10.0% compared to the prior year. Estimated deflation was 2.1% in our specialty category and inflation was 3.1% in our center-of-the-plate category compared to the prior year earlier quarter, impacted in part by the impact of both hurricanes Harvey and Irma. Estimated inflation continued its sequential increase and was 5.3% and 5.1% in our specialty and protein divisions, respectively.period.
Gross Profit
|
| | | | | | | | | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
Gross profit | $ | 90,901 |
| | $ | 90,189 |
| | $ | 712 |
| | 0.8 | % |
Gross profit margin | 24.2 | % | | 25.3 | % | | | | |
Gross profit was relatively unchanged versus the prior year quarter despite the increase in net sales. Gross profit margin decreased approximately 105 basis points. Gross profit margins decreased 311 basis points in the Company’s specialty category and increased 157 basis points in the Company’s center-of-the-plate category compared to the prior year period. Our specialty category gross profit results include a charge of approximately 8.8%, or $6,513,$3.3 million related to $80,905estimated inventory losses from obsolescence due to impacts of COVID-19. Center-of-the-plate category gross profit was favorably impacted by a greater mix of retail sales in the current year period.
Operating Expenses
|
| | | | | | | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
Operating expenses | 107,917 |
| | 84,039 |
| | $ | 23,878 |
| | 28.4 | % |
Percentage of net sales | 28.7 | % | | 23.5 | % | | | | |
The increase in operating expenses relates primarily to our recent acquisitions and an estimated non-cash charge of approximately $15.8 million related to incremental bad debt expense as a result COVID-19, partially offset by a decrease in non-cash charges due to changes in the fair value of our contingent earn-out liabilities. Total operating expenses for the thirteen weeks ended September 29, 2017, from $74,392March 27, 2020 includes a $6.8 million credit due to a reduction in the fair value of our contingent earn-out liabilities compared to a charge of $0.1 million for the thirteen weeks ended September 23, 2016. Gross profit margin decreased approximately 8 basis points to 24.9% from 25.0%, due in large part to the impactMarch 29, 2019. Our ratio of inflation. Gross margins in the Company's specialty division decreased 12 basis points and decreased 3 basis points in the Company's protein division compared to the prior year quarter.
Operating Expenses
Total operating expenses increased by approximately 6.5%, or $4,305, to $70,411 for the thirteen weeks ended September 29, 2017 from $66,106 for the thirteen weeks ended September 23, 2016. As a percentage of net sales operating expenses were 21.7%was higher as a result of adverse COVID-19 impacts to our sales growth and a 467 basis point increase in the second quarter of 2017 comparednon-cash charges related to 22.2% in the second quarter of 2016. The 54bad debt expense, partially offset by a 184 basis point decrease in the Company’s operating expense ratio is due largely to better utilization of the Company's warehouse facilities, 20 basis points, favorable warehouse and selling labor costs, 16 basis points, and depreciation and amortization expense, 22 basis points, offset in part by higher compensation costsnon-cash charges related to changes in the Company's management infrastructure, 25 basis points.fair value of our contingent earn-out liabilities.
Operating Income
Operating income forInterest and Other Expense
|
| | | | | | | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
Interest and other expense | 5,166 |
| | 4,585 |
| | $ | 581 |
| | 12.7 | % |
Interest and other expense increased primarily due to the thirteen weeks ended September 29, 2017 was $10,494 compared to $8,286 forinterest charged on our Convertible Senior Notes issued on November 22, 2019 and the thirteen weeks ended September 23, 2016. As a percentage of net sales, operating income was 3.2% for the thirteen weeks ended September 29, 2017 compared to 2.8% for the thirteen weeks ended September 23, 2016. The increase in operating income was driven primarily from the higher gross profit discussed above,$100.0 million draw on our asset-based loan facility on March 18, 2020, partially offset by higher operating expenses.
Interest Expense
Total interest expense decreased to $5,593 for the thirteen weeks ended September 29, 2017 compared to $5,947 for the thirteen weeks ended September 23, 2016 due primarily to a reduction inlower effective interest rates charged on the Company'sour outstanding debt.
Provision for Income Taxes
For the thirteen weeks ended September 29, 2017, we recorded an |
| | | | | | | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
Provision for income taxes | (8,097 | ) | | 431 |
| | $ | (8,528 | ) | | (1,978.7 | )% |
Effective tax rate | 36.5 | % | | 27.5 | % | | | | |
The higher effective income tax rate of 41.7%. For the thirteen weeks ended September 23, 2016,is primarily related to our effective income tax rate was 41.6%.
Net Income
Reflecting the factors described above, net income was $2,851 for the thirteen weeks ended September 29, 2017, compared to net income of $1,343 for the thirteen weeks ended September 23, 2016.
Thirty-nine Weeks Ended September 29, 2017 Compared to Thirty-nine Weeks Ended September 23, 2016
Net Sales
Our net sales for the thirty-nine weeks ended September 29, 2017 increased approximately 11.1%, or $94,460, to $944,422 from $849,962 for the thirty-nine weeks ended September 23, 2016. Organic growth contributed $65,401, or 7.7% to sales growth in the quarter. The remaining sales growth resulted from the acquisition of MT Food on June 27, 2016, $23,244 or 2.7%, and from the acquisition of Fells Point on August 25, 2017, $5,815 or 0.7%. Compared to the 2016 period, organic case count grew approximately 5.9%, while the number of unique customers and placements grew 4.6% and 5.8%, respectively, in our specialty business in the first thirty nine weeks of 2017. Pounds sold in our protein division increased 0.4% for the first thirty-nine weeks of 2017 compared to the prior year. Internally calculated inflation was approximately 3.2% during the 2017 period, consisting of 3.7% inflation in our specialty division and 2.5% in our protein division.
Gross Profit
Gross profit increased approximately 11.9%, or $25,252, to $237,405 for the thirty-nine weeks ended September 29, 2017, from $212,153 for the thirty-nine weeks ended September 23, 2016. Gross profit margin increased approximately 18 basis points to 25.1% from 25.0%. Gross profit margins increased approximately 1 basis point in our specialty division. Gross profit margins increased approximately 14 basis points in our protein division.
Operating Expenses
Total operating expenses increased by approximately 13.0%, or $24,309, to $211,627 for the thirty-nine weeks ended September 29, 2017 from $187,318 for the thirty-nine weeks ended September 23, 2016. As a percentage of net sales, operating expenses were 22.4% in the thirty-nine weeks ended September 29, 2017 compared to 22.0% in the thirty-nine weeks ended September 23, 2016. The increase in the Company’s operating expense ratio of 37 basis points is largely attributable to the impact of prior year gains upon the reduction of the Company’s earn-out liabilities, 22 basis points, and investments in additional management personnel, 36 basis points, partially offset by better utilization of the Company's warehouse facilities, 15 basis points.
Operating Income
Operating income for the thirty-nine weeks ended September 29, 2017 was $25,778 compared to $24,835 for the thirty-nine weeks ended September 23, 2016. As a percentage of net sales, operating income was 2.7% for the thirty-nine weeks ended September 29, 2017 compared to 3.0% for the thirty-nine weeks ended September 23, 2016. The increase in operating income was driven primarily from the higher gross profit discussed above partially offset by higher operating expenses.
Interest Expense
Total interest expense decreased to $17,406 for the thirty-nine weeks ended September 29, 2017 compared to $35,271 for the thirty-nine weeks ended September 23, 2016 due primarily to the prior year $22,310 prepayment penalty associated with the Company's debt refinancing in June 2016. This decrease was partially offset by increased interest expense due to higher levels of debt associated with that refinancing.
Provision for Income Taxes
For the thirty-nine weeks ended September 29, 2017, we recorded an effective income tax rate of 41.6%. For the thirty-nine weeks ended September 23, 2016, our effective income tax rate was 41.6%.
Net Income (Loss)
Reflecting the factors described above, net income was $4,883 for the thirty-nine weeks ended September 29, 2017, compared tocurrent net loss forecast for fiscal 2020 which allows us to claim tax refunds against taxes paid in fiscal 2015 and 2017, both of $(6,119) for the thirty-nine weeks ended September 23, 2016.which were at statutory tax rates of 35%.
Product Category Sales Mix
The sales mix for the principal product categories for thirteen weeks and thirty-nine weeks ended September 29, 2017 and September 23, 2016 is as follows (dollars in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
| September 29, 2017 | | September 23, 2016 | | September 29, 2017 | | September 23, 2016 |
Center of the Plate | $ | 151,062 |
| | 47 | % | | $ | 146,552 |
| | 49 | % | | $ | 440,556 |
| | 47 | % | | $ | 416,327 |
| | 49 | % |
Dry Goods | 56,442 |
| | 17 | % | | 49,488 |
| | 17 | % | | 164,023 |
| | 17 | % | | 142,961 |
| | 17 | % |
Pastry | 43,654 |
| | 13 | % | | 38,938 |
| | 13 | % | | 128,483 |
| | 14 | % | | 112,732 |
| | 13 | % |
Cheese | 25,796 |
| | 8 | % | | 23,838 |
| | 8 | % | | 74,544 |
| | 8 | % | | 66,774 |
| | 8 | % |
Dairy | 23,294 |
| | 7 | % | | 17,926 |
| | 6 | % | | 65,324 |
| | 7 | % | | 51,935 |
| | 6 | % |
Oils and Vinegar | 18,360 |
| | 6 | % | | 16,211 |
| | 5 | % | | 53,154 |
| | 6 | % | | 45,508 |
| | 5 | % |
Kitchen Supplies | 6,468 |
| | 2 | % | | 4,964 |
| | 2 | % | | 18,338 |
| | 1 | % | | 13,725 |
| | 2 | % |
Total | $ | 325,076 |
| | 100 | % | | $ | 297,917 |
| | 100 | % | | $ | 944,422 |
| | 100 | % | | $ | 849,962 |
| | 100 | % |
LIQUIDITY AND CAPITAL RESOURCES
We finance our day-to-day operations and growth primarily with cash flows from operations, borrowings under our senior secured credit facilities and other indebtedness, operating leases, trade payables and bank indebtedness.equity financing.
Senior Secured Term Loan Credit Facility
On June 22, 2016, Chefs’ Warehouse Parent, LLC (“CW Parent”)Indebtedness
The following table presents selected financial information on our indebtedness (in thousands):
|
| | | | | | | |
| March 27, 2020 | | December 27, 2019 |
Senior secured term loan | $ | 238,129 |
| | $ | 238,129 |
|
Total convertible debt | $ | 154,000 |
| | $ | 154,000 |
|
Borrowings outstanding on asset-based loan facility | $ | 100,000 |
| | $ | — |
|
Finance leases and other financing obligations | $ | 16,337 |
| | $ | 3,905 |
|
As of March 27, 2020, we have various floating- and Dairyland USA Corporation (“Dairyland”), as co-borrowers, and The Chefs’ Warehouse, Inc. (the “Company”) and certain other subsidiaries of the Company, as guarantors, entered into a credit agreement (the “Term Loan Credit Agreement”)fixed-rate debt instruments with a group of lendersvarying maturities for which Jefferies Finance LLC (“Jefferies”) acts as administrative agent and collateral agent. The Term Loan Credit Agreement provides for a senior secured term loan B facility (the “Term Loan Facility”) in an aggregate amount of $305,000 with a $50,000 six-month delayed draw term loan facility (the “DDTL”; the loans outstanding under the Term Loan Facility (including the DDTL), the “Term Loans”). Additionally, the Term Loan Facility includes an accordion which permits the Company to request that the lenders extend additional Term Loans in an aggregate principal amount of up to $50,000 (less the aggregate amount of certain indebtedness incurred to finance acquisitions) plus an unlimited amount Subject to the Company's consolidated Total Leverage Ration not exceeding 4.90:1.00 on a pro forma basis. Borrowings under the Term Loan Facility were used to repay the Company’s senior secured notes, as well as the prior term loan and revolving credit facility. Remaining funds will be used for capital expenditures, permitted acquisitions, working capital and general corporate purposes of the Company. On June 27, 2016, the Company drew $14,000 from the DDTL to help pay for the MT Food acquisition. On September 14, 2016, the Company entered into an amendment to the Term Loan Credit Agreement under which the remaining portion of the DDTL was terminated, the Company’s interest rate schedule was modified and the Company repaid $25,000 of the outstanding balance of the Term Loans. The interest rate on this facility at September 29, 2017 was 5.99%.$492.1 million.
The final maturity of the Term Loan Facility is June 22, 2022. Subject to adjustment for prepayments, the Company is required to make quarterly amortization payments on the Term Loans in an amount equal to 0.25% of the aggregate principal amount of the Term Loans.
The interest rates per annum applicable to Term Loans, will be, at the co-borrowers’ option, equal to either a base rate or an adjusted LIBO rate for one, two, three, six or (if consented to by the lenders) twelve-month interest periods chosen by the Company, in each case plus an applicable margin percentage. A commitment fee is payable in respect of the amount of the undrawn DDTL commitments during the period the DDTL is available, equal to a percentage equal to 50% of the interest rate with respect to Term Loans accruing interest based on the adjusted LIBO rate.
The Term Loan Facility contains customary affirmative covenants, negative covenants (including restrictions, subject to customary exceptions, on incurring debt or liens, paying dividends, repaying payment subordinated and junior lien debt, disposing assets, and making investments and acquisitions), and events of default for a term loan B facility of this type, as more particularly described in the Term Loan Credit Agreement.
As of September 29, 2017, the Company was in compliance with all debt covenants under the Term Loan Facility.
Asset Based Loan Facility
On June 22, 2016, the Company entered into a credit agreement (the “ABL Credit Agreement”) with a group of lenders for which JPMorgan Chase Bank, N.A., acts as administrative agent and collateral agent. The ABL Credit Agreement provides for an asset based loan facility (the “ABL Facility”) in the aggregate amount of up to $75,000. Availability under the ABL Facility will be limited to a borrowing base consisting of the difference of (a) the lesser of: (i) the aggregate amount of commitments or (ii) the sum of specified percentages of eligible receivables and eligible inventory, minus certain availability reserves minus (b) outstanding borrowings. The co-borrowers under the ABL Facility are entitled on one or more occasions, subject to the satisfaction of certain conditions, to request an increase in the commitments under the ABL Facility in an aggregate principal amount of up to $25,000. The ABL Facility matures on June 22, 2021.
The interest rates per annum applicable to loans, other than swingline loans, under the ABL Credit Facility will be, at the co-borrowers’ option, equal to either a base rate or an adjusted LIBO rate for one, two, three, six or (if consented to by the lenders) twelve-month, interest periods chosen by the Company, in each case plus an applicable margin percentage. The Company will pay certain recurring fees with respect to the ABL Facility, including fees on the unused commitments of the lenders.The ABL Facility contains customary affirmative covenants, negative covenants and events of default as more particularly described in the ABL Credit Agreement. The ABL Facility will require compliance with a minimum consolidated fixed charge coverage ratio of 1:1 if the amount of availability under the ABL Facility falls below a specified dollar amount or percentage of the borrowing base.
There were no outstanding balances under the ABL as of September 29, 2017. Borrowings under the ABL Facility will be used, and are expected to be used, for capital expenditures, permitted acquisitions, working capital and general corporate purposes of the Company. As of September 29, 2017, the Company was in compliance with all debt covenants and the Company had reserved $9,545 of the ABL facility for the issuance of letters of credit. As of September 29, 2017, funds totaling $65,455 were available for borrowing under the ABL facility.
Convertible Subordinated Notes
On April 6, 2015, the Company issued $36,750 principal amount of convertible subordinated notes with a six-year maturity bearing interest at 2.5% and a conversion price of $29.70 per share (the “Convertible Subordinated Notes”) to certain of the Del Monte entities as partial consideration in the Del Monte acquisition. The holders of the Convertible Subordinated Notes may, in certain instances beginning one year after issuance, redeem the Convertible Subordinated Notes for cash or shares of the Company’s common stock. Moreover, the Company may, at its discretion, pay the outstanding principal amount due and owing under the Convertible Subordinated Notes at maturity in either cash or shares of the Company’s common stock. Interest is payable annually in cash with the first interest payment due on April 6, 2016. The Convertible Subordinated Notes, which are subordinate to the Company’s and its subsidiaries’ senior debt, are convertible into shares of the Company’s common stock by the holders at any time at a conversion price of $29.70.Liquidity
The following table presents selected financial information on liquidity (in thousands):
|
| | | | | | | |
| March 27, 2020 | | December 27, 2019 |
Cash and cash equivalents | $ | 193,517 |
| | $ | 140,233 |
|
Working capital, excluding cash and cash equivalents | $ | 146,746 |
| | $ | 162,772 |
|
Availability under asset-based loan facility | $ | 33,359 |
| | $ | 133,359 |
|
We believe ouranticipate capital expenditures, excluding cash paid for acquisitions, for fiscal 20172020 will be approximately $12,000.in the range of $10.0 million to $12.0 million which is down from our original estimate of $38.0 million to $42.0 million. The significant decrease in projectedis a result of us postponing certain investments due to COVID-19. We believe our existing balances of cash and cash equivalents, working capital and the availability under our asset-based loan facility, are sufficient to satisfy our working capital needs, capital expenditures, in fiscal 2017 as compared to fiscal 2016 isdebt service and other liquidity requirements associated with our current operations over the result of the completion of the renovation and expansion of our new Bronx, NY and Las Vegas, NV distribution facilities. Recurring capital expenditures will be financed with cash generated from operations and borrowings under our ABL Facility. Our planned capital projects will provide both new and expanded facilities and improvements to our technology that we believe will produce increased efficiency and the capacity to continue to support the growth of our customer base. Future investments and acquisitions will be financed through either internally generated cash flow, borrowings under our senior secured credit facilities in place at the time of the potential investment or acquisition or through the issuance of equity or debt securities, including, but not limited to, longer-term, fixed-rate debt securities and shares of our common stock.next 12 months.
On August 25, 2017, the Company entered into an asset purchase agreement to acquire substantially all of the assets of Fells Point, a specialty protein manufacturer and distributor based in the metro Baltimore and Washington DC area. The aggregate purchase price for the transaction at acquisition date was approximately $33,022, including the impact of an initial net working capital adjustment which is subject to a post-closing working capital adjustment true up. Approximately $29,722 was paid in cash at closing and the remaining $3,300 consisted of 185,442 shares of the Company's common stock.
On June 27, 2016, the Company acquired substantially all the assets of MT Food, a specialty food distributor based out of Chicago, IL. The aggregate cash purchase price for the transaction at acquisition date was $21,000, exclusive of an additional $500 payable eighteen months after the closing date and an earn-out of $500, paid during the second quarter of fiscal 2017. The final aggregate purchase price was subject to the impact of a customary net working capital true-up. In October 2017, the Company settled the net working capital true-up with a payment of $447 to the former owners of MT Food. The acquisition was paid for with cash on hand and drawdown of our delayed draw term loan facility.Cash Flows
On April 26, 2017, the Company repaid its New Markets Tax Credit Loan in full, inclusive of accrued interest outstanding, for $11,009, of which, $8,070 was paid in cash and $2,939 was paid from the associated sinking fund. |
| | | | | | | |
| Thirteen Weeks Ended |
| March 27, 2020 | | March 29, 2019 |
Net (loss) income | $ | (14,085 | ) | | $ | 1,134 |
|
Non-cash charges | $ | 19,678 |
| | $ | 9,855 |
|
Changes in working capital | $ | 16,392 |
| | $ | (3,598 | ) |
Cash provided by operating activities | $ | 21,985 |
| | $ | 7,391 |
|
Cash used in investing activities | $ | (66,543 | ) | | $ | (32,115 | ) |
Cash provided by (used in) financing activities | $ | 97,975 |
| | $ | (367 | ) |
Net cash provided by operations was $23,203$22.0 million for the thirty-ninethirteen weeks ended September 29, 2017, an increaseMarch 27, 2020 consisting of $1,995 from the $21,208 provideda net loss of $14.1 million offset by operations for the thirty-nine weeks ended September 23, 2016. The primary reasons for the increase in net cash provided by operations was$19.7 million of non-cash charges and cash generated byfrom working capital changes, partially offset by decreased cash generated through net income.of $16.4 million. The increase in cash provided by changes in working capital wasnon-cash charges of $9.8 million is primarily due to increases in cash provided by accounts payable changes and prepaid expenses and other current assets changes of $28,854 and $17,280, respectively, partially offsetdriven by an increase in cash usednon-cash bad debt expense due to COVID-19, partially offset by a $6.8 million credit due to the reduction in accounts receivable changes and inventory changes of $10,387 and $25,369, respectively. During the first thirty-nine weeks of fiscal 2017 net income increased by $11,002. The primary cause for this increase in net income was a decrease in interest expense of $17,865 as a resultfair value of our debt refinancing on June 22, 2016, thecontingent earn-out liabilities. The cash impactgenerated from working capital increase of which$20.0 million is reflected as financing activity.primarily driven by a $19.4 million increase from accounts receivable.
Net cash used in investing activities was $39,582$66.5 million for the thirty-ninethirteen weeks ended September 29, 2017, an increase of $8,308 from the netMarch 27, 2020, driven by $63.5 million in cash used to fund acquisitions and $3.1 million in investing activitiescapital expenditures which included implementations of $31,274 for the thirty-nine weeks ended September 23, 2016. The increase in net cash used was primarily due to the Fells Point acquisition partially offset by lower capital expenditures.our Enterprise Resource Planning system.
Net used in financing activities was $12,596 for the thirty-nine weeks ended September 29, 2017, a increase of $46,247 from the $33,651cash provided by financing activities was $98.0 million for the thirty-ninethirteen weeks ended September 23, 2016. This increase was primarily due to the cash generatedMarch 27, 2020, driven by our debt refinancing on June 22, 2016 offset by net payments of $93,382a $100.0 million draw on our revolving credit facility in the thirty-nine weeks ended September 23, 2016 and the repayment of the New Markets Tax credit Loan in the second quarter of 2017.asset-based loan facility.
Seasonality
Excluding our direct-to-consumer business, we generally do not experience any material seasonality. However, our sales and operating results may vary from quarter to quarter due to factors such as changes in our operating expenses, management’s ability to execute our operating and growth strategies, personnel changes, demand for our products, supply shortages, weather patterns and general economic conditions.
Our direct-to-consumer business is subject to seasonal fluctuations, with direct-to-consumer center-of-the-plate protein sales typically higher during the holiday season in our fourth quarter; accordingly, a disproportionate amount of operating cash flows from this portion of our business is generated by our direct-to-consumer business in the fourth quarter of our fiscal year. Despite a significant portion of these sales occurring in the fourth quarter, there are operating expenses, principally advertising and promotional expenses, throughout the year.
Inflation
Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our customers. The impact of inflation and deflation on food, labor, energy and occupancy costs can significantly affect the profitability of our operations.
Off-Balance Sheet Arrangements
As of September 29, 2017,March 27, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies and Estimates
The preparation of the Company’s consolidated financial statements requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal of the Company’s financial condition and results and require its most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the following: (i) determining theour allowance for doubtful accounts, (ii) inventory valuation, with regard to determining the reserveinventory balance adjustments for excess and obsolete inventory, (iii) business combinations, (iv) valuing goodwill and intangible assets, (iv)(v) vendor rebates and other promotional incentives, (v)(vi) self-insurance reserves, (vi)(vii) accounting for income taxes and (vii)(viii) contingent earn-out liabilities. There have been no material changes to ourOur critical accounting policies and estimates as compared to our critical accounting policies and estimatesare described in the Form 10-K filed with the SEC on March 10, 2017.February 24, 2020. Pursuant to our adoption of Accounting Standards Update 2016-13 Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments on December 28, 2019, our accounting policy for determining our allowance for doubtful accounts has been changed as follows:
Allowance for Doubtful Accounts
We analyze customer creditworthiness, accounts receivable balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of our allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are either conducted using cash-on-delivery terms or the account is closely monitored so that agreed-upon payments are received prior to orders being released. A failure to pay results in held or cancelled orders. We also estimate receivables that will ultimately be uncollectible based upon historical write-off experience. Management incorporates current macro-economic factors in existence as of the balance sheet date that may impact the food-away-from-home industry and/or its customers, and specifically in the first quarter of fiscal 2020 the impact of the COVID-19 pandemic. We may be required to increase or decrease our allowance for doubtful accounts due to various factors, including the overall economic environment and particular circumstances of individual customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of September 29, 2017,March 27, 2020, we had $289.2an aggregate $338.1 million of indebtedness outstanding under the Senior Secured Term Loan and $1.0 million outstanding under a software financing agreementABL Facility that bore interest at variable rates. A 100 basis point increase in market interest rates would decrease our after tax earnings by approximately $1.7$2.1 million per annum, holding other variables constant.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management,
The Company, under the supervision and with the participation of our chief executive officerits management, including the Chief Executive Officer and chief financial officer,the Chief Financial Officer, evaluated the effectiveness of our disclosurethe design and operation of the Company’s “disclosure controls and procedures pursuant toprocedures” (as defined in Rule 13a-1513a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act),“Exchange Act”) as of the end of the period covered by this Form 10-Q. The evaluation included certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
report. Based on that evaluation, our chief executive officerthe Chief Executive Officer and chief financial officerthe Chief Financial Officer concluded that ourthe Company's disclosure controls and procedures were effective at the endas of the period covered by this Form 10-Q to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.March 27, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal periodquarter ended March 27, 2020 that may have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in legal proceedings, claims and litigation arising out of the ordinary conduct of our business. Although we cannot assure the outcome, management presently believes that the result of such legal proceedings, either individually or in the aggregate, will not have a material adverse effect on our consolidated financial statements, and no material amounts have been accrued in our consolidated financial statements with respect to these matters.
ITEM 1A. RISK FACTORS
There hasExcept as stated below, there have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. included in our Annual Report on Form 10-K for the year ended December 27, 2019 filed with respectthe SEC on February 24, 2020. In addition to the information contained herein, you should consider the risk factors disclosed in our Annual Report on Form 10-K filed10-K.
Significant public health epidemics or pandemics, including COVID-19, may adversely affect our business, results of operations and financial condition.
A public health epidemic or pandemic can significantly impact our business or those of our core customers or suppliers, particularly if located in geographies in which we have significant operations. Such events could significantly impact the food-away-from-home industry and other industries that are sensitive to changes in consumer discretionary spending habits. In addition, our operations could be disrupted if we were required to quarantine employees that work at our various distribution centers and processing facilities.
For instance, the recent outbreak of COVID-19 and its development into a pandemic is resulting in governmental authorities in many locations where we operate, and in which our customers are present and suppliers operate, to impose mandatory closures, seek voluntary closures and impose restrictions on, or advisories with respect to, travel, business operations and public gatherings or interactions. Among other matters, these actions have required or strongly urged various venues where foodservice products are served, including restaurants and hotels, to reduce or discontinue operations, which has and will continue to adversely affect demand in the SECfoodservice industry, including demand for our products and services. In addition, the perceived risk of infection and health risk associated with COVID-19, and the illness of many individuals across the globe, is resulting in many of the same effects intended by such governmental authorities to stop the spread of COVID-19. These events have had, and could continue to have, an adverse impact on March 10, 2017.numerous aspects of our business, financial condition and results of operations including, but not limited to, our growth, product costs, supply chain disruptions, labor shortages, logistics constraints, customer demand for our products and industry demand generally, consumer spending, our liquidity, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally. The extent to which the COVID-19 pandemic impacts our financial condition or results of operations is uncertain and will depend on future developments including new information that may emerge on the severity of the disease, the extent of the outbreak, and federal, state and local government responses, among others.
ITEM 2. UNREGISTEREDUNREGISTERD SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
| | | | | | | | | | | | |
| Total Number of Shares Repurchased(1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs |
July 1, 2017 to July 28, 2017 | 7,006 |
| | $ | 12.97 |
| | — |
| | — |
|
July 29, 2017 to August 25, 2017 | 2,782 |
| | $ | 16.32 |
| | — |
| | — |
|
August 26, 2017 to September 29, 2017 | — |
| | $ | — |
| | — |
| | — |
|
Total | 9,788 |
| | $ | 13.93 |
| | — |
| | — |
|
|
| | | | | | | | | | | | | |
| | Total Number of Shares Repurchased(1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs |
December 28, 2019 to January 24, 2020 | | — |
| | $ | — |
| | — |
| | — |
|
January 25, 2020 to February 21, 2020 | | 22,899 |
| | 37.28 |
| | — |
| | — |
|
February 22, 2020 to March 27, 2020 | | 136,733 |
| | 13.50 |
| | — |
| | — |
|
Total | | 159,632 |
| | $ | 16.91 |
| | — |
| | — |
|
| |
(1) | During the thirteen weeks ended September 29, 2017,March 27, 2020, we withheld 9,788159,632 shares of our common stock to satisfy tax withholding requirements upon the vesting ofrelated to restricted shares of our common stock awarded to our officers and key employees.employees resulting from either elections under 83(b) of the Internal Revenue Code of 1986, as amended, or upon vesting of such awards. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
|
| | | |
Exhibit No. | | Description |
| | |
| | Amendment No. 1, dated asCertificate of September 1, 2017, toDesignation of the Credit Agreement dated asVoting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights and Qualifications, Limitations and Restrictions of June 22, 2016, among Chefs’ Warehouse Parent, LLC and Dairyland USA Corporation, as Borrowers, andthe Series A Preferred Stock of The Chefs’ Warehouse, Inc., The Chefs’ Warehouse Mid-Atlantic, LLC, Bel Canto Foods, LLC, The Chefs’ Warehouse West Coast, LLC, The Chefs’ Warehouse Of Florida, LLC, Michael’s Finer Meats, LLC, Michael’s Finer Meats Holdings, LLC, The Chefs’ Warehouse Midwest, LLC, and other Loan Parties party thereto as Guarantors, (incorporated by reference to Exhibit 3.1 to the Lenders party thereto, JPMorgan Chase Bank, N.A., as Sole Lead Arranger and Sole Bookrunner, and Administrative Agent, and Wells Fargo Bank, N.A., Bank of America, N.A. and BMO Harris Bank N.A.as Co-Syndication Agents. Company’s Form 8-K filed on March 23, 2020) |
| | |
| | Amendment No. 2, dated as of September 1, 2017, to the CreditRights Agreement, dated as of JuneMarch 22, 2016, among Dairyland USA Corporation and Chefs’ Warehouse Parent, LLC, as Borrowers, and2020, between The Chefs’ Warehouse, Inc. and the other Loan Parties party thereto, as Guarantors, the Lenders party thereto, Jefferies FinanceAmerican Stock Transfer & Trust Company, LLC, as Joint Lead Arranger and Joint Bookrunner, AdministrativeRights Agent and Collateral Agent, and BMO Capital Markets Corp., JPMorgan Chase Bank, N.A. and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Bookrunners.(incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on March 23, 2020) |
| | |
| | Form of Restricted Share Award Agreement under The Chefs’ Warehouse, Inc. 2019 Omnibus Equity Incentive Plan* |
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| | The Chefs’ Warehouse, Inc. Executive Change in Control Plan* |
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| | Form of Executive Severance Agreement* |
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| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS | | XBRL Instance Document – the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. |
* Compensatory Plan or Arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 8, 2017.May 6, 2020.
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| | | |
| THE CHEFS’ WAREHOUSE, INC. |
| (Registrant) |
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November 8, 2017Date: May 6, 2020 | | | /s/ John D. AustinJames Leddy |
Date | John D. AustinJames Leddy |
| Chief Financial Officer |
| (Principal Financial Officer and PrincipalOfficer) |
| Accounting Officer) |
Date: May 6, 2020 | | | /s/ Timothy McCauley |
| | | Timothy McCauley |
| | | Chief Accounting Officer |
| | | (Principal Accounting Officer) |