The Chefs' Warehouse(CHEF) - 2019 Q2 - Quarterly Report

Caution Concerning Forward-Looking Statements This section identifies forward-looking statements and outlines risks that may cause actual results to differ materially from expectations - Statements in this report that are not historical facts are considered "forward-looking statements" under the Private Securities Litigation Reform Act, involving risks and uncertainties based on current expectations and management estimates[13] - Key risks and uncertainties include sensitivity to general economic conditions, ability to expand through acquisitions, challenges in managing future growth, potential disruptions in the distribution network, price volatility in center-of-the-plate products, low-profit margins sensitive to inflation/deflation, and reliance on key management personnel[13] Part I. Financial Information This section provides unaudited consolidated financial statements, management's discussion, market risk disclosures, and controls information for the interim period ended June 28, 2019 Item 1. Consolidated Financial Statements (Unaudited) This chapter presents the Company's unaudited consolidated financial statements, including balance sheets, statements of operations, equity, cash flows, and detailed notes Consolidated Balance Sheets This statement provides a snapshot of the Company's financial position, detailing assets, liabilities, and equity, significantly impacted by ASC 842 adoption Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | June 28, 2019 | December 28, 2018 | | :--------------------------------- | :------------ | :------------------ | | Total Assets | $877,751 | $732,398 | | Total Liabilities | $560,356 | $423,722 | | Total Stockholders' Equity | $317,395 | $308,676 | - The adoption of ASC 842 on December 29, 2018, materially impacted the consolidated balance sheet, recognizing ROU assets of $118,031 thousand and lease liabilities of $126,309 thousand, with a $2,027 thousand cumulative effect adjustment to opening retained earnings[34][36] Consolidated Statements of Operations and Comprehensive Income This statement outlines the Company's financial performance for the thirteen and twenty-six weeks ended June 28, 2019, showing increases in net sales, gross profit, operating income, and net income Consolidated Statements of Operations Highlights (Amounts in thousands, except per share) | Metric | 13 Weeks Ended June 28, 2019 | 13 Weeks Ended June 29, 2018 | 26 Weeks Ended June 28, 2019 | 26 Weeks Ended June 29, 2018 | | :--------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Sales | $411,420 | $370,442 | $768,447 | $689,057 | | Gross Profit | $106,475 | $93,240 | $196,664 | $172,762 | | Operating Income | $15,536 | $14,948 | $21,686 | $20,688 | | Net Income | $7,746 | $6,819 | $8,880 | $7,363 | | Basic Net Income Per Share | $0.26 | $0.24 | $0.30 | $0.26 | | Diluted Net Income Per Share | $0.26 | $0.24 | $0.30 | $0.26 | - For the thirteen weeks ended June 28, 2019, net sales increased by 11.1% and net income increased by 13.6% year-over-year[19] - For the twenty-six weeks ended June 28, 2019, net sales increased by 11.5% and net income increased by 20.6% year-over-year[19] Consolidated Statements of Changes in Stockholders' Equity This statement details changes in the Company's stockholders' equity from December 28, 2018, to June 28, 2019, reflecting net income, stock compensation, and cumulative translation adjustments Changes in Stockholders' Equity (Amounts in thousands) | Metric | Balance Dec 28, 2018 | Cumulative Effect Adjustment | Net Income | Stock Compensation | Exercise of Stock Options | Cumulative Translation Adjustment | Shares Surrendered to Pay Withholding Taxes | Balance June 28, 2019 | | :--------------------------------- | :------------------- | :--------------------------- | :--------- | :----------------- | :------------------------ | :-------------------------------- | :------------------------------------------ | :-------------------- | | Common Stock (Shares) | 29,968,483 | — | — | 346,915 | 7,193 | — | (3,928) | 30,291,364 | | Common Stock (Amount) | $300 | — | — | $3 | — | — | — | $303 | | Additional Paid in Capital | $207,326 | — | — | $1,085 | $146 | — | $(126) | $209,016 | | Accumulated Other Comprehensive Loss | $(2,221) | — | — | — | — | $118 | — | $(2,048) | | Retained Earnings | $103,271 | $(2,027) | $7,746 | — | — | — | — | $110,124 | | Total Stockholders' Equity | $308,676 | $(2,027) | $7,746 | $1,088 | $146 | $118 | $(126) | $317,395 | - The cumulative effect adjustment due to the adoption of a new accounting standard (ASC 842 for leases) decreased retained earnings by $2,027 thousand as of December 28, 2018[23][36] Consolidated Statements of Cash Flows This statement presents cash flows from operating, investing, and financing activities for the twenty-six weeks ended June 28, 2019, showing increased operating cash and investing cash usage Consolidated Statements of Cash Flows Highlights (Amounts in thousands) | Cash Flow Activity | 26 Weeks Ended June 28, 2019 | 26 Weeks Ended June 29, 2018 | | :--------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $21,890 | $18,918 | | Net cash used in investing activities | $(36,841) | $(17,414) | | Net cash used in financing activities | $(3,186) | $(3,353) | | Net decrease in cash and cash equivalents | $(18,116) | $(1,911) | | Cash and cash equivalents-end of period | $24,294 | $39,593 | - Net cash provided by operating activities increased by $2,972 thousand (15.7%) for the twenty-six weeks ended June 28, 2019, primarily due to increased net income[27][138] - Net cash used in investing activities increased by $19,427 thousand (111.6%) for the twenty-six weeks ended June 28, 2019, mainly due to higher cash paid for acquisitions and capital expenditures[27][139] Notes to Consolidated Financial Statements These notes provide detailed explanations and additional disclosures for the consolidated financial statements, covering operations, accounting policies, earnings per share, fair value, acquisitions, and other financial details Note 1 Operations and Basis of Presentation This note describes the Company's foodservice distribution business in the U.S. and details the material balance sheet impact from adopting ASC 842 for leases - The Company operates in one reportable segment: foodservice distribution, concentrated primarily in the United States, serving menu-driven independent restaurants, fine dining establishments, and other culinary businesses[29] - The Company adopted ASC 842 (Leases) on December 29, 2018, recognizing $118,031 thousand in right-of-use assets and $126,309 thousand in lease liabilities, with a $2,027 thousand cumulative effect adjustment to retained earnings, without material impact on operations or debt covenants[34][36] Note 2 Summary of Significant Accounting Policies This note outlines the Company's revenue recognition policies, stating that product sales revenue is recognized upon transfer of control, and disaggregates net sales by principal product category - Revenues from product sales are recognized when control of each product is transferred to the customer, with performance obligations satisfied upon physical possession, and sales incentives reduce revenue[40] Net Sales Disaggregated by Principal Product Category (Amounts in thousands) | Product Category | 13 Weeks Ended June 28, 2019 | % of Total | 26 Weeks Ended June 28, 2019 | % of Total | | :----------------------- | :--------------------------- | :--------- | :--------------------------- | :--------- | | Center-of-the-Plate | $183,513 | 44.6% | $340,128 | 44.3% | | Dry Goods | $72,764 | 17.7% | $136,519 | 17.8% | | Pastry | $56,532 | 13.7% | $106,737 | 13.9% | | Cheese and Charcuterie | $41,218 | 10.0% | $76,573 | 10.0% | | Dairy and Eggs | $28,671 | 7.0% | $54,285 | 7.1% | | Oils and Vinegar | $20,937 | 5.1% | $39,630 | 5.2% | | Kitchen Supplies | $7,785 | 1.9% | $14,575 | 1.7% | | Total | $411,420 | 100% | $768,447 | 100% | Note 3 Earnings Per Share This note provides the computation of basic and diluted net income per share, weighted average common shares outstanding, and lists excluded anti-dilutive securities Net Income Per Share and Weighted Average Common Shares Outstanding | Metric | 13 Weeks Ended June 28, 2019 | 13 Weeks Ended June 29, 2018 | 26 Weeks Ended June 28, 2019 | 26 Weeks Ended June 29, 2018 | | :--------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic Net Income Per Share | $0.26 | $0.24 | $0.30 | $0.26 | | Diluted Net Income Per Share | $0.26 | $0.24 | $0.30 | $0.26 | | Basic Weighted Average Common Shares | 29,527,167 | 28,166,875 | 29,492,138 | 28,144,782 | | Diluted Weighted Average Common Shares | 29,848,285 | 29,595,247 | 29,844,614 | 28,311,549 | - Potentially dilutive securities excluded from diluted EPS calculation due to anti-dilutive effect for the thirteen weeks ended June 28, 2019, include 148,793 Restricted Share Awards (RSAs) and 91,053 convertible notes[53] Note 4 Fair Value Measurements This note details fair value measurements for contingent earn-out liabilities and a convertible unsecured note, with earn-out liabilities increasing significantly using Level 3 inputs Changes in Level 3 Contingent Earn-out Liabilities (Amounts in thousands) | Metric | Balance Dec 28, 2018 | Acquisition Value | Cash Payments | Changes in Fair Value | Balance June 28, 2019 | | :-------------------- | :------------------- | :---------------- | :------------ | :-------------------- | :-------------------- | | Total | $5,090 | $2,800 | $(200) | $2,795 | $10,485 | - The fair value of the convertible unsecured note was estimated at $3,987 thousand as of June 28, 2019, compared to its carrying value of $4,000 thousand, using Level 3 inputs including market interest rates and a Black Scholes valuation model[57][58] Note 5 Acquisitions This note details the acquisition of Bassian Farms, Inc. on February 25, 2019, for approximately $32.0 million, funded by cash and a convertible unsecured note, including potential contingent earn-out payments - On February 25, 2019, the Company acquired Bassian Farms, Inc. for approximately $31,990 thousand, funded by $27,990 thousand in cash and a $4,000 thousand unsecured convertible note[58] - The acquisition includes additional contingent consideration (earn-out) of up to $9,000 thousand over four years, with an estimated fair value of $2,885 thousand as of June 28, 2019[59] Preliminary Purchase Price Allocation of Bassian Acquisition (Amounts in thousands) | Asset/Liability | Bassian | | :------------------------------ | :------ | | Current assets | $6,656 | | Customer relationships | $13,250 | | Trademarks | $6,320 | | Non-compete agreement | $940 | | Goodwill | $9,149 | | Fixed assets | $856 | | Other assets | $10 | | Current liabilities | $(2,391)| | Earn-out liability | $(2,800)| | Total Consideration | $31,990 | Note 6 Inventories This note explains that inventories, primarily finished products, are recorded using FIFO and average cost methods, presented net of adjustments for shrinkage, excess, and obsolescence - Inventories are recorded using a mixture of first-in, first-out (FIFO) and average cost methods, which approximate FIFO[62] - Inventories are reflected net of adjustments for shrinkage, excess, and obsolescence totaling $1,888 thousand at June 28, 2019, and $1,921 thousand at December 28, 2018[62] Note 7 Equipment, Leasehold Improvements and Software This note provides a breakdown of the Company's equipment, leasehold improvements, and software, including net book value, depreciation, and amortization expenses, with construction-in-process primarily for ERP and headquarters Equipment, Leasehold Improvements and Software, Net (Amounts in thousands) | Category | June 28, 2019 | December 28, 2018 | | :------------------------------------------ | :------------ | :------------------ | | Gross Amount | $147,543 | $136,776 | | Less: Accumulated Depreciation and Amortization | $(57,345) | $(51,500) | | Net Amount | $90,198 | $85,276 | - Construction-in-process totaled $17,422 thousand at June 28, 2019, primarily for the implementation of the Company's ERP system and the buildout of its headquarters, expected to be completed in fiscal 2019 and 2020, respectively[63] - Depreciation expense (excluding finance leases) was $4,122 thousand and software amortization expense was $1,820 thousand for the twenty-six weeks ended June 28, 2019[65] Note 8 Goodwill and Other Intangible Assets This note details changes in goodwill and other intangible assets, including customer relationships, non-compete agreements, and trademarks, with goodwill increasing due to acquisitions and estimated future amortization provided Changes in Goodwill (Amounts in thousands) | Metric | Amount | | :--------------------------------- | :----- | | Carrying amount as of December 28, 2018 | $184,280 | | Acquisitions | $9,207 | | Foreign currency translation | $39 | | Carrying amount as of June 28, 2019 | $193,526 | Other Intangible Assets, Net (Amounts in thousands) | Category | Gross Carrying Amount (June 28, 2019) | Accumulated Amortization (June 28, 2019) | Net Amount (June 28, 2019) | | :----------------------- | :------------------------------------ | :--------------------------------------- | :------------------------- | | Customer relationships | $132,766 | $(40,705) | $92,061 | | Non-compete agreements | $8,519 | $(7,335) | $1,184 | | Trademarks | $66,215 | $(15,040) | $51,175 | | Total | $207,500 | $(63,080) | $144,420 | Estimated Amortization Expense for Other Intangibles (Amounts in thousands) | Fiscal Year | Estimated Expense | | :------------ | :---------------- | | 2019 (remainder) | $6,560 | | 2020 | $12,859 | | 2021 | $12,854 | | 2022 | $12,074 | | 2023 | $11,046 | | Thereafter | $89,027 | | Total | $144,420 | Note 9 Debt Obligations This note details the Company's debt structure, including its senior secured term loan, convertible unsecured note, and ABL facility, providing outstanding balances, interest rates, and confirming compliance with all debt covenants Debt Obligations (Amounts in thousands) | Debt Type | June 28, 2019 | December 28, 2018 | | :------------------------------------------ | :------------ | :------------------ | | Senior secured term loan | $238,129 | $239,745 | | Convertible unsecured note | $4,000 | — | | Asset based loan facility | $43,225 | $44,185 | | Finance leases and other financing obligations | $1,629 | $193 | | Deferred finance fees and original issue discount | $(5,051) | $(5,893) | | Total Debt Obligations | $281,932 | $278,230 | | Less: Current installments | $(304) | $(61) | | Total Debt Obligations excluding current installments | $281,628 | $278,169 | - A $4,000 thousand convertible unsecured note was issued on February 25, 2019, maturing June 29, 2023, with an initial interest rate of 4.5% per annum, convertible into common stock at $43.93 per share[71] - As of June 28, 2019, the Company was in compliance with all debt covenants, with interest rates on the senior secured term loan and ABL Facility at 5.9% and 3.7%, respectively, and $90,015 thousand available for borrowing under the ABL Facility[72] Note 10 Leases This note details the Company's lease costs, including operating and finance lease components, presents lease liability maturities, and specifies weighted-average lease terms and discount rates Components of Net Lease Cost (Amounts in thousands) | Lease Cost Component | 13 Weeks Ended June 28, 2019 | 26 Weeks Ended June 28, 2019 | | :--------------------------- | :--------------------------- | :--------------------------- | | Operating lease cost | $6,808 | $13,440 | | Finance lease cost | $93 | $153 | | Short-term lease cost | $486 | $897 | | Variable lease cost | $660 | $1,311 | | Sublease income | $(191) | $(371) | | Total Lease Cost, Net | $7,856 | $15,430 | Maturities of Operating and Finance Lease Liabilities (Amounts in thousands) | Fiscal Year | Operating Leases | Finance Leases | | :------------ | :--------------- | :------------- | | 2019 | $12,196 | $194 | | 2020 | $24,703 | $387 | | 2021 | $21,977 | $382 | | 2022 | $19,899 | $364 | | 2023 | $16,881 | $305 | | Thereafter | $99,277 | $272 | | Total | $194,933 | $1,904 | | Less interest | $(56,533) | $(290) | | Present Value | $138,400 | $1,614 | - As of June 28, 2019, the weighted-average lease term for operating leases was 13.4 years with a discount rate of 6.3%, and for finance leases, it was 5.3 years with a discount rate of 5.6%[76] Note 11 Stockholders' Equity This note describes the 2019 Omnibus Equity Incentive Plan, detailing stock-based awards, Restricted Share Award (RSA) activity, compensation expenses, and shares available for future grants - The 2019 Omnibus Equity Incentive Plan was approved on May 17, 2019, making 2,600,000 shares available for grant, with 2,244,567 shares remaining available as of June 28, 2019[78][80][85] Restricted Share Award (RSA) Activity (26 Weeks Ended June 28, 2019) | Activity | Shares | | :--------------------------- | :------- | | Unvested at December 28, 2018 | 526,730 | | Granted | 355,433 | | Vested | (102,929)| | Forfeited | (32,198) | | Unvested at June 28, 2019 | 747,036| - Total unrecognized compensation cost for unvested RSAs was $12,376 thousand at June 28, 2019, with a weighted-average remaining period of approximately 2.6 years[83] Note 12 Related Parties This note discloses related party transactions, including lease payments for a distribution facility owned by entities controlled by the Company's chairman and vice chairman, and compensation paid to a board member - Lease expense related to a distribution facility owned by entities controlled by Christopher Pappas (Chairman, President, CEO) and John Pappas (Vice Chairman, Director) totaled $217 thousand for the twenty-six weeks ended June 28, 2019[86] - John Pappas, a board member and employee, received approximately $551 thousand in total compensation for the twenty-six weeks ended June 28, 2019, excluding compensation for board service[87][88] Note 13 Supplemental Disclosures of Cash Flow Information This note provides supplemental cash flow information, including cash paid for income taxes and interest, and details non-cash investing and financing activities such as convertible notes and contingent earn-out liabilities for acquisitions Supplemental Cash Flow Disclosures (26 Weeks Ended June 28, 2019, Amounts in thousands) | Item | Amount | | :------------------------------------------ | :----- | | Cash paid for income taxes, net of cash received | $3,690 | | Cash paid for interest | $9,494 | | Operating cash flows from operating expenses (lease liabilities) | $12,174 | | Operating cash flows from finance leases | $40 | | ROU assets obtained in exchange for operating lease liabilities | $146,726 | | ROU assets obtained in exchange for finance lease liabilities | $1,728 | | Convertible notes issued for acquisitions | $4,000 | | Contingent earn-out liabilities for acquisitions | $2,800 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, condition, and results of operations, covering business overview, acquisitions, growth strategies, key performance factors, and detailed financial analysis Overview The Company is a premier distributor of specialty foods and center-of-the-plate proteins in leading culinary markets across the U.S. and Canada, serving over 34,000 customer locations with a differentiated business model - The Company is a premier distributor of over 55,000 SKUs of specialty foods and center-of-the-plate proteins, serving more than 34,000 customer locations, primarily independent restaurants and fine dining establishments in 16 geographic markets across the U.S. and Canada[93] - Key differentiating factors include a portfolio of distinctive products, extensive center-of-the-plate proteins, a highly trained sales force, strong sourcing capabilities, a fully integrated warehouse management system, and a sophisticated distribution and logistics platform[94] Recent Acquisitions This section highlights the acquisition of Bassian Farms, Inc. on February 25, 2019, a specialty protein manufacturer and distributor, for approximately $32.0 million, funded by cash and a convertible unsecured note, with potential for additional contingent earn-out payments - On February 25, 2019, the Company acquired substantially all assets of Bassian Farms, Inc., a specialty protein manufacturer and distributor in northern California, for approximately $32.0 million[97] - The acquisition was funded with $28.0 million in cash and a $4.0 million unsecured convertible note, with potential for an additional $9.0 million in contingent earn-out payments over four years[97] Our Growth Strategies and Outlook The Company's growth strategies focus on continuous investment in people, facilities, and technology to expand sales, achieve operational excellence, enhance purchasing power, drive product innovation, improve system efficiencies, and centralize general and administrative functions - Growth objectives include sales and service territory expansion, operational excellence, expanded purchasing programs, product innovation, operational efficiencies through system enhancements, and operating expense reduction through G&A centralization[98] - The Company has increased its distribution capacity to approximately 1.9 million square feet across 30 distribution facilities as of June 28, 2019, and has invested significantly in acquisitions, infrastructure, and management[99] Key Factors Affecting Our Performance The Company's performance is significantly influenced by general economic conditions, consumer discretionary spending, the food-away-from-home industry, volatile food costs, shifts in product sales mix, and industry consolidation opportunities - Results are materially impacted by the success of the food-away-from-home industry, which is sensitive to general economic conditions, weather, discretionary spending levels, and consumer confidence[102] - Volatile food costs can directly impact profitability; prolonged inflation may negatively affect profit margins if not passed to customers, while deflation can also impact profit levels[103] - Shifts in product sales mix, driven by new product categories, acquisitions, and growth in higher velocity items, can impact net sales and gross profit margins[104] Results of Operations This section provides a detailed analysis of the Company's financial performance for the thirteen and twenty-six weeks ended June 28, 2019, compared to prior year periods, highlighting increases in net sales and gross profit, alongside changes in operating expenses and net income Key Income and Expense Items as a Percentage of Net Sales | Metric | 13 Weeks Ended June 28, 2019 | 13 Weeks Ended June 29, 2018 | 26 Weeks Ended June 28, 2019 | 26 Weeks Ended June 29, 2018 | | :--------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Sales | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of Sales | 74.1% | 74.8% | 74.4% | 74.9% | | Gross Profit | 25.9% | 25.2% | 25.6% | 25.1% | | Operating Expenses | 22.1% | 21.1% | 22.8% | 22.1% | | Operating Income | 3.8% | 4.1% | 2.8% | 3.0% | | Other Expense | 1.2% | 1.5% | 1.2% | 1.5% | | Income Before Income Tax Expense | 2.6% | 2.6% | 1.6% | 1.5% | | Provision for Income Taxes | 0.7% | 0.7% | 0.4% | 0.4% | | Net Income | 1.9% | 1.9% | 1.2% | 1.1% | Financial Performance Highlights (Amounts in millions) | Metric | 13 Weeks Ended June 28, 2019 | YoY Change | 26 Weeks Ended June 28, 2019 | YoY Change | | :----------------- | :--------------------------- | :--------- | :--------------------------- | :--------- | | Net Sales | $411.4 | +11.1% | $768.4 | +11.5% | | Gross Profit | $106.5 | +14.2% | $196.7 | +13.8% | | Operating Income | $15.5 | +3.9% | $21.7 | +4.8% | | Net Income | $7.7 | +13.6% | $8.9 | +20.6% | - For the thirteen weeks, organic growth contributed 4.0% to sales, and acquisitions contributed 7.1%, with gross profit margin increasing by 71 basis points to 25.9% due to increases in both specialty and center-of-the-plate categories, while operating expenses increased by 16.2%, partly due to a $2.6 million increase in non-cash charges for contingent earn-out liabilities[109][110][111] - For the twenty-six weeks, organic growth contributed 4.7% to sales, and acquisitions contributed 6.8%, with gross profit margin increasing by 52 basis points to 25.6% largely due to inflation in center-of-the-plate categories, while operating expenses increased by 15.1%, including a $2.6 million increase in non-cash charges for contingent earn-out liabilities[117][118][119] Liquidity and Capital Resources The Company finances operations and growth through cash flows, senior secured credit facilities, equity financing, operating leases, and trade payables, outlining capital expenditure plans and analyzing cash flow activities - The Company's primary funding sources include cash flows from operations, borrowings under its senior secured credit facilities (Term Loan and ABL Facility), equity financing, operating leases, and trade payables[126] - Projected capital expenditures for fiscal 2019 are $24.0 million to $26.0 million, an increase from fiscal 2018, primarily for distribution facility expansions and corporate headquarters renovations[137] Cash Flow Activities (26 Weeks Ended June 28, 2019 vs. June 29, 2018, Amounts in millions) | Cash Flow Activity | 2019 | 2018 | Change | | :--------------------------------- | :--- | :--- | :----- | | Net cash provided by operating activities | $21.9 | $18.9 | +$3.0 | | Net cash used in investing activities | $(36.8)| $(17.4)| $(19.4)| | Net cash used in financing activities | $(3.2)| $(3.4)| +$0.2 | Seasonality The Company's core foodservice distribution business generally does not experience material seasonality, but its direct-to-consumer business sees higher sales during the fourth-quarter holiday season, leading to disproportionate operating cash flows in that period - The core foodservice distribution business generally does not experience material seasonality, though results can vary due to operating expenses, demand, supply shortages, weather, and economic conditions[141][142] - The direct-to-consumer business is subject to seasonal fluctuations, with higher sales of center-of-the-plate proteins typically occurring during the holiday season in the fourth quarter[143] Inflation The Company's profitability is sensitive to changes in the costs of key operating resources, such as food, labor, and energy, where substantial cost increases can negatively impact operating results if not passed on to customers - Profitability depends on the ability to anticipate and react to changes in costs of food, raw materials, labor, energy, and other supplies and services[144] - Substantial increases in costs and expenses could impact operating results if such increases cannot be passed along to customers[144] Off-Balance Sheet Arrangements As of June 28, 2019, the Company reported no off-balance sheet arrangements - The Company did not have any off-balance sheet arrangements as of June 28, 2019[145] Critical Accounting Policies and Estimates This section identifies the Company's critical accounting policies and estimates, which require significant management judgment, noting no material changes since the prior annual report - Critical accounting policies and estimates include allowance for doubtful accounts, inventory valuation, goodwill and intangible asset valuation, vendor rebates, self-insurance reserves, accounting for income taxes, and contingent earn-out liabilities[146] - There have been no material changes to the Company's critical accounting policies and estimates compared to those described in the Annual Report on Form 10-K filed on March 1, 2019[146] Item 3. Quantitative and Qualitative Disclosures about Market Risk This chapter addresses the Company's exposure to market risks, specifically interest rate risk, due to its significant variable-rate indebtedness, and quantifies the potential impact of interest rate fluctuations on after-tax earnings - As of June 28, 2019, the Company had $281.4 million of indebtedness outstanding under the Term Loan and ABL Facility that bore interest at variable rates[147] - A 100 basis point increase in market interest rates would decrease the Company's after-tax earnings by approximately $2.0 million per annum, holding other variables constant[147] Item 4. Controls and Procedures This chapter reports on the effectiveness of the Company's disclosure controls and procedures and any changes in internal control over financial reporting, concluding that disclosure controls were effective and new controls were implemented for ASC 842 lease standard adoption - The Company's disclosure controls and procedures were evaluated and concluded to be effective as of June 28, 2019[148] - New internal controls were implemented to adequately evaluate contracts and assess the impact of the new accounting standard related to leases (ASC 842) upon its adoption on December 29, 2018, with no other material changes in internal control over financial reporting during the quarter[149] Part II. Other Information This section includes additional information not covered in Part I, such as legal proceedings, risk factors, issuer purchases of equity securities, and a list of exhibits filed with the report Item 1. Legal Proceedings The Company is involved in various legal proceedings arising from its ordinary business conduct, with management believing the outcome will not have a material adverse effect on consolidated financial statements - The Company is involved in legal proceedings, claims, and litigation arising out of the ordinary conduct of its business[151] - Management believes that the result of such legal proceedings will not have a material adverse effect on the Company's consolidated financial statements[151] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K filed on March 1, 2019 - There have been no material changes with respect to the risk factors disclosed in the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2019[152] Item 2. Issuer Purchases of Equity Securities This section reports on the Company's purchases of its own equity securities during the quarter, primarily involving shares withheld to satisfy tax withholding requirements upon the vesting of restricted stock awards Issuer Purchases of Equity Securities (Thirteen Weeks Ended June 28, 2019) | Period | Total Number of Shares Repurchased | Average Price Paid Per Share | | :--------------------------- | :------------------------------- | :--------------------------- | | April 27, 2019 to May 24, 2019 | 3,501 | $31.67 | | May 25, 2019 to June 28, 2019 | 427 | $34.30 | | Total | 3,928 | $31.96 | - During the thirteen weeks ended June 28, 2019, the Company withheld 3,928 shares to satisfy tax withholding requirements upon the vesting of restricted shares awarded to officers and key employees[154] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[155] Item 4. Mine Safety Disclosures This section indicates that there are no mine safety disclosures to report - There are no mine safety disclosures[156] Item 5. Other Information This section states that there is no other information to disclose - There is no other information to disclose[157] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including the 2019 Omnibus Equity Incentive Plan and various certifications required by the Sarbanes-Oxley Act - Exhibits include the 2019 Omnibus Equity Incentive Plan, forms of Restricted Share Award Agreements, and certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[159] Signature This section contains the signatures of the Company's Chief Financial Officer and Chief Accounting Officer, certifying the report on July 31, 2019 - The report was duly signed on behalf of The Chefs' Warehouse, Inc. by James Leddy, Chief Financial Officer, and Timothy McCauley, Chief Accounting Officer, on July 31, 2019[162][165]