The Chefs' Warehouse(CHEF) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the Company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations and comprehensive income, changes in stockholders' equity, and cash flows, along with their accompanying notes, providing a detailed view of the Company's financial position and performance for the reported interim periods Condensed Consolidated Balance Sheets This section presents the Company's unaudited condensed consolidated balance sheets, detailing assets, liabilities, and stockholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (Amounts in thousands) | Item | June 30, 2023 | December 30, 2022 | | :--------------------------------------------------- | :------------ | :---------------- | | ASSETS | | | | Cash and cash equivalents | $ 59,592 | $ 158,800 | | Accounts receivable, net | 301,375 | 260,167 | | Inventories, net | 291,917 | 245,693 | | Prepaid expenses and other current assets | 60,735 | 56,200 | | Total current assets | 713,619 | 720,860 | | Property and equipment, net | 205,535 | 185,728 | | Operating lease right-of-use assets | 182,215 | 156,629 | | Goodwill | 348,951 | 287,120 | | Intangible assets, net | 195,785 | 155,703 | | Other assets | 4,884 | 3,256 | | Total assets | $ 1,650,989 | $ 1,509,296 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | $ 198,087 | $ 163,397 | | Accrued liabilities | 71,739 | 54,325 | | Short-term operating lease liabilities | 23,104 | 19,428 | | Accrued compensation | 28,486 | 34,167 | | Current portion of long-term debt | 12,017 | 12,428 | | Total current liabilities | 333,433 | 283,745 | | Long-term debt, net of current portion | 709,073 | 653,504 | | Operating lease liabilities | 175,142 | 151,406 | | Deferred taxes, net | 7,294 | 6,098 | | Other liabilities and deferred credits | 3,072 | 13,034 | | Total liabilities | 1,228,014 | 1,107,787 | | Stockholders' equity | | | | Common Stock | 396 | 386 | | Additional paid-in capital | 347,861 | 337,947 | | Accumulated other comprehensive loss | (1,911) | (2,185) | | Retained earnings | 76,629 | 65,361 | | Total stockholders' equity | 422,975 | 401,509 | | Total liabilities and stockholders' equity | $ 1,650,989 | $ 1,509,296 | Condensed Consolidated Statements of Operations and Comprehensive Income This section presents the Company's unaudited condensed consolidated statements of operations and comprehensive income, outlining revenues, expenses, and net income for the reported periods Condensed Consolidated Statements of Operations and Comprehensive Income (Amounts in thousands, except share and per share amounts) | Item | Thirteen Weeks Ended June 30, 2023 | Thirteen Weeks Ended June 24, 2022 | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :------------------------------------------- | :--------------------------------- | :--------------------------------- | :----------------------------------- | :----------------------------------- | | Net sales | $ 881,820 | $ 648,104 | $ 1,601,465 | $ 1,160,207 | | Cost of sales | 673,376 | 492,100 | 1,223,313 | 886,690 | | Gross profit | 208,444 | 156,004 | 378,152 | 273,517 | | Selling, general and administrative expenses | 179,042 | 124,487 | 335,179 | 234,573 | | Other operating expenses, net | 4,062 | 3,883 | 5,734 | 5,046 | | Operating income | 25,340 | 27,634 | 37,239 | 33,898 | | Interest expense | 12,006 | 4,465 | 22,012 | 8,830 | | Income before income taxes | 13,334 | 23,169 | 15,227 | 25,068 | | Provision for income tax expense | 3,467 | 6,254 | 3,959 | 6,768 | | Net income | $ 9,867 | $ 16,915 | $ 11,268 | $ 18,300 | | Other comprehensive income: | | | | | | Foreign currency translation adjustments | 193 | (74) | 274 | 51 | | Comprehensive income | $ 10,060 | $ 16,841 | $ 11,542 | $ 18,351 | | Net income per share: | | | | | | Basic | $ 0.26 | $ 0.46 | $ 0.30 | $ 0.49 | | Diluted | $ 0.25 | $ 0.42 | $ 0.29 | $ 0.47 | | Weighted average common shares outstanding: | | | | | | Basic | 37,634,127 | 37,100,968 | 37,570,595 | 37,018,044 | | Diluted | 45,604,297 | 42,053,453 | 38,201,408 | 41,896,379 | Condensed Consolidated Statements of Changes in Stockholders' Equity This section presents the Company's unaudited condensed consolidated statements of changes in stockholders' equity, detailing movements in common stock, additional paid-in capital, and retained earnings Condensed Consolidated Statements of Changes in Stockholders' Equity (Amounts in thousands, except share amounts) | Item | Common Shares | Common Stock Amount | Additional Paid-in Capital | Other Comprehensive Loss | Retained Earnings | Total | | :------------------------------------ | :------------ | :------------------ | :------------------------- | :----------------------- | :---------------- | :------ | | Balance December 30, 2022 | 38,599,390 | $ 386 | $ 337,947 | $ (2,185) | $ 65,361 | $ 401,509 | | Net income | — | — | — | — | 1,401 | 1,401 | | Stock compensation | 998,777 | 10 | 4,780 | — | — | 4,790 | | Cumulative translation adjustment | — | — | — | 81 | — | 81 | | Shares surrendered to pay tax withholding | (54,036) | (1) | (1,828) | — | — | (1,829) | | Balance March 31, 2023 | 39,544,131 | $ 395 | $ 340,899 | $ (2,104) | $ 66,762 | $ 405,952 | | Net income | — | — | — | — | 9,867 | 9,867 | | Stock compensation | 53,543 | — | 4,704 | — | — | 4,704 | | Shares issued for acquisitions | 75,008 | 1 | 2,495 | — | — | 2,496 | | Cumulative translation adjustment | — | — | — | 193 | — | 193 | | Shares surrendered to pay tax withholding | (6,991) | — | (237) | — | — | (237) | | Balance June 30, 2023 | 39,665,691 | $ 396 | $ 347,861 | $ (1,911) | $ 76,629 | $ 422,975 | Condensed Consolidated Statements of Cash Flows This section presents the Company's unaudited condensed consolidated statements of cash flows, categorizing cash movements from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Cash Flow Activity | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :---------------------------------------------------- | :----------------------------------- | :----------------------------------- | | Net income | $ 11,268 | $ 18,300 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Depreciation and amortization | 15,682 | 11,755 | | Amortization of intangible assets | 10,456 | 6,819 | | Provision for allowance for doubtful accounts | 3,311 | 1,817 | | Non-cash operating lease expense | 1,812 | 1,076 | | Provision for deferred income taxes | 990 | 5,004 | | Amortization of deferred financing fees | 1,813 | 1,009 | | Stock compensation | 10,581 | 5,982 | | Change in fair value of contingent earn-out liabilities | 1,092 | 3,628 | | Intangible asset impairment | 1,838 | — | | Loss on asset disposal | 22 | 17 | | Changes in assets and liabilities, net of acquisitions: | | | | Accounts receivable | (9,854) | (24,659) | | Inventories | (35,450) | (30,569) | | Prepaid expenses and other current assets | (2,435) | 106 | | Accounts payable, accrued liabilities and accrued compensation | 453 | 19,733 | | Other assets and liabilities | (796) | (237) | | Net cash provided by operating activities | $ 10,783 | $ 19,781 | | Cash flows from investing activities: | | | | Capital expenditures | (23,155) | (23,490) | | Cash paid for acquisitions, net of cash acquired | (119,580) | (52,007) | | Net cash used in investing activities | $ (142,735) | $ (75,497) | | Cash flows from financing activities: | | | | Payment of debt, finance lease and other financing obligations | (11,680) | (2,769) | | Payment of deferred financing fees | — | (406) | | Surrender of shares to pay withholding taxes | (2,115) | (2,558) | | Cash paid for contingent earn-out liability | (3,210) | (2,000) | | Borrowings under asset-based loan facility | 50,000 | — | | Net cash provided by (used in) financing activities | $ 32,995 | $ (7,733) | | Effect of foreign currency on cash and cash equivalents | (251) | 100 | | Net change in cash and cash equivalents | (99,208) | (63,349) | | Cash and cash equivalents-beginning of period | 158,800 | 115,155 | | Cash and cash equivalents-end of period | $ 59,592 | $ 51,806 | Notes to Condensed Consolidated Financial Statements This section provides explanatory notes to the unaudited condensed consolidated financial statements, detailing accounting policies, significant transactions, and other relevant financial information Note 1 - Operations and Basis of Presentation This note outlines the Company's business operations, including its segments and customer base, and confirms that the unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC rules for interim reporting, with all significant intercompany accounts eliminated - The Company's business consists of three operating segments (East, Midwest, West) that aggregate into one reportable segment: foodservice distribution, primarily in the United States[202] - The financial statements are prepared in conformity with GAAP and SEC rules for interim information, including all normal recurring adjustments[39][195] - Results for the thirteen and twenty-six weeks ended June 30, 2023, are not necessarily indicative of full-year results due to seasonal fluctuations and other factors[39] Note 2 – Summary of Significant Accounting Policies This note details the Company's significant accounting policies, including revenue recognition, product category classification, and the correction of immaterial errors in prior period disclosures related to intangible asset amortization and debt maturity schedules - Revenue from product sales is recognized when control of the product is transferred to the customer, typically within a day of order fulfillment[210] - Sales tax billed to customers is recorded as a liability, not included in revenue[41] - Immaterial errors in prior period disclosures regarding weighted average remaining amortization periods for intangible assets (customer relationships, non-compete agreements, trademarks) and the debt maturity schedule have been corrected[26][70] Note 3 – Net Income per Share This note provides the computation of basic and diluted net income per common share, along with a reconciliation of the numerator and denominator, and lists potentially dilutive securities excluded from the diluted EPS calculation due to their anti-dilutive effect Net Income Per Share (EPS) and Weighted Average Common Shares | Item | Thirteen Weeks Ended June 30, 2023 | Thirteen Weeks Ended June 24, 2022 | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :------------------------------------ | :--------------------------------- | :--------------------------------- | :----------------------------------- | :----------------------------------- | | Basic EPS | $ 0.26 | $ 0.46 | $ 0.30 | $ 0.49 | | Diluted EPS | $ 0.25 | $ 0.42 | $ 0.29 | $ 0.47 | | Basic Weighted Average Common Shares | 37,634,127 | 37,100,968 | 37,570,595 | 37,018,044 | | Diluted Weighted Average Common Shares | 45,604,297 | 42,053,453 | 38,201,408 | 41,896,379 | Potentially Dilutive Securities Excluded from Diluted EPS (Anti-Dilutive) | Item | Thirteen Weeks Ended June 30, 2023 | Weeks Ended June 24, 2022 | Twenty-Six Weeks Ended June 30, 2023 | Weeks Ended June 24, 2022 | | :----------------------------------- | :--------------------------------- | :------------------------ | :----------------------------------- | :------------------------ | | Restricted share awards ("RSAs") | 46,746 | 106,571 | 29,717 | 83,001 | | Convertible notes | — | — | 7,392,817 | 91,053 | Note 4 – Fair Value Measurements This note details the fair value measurements of the Company's financial instruments, including contingent earn-out liabilities and convertible notes, categorizing them by fair value hierarchy levels and explaining the valuation inputs used Changes in Level 3 Contingent Earn-Out Liabilities (Amounts in thousands) | Item | Total | | :---------------------- | :------ | | Balance December 30, 2022 | $ 17,294 | | Acquisition value | 5,835 | | Cash payments | (4,250) | | Changes in fair value | 1,092 | | Balance June 30, 2023 | $ 19,971 | - The fair values of the asset-based loan facility and term loan approximate their book values due to variable interest rates, classified as Level 2 fair value measurements[49] Carrying Value and Fair Value of Convertible Notes and GreenLeaf Note (Amounts in thousands) | Item | Fair Value Hierarchy | June 30, 2023 Carrying Value | June 30, 2023 Fair Value | December 30, 2022 Carrying Value | December 30, 2022 Fair Value | | :-------------------------- | :------------------- | :--------------------------- | :----------------------- | :--------------------------- | :----------------------- | | 2028 Convertible Senior Notes | Level 1 | $ 287,500 | $ 302,338 | $ 287,500 | $ 292,531 | | 2024 Convertible Senior Notes | Level 3 | $ 39,684 | $ 41,070 | $ 41,684 | $ 43,723 | | GreenLeaf Note | Level 2 | $ 10,000 | $ 9,706 | $ — | $ — | | Convertible Unsecured Note | Level 3 | $ — | $ — | $ 4,000 | $ 4,345 | Note 5 – Acquisitions This note details the Company's acquisition activities, including the GreenLeaf, Hardie's Fresh Foods, and Chef Middle East acquisitions, outlining purchase prices, funding, acquired assets, and preliminary purchase price allocations, along with pro forma financial information - On May 1, 2023, the Company acquired GreenLeaf for $86.1 million, funded by cash, an unsecured note, and common stock, including customer relationships ($27.76 million) and trademarks ($2.9 million) amortized over 10 years[76][123] - On March 20, 2023, the Company acquired Hardie's Fresh Foods for approximately $42.1 million, consisting of cash and an earn-out liability, with acquired intangible assets including customer relationships ($13.8 million) and trademarks ($3.6 million)[100][205] Pro Forma Financial Information (Amounts in thousands) | Item | Thirteen Weeks Ended June 30, 2023 | Thirteen Weeks Ended June 24, 2022 | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :------------------------- | :--------------------------------- | :--------------------------------- | :----------------------------------- | :----------------------------------- | | Net sales | $ 892,161 | $ 788,182 | $ 1,695,649 | $ 1,435,104 | | Income before income taxes | $ 13,617 | $ 28,513 | $ 16,752 | $ 39,144 | Note 6 – Inventories This note describes the Company's inventory valuation policy, stating that inventories primarily consist of finished products and are reported net of adjustments for shrinkage, excess, and obsolescence to approximate their net realizable value - Inventories are primarily finished products and are reflected net of adjustments for shrinkage, excess, and obsolescence to approximate their net realizable value[82] Inventory Adjustments (Amounts in thousands) | Date | Amount | | :---------------- | :------- | | June 30, 2023 | $ 10,187 | | December 30, 2022 | $ 9,198 | Note 7 – Property and Equipment This note provides a detailed breakdown of the Company's property and equipment, net of accumulated depreciation and amortization, and outlines the components of depreciation and software amortization expense for the reported periods Property and Equipment, Net (Amounts in thousands) | Item | Useful Lives | June 30, 2023 | December 30, 2022 | | :----------------------------------------- | :----------- | :------------ | :---------------- | | Land | Indefinite | $ 5,542 | $ 5,542 | | Buildings | 20 years | 40,704 | 39,893 | | Machinery and equipment | 5 - 10 years | 34,722 | 32,107 | | Computers, data processing and other equipment | 3 - 7 years | 20,326 | 18,475 | | Software | 3 - 7 years | 48,544 | 42,609 | | Leasehold improvements | 1 - 40 years | 124,386 | 94,245 | | Furniture and fixtures | 7 years | 3,883 | 3,825 | | Vehicles | 5 - 10 years | 34,810 | 31,462 | | Construction-in-process | | 21,987 | 36,583 | | Total | | 334,904 | 304,741 | | Less: accumulated depreciation and amortization | | (129,369) | (119,013) | | Property and equipment, net | | $ 205,535 | $ 185,728 | Depreciation and Amortization Expense (Amounts in thousands) | Item | Thirteen Weeks Ended June 30, 2023 | Thirteen Weeks Ended June 24, 2022 | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :---------------- | :--------------------------------- | :--------------------------------- | :----------------------------------- | :----------------------------------- | | Depreciation expense | $ 7,132 | $ 4,385 | $ 12,674 | $ 8,800 | | Software amortization | $ 1,539 | $ 1,481 | $ 3,008 | $ 2,955 | | Total | $ 8,671 | $ 5,866 | $ 15,682 | $ 11,755 | Note 8 – Goodwill and Other Intangible Assets This note details the changes in the carrying amount of goodwill and provides a breakdown of other intangible assets, including customer relationships, trademarks, and non-compete agreements, along with their amortization periods and estimated future amortization expense Changes in Carrying Amount of Goodwill (Amounts in thousands) | Item | Amount | | :------------------------------------ | :------- | | Carrying amount as of December 30, 2022 | $ 287,120 | | Goodwill adjustments | 1,859 | | Acquisitions | 59,936 | | Foreign currency translation | 36 | | Carrying amount as of June 30, 2023 | $ 348,951 | Other Intangible Assets, Net (Amounts in thousands) | Item | Weighted-Average Remaining Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Amount | | :--------------------------- | :------------------------------------------- | :-------------------- | :----------------------- | :--------- | | June 30, 2023 | | | | | | Customer relationships | 111 months | $ 249,628 | $ (93,433) | $ 156,195 | | Trademarks | 148 months | 57,655 | (18,484) | 39,171 | | Non-compete agreements | 21 months | 8,899 | (8,480) | 419 | | Total | | $ 316,182 | $ (120,397) | $ 195,785 | | December 30, 2022 | | | | | | Customer relationships | 117 months | $ 205,608 | $ (85,447) | $ 120,161 | | Trademarks | 165 months | 51,137 | (16,201) | 34,936 | | Non-compete agreements | 25 months | 8,899 | (8,293) | 606 | | Total | | $ 265,644 | $ (109,941) | $ 155,703 | - The Company recognized a customer relationships intangible asset impairment charge of $1.838 million related to the loss of a significant Hardie's Fresh Foods customer post-acquisition[111] Note 9 – Debt Obligations This note details the Company's debt obligations, including senior secured term loans, convertible senior notes, asset-based loan facility, and finance leases, providing their effective interest rates, maturities, and a breakdown of interest expense Debt Obligations (Amounts in thousands) | Item | Weighted Average Effective Interest Rate at June 30, 2023 | Maturity | June 30, 2023 | December 30, 2022 | | :------------------------------------------ | :---------------------------------------------------------- | :--------- | :------------ | :---------------- | | Senior secured term loans | 10.61 % | August 2029 | $ 297,750 | $ 299,250 | | 2028 Convertible senior notes | 2.77 % | December 2028 | 287,500 | 287,500 | | 2024 Convertible senior notes | 2.34 % | December 2024 | 39,684 | 41,684 | | Asset-based loan facility | 6.80 % | March 2027 | 90,000 | 40,000 | | Finance leases and other financing obligations | 5.38 % | Various | 24,528 | 13,548 | | Convertible unsecured note | — % | June 2023 | — | 4,000 | | Unamortized deferred costs and premium | | | (18,372) | (20,050) | | Total debt obligations | | | 721,090 | 665,932 | | Less: current installments | | | (12,017) | (12,428) | | Total debt obligations excluding current installments | | | $ 709,073 | $ 653,504 | Components of Interest Expense on Convertible Notes (Amounts in thousands) | Item | Thirteen Weeks Ended June 30, 2023 | Thirteen Weeks Ended June 24, 2022 | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :------------------------------------------ | :--------------------------------- | :--------------------------------- | :----------------------------------- | :----------------------------------- | | Coupon interest | $ 1,893 | $ 938 | $ 3,792 | $ 1,875 | | Amortization of deferred costs and premium | 333 | 224 | 668 | 448 | | Total interest | $ 2,226 | $ 1,162 | $ 4,460 | $ 2,323 | - The convertible unsecured note matured on June 29, 2023, and was repaid in full for $4.049 million in cash[88][161] Note 10 – Stockholders' Equity This note details the Company's equity awards, including Restricted Share Awards (RSAs) and stock options, outlining grants, vesting, compensation expense recognized, and shares available for future grants - The Company granted 1,055,320 RSAs with a weighted average grant date fair value of $32.71 during the twenty-six weeks ended June 30, 2023[91] Stock Compensation Expense for RSAs (Amounts in thousands) | Period | Thirteen Weeks Ended June 30, 2023 | Thirteen Weeks Ended June 24, 2022 | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :------------------------------------ | :--------------------------------- | :--------------------------------- | :----------------------------------- | :----------------------------------- | | RSA Compensation Expense | $ 4,704 | $ 2,939 | $ 9,494 | $ 5,982 | - As of June 30, 2023, total unrecognized compensation cost for unvested RSAs was $34.735 million, with a weighted-average remaining period of approximately 1.3 years[115] Note 11 – Related Parties This note discloses a related party transaction involving a lease agreement for a distribution facility owned by entities controlled by the Company's Chairman, President, CEO, and Vice Chairman - The Company leases a distribution facility from entities controlled by its Chairman, President, CEO, Christopher Pappas, and Vice Chairman, John Pappas[117] Expense Related to Related Party Lease (Amounts in thousands) | Period | Thirteen Weeks Ended June 30, 2023 | Thirteen Weeks Ended June 24, 2022 | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :------------------------------------ | :--------------------------------- | :--------------------------------- | :----------------------------------- | :----------------------------------- | | Lease Expense | $ 123 | $ 123 | $ 246 | $ 246 | Note 12 – Income Taxes This note explains the Company's effective tax rate and the factors contributing to its variation from the statutory rate, primarily highlighting the impact of foreign earnings Effective Tax Rate | Period | Thirteen Weeks Ended June 30, 2023 | Thirteen Weeks Ended June 24, 2022 | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :------------------------------------ | :--------------------------------- | :--------------------------------- | :----------------------------------- | :----------------------------------- | | Effective Tax Rate | 26.0 % | 27.0 % | 26.0 % | 27.0 % | - The lower effective tax rate for both the thirteen and twenty-six weeks ended June 30, 2023, was primarily due to a greater mix of foreign earnings subject to tax rates below the US statutory rate of 21%[118][155][159] 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 ROU assets obtained for lease liabilities and common stock/unsecured notes issued for acquisitions Supplemental Cash Flow Disclosures (Amounts in thousands) | Item | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :---------------------------------------------------- | :----------------------------------- | :----------------------------------- | | Cash paid (received) for income taxes | $ 10,673 | $ (239) | | Cash paid for interest, net of cash received | $ 20,266 | $ 7,718 | | Operating cash flows from operating leases | $ 18,591 | $ 13,837 | | Operating cash flows from finance leases | $ 336 | $ 223 | | ROU assets obtained in exchange for lease liabilities: Operating leases | $ 42,182 | $ 20,116 | | ROU assets obtained in exchange for lease liabilities: Finance leases | $ 3,684 | $ 411 | | Common stock issued for acquisitions | $ 2,496 | $ — | | Unsecured notes issued for acquisitions | $ 10,000 | $ — | | Contingent earn-out liabilities for acquisitions | $ 5,835 | $ 1,200 | Note 14 – Subsequent Events This note discloses a subsequent event where the Company amended its ABL Credit Agreement on July 7, 2023, increasing the aggregate commitments - On July 7, 2023, the Company entered into a sixth amendment to the ABL Credit Agreement, increasing aggregate commitments from $200 million to $300 million, maturing on March 11, 2027[97][139] 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 condition, changes in financial condition, and results of operations, discussing key performance indicators, recent acquisitions, and factors affecting liquidity and capital resources Business Overview The Company is a premier distributor of specialty foods in leading culinary markets, offering a wide range of SKUs to over 40,000 customer locations, primarily independent restaurants and fine dining establishments - The Company is a premier distributor of specialty foods in the United States and the Middle East, offering over 55,000 SKUs[122] - It serves over 40,000 customer locations, primarily independent restaurants and fine dining establishments, across 23 geographic markets[122] Recent Acquisitions The Company completed several acquisitions, including GreenLeaf and Hardie's Fresh Foods, expanding its specialty produce distribution capabilities, and three other smaller acquisitions during the twenty-six weeks ended June 30, 2023 - On May 1, 2023, the Company acquired GreenLeaf, a leading produce and specialty food distributor in Northern California, for $86.1 million[123] - On March 20, 2023, the Company acquired Hardie's Fresh Foods, a specialty produce distributor in Texas, for approximately $42.1 million[100] - During the twenty-six weeks ended June 30, 2023, the Company completed three other acquisitions for an aggregate purchase price of approximately $16.9 million[124] Results of Operations This section analyzes the Company's financial performance for the thirteen and twenty-six weeks ended June 30, 2023, compared to the prior year periods, highlighting changes in net sales, gross profit, operating expenses, interest expense, and income taxes, driven by organic growth, acquisitions, and market conditions Thirteen Weeks Ended June 30, 2023 Compared to Thirteen Weeks Ended June 24, 2022 For the thirteen weeks ended June 30, 2023, net sales increased significantly due to acquisitions and organic growth, while gross profit margin decreased slightly. Operating expenses rose due to acquisitions and investments, leading to a decrease in operating income and net income, despite a lower effective tax rate Net Sales (Amounts in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :----- | :--- | :--- | :------- | :------- | | Net sales | $ 881,820 | $ 648,104 | $ 233,716 | 36.1 % | - Organic growth contributed $52.6 million (8.1%) to sales growth, and acquisitions contributed $181.1 million (28.0%)[125] Gross Profit (Amounts in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :----- | :--- | :--- | :------- | :------- | | Gross profit | $ 208,444 | $ 156,004 | $ 52,440 | 33.6 % | | Gross profit margin | 23.6 % | 24.1 % | | | - Selling, general and administrative expenses increased by 43.8% to $179.042 million, primarily due to higher depreciation and amortization from acquisitions, and increased compensation, benefits, facilities, and distribution costs[105][127] - Interest expense increased by 168.9% to $12.006 million, driven by higher principal amounts of outstanding debt and increased rates on variable-rate debt[108][154] - Provision for income tax expense decreased by 44.6% to $3.467 million, with the effective tax rate decreasing to 26.0% due to a greater mix of foreign earnings subject to lower tax rates[108][155] Twenty-Six Weeks Ended June 30, 2023 Compared to Twenty-Six Weeks Ended June 24, 2022 For the twenty-six weeks ended June 30, 2023, net sales grew significantly, largely driven by acquisitions. Gross profit margin remained consistent, but increased selling, general, and administrative expenses and higher interest expense led to a decrease in net income, despite a lower effective tax rate Net Sales (Amounts in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :----- | :--- | :--- | :------- | :------- | | Net sales | $ 1,601,465 | $ 1,160,207 | $ 441,258 | 38.0 % | - Organic growth contributed $140.5 million (12.1%) to sales growth, and acquisitions contributed $300.8 million (25.9%)[108] Gross Profit (Amounts in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :----- | :--- | :--- | :------- | :------- | | Gross profit | $ 378,152 | $ 273,517 | $ 104,635 | 38.3 % | | Gross profit margin | 23.6 % | 23.6 % | | | - Selling, general and administrative expenses increased by 42.9% to $335.179 million, primarily due to higher depreciation and amortization, compensation, benefits, facilities, and fuel costs[110][133][158] - Interest expense increased by 149.3% to $22.012 million, driven by higher principal amounts of outstanding debt from new convertible notes and term loan refinancing, and increased rates on variable-rate debt[134][159] - Provision for income tax expense decreased by 41.5% to $3.959 million, with the effective tax rate decreasing to 26.0% due to a greater mix of foreign earnings subject to lower tax rates[135][159] Liquidity and Capital Resources This section discusses the Company's financial resources, including cash flows from operations, debt, and available liquidity, and outlines its capital expenditure plans and expectations for meeting future financial obligations Indebtedness The Company's indebtedness primarily consists of floating- and fixed-rate debt instruments, with an aggregate principal amount of $714.9 million as of June 30, 2023, and an increased ABL Credit Agreement commitment - As of June 30, 2023, the Company had aggregate indebtedness outstanding of $714.9 million, comprising various floating- and fixed-rate debt instruments[138] - On July 7, 2023, the ABL Credit Agreement was amended to increase aggregate commitments from $200.0 million to $300.0 million, maturing on March 11, 2027[139] Selected Financial Information on Indebtedness (Amounts in thousands) | Item | June 30, 2023 | December 30, 2022 | | :------------------------------------------ | :------------ | :---------------- | | Senior secured term loan | $ 297,750 | $ 299,250 | | Total convertible debt | 327,184 | 333,184 | | Borrowings outstanding on asset-based loan facility | 90,000 | 40,000 | | Finance leases and other financing obligations | 24,528 | 13,548 | | Total | $ 739,462 | $ 685,982 | Liquidity The Company's liquidity is supported by cash and cash equivalents, working capital, and available funds under its asset-based loan facility, which are deemed sufficient to meet operational and growth needs for the next 12 months Selected Financial Information on Liquidity (Amounts in thousands) | Item | June 30, 2023 | December 30, 2022 | | :----------------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $ 59,592 | $ 158,800 | | Working capital, excluding cash and cash equivalents | 320,594 | 278,315 | | Availability under asset-based loan facility | 85,830 | 135,827 | | Total | $ 466,016 | $ 572,942 | - The Company believes its existing cash, working capital, and ABL facility availability are sufficient to satisfy working capital needs, capital expenditures, debt service, and other liquidity requirements over the next 12 months[140] - Capital expenditures, excluding cash paid for acquisitions, for fiscal 2023 are expected to be approximately $50.0 million to $60.0 million[140] Cash Flows Net cash provided by operating activities decreased due to working capital growth, while net cash used in investing activities increased significantly due to acquisitions. Net cash provided by financing activities turned positive, driven by borrowings under the ABL facility Selected Financial Information on Cash Flows (Amounts in thousands) | Item | Twenty-Six Weeks Ended June 30, 2023 | Twenty-Six Weeks Ended June 24, 2022 | | :------------------------------------------ | :----------------------------------- | :----------------------------------- | | Net income | $ 11,268 | $ 18,300 | | Non-cash charges | $ 47,597 | $ 37,107 | | Changes in working capital | $ (48,082) | $ (35,626) | | Net cash provided by operating activities | $ 10,783 | $ 19,781 | | Net cash used in investing activities | $ (142,735) | $ (75,497) | | Net cash provided by (used in) financing activities | $ 32,995 | $ (7,733) | - Net cash provided by operating activities decreased to $10.8 million for the twenty-six weeks ended June 30, 2023, from $19.8 million in the prior year, primarily due to $12.5 million in working capital growth driven by strategic inventory purchases[142] - Net cash used in investing activities increased to $142.7 million, primarily due to $119.6 million in cash paid for acquisitions and $23.2 million in capital expenditures[165] - Net cash provided by financing activities was $33.0 million, driven by $50.0 million of net borrowings on the ABL facility, partially offset by debt payments and earn-out payments[143] Seasonality The Company's direct-to-consumer business experiences seasonality, with higher sales during the fourth-quarter holiday season, while its core foodservice distribution business generally does not experience material seasonality - The direct-to-consumer business experiences seasonal fluctuations, with sales typically higher during the fourth-quarter holiday season[166] - Excluding the direct-to-consumer business, the Company generally does not experience any material seasonality[144] Inflation The Company's profitability is sensitive to inflation and deflation in key operating resources, as substantial cost increases may not be fully passed on to customers - Profitability is dependent on the ability to anticipate and react to changes in costs of food, raw materials, labor, energy, and other supplies[167] - Substantial increases in costs could impact operating results if not passed along to customers[167] Critical Accounting Policies and Estimates The Company's critical accounting policies and estimates involve significant management judgment and affect reported financial amounts, including allowance for doubtful accounts, inventory valuation, business combinations, goodwill and intangible asset valuation, self-insurance reserves, income taxes, and contingent earn-out liabilities - Critical accounting policies and estimates include: allowance for doubtful accounts, inventory valuation, business combinations, valuing goodwill and intangible assets, self-insurance reserves, accounting for income taxes, and contingent earn-out liabilities[168] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section addresses the Company's exposure to market risks, primarily focusing on interest rate risk associated with its variable-rate long-term debt Interest Rate Risk The Company's primary market risk exposure is to interest rate fluctuations on its variable-rate long-term debt, with a 100 basis point increase in rates estimated to decrease after-tax earnings by approximately $2.9 million annually - As of June 30, 2023, the Company had $387.8 million in outstanding indebtedness that bore interest at variable rates[169] - A 100 basis point increase in market interest rates would decrease the Company's after-tax earnings by approximately $2.9 million per annum[169] Item 4. Controls and Procedures This section reports on the effectiveness of the Company's disclosure controls and procedures and any changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures The Company's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective as of June 30, 2023 - The Company's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023[170] Changes in Internal Control over Financial Reporting There were no material changes to the Company's internal control over financial reporting during the quarter, though the Company is actively integrating recent acquisitions into its control system - No material changes in internal controls over financial reporting occurred during the quarter ended June 30, 2023[180] - The Company is currently integrating recent acquisitions (CME and fiscal 2023 acquisitions) into its overall system of internal control over financial reporting[180] PART II. OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings The Company is involved in various legal proceedings arising from its ordinary business conduct, but management believes these will not have a material adverse effect on its financial statements - Management believes that the outcome of current legal proceedings, individually or in aggregate, will not have a material adverse effect on the condensed consolidated financial statements[181] Item 1A. Risk Factors There have been no material changes to the Company's previously disclosed risk factors as presented in its Annual Report on Form 10-K - No material changes to risk factors have occurred since the Annual Report on Form 10-K filed on February 28, 2023[150] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on shares of common stock withheld by the Company to satisfy tax withholding requirements related to restricted share awards Shares Withheld for Tax Withholding Requirements | Period | Total Number of Shares Repurchased (1) | Average Price Paid Per Share | | :-------------------------- | :----------------------------------- | :--------------------------- | | April 1, 2023 to April 28, 2023 | 1,914 | $ 34.05 | | April 29, 2023 to May 26, 2023 | 4,635 | $ 33.78 | | May 27, 2023 to June 30, 2023 | 442 | $ 33.71 | | Total | 6,991 | $ 33.85 | - During the twenty-six weeks ended June 30, 2023, 6,991 shares of common stock were withheld to satisfy tax withholding requirements related to restricted share awards[151][173] Item 3. Defaults Upon Senior Securities The Company reports that there were no defaults upon senior securities during the period - None[184] Item 4. Mine Safety Disclosures The Company reports that there are no mine safety disclosures for the period - None[185] Item 5. Other Information This section discloses the adoption of a Rule 10b5-1 trading arrangement by the Chief Accounting Officer during the quarterly period Rule 10b5-1 Trading Arrangement | Name | Title | Type of Trading Arrangement | Security | Action | Date of Action | Duration of Trading Arrangement | Aggregate Number of Securities Covered | | :----------- | :----------------------- | :-------------------------- | :----------- | :------- | :------------- | :------------------------------ | :------------------------------------- | | Tim McCauley | Chief Accounting Officer | Rule 10b-5 Plan to Sell | Common Stock | Adoption | June 5, 2023 | Up to October 2, 2025 | 18,000 | Item 6. Exhibits This section lists the exhibits filed as part of the quarterly report, including certifications, amendments, and XBRL taxonomy documents - Exhibits include certifications from the CEO and CFO (Sections 302 and 906 of Sarbanes-Oxley Act), Amendment No. 6 to the ABL Facility, and various XBRL taxonomy extension documents[176][188] Signatures This section contains the required signatures for the quarterly report, confirming its submission on behalf of The Chefs' Warehouse, Inc - The report was duly caused to be signed on August 2, 2023, by James Leddy, Chief Financial Officer, and Timothy McCauley, Chief Accounting Officer[177][178][189]