The Chefs' Warehouse(US:CHEF)2022-02-21 16:00Part I This section covers the company's business, risk factors, properties, legal proceedings, and mine safety disclosures Item 1. Business The company is a premier specialty food distributor in the US and Canada, serving high-end foodservice and direct-to-consumer markets - The company is a premier distributor of specialty food and center-of-the-plate products in the United States and Canada, focused on serving chefs in leading menu-driven independent restaurants, fine dining establishments, and other high-end foodservice customers13 - The product portfolio includes over 50,000 Stock Keeping Units (SKUs) from more than 2,500 different suppliers, comprising imported and domestic specialty food products, custom-cut beef, seafood, hormone-free poultry, produce, and broadline food products14 - Net revenues grew from approximately $1.3 billion in FY2017 to $1.7 billion in FY2021, driven by organic growth and twelve acquisitions totaling over $112.7 million in cash purchase prices since December 201715 - The company serves over 35,000 core customer locations in nineteen primary geographic markets across the United States and Canada, supported by approximately 570 sales and customer service professionals and 40 distribution centers16 - Despite the adverse impact of the COVID-19 Pandemic on demand, costs, and labor, the company returned to profitability during the second quarter of fiscal 202117 Liquidity Position (as of December 24, 2021) | Metric | Amount (Millions $) | | :----------------------- | :------------------ | | Working Capital | 157.8 | | Cash and Cash Equivalents | 115.2 | | ABL Facility Availability | 109.5 | - Key growth strategies include increasing penetration with existing customers, expanding the customer base in existing markets, improving operating margins through efficiency and technology, and pursuing selective acquisitions28293031 - The company has no meaningful customer concentration, with its top ten customers accounting for less than 7.5% of total net sales for fiscal year 202134 - The company employs a sophisticated sales force of approximately 570 professionals, many with culinary training, who are compensated primarily on gross profit dollars obtained and supported by ongoing education and training424344 - The company is subject to extensive international, federal, state, provincial, and local regulations, including those from the FDA, USDA, Health Canada, and transportation authorities, and believes it is in material compliance6061636466 - The core business generally does not experience material seasonality, but the Allen Brothers direct-to-consumer business sees higher sales during the fourth-quarter holiday season6970 - Profitability is sensitive to changes in the costs of key operating resources (food, labor, energy), and the inability to pass on cost increases to customers can impact operating results72 Item 1A. Risk Factors The company faces diverse risks from economic conditions, growth management, supply chain, labor costs, IT failures, and substantial indebtedness - The company's success is significantly dependent on general economic conditions and consumer discretionary spending, particularly in the food-away-from-home industry, making it vulnerable to economic downturns8182 - Future growth relies on expanding in existing markets and penetrating new ones through organic growth or acquisitions, which carry risks such as difficulty in market expansion, integration challenges, and potential liabilities or dilution from M&A83848586878990919293 - Operating in a low-margin industry, the company's profit margins are sensitive to inflationary and deflationary pressures, and the inability to pass on cost increases can negatively impact profitability99 - The foodservice distribution industry is highly competitive, and the company faces risks of price reductions, reduced gross margins, and loss of market share from competitors100 - The company's profitability and operating margins are dependent on the cost and availability of specialty food products, produce, and center-of-the-plate products, which can be affected by supplier issues, weather, government regulation, and transportation interruptions117118121122123 - Distribution of center-of-the-plate products (meat, poultry, seafood) involves exposure to price volatility due to factors like feed costs, weather, diseases, and government regulation, along with risks of product recalls124125126127129130131 - Increases in labor costs (e.g., minimum wage, healthcare), labor shortages, and unionization efforts could slow growth or harm the business135136138139141142 - Concentration of foodservice distribution operations in certain culinary markets makes the company susceptible to local economic downturns, adverse weather conditions, and other catastrophic events146147149150151 - Reliance on information technology systems exposes the company to risks of system failures, cybersecurity incidents, and data breaches, which could interrupt operations and adversely affect the business153 - The company's substantial indebtedness of approximately $404.3 million as of December 24, 2021, limits cash flow, increases vulnerability to adverse conditions, and may restrict future financing or lead to default if covenants are not met171173174176 - Changes in the method of determining LIBOR or its replacement with an alternative rate (like SOFR) may adversely affect interest charged on outstanding debt, potentially requiring renegotiation of credit facilities on less favorable terms182183 - The price of the common stock may be volatile due to various factors, and the concentration of ownership among executive officers, directors, and their affiliates (approximately 10.8%) may prevent new investors from influencing significant corporate decisions184186 Item 1B. Unresolved Staff Comments No unresolved staff comments from the SEC - No unresolved staff comments198 Item 2. Properties The company operates 40 distribution centers in the US and Canada, owning four facilities and leasing the rest - The company operates 40 distribution centers in the United States and Canada, totaling approximately 2.5 million square feet201 - Four distribution facilities are owned (two in Massachusetts, one in Cincinnati, Ohio, and one in Chicago, Illinois), with all other properties being leased201 - Properties are considered to be in good condition and adequate for operations, providing sufficient capacity for anticipated requirements202 Item 3. Legal Proceedings The company is involved in routine legal proceedings, with no material adverse effects currently anticipated - The company is subject to various legal proceedings arising from normal business activities203 - Management is not aware of any pending or threatened legal proceedings that could have a material adverse effect on the business, operating results, or financial condition203 Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable204 Part II This section covers market information, management's discussion and analysis, financial statements, and controls Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on NASDAQ; 198 holders; no cash dividends; recent repurchases for tax withholding - The company's common stock is publicly traded under the symbol "CHEF" on the NASDAQ Global Select Market206 - As of February 8, 2022, there were 198 holders of record of the common stock206 - The company has never paid cash dividends on its common stock and does not anticipate paying any in the foreseeable future, also being prohibited by its senior secured credit facilities207 Issuer Purchases of Equity Securities (Q4 Fiscal 2021) | Period | Total Number of Shares Repurchased | Average Price Paid Per Share | | :--------------------------------- | :------------------------------- | :--------------------------- | | September 25, 2021 to October 22, 2021 | — | — | | October 23, 2021 to November 19, 2021 | 1,096 | $36.06 | | November 20, 2021 to December 24, 2021 | 7,730 | $32.57 | | Total | 8,826 | $33.00 | - The shares repurchased were withheld to satisfy tax withholding requirements upon the vesting of restricted shares awarded to officers and key employees214 Item 6. Reserved This item is reserved and contains no information - This item is reserved216 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes financial condition and operations, highlighting Pandemic impact, acquisitions, and key performance drivers Overview and Recent Developments Premier specialty food distributor recovering from Pandemic, with strong liquidity and growth via acquisitions and operational improvements - The company is a premier distributor of specialty foods in leading culinary markets, offering over 50,000 SKUs to more than 35,000 core customer locations, primarily independent restaurants and fine dining establishments218 - Key differentiating factors include a distinctive product portfolio, highly trained sales force, strong sourcing, integrated warehouse management, sophisticated distribution, and an experienced management team219 - Sales growth has been driven by increased demand, market share gains, expansion of distribution centers (including new ones in San Francisco, Toronto, Dallas, Los Angeles, and Miami), and the import and sale of proprietary brands220 - The COVID-19 Pandemic impacted demand and costs, but the company returned to profitability in Q2 2021 with $157.8 million in working capital and $115.2 million in cash and cash equivalents as of December 24, 2021221 - Recent acquisitions include Sid Wainer & Son ($44.1 million) and Cambridge Packing Co. ($16.4 million) in early 2020, and Bassian Farms ($31.8 million) in 2019223224226 - Impairment charges of $0.6 million (Cambridge trademark in 2021) and $24.2 million (Del Monte and Bassian Farms trademarks in 2020) were recognized due to a strategic shift to leverage the Allen Brothers brand227228 - Growth strategies include sales and service territory expansion, operational excellence, expanded purchasing programs, product innovation, system enhancements, and operating expense reduction through centralization229 - Distribution capacity expanded to approximately 2.5 million square feet across 40 facilities as of February 11, 2022230 Key Factors Affecting Our Performance Performance is influenced by the food-away-from-home industry, economic conditions, volatile food costs, product mix shifts, and industry consolidation - Results of operations are materially impacted by the success of the food-away-from-home industry, general economic conditions, weather, discretionary spending levels, and consumer confidence231 - Volatile food costs directly impact profitability; prolonged inflation may negatively affect profit margins if not passed to customers, while deflation can also impact profit levels232 - Shifts in product sales mix, driven by new product categories, acquisitions, and growth in higher velocity items (e.g., dairy products), impact net sales and gross profit margins234 - The fragmented but consolidating foodservice distribution industry continues to present acquisition opportunities for faster business growth235 Performance Indicators Management assesses performance through net sales growth and gross profit/margin, driven by volume, commodity prices, and product mix - Net sales growth is driven principally by changes in volume and, to a lesser degree, changes in price related to commodity price inflation and product mix237 - Gross profit and gross profit margin are driven by changes in volume, fluctuations in food and commodity prices, the ability to pass on price increases, and the product mix of net sales237 Key Financial Definitions This section defines key financial terms including net sales, cost of sales, selling, general and administrative expenses, other operating expenses, and interest expense - Net sales consist primarily of sales of specialty products, produce, center-of-the-plate proteins, and other food products to independently-owned restaurants and high-end foodservice customers, net of discounts and sales incentives, and direct-to-consumer sales238 - Cost of sales includes the net purchase price of products sold, transportation costs to distribution facilities, and food processing costs (direct labor, benefits, overhead, depreciation)238 - Selling, general and administrative expenses include facilities, product shipping and handling, warehouse, and other selling, general and administrative costs238 - Other operating expenses primarily relate to changes in the fair value of earn-out liabilities, gains/losses on asset disposals, asset impairments, and third-party deal costs for acquisitions or financing238 - Interest expense consists primarily of interest on outstanding indebtedness and amortization/write-off of deferred financing fees238 Results of Operations Fiscal 2021 saw significant recovery with increased net sales and reduced net loss, contrasting with 2020's Pandemic-driven decline Consolidated Statements of Operations (Amounts in thousands) | Metric | FY2021 | FY2020 | FY2019 | | :----------------------------------- | :------- | :------- | :------- | | Net sales | 1,745,757 | 1,111,631 | 1,591,834 | | Cost of sales | 1,355,272 | 863,480 | 1,205,266 | | Gross profit | 390,485 | 248,151 | 386,568 | | Selling, general and administrative expenses | 379,252 | 336,394 | 329,542 | | Other operating expenses | 422 | 14,417 | 6,359 | | Operating income (loss) | 10,811 | (102,660) | 50,667 | | Interest and other expense, net | 17,587 | 20,946 | 18,264 | | (Loss) income before income taxes | (6,776) | (123,606) | 32,403 | | Provision for income tax (benefit) expense | (1,853) | (40,703) | 8,210 | | Net (loss) income | (4,923) | (82,903) | 24,193 | - Net sales increased by $634.1 million (57.0%) in FY2021, with organic growth contributing $574.2 million (51.6%) due to Pandemic recovery and acquisitions contributing $59.9 million (5.4%)241 - Gross profit increased by $142.3 million (57.4%) in FY2021, with gross profit margin rising 4 basis points to 22.4%242 - Selling, general and administrative expenses increased by $42.9 million (12.7%) in FY2021, but decreased as a percentage of net sales from 30.3% to 21.7% due to sales growth243 - Other operating expenses decreased significantly by $14.0 million (97.1%) in FY2021, primarily due to a $24.2 million impairment charge for trademarks in FY2020245 - Net sales declined by $480.2 million (30.2%) in FY2020, with organic sales down $616.7 million (38.8%) due to the Pandemic, partially offset by $136.5 million (8.6%) from acquisitions248 - Gross profit decreased by $138.4 million (35.8%) in FY2020, with gross profit margin falling 196 basis points to 22.3%249 - Selling, general and administrative expenses increased by $6.9 million (2.1%) in FY2020, but increased as a percentage of net sales from 20.7% to 30.3% due to the Pandemic's adverse impact on sales and a $15.8 million non-cash bad debt expense251 - Other operating expenses increased by $8.1 million (126.7%) in FY2020, primarily due to a $24.2 million impairment charge on Del Monte and Bassian trademarks252 Liquidity and Capital Resources Finances operations via cash flows, credit, and equity; $404.3 million total debt; sufficient liquidity for next year - The company finances day-to-day operations and growth primarily with cash flows from operations, borrowings under senior secured credit facilities, other indebtedness, operating leases, trade payables, and equity financing255 Selected Indebtedness Information (Amounts in thousands) | Debt Type | Dec 24, 2021 | Dec 25, 2020 | Dec 27, 2019 | | :------------------------------------ | :----------- | :----------- | :----------- | | Senior secured term loan | $168,675 | $201,553 | $238,129 | | Total convertible debt | $204,000 | $154,000 | $154,000 | | Borrowings outstanding on asset-based loan facility | $20,000 | $40,000 | $— | | Finance leases and other financing obligations | $11,602 | $15,798 | $3,905 | - On March 1, 2021, $50.0 million in 1.875% Convertible Senior Notes were issued, with proceeds repaying $31.2 million of senior secured term loans and a portion of ABL borrowings259 - On June 8, 2020, the company amended its senior secured credit agreement, converting $238.1 million of term loans into a new 2025 Tranche, extending maturity and increasing the fixed-rate portion of interest260 - Public offerings in May and June 2020 generated $85.9 million in net proceeds from 6,634,615 common stock shares264 - The company believes its existing cash and cash equivalents, working capital, and ABL availability are sufficient to satisfy liquidity requirements over the next twelve months265 Selected Liquidity Information (Amounts in thousands) | Metric | Dec 24, 2021 | Dec 25, 2020 | Dec 27, 2019 | | :------------------------------------ | :----------- | :----------- | :----------- | | Cash and cash equivalents | $115,155 | $193,281 | $140,233 | | Working capital, excluding cash and cash equivalents | $157,787 | $94,279 | $162,772 | | Availability under asset-based loan facility | $109,459 | $50,282 | $90,015 | - Capital expenditures were approximately $38.8 million for fiscal 2021 and are projected to be $35.0 million to $45.0 million for fiscal 2022266 Cash Flows Fiscal 2021 saw net cash used in operations, investing, and financing, contrasting with 2020's positive operating and financing cash flows Consolidated Statements of Cash Flows (Amounts in thousands) | Cash Flow Activity | FY2021 | FY2020 | FY2019 | | :------------------------------------ | :------- | :------- | :------- | | Net (loss) income | $(4,923) | $(82,903) | $24,193 | | Non-cash charges | $47,372 | $62,509 | $47,625 | | Changes in working capital | $(62,348) | $63,275 | $(26,811) | | Net cash (used in) provided by operating activities | $(19,899) | $42,881 | $45,007 | | Net cash used in investing activities | $(48,991) | $(67,968) | $(44,154) | | Net cash (used in) provided by financing activities | $(9,222) | $78,056 | $96,947 | - Net cash used in operations for fiscal 2021 was $19.9 million, driven by a net loss and $62.3 million in working capital investments to support growth, partially offset by $47.4 million of non-cash charges270 - Net cash used in investing activities for fiscal 2021 was $49.0 million, including $38.8 million in capital expenditures (e.g., Los Angeles, New England, Miami distribution facilities) and $10.2 million for acquisitions271 - Net cash used in financing activities for fiscal 2021 was $9.2 million, primarily due to $37.6 million in senior term loan and finance lease payments and a $20.0 million ABL payment, partially offset by $51.8 million from convertible senior notes issuance272 - Net cash provided by operations for fiscal 2020 was $42.9 million, despite an $82.9 million net loss, offset by $62.5 million in non-cash charges (including a $24.2 million trademark write-down) and a $63.3 million increase in working capital273 - Net cash used in investing activities for fiscal 2020 was $68.0 million, including $7.0 million in capital expenditures (e.g., ERP system implementation) and $60.9 million for acquisitions (e.g., Sid Wainer and Cambridge)274 - Net cash provided by financing activities for fiscal 2020 was $78.1 million, driven by $85.9 million net proceeds from common stock offerings and $40.0 million net draws on the ABL facility, partially offset by $40.4 million in debt and finance lease payments275 Seasonality The core business is not materially seasonal, but the direct-to-consumer segment sees higher sales and cash flows in Q4 due to holidays - Excluding the Allen Brothers direct-to-consumer business, the company generally does not experience any material seasonality276 - The Allen Brothers direct-to-consumer business is subject to seasonal fluctuations, with sales typically higher during the holiday season in the fourth quarter, generating a disproportionate amount of operating cash flows277 - The COVID-19 Pandemic materially impacted net sales most significantly during the second quarter of fiscal 2020 due to government restrictions and temporary closures of non-essential businesses278279 Inflation Profitability depends on managing volatile operating costs; inability to pass on cost increases to customers can impact results - Profitability is dependent on the ability to anticipate and react to changes in the costs of key operating resources, including food, raw materials, labor, energy, and other supplies and services280 - Substantial increases in costs and expenses could impact operating results if such increases cannot be passed along to customers280 Commitments and Significant Contractual Obligations Total contractual obligations were $635.0 million as of December 24, 2021, primarily debt and leases, with assets pledged as collateral Contractual Obligations and Commercial Commitments (Amounts in thousands, as of December 24, 2021) | Obligation Type | Total | Less than One Year | 1-3 Years | 4-5 Years | Thereafter | | :------------------------------ | :------ | :----------------- | :-------- | :-------- | :--------- | | Indebtedness | $403,991 | $5,662 | $234,790 | $163,539 | $— | | Finance lease obligations | $12,748 | $3,834 | $5,553 | $3,192 | $169 | | Pension exit liabilities | $1,861 | $170 | $375 | $428 | $888 | | Long-term operating leases | $216,423 | $24,726 | $38,167 | $27,644 | $125,886 | | Total | $635,023 | $34,392 | $278,885 | $194,803 | $126,943 | - Outstanding letters of credit totaled approximately $20.5 million as of December 24, 2021283 - Substantially all of the company's assets are pledged as collateral to secure borrowings under its credit facilities283 Off-Balance Sheet Arrangements As of December 24, 2021, the company had no off-balance sheet arrangements - As of December 24, 2021, the company did not have any off-balance sheet arrangements284 Critical Accounting Policies Critical accounting policies involve estimates for doubtful accounts, inventory, business combinations, goodwill, self-insurance, income taxes, and earn-out liabilities - Critical accounting policies 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 liabilities285 - The allowance for doubtful accounts is determined by analyzing customer creditworthiness, accounts receivable balances, payment history, payment terms, historical bad debt levels, and current macroeconomic factors, including the impact of the Pandemic286287 - Inventory adjustments for excess and obsolescence are based on demand and age; $14.6 million in charges were incurred in fiscal 2020 due to the Pandemic288 - Business combinations are accounted for by recording acquired assets and assumed liabilities at estimated fair values, with judgments impacting depreciation and amortization. Goodwill is the excess of purchase price over identifiable net assets289 - Goodwill is tested for impairment annually (Q4) or more frequently at the reporting unit level (East Coast, Midwest, West Coast) using qualitative or quantitative (discounted cash flow) assessments; no impairment was found in fiscal 2020 or 2021290291292293295296 - Intangible asset impairment charges included $0.6 million (Cambridge trademark in fiscal 2021) and $24.2 million (Del Monte and Bassian Farms trademarks in fiscal 2020) due to brand strategy shifts297298 - Self-insurance reserves for group medical, workers' compensation, and automobile liability are estimated based on historical claims experience and cost trends, subject to inherent uncertainties301302 - Income tax provision involves judgment on deferred tax assets, with valuation allowances of $2.0 million (2021) and $2.3 million (2020) for net operating losses303305 - Contingent earn-out liabilities related to business combinations are remeasured at fair value each balance sheet date, with changes recorded in operations, using probability-based approaches and Monte Carlo simulations306 Recent Accounting Pronouncements Recent accounting guidance adopted in fiscal 2021 for income taxes and convertible instruments had an immaterial impact, with no material impact expected from future adoptions - Guidance adopted in fiscal 2021 includes simplifying the accounting for income taxes and accounting for convertible instruments and contracts in an entity's own equity, with an immaterial impact on consolidated financial statements341342 - No recent accounting guidance not yet adopted is expected to have a material impact on the company's financial statements343 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuations on floating-rate debt; 100 basis point increase impacts earnings by $1.4 million annually - The company's exposure to interest rate market risk primarily relates to its long-term debt310 - As of December 24, 2021, the company had an aggregate of $188.7 million in floating-rate indebtedness310 - A 100 basis point increase in market interest rates would decrease after-tax earnings by approximately $1.4 million per annum, holding other variables constant310 Item 8. Consolidated Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, including balance sheets, statements of operations, equity changes, and cash flows, along with accompanying notes Report of Independent Registered Public Accounting Firm BDO USA, LLP issued unqualified opinions on the financial statements and internal controls, identifying Convertible Notes as a critical audit matter - BDO USA, LLP issued an unqualified opinion on the consolidated financial statements for the period ended December 24, 2021, stating they present fairly the financial position, results of operations, and cash flows in conformity with GAAP313 - An unqualified opinion was also expressed on the effectiveness of the company's internal control over financial reporting as of December 24, 2021314 - The accounting evaluation of Convertible Notes was identified as a critical audit matter due to the challenging judgment required for evaluating contract terms and potential derivatives319320 Consolidated Balance Sheets Total assets increased by $99.5 million to $1,073.8 million in 2021, driven by receivables and inventories, with liabilities also rising Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | Dec 24, 2021 | Dec 25, 2020 | Change | | :------------------------------------ | :----------- | :----------- | :----- | | Cash and cash equivalents | $115,155 | $193,281 | $(78,126) | | Accounts receivable, net | $172,540 | $96,383 | $76,157 | | Inventories, net | $144,491 | $82,519 | $61,972 | | Total current assets | $469,960 | $405,662 | $64,298 | | Equipment, leasehold improvements and software, net | $133,622 | $115,448 | $18,174 | | Goodwill | $221,775 | $214,864 | $6,911 | | Intangible assets, net | $104,743 | $111,717 | $(6,974) | | Total assets | $1,073,795 | $974,325 | $99,470 | | Accounts payable | $118,284 | $57,515 | $60,769 | | Total current liabilities | $197,018 | $118,102 | $78,916 | | Long-term debt, net of current portion | $394,160 | $398,084 | $(3,924) | | Operating lease liabilities | $127,296 | $109,133 | $18,163 | | Total liabilities | $723,584 | $629,735 | $93,849 | | Common Stock | $380 | $373 | $7 | | Additional paid in capital | $314,242 | $303,734 | $10,508 | | Retained earnings | $37,611 | $42,534 | $(4,923) | | Total stockholders' equity | $350,211 | $344,590 | $5,621 | Consolidated Statements of Operations and Comprehensive (Loss) Income Net sales recovered to $1,745.8 million in 2021, yielding positive operating income and reduced net loss, improving EPS Consolidated Statements of Operations and Comprehensive (Loss) Income (Amounts in thousands, except per share) | Metric | FY2021 | FY2020 | FY2019 | | :----------------------------------- | :------- | :------- | :------- | | Net sales | $1,745,757 | $1,111,631 | $1,591,834 | | Gross profit | $390,485 | $248,151 | $386,568 | | Operating income (loss) | $10,811 | $(102,660) | $50,667 | | Net (loss) income | $(4,923) | $(82,903) | $24,193 | | Basic Net (loss) income per share | $(0.13) | $(2.46) | $0.82 | | Diluted Net (loss) income per share | $(0.13) | $(2.46) | $0.81 | | Weighted average basic common shares outstanding | 36,744,304 | 33,716,157 | 29,532,342 | | Weighted average diluted common shares outstanding | 36,744,304 | 33,716,157 | 30,073,338 | Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity increased to $350.2 million in 2021, reflecting net loss, stock compensation, and prior year public offerings Consolidated Statements of Changes in Stockholders' Equity Highlights (Amounts in thousands) | Metric | Dec 24, 2021 | Dec 25, 2020 | Dec 27, 2019 | | :------------------------------------ | :----------- | :----------- | :----------- | | Common Stock Amount | $380 | $373 | $304 | | Additional Paid in Capital | $314,242 | $303,734 | $212,240 | | Accumulated Other Comprehensive Loss | $(2,022) | $(2,051) | $(2,048) | | Retained Earnings | $37,611 | $42,534 | $125,437 | | Total Stockholders' Equity | $350,211 | $344,590 | $335,933 | | Net (loss) income | $(4,923) | $(82,903) | $24,193 | | Stock compensation | $11,479 | $9,292 | $4,399 | | Public offering (net proceeds) | $— | $85,941 | $— | | Warrants issued for acquisition | $1,120 | $— | $— | | Shares surrendered to pay withholding taxes | $(2,084) | $(3,670) | $(1,022) | Consolidated Statements of Cash Flows Fiscal 2021 saw net cash used in operating, investing, and financing activities, resulting in a $78.1 million decrease in cash and cash equivalents Consolidated Statements of Cash Flows (Amounts in thousands) | Cash Flow Activity | FY2021 | FY2020 | FY2019 | | :------------------------------------ | :------- | :------- | :------- | | Net cash (used in) provided by operating activities | $(19,899) | $42,881 | $45,007 | | Net cash used in investing activities | $(48,991) | $(67,968) | $(44,154) | | Net cash (used in) provided by financing activities | $(9,222) | $78,056 | $96,947 | | Effect of foreign currency on cash and cash equivalents | $(14) | $79 | $23 | | Net change in cash and cash equivalents | $(78,126) | $53,048 | $97,823 | | Cash and cash equivalents at end of year | $115,155 | $193,281 | $140,233 | Notes to Consolidated Financial Statements These notes provide detailed information on operations, accounting policies, financial accounts, debt, equity, leases, taxes, and cash flow disclosures Note 1 - Operations and Basis of Presentation The company operates in three food product distribution segments, facing ongoing Pandemic impacts, and adopted new immaterial accounting guidance in 2021 - The company's business consists of three operating segments: East Coast, Midwest, and West Coast, which aggregate into one reportable segment: food product distribution337 - The COVID-19 Pandemic has had and continues to have an adverse impact on demand, cost inflation, and labor shortages, with future impacts remaining uncertain338339 - New accounting guidance for simplifying income taxes and convertible instruments was adopted on December 26, 2020, with an immaterial impact on the consolidated financial statements341342 Note 2 – Summary of Significant Accounting Policies Details policies for revenue, cost of sales, SG&A, cash, receivables, inventory, vendor rebates, depreciation, leases, software, debt, and intangibles - Revenue from product sales is recognized when control is transferred to the customer, typically within a day of order, with sales incentives accounted for as variable consideration347 Net Sales Disaggregated by Principal Product Category (Amounts in thousands) | Product Category | FY2021 ($) | FY2021 (%) | FY2020 ($) | FY2020 (%) | FY2019 ($) | FY2019 (%) | | :------------------------ | :--------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Center-of-the-Plate | 877,060 | 50.2% | 533,813 | 48.0% | 711,980 | 44.7% | | Dry Goods | 238,758 | 13.7% | 150,631 | 13.6% | 260,976 | 16.4% | | Pastry | 178,352 | 10.2% | 135,913 | 12.2% | 221,041 | 13.9% | | Cheeses and Charcuterie | 143,048 | 8.2% | 107,915 | 9.7% | 158,834 | 10.0% | | Produce | 120,759 | 6.9% | 80,920 | 7.3% | 17,955 | 1.1% | | Dairy and Eggs | 79,512 | 4.6% | 38,172 | 3.4% | 110,740 | 7.0% | | Oils and Vinegars | 71,369 | 4.1% | 40,389 | 3.6% | 80,155 | 5.0% | | Kitchen Supplies | 36,899 | 2.1% | 23,878 | 2.2% | 30,153 | 1.9% | | Total | $1,745,757 | 100% | $1,111,631 | 100% | $1,591,834 | 100% | - Cost of sales includes product purchase price, freight, and food processing costs, totaling $28.4 million in FY2021, $18.7 million in FY2020, and $19.8 million in FY2019355 - Selling, general and administrative expenses include facilities, shipping, and warehouse costs; shipping and handling costs were $98.7 million in FY2021, $78.2 million in FY2020, and $85.6 million in FY2019356 - Allowance for doubtful accounts was $20.3 million in 2021 and $24.0 million in 2020, based on creditworthiness, payment history, and macroeconomic factors287359 - Inventories are valued at lower of cost or market, with adjustments for shrinkage, excess, and obsolescence totaling $8.3 million in 2021 and $9.0 million in 2020411 - The company recorded intangible asset impairment charges of $0.6 million (Cambridge trademark) in FY2021 and $24.2 million (Del Monte and Bassian Farms trademarks) in FY2020 due to brand strategy shifts375 - Goodwill is tested for impairment annually in the fourth quarter or more frequently if circumstances indicate; no impairment was found in fiscal 2020 or 2021377378379380381 Note 3 – Net (Loss) Income per Share This note details basic and diluted net (loss) income per share, with potentially dilutive securities excluded in 2021 and 2020 due to anti-dilutive effects Net (Loss) Income per Share (Amounts in thousands, except per share) | Metric | FY2021 | FY2020 | FY2019 | | :------------------------------------ | :------- | :------- | :------- | | Net (loss) income | $(4,923) | $(82,903) | $24,193 | | Basic Net (loss) income per share | $(0.13) | $(2.46) | $0.82 | | Diluted Net (loss) income per share | $(0.13) | $(2.46) | $0.81 | | Weighted average basic common shares outstanding | 36,744,304 | 33,716,157 | 29,532,342 | | Weighted average diluted common shares outstanding | 36,744,304 | 33,716,157 | 30,073,338 | Potentially Dilutive Securities Excluded from Diluted EPS (Shares) | Security Type | Dec 24, 2021 | Dec 25, 2020 | Dec 27, 2019 | | :------------------------------------ | :----------- | :----------- | :----------- | | Restricted share awards | 306,084 | 505,568 | 132,861 | | Stock options and warrants | 139,198 | 115,639 | — | | Convertible notes | 4,410,639 | 3,484,788 | 76,384 | - Potentially dilutive securities were excluded from the calculation of diluted net (loss) income per common share in fiscal 2021 and 2020 because their effect was anti-dilutive396 Note 4 – Fair Value Measurements Fair value measurements for contingent earn-out liabilities ($6.9 million in 2021) and convertible notes are detailed, Pandemic impacted valuations - Contingent earn-out liabilities are measured at fair value using Level 3 inputs, based on projected results, probability of occurrence, and a discount rate397 - The Pandemic's impact on revenue growth and profitability resulted in a significant reduction in the fair value of contingent earn-out liabilities397 Changes in Level 3 Contingent Earn-out Liabilities (Amounts in thousands) | Metric | Dec 24, 2021 | Dec 25, 2020 | Dec 27, 2019 | | :------------------------------------ | :----------- | :----------- | :----------- | | Balance at Beginning of Period | $2,756 | $14,698 | N/A | | Acquisition value | $5,500 | $3,464 | N/A | | Cash payments | $(83) | $(3,927) | N/A | | Changes in fair value | $(1,296) | $(11,479) | N/A | | Balance at End of Period | $6,877 | $2,756 | $14,698 | - The fair values of the asset-based loan facility and term loan approximated their book values due to variable interest rates reflecting current market rates399 Carrying Value and Fair Value of Convertible Notes (Amounts in thousands) | Debt Type | Dec 24, 2021 Carrying Value | Dec 24, 2021 Fair Value | Dec 25, 2020 Carrying Value | Dec 25, 2020 Fair Value | | :------------------------------------ | :-------------------------- | :------------------------ | :-------------------------- | :------------------------ | | Convertible Senior Notes | $200,000 | $206,182 | $150,000 | $163,204 | | Convertible Unsecured Note | $4,000 | $4,102 | $4,000 | $4,290 | Note 5 – Acquisitions In 2021, three acquisitions totaled $11.3 million; prior year acquisitions included Sid Wainer & Son ($44.1 million) and Bassian Farms ($31.8 million) - In fiscal 2021, three acquisitions totaled approximately $11.3 million, including $10.2 million in cash and $1.1 million in common stock warrants, with potential contingent consideration of up to $9.8 million402 - Fiscal 2021 acquisitions contributed $49.5 million in net sales and a $(44) thousand loss before income taxes404 - On January 27, 2020, Sid Wainer & Son was acquired for approximately $44.1 million, including cash and potential contingent consideration of up to $4.0 million405 - On February 25, 2019, Bassian Farms, Inc. was acquired for approximately $31.8 million, including cash and a $4.0 million unsecured convertible note, with potential contingent consideration of up to $9.0 million407 Purchase Price Allocation for Acquisitions (Amounts in thousands) | Asset/Liability | Sid Wainer | Bassian | Other Acquisitions | | :------------------------------ | :--------- | :------ | :----------------- | | Current assets | $22,960 | $6,657 | $14,244 | | Customer relationships | — | $15,530 | $11,067 | | Trademarks | $3,500 | $4,610 | $2,812 | | Goodwill | $11,571 | $13,065 | $13,636 | | Fixed assets | $19,425 | $856 | $1,433 | | Right-of-use assets | $8,259 | — | $2,787 | | Lease liabilities | $(8,259) | — | $(2,787) | | Current liabilities | $(11,294) | $(2,501) | $(6,449) | | Earn-out liability | $(2,081) | $(7,450) | $(7,783) | | Total consideration | $44,081 | $31,777 | $27,341 | Note 6 – Inventories Inventories, primarily finished products, are valued at the lower of cost or market, with adjustments for shrinkage, excess, and obsolescence totaling $8.3 million in 2021 - Inventories consist primarily of finished product, valued at the lower of cost or market using a mixture of first-in, first-out (FIFO) and average cost methods411 Inventory Adjustments (Amounts in thousands) | Metric | Dec 24, 2021 | Dec 25, 2020 | | :------------------------------------ | :----------- | :----------- | | Adjustments for shrinkage, excess, and obsolescence | $8,312 | $9,013 | Note 7 – Equipment, Leasehold Improvements and Software Net book value of equipment, leasehold improvements, and software was $133.6 million in 2021, with $24.4 million in construction-in-process and $15.9 million depreciation Equipment, Leasehold Improvements and Software (Amounts in thousands) | Asset Category | Dec 24, 2021 | Dec 25, 2020 | | :------------------------------------ | :----------- | :----------- | | Land | $5,020 | $5,020 | | Buildings | $18,406 | $15,685 | | Machinery and equipment | $28,099 | $24,900 | | Computers, data processing and other equipment | $15,480 | $14,207 | | Software | $39,799 | $33,063 | | Leasehold improvements | $69,105 | $68,747 | | Furniture and fixtures | $3,582 | $3,500 | | Vehicles | $29,632 | $21,873 | | Construction-in-process | $24,355 | $8,115 | | Less: accumulated depreciation and amortization | $(99,856) | $(79,662) | | Net Book Value | $133,622 | $115,448 | - Construction-in-process at December 24, 2021, primarily for Los Angeles and Miami distribution facilities, is expected to be completed in FY2022 for approximately $20.0 million412 Depreciation and Software Amortization Expense (Amounts in thousands) | Expense Type | FY2021 | FY2020 | FY2019 | | :------------------------------------ | :------- | :------- | :------- | | Depreciation expense | $15,918 | $14,984 | $9,535 | | Software amortization | $6,080 | $4,790 | $3,793 | Note 8 – Goodwill and Other Intangible Assets Goodwill increased to $221.8 million in 2021 from acquisitions; $0.6 million and $24.2 million trademark impairment charges in 2021 and 2020 Changes in Carrying Amount of Goodwill (Amounts in thousands) | Metric | Amount | | :------------------------------------ | :------- | | Carrying amount as of December 27, 2019 | $197,743 | | Acquisitions | $17,104 | | Foreign currency translation | $17 | | Carrying amount as of December 25, 2020 | $214,864 | | Acquisitions | $6,845 | | Foreign currency translation | $66 | | Carrying amount as of December 24, 2021 | $221,775 | Other Intangible Assets, Net (Amounts in thousands) | Asset Category | Dec 24, 2021 Gross Carrying Amount | Dec 24, 2021 Accumulated Amortization | Dec 24, 2021 Net Amount | Dec 25, 2020 Net Amount | | :------------------------------------ | :--------------------------------- | :---------------------------- | :-------------------- | :-------------------- | | Customer relationships | $155,678 | $(74,644) | $81,034 | $86,544 | | Non-compete agreements | $8,579 | $(8,018) | $561 | $827 | | Trademarks | $36,514 | $(13,366) | $23,148 | $24,346 | | Total | $200,771 | $(96,028) | $104,743 | $111,717 | - In Q2 FY2021, a $0.6 million impairment charge ($0.4 million net of tax) fully wrote down the Cambridge trademark's net book value416 - In Q4 FY2020, a $24.2 million impairment charge ($17.5 million net of tax) wrote down Del Monte and Bassian Farms trademarks due to a brand strategy shift416 Amortization Expense for Other Intangible Assets (Amounts in thousands) | Fiscal Year | Amortization Expense | | :------------------------------------ | :------------------- | | December 24, 2021 | $12,967 | | December 25, 2020 | $13,502 | | December 27, 2019 | $12,663 | Estimated Amortization Expense for Other Intangible Assets (Amounts in thousands) | Fiscal Year | Estimated Expense | | :------------------------------------ | :---------------- | | 2022 | $11,984 | | 2023 | $10,955 | | 2024 | $10,097 | | 2025 | $9,680 | | 2026 | $9,680 | | Thereafter | $52,347 | | Total | $104,743 | Note 9 – Debt Obligations Total debt obligations were $399.3 million in 2021 (term loans, convertible notes, ABL), with details on refinancing, interest rates, and covenants Debt Obligations (Amounts in thousands) | Debt Type | Dec 24, 2021 | Dec 25, 2020 | | :------------------------------------ | :----------- | :----------- | | Senior secured term loan | $168,675 | $201,553 | | Convertible senior notes | $200,000 | $150,000 | | Asset-based loan facility | $20,000 | $40,000 | | Finance lease and other financing obligations | $11,602 | $15,798 | | Convertible unsecured note | $4,000 | $4,000 | | Deferred finance fees and original issue discount | $(4,976) | $(7,172) | | Total debt obligations | $399,301 | $404,179 | | Less: current installments | $(5,141) | $(6,095) | | Total debt obligations excluding current installments | $394,160 | $398,084 | Maturities of Debt (excluding finance leases) (Amounts in thousands) | Fiscal Year | Amount | | :------------------------------------ | :------- | | 2022 | $1,712 | | 2023 | $25,712 | | 2024 | $201,712 | | 2025 | $163,539 | | 2026 | $— | | Thereafter | $— | | Total | $392,675 | - On March 1, 2021, $50.0 million in Convertible Senior Notes were issued, repaying $31.2 million of 2022 tranche senior secured term loans and a portion of ABL borrowings436 - The 2025 Tranche of the Term Loan Facility has a springing maturity date of June 22, 2024, if the 1.875% convertible senior notes due December 1, 2024, have not been repaid or refinanced427 - The Term Loans' interest rate was 5.6% and the ABL interest rate was 1.4% at December 24, 2021428431 - As of December 24, 2021, $109.5 million was available for borrowing under the ABL facility434 - The Convertible Senior Notes' effective interest rate was approximately 2.3% at December 24, 2021, with an initial conversion price of approximately $44.20 per share436437 - The Convertible Unsecured Note, issued for the Bassian acquisition, has a 4.5% interest rate (increasing to 5.0% after two years) and is convertible into common stock at $43.93 per share439440 Note 10 – Stockholders' Equity Equity changes include $1.1 million warrants for acquisition, $85.9 million from 2020 public offerings, and $11.5 million stock compensation expense in 2021 - In fiscal 2021, $1.1 million in warrants were issued for an acquisition, allowing purchase of up to 150,000 shares at $31.96 per share, expiring April 22, 2024441 - Preferred Stock Purchase Rights, approved in March 2020, expired on March 21, 2021442 - Public offerings in May and June 2020 generated approximately $85.9 million in net proceeds from the issuance of 6,634,615 shares of common stock443 - The 2019 Omnibus Equity Incentive Plan provides for stock options, SARs, RSAs, and other awards, with 883,042 shares available for grant as of December 24, 2021444445 Stock Compensation Expense (Amounts in thousands) | Fiscal Year | Stock Compensation Expense | | :------------------------------------ | :------------------------- | | December 24, 2021 | $11,479 | | December 25, 2020 | $9,292 | | December 27, 2019 | $4,399 | - Unrecognized compensation cost for unvested RSAs was $18.3 million as of December 24, 2021, to be recognized over a weighted-average period of approximately 2.2 years452 Stock Option Activity (as of December 24, 2021) | Metric | Shares | Weighted Average Exercise Price | | :------------------------------------ | :------- | :------------------------------ | | Outstanding | 115,639 | $20.23 | | Exercisable | 115,639 | $20.23 | Note 11 – Leases Total net lease cost was $38.1 million in 2021, with operating lease liabilities of $143.2 million and finance lease liabilities of $11.6 million Components of Net Lease Cost (Amounts in thousands) | Lease Cost Type | FY2021 | FY2020 | FY2019 | | :------------------------------------ | :------- | :------- | :------- | | Operating lease cost | $26,531 | $27,521 | $27,415 | | Total finance lease cost | $5,222 | $4,718 | $404 | | Short-term lease cost | $3,491 | $2,475 | $2,143 | | Variable lease cost | $3,331 | $1,990 | $2,707 | | Sublease income | $(430) | $(96) | $(514) | | Total lease cost, net | $38,145 | $36,608 | $32,155 | Maturities of Lease Liabilities (Amounts in thousands, as of December 24, 2021) | Fiscal Year | Operating Leases Total | Finance Leases Vehicles and Equipment | | :------------------------------------ | :--------------------- | :------------------------------------ | | 2022 | $24,726 | $3,834 | | 2023 | $21,270 | $3,041 | | 2024 | $16,897 | $2,512 | | 2025 | $14,692 | $1,992 | | 2026 | $12,952 | $1,200 | | Thereafter | $125,886 | $169 | | Total | $216,423 | $12,748 | | Less interest | $(73,245) | $(1,146) | | Present value | $143,178 | $11,602 | - As of December 24, 2021, the weighted-average lease term for operating leases was 12.0 years and for finance leases was 4.0 years455 - The weighted-average discount rate for operating leases was 6.8% and for finance leases was 4.1% as of December 24, 2021455 - The company is obligated to make approximately $10.0 million in payments for uncommenced distribution facility leases456 Note 12 – Income Taxes Effective tax rate was 27.3% in 2021, with $1.4 million ERTC receivable and $9.4 million net deferred tax assets, including $2.0 million valuation allowances - The company recognized a $1.4 million receivable for the Employee Retention Tax Credit (ERTC) in Q2 fiscal 2021459 Income Tax (Benefit) Expense and Effective Tax Rate (Amounts in thousands) | Metric | FY2021 | FY2020 | FY2019 | | :------------------------------------ | :------- | :------- | :------- | | Total income tax (benefit) expense | $(1,853) | $(40,703) | $8,210 | | Effective tax rate | 27.3% | 32.9% | 25.3% | - The higher effective tax rate in fiscal 2020 was primarily due to the carryback of a portion of the net taxable loss, allowing tax refunds against taxes paid in fiscal 2015 and 2017 at 35% statutory rates459 Deferred Tax Assets and Liabilities, Net (Amounts in thousands) | Metric | Dec 24, 2021 | Dec 25, 2020 | | :------------------------------------ | :----------- | :----------- | | Total deferred tax assets | $77,660 | $72,279 | | Total deferred tax liabilities | $(66,234) | $(62,483) | | Valuation allowance | $(2,046) | $(2,261) | | Total net deferred tax asset | $9,380 | $7,535 | - As of December 24, 2021, a valuation allowance of $2.0 million was held against foreign ($1.2 million) and certain state ($0.8 million) net operating loss carryforwards462 - The company's Canada net operating loss carryforward of $1.5 million expires between fiscal 2038 and 2040, state NOLs of $6.3 million expire from fiscal 2026 onwards, and federal NOLs of $7.4 million are indefinite-lived462 - No material uncertain tax positions existed as of December 24, 2021465 Note 13 – Supplemental Disclosures of Cash Flow Information Supplemental cash flow details include cash paid for taxes/interest, lease cash flows, and non-cash investing/financing activities Supplemental Disclosures of Cash Flow Information (Amounts in thousands) | Metric | FY2021 | FY2020 | FY2019 | | :------------------------------------ | :------- | :------- | :------- | | Cash paid for income taxes, net of cash received | $(230) | $308 | $6,046 | | Cash paid for interest | $15,387 | $18,182 | $16,271 | | Operating cash flows from operating leases | $25,111 | $25,090 | $25,302 | | Operating cash flows from finance leases | $555 | $3,856 | $96 | | ROU assets obtained in exchange for lease liabilities: Operating leases | $32,741 | $7,201 | $155,027 | | ROU assets obtained in exchange for lease liabilities: Finance leases | $536 | $16,063 | $4,183 | | Non-cash investing and financing activities: Warrants issued for acquisition | $1,120 | $— | $— | | Non-cash investing and financing activities: Contingent earn-out liabilities for acquisitions | $5,500 | $3,464 | $7,929 | | Non-cash investing and financing activities: Convertible notes issued for acquisitions | $— | $— | $4,000 | Note 14 – Employee Benefit Plans The 401(k) Plan includes discretionary matching contributions, which were temporarily suspended from March 2020 to August 2021 due to the Pandemic - The company sponsors a 401(k) Plan for eligible full-time employees, offering discretionary matching contributions equal to 50% of employee contributions, up to a maximum of 6% of annual salary, capped at $2.5 thousand per employee per year467 - Matching contributions were temporarily suspended from March 31, 2020, through August 31, 2021, as a result of the Pandemic467 401(k) Plan Matching Contributions Expense (Amounts in thousands) | Fiscal Year | Matching Contributions Expense | | :------------------------------------ | :----------------------------- | | December 24, 2021 | $683 | | December 25, 2020 | $720 | | December 27, 2019 | $1,268 | Note 15 – Related Parties The company leases a distribution facility from entities controlled by its Chairman and Vice Chairman, with lease expense of $493 thousand in 2021 - The Chefs' Warehouse Mid-Atlantic, LLC leases a distribution facility from entities controlled by Christopher Pappas (Chairman, President, CEO) and John Pappas (Vice Chairman, Director)468 - Lease expense for this facility was $493 thousand for fiscal 2021, $488 thousand for fiscal 2020, and $433 thousand for fiscal 2019468 - The lease was amended during the first quarter of fiscal 2020 and expires on September 30, 2023468 Note 16 – Commitments and Contingencies The company is involved in legal and tax matters, maintains self-insurance reserves (e.g., $7.1 million for workers' compensation), and has unionized employees - The company is involved in various legal proceedings and tax matters, establishing reserves when a loss is probable and can be reasonably estimated469472 - Management does not believe there is a reasonable possibility of material loss or loss in excess of accrued amounts for legal matters469 Self-Insurance Reserves (Amounts in thousands) | Reserve Type | Dec 24, 2021 | Dec 25, 2020 | | :------------------------------------ | :----------- | :----------- | | Medical program | $2,373 | $1,220 | | Automobile liability program | $3,980 | $3,450 | | Workers' compensation | $7,053 | $7,696 | - Approximately 9% of the company's employees are represented by unions, with collective bargaining agreements expiring between fiscal 2022 and 2025474 Note 17 – Valuation Reserves The allowance for doubtful accounts decreased to $20.3 million in 2021, and the allowance for deferred tax assets decreased to $2.0 million Valuation Account Activity (Amounts in thousands) | Valuation Account | Balance at Beginning of Period (FY2021) | (Recoveries) to Additions Charged Expense (FY2021) | Deductions (FY2021) | Balance at End of Period (FY2021) | | :------------------------------------ | :-------------------------------------- | :------------------------------------------------- | :------------------ | :-------------------------------- | | Allowance for doubtful accounts | $24,027 | $(422) | $(3,345) | $20,260 | | Allowance for deferred tax assets | $2,261 | $(215) | $— | $2,046 | Note 18 – Subsequent Events On December 28, 2021, the company agreed to acquire CGC Holdings, Inc., a specialty seafood and produce distributor, for $28.0 million cash - On December 28, 2021, the company agreed to acquire substantially all assets of CGC Holdings, Inc., a specialty seafood and produce distributor, for $28.0 million in cash476 - The preliminary purchase price allocations for the CGC Holdings, Inc. acquisition are incomplete476 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants on accounting and financial disclosure - Not applicable478 Item 9A. Controls and Procedures Management concluded that disclosure cont