The Chefs' Warehouse(US:CHEF)2023-02-27 16:00Part I Business Overview The company is a premier distributor of specialty food products to over 40,000 customer locations across the US, Middle East, and Canada, focusing on organic growth and strategic acquisitions - The company is a leading distributor of specialty food products, offering over 55,000 SKUs from more than 2,500 suppliers to over 40,000 customer locations1117 - Net revenues grew from approximately $1.3 billion in fiscal 2018 to $2.6 billion in fiscal 2022, supported by organic growth and sixteen acquisitions since December 2018 with an aggregate cash consideration of over $294.5 million12 - The company's growth strategy focuses on four key pillars: increasing sales to existing customers, expanding the customer base in current markets, improving operating margins through efficiency gains, and pursuing selective strategic acquisitions22232425 - Operations are supported by a network of 44 distribution centers and a sales force of approximately 720 professionals, many with culinary backgrounds4835 Risk Factors The company faces diverse risks including macroeconomic factors, supply chain and labor issues, geographic concentration, IT and data security threats, regulatory compliance, and substantial indebtedness Business and Macroeconomic Risk Business success depends on consumer spending and successful acquisition integration, operating in a low-margin industry sensitive to inflation and intense competition - Business success is significantly tied to consumer discretionary spending, which affects the food-away-from-home industry91 - Future growth is dependent on expanding operations and penetrating new markets, with a history of growth through acquisitions that present integration challenges and financial risks676993 - The foodservice distribution industry is a low-margin business, making profitability sensitive to inflationary pressures and volatile food costs98129 Supply Chain and Labor Risk The company faces supply chain disruptions, volatile food costs, and rising labor expenses, including potential shortages and unionization risks, with 4% of employees unionized - Profitability is dependent on anticipating and reacting to interruptions in the distribution network and changes in food costs, with reliance on numerous third-party suppliers without long-term contracts109141 - Center-of-the-plate products (meat, poultry, seafood) expose the company to significant price volatility due to factors like feed costs, weather, and livestock diseases112144 - The company faces risks from rising labor costs, potential shortages of qualified personnel, and unionization efforts. As of December 30, 2022, 181 of 4,124 full-time employees (approx. 4%) are represented by unions181152 Geographic and Global Risk Operations are concentrated in key culinary markets, with New York representing 18.8% of net sales in fiscal 2022, making the company vulnerable to regional events and public health crises - Operations are concentrated in key culinary markets, with the New York market representing 18.8% of net sales in fiscal 2022, creating exposure to regional economic conditions and events122154 - Significant public health crises, like the COVID-19 pandemic, can adversely affect business by impacting customer demand, supply chains, and labor availability184121 Information Technology, Intellectual Property and Data Risk Heavy reliance on IT systems exposes the company to failures and cyber threats, while new technology investments may not yield benefits, and intellectual property protection is crucial - The company relies on IT systems for business processes and is exposed to risks of system failures and cybersecurity incidents that could interrupt operations and cause data breaches156188189 - Significant investments in new information technology may not produce the anticipated benefits in operational efficiency and cost savings158190 - The company's ability to protect its intellectual property, including trademarks and proprietary brands, is crucial, and failure to do so could harm brand value and business performance159191 Legal and Regulatory Risk As a food distributor, the company faces product liability claims and extensive governmental regulation from agencies like the FDA and USDA, with non-compliance risking penalties - The company faces inherent risk of product liability claims if its products cause injury or illness, which could result in substantial costs and reputational damage161192 - The business is highly regulated by federal, state, and local authorities in the U.S., Canada, and the Middle East, including the FDA, USDA, and Health Canada. Non-compliance can lead to significant penalties163194 Financial Risk The company's substantial indebtedness of approximately $686.0 million as of December 30, 2022, limits investment, increases vulnerability to downturns, and restricts financial flexibility - As of December 30, 2022, the company had approximately $686.0 million in total indebtedness, which may limit its ability to invest in the business and increases financial vulnerability199 - The substantial debt requires a significant portion of cash flow for service payments, limits flexibility, and makes the company more vulnerable to interest rate increases on its variable-rate borrowings170200 Risks Relating to Ownership of our Common Stock Common stock ownership risks include price volatility influenced by market conditions, significant ownership concentration by insiders (11.9% as of February 13, 2023), and no anticipated dividends - The market price of the company's common stock may be volatile due to factors like earnings performance, analyst recommendations, and general market conditions174204 - As of February 13, 2023, executive officers, directors, and their affiliates beneficially owned approximately 11.9% of outstanding common stock, enabling significant influence over corporate matters206230 - The company does not anticipate paying cash dividends in the foreseeable future, meaning investment returns depend on potential stock price appreciation177207 Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments234 Properties As of February 13, 2023, the company operates 44 distribution centers totaling approximately 2.9 million square feet across the US, Canada, and the Middle East, with most properties leased - The company operates 44 distribution centers totaling approximately 2.9 million square feet in the U.S., Canada, Qatar, Oman, and the United Arab Emirates211 - The company owns five facilities and leases all other properties, including its corporate headquarters in Ridgefield, Connecticut211212 Legal Proceedings The company is not currently aware of any pending or threatened legal proceedings that would materially adversely affect its business or financial condition - The company is not currently aware of any pending legal proceedings that would have a material adverse effect on its financial condition or operations236 Mine Safety Disclosures This item is not applicable to the company - Not applicable237 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "CHEF", with 204 holders of record as of December 31, 2022, and no cash dividends are anticipated due to credit facility restrictions - The company's common stock is traded on the NASDAQ under the symbol "CHEF", with 204 holders of record as of December 31, 2022215 - The company has never paid a cash dividend and does not plan to in the foreseeable future, a policy reinforced by restrictions in its credit facilities238 5-Year Cumulative Total Return Comparison | Index | Dec 2017 | Dec 2018 | Dec 2019 | Dec 2020 | Dec 2021 | Dec 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | The Chefs' Warehouse, Inc. | $100.00 | $152.83 | $185.22 | $116.54 | $158.88 | $162.34 | | NASDAQ Composite Index | $100.00 | $95.38 | $130.47 | $185.48 | $226.75 | $151.61 | | S&P Smallcap Food Distributor Index | $100.00 | $63.50 | $59.46 | $63.45 | $122.95 | $112.92 | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, including $2.6 billion in net sales for fiscal 2022, liquidity with $686.0 million in debt, and critical accounting estimates Overview and Recent Developments The company, a premier specialty food distributor, returned to profitability in Q2 2021, driven by key acquisitions including Chef Middle East LLC for $108.7 million and Capital Seaboard for $31.0 million - On November 1, 2022, the company acquired Chef Middle East LLC (CME) for approximately $108.7 million in cash, expanding its presence to the United Arab Emirates, Qatar, and Oman225 - On December 28, 2021, the company acquired Capital Seaboard, a specialty seafood and produce distributor in Maryland, for a purchase price of approximately $31.0 million247 Results of Operations Financial performance significantly improved in fiscal 2022, with net sales increasing 49.7% to $2.6 billion and net income reaching $27.8 million, driven by pandemic recovery and acquisitions Consolidated Results of Operations (in thousands) | Metric | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Net Sales | $2,613,399 | $1,745,757 | $1,111,631 | | Gross Profit | $618,636 | $390,485 | $248,151 | | Operating Income (Loss) | $85,738 | $10,811 | $(102,660) | | Net Income (Loss) | $27,750 | $(4,923) | $(82,903) | Fiscal Year 2022 Compared to Fiscal Year 2021 In fiscal 2022, net sales surged 49.7% to $2.61 billion, driven by organic growth and acquisitions, leading to a 58.4% increase in gross profit and a net income of $27.8 million FY 2022 vs. FY 2021 Performance | Metric | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $2,613,399 | $1,745,757 | $867,642 | 49.7% | | Gross Profit | $618,636 | $390,485 | $228,151 | 58.4% | | Gross Profit Margin | 23.7% | 22.4% | - | 1.3 ppt | | SG&A Expenses | $518,219 | $379,252 | $138,967 | 36.6% | - Organic growth contributed $561.6 million (32.2%) to sales growth, while acquisitions added $306.1 million (17.5%). The 53rd week of the fiscal year contributed approximately 2.0% to annual sales growth283 Fiscal Year 2021 Compared to Fiscal Year 2020 Fiscal 2021 saw a significant recovery, with net sales increasing 57.0% to $1.75 billion, and the net loss narrowing dramatically to $4.9 million from $82.9 million in fiscal 2020 FY 2021 vs. FY 2020 Performance | Metric | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,745,757 | $1,111,631 | $634,126 | 57.0% | | Gross Profit | $390,485 | $248,151 | $142,334 | 57.4% | | Gross Profit Margin | 22.4% | 22.3% | - | 0.1 ppt | | SG&A Expenses | $379,252 | $336,394 | $42,858 | 12.7% | - Organic growth contributed $574.2 million (51.6%) to sales growth, primarily driven by recovery from the COVID-19 pandemic288 Liquidity and Capital Resources As of December 30, 2022, total debt was $674.7 million, with key financing activities including a $300.0 million term loan refinancing and $287.5 million in new convertible notes, resulting in $23.1 million cash from operations Indebtedness (in thousands) | Debt Instrument | Dec 30, 2022 | Dec 24, 2021 | | :--- | :--- | :--- | | Senior secured term loan | $299,250 | $168,675 | | Total convertible debt | $333,184 | $204,000 | | ABL and revolving credit | $42,217 | $20,000 | | Finance leases & other | $11,331 | $11,602 | Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Operating Activities | $23,134 | $(19,899) | $42,881 | | Investing Activities | $(232,023) | $(48,991) | $(67,968) | | Financing Activities | $253,215 | $(9,222) | $78,056 | - Significant 2022 financing activities included refinancing the senior secured term loan for $300.0 million and issuing $287.5 million in 2.375% Convertible Senior Notes due 2028322296 Critical Accounting Estimates The company's financial statements rely on critical accounting estimates for doubtful accounts, inventory, business combinations, goodwill, intangible assets, self-insurance, income taxes, and contingent earn-out liabilities - Key critical accounting policies requiring significant estimates include: allowance for doubtful accounts, inventory valuation, business combinations, goodwill and intangible asset valuation, self-insurance reserves, income taxes, and contingent earn-out liabilities307 - The allowance for doubtful accounts was $20.7 million as of Dec 30, 2022, against an accounts receivable balance of $260.2 million308 - Goodwill is tested for impairment annually in the fourth quarter. For fiscal 2022 and 2021, a qualitative assessment was performed, which concluded that the fair value of reporting units exceeded their carrying values359338 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on its $341.5 million floating-rate debt as of December 30, 2022, where a 100 basis point increase would reduce after-tax earnings by $2.5 million annually - The company's main market risk is interest rate risk from its debt. As of December 30, 2022, it had $341.5 million in floating-rate debt343 - A 100 basis point increase in interest rates would reduce after-tax earnings by approximately $2.5 million annually343 Consolidated Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2020-2022, including balance sheets and cash flows, which received an unqualified opinion from BDO USA, LLP - The independent registered public accounting firm, BDO USA, LLP, issued an unqualified opinion on the consolidated financial statements345370 Key Financial Statement Data (in thousands) | Metric | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Total Assets | $1,509,296 | $1,073,795 | | Total Liabilities | $1,107,787 | $723,584 | | Total Stockholders' Equity | $401,509 | $350,211 | Notes to Consolidated Financial Statements The notes detail accounting policies, recent acquisitions like Chef Middle East and Capital Seaboard, goodwill and intangible assets, and debt obligations totaling $665.9 million as of December 30, 2022 - Note 5 details the acquisition of Chef Middle East for ~$108.7 million and Capital Seaboard for ~$31.0 million, including purchase price allocations476452 - Note 9 provides a comprehensive breakdown of debt obligations, which totaled $665.9 million as of December 30, 2022, including senior secured term loans and convertible senior notes485 - Note 8 shows that Goodwill increased to $287.1 million in 2022 from $221.8 million in 2021, primarily due to acquisitions. Net intangible assets also increased to $155.7 million from $104.7 million507483 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - There were no disagreements with accountants on accounting and financial disclosure630 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 30, 2022, a conclusion attested to by BDO USA, LLP with an unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report662 - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 30, 2022632 - The independent registered public accounting firm, BDO USA, LLP, provided an unqualified attestation report on the company's internal control over financial reporting623665 Other Information The company reports no other information for this item - None669 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable620 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement - Required information is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders640 Executive Compensation Information regarding executive compensation is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement - Required information is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders671 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement - Required information is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders591 Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement - Required information is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders672 Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement - Required information is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders592 Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, with financial statements indexed under Item 8 - This section provides a list of all financial statements and exhibits filed with the Form 10-K674 Form 10-K Summary The company has chosen not to provide a summary for its Form 10-K - None provided594