Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 692K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 22K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 22K
12: R1 Cover Page HTML 77K
13: R2 Consolidated Balance Sheets HTML 110K
14: R3 Consolidated Balance Sheets (Parenthetical) HTML 40K
15: R4 Consolidated Statements of Operations and HTML 88K
Comprehensive (Loss) Income
16: R5 Consolidated Statements of Changes in HTML 89K
Stockholders' Equity
17: R6 Consolidated Statements of Cash Flows HTML 107K
18: R7 Operations and Basis of Presentation HTML 35K
19: R8 Revenue Recognition HTML 97K
20: R9 Net (Loss) Income per Share HTML 77K
21: R10 Fair Value Measurements HTML 67K
22: R11 Acquisitions HTML 58K
23: R12 Inventories HTML 22K
24: R13 Equipment, Leasehold Improvements and Software HTML 72K
25: R14 Goodwill and Other Intangible Assets HTML 69K
26: R15 Debt Obligations HTML 53K
27: R16 Stockholders' Equity HTML 39K
28: R17 Income Taxes HTML 25K
29: R18 Related Parties HTML 24K
30: R19 Supplemental Disclosures of Cash Flow Information HTML 46K
31: R20 Operations and Basis of Presentation (Policies) HTML 54K
32: R21 Revenue Recognition (Tables) HTML 83K
33: R22 Net (Loss) Income per Share (Tables) HTML 81K
34: R23 Fair Value Measurements (Tables) HTML 66K
35: R24 Acquisitions (Tables) HTML 57K
36: R25 Equipment, Leasehold Improvements and Software HTML 71K
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41: R30 Operations and Basis of Presentation - Narrative HTML 28K
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42: R31 Revenue Recognition - Narrative (Details) HTML 34K
43: R32 Revenue Recognition - Schedule of Disaggregation HTML 61K
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44: R33 Net (Loss) Income per Share - Computation of Basic HTML 39K
and Diluted Earnings per Share (Details)
45: R34 Net (Loss) Income per Share - Schedule of HTML 38K
Reconciliation of Earnings per Share (Details)
46: R35 Net (Loss) Income per Share - Schedule of HTML 28K
Potentially Dilutive Securities Excluded from
Calculation of Diluted Net Income per Share
(Details)
47: R36 Fair Value Measurements - Narrative (Details) HTML 22K
48: R37 Fair Value Measurements - Summary of Changes in HTML 44K
Level 3 Contingent Consideration Liability
(Details)
49: R38 Fair Value Measurements - Summary of the Carrying HTML 33K
Value and Fair Value of Convertible Subordinated
Notes (Details)
50: R39 Acquisitions - Narrative (Details) HTML 47K
51: R40 Acquisitions - Pro Forma Consolidated Income HTML 26K
Statement Information (Details)
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Acquisition (Details)
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(Details)
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(Details)
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amortization (Details)
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(Details)
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62: R51 Debt Obligations - Schedule of Term Loans HTML 35K
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(Exact name of registrant as specified in its charter)
iDelaware
i20-3031526
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i100 East Ridge Road
iRidgefield,
iConnecticuti06877
(Address of principal executive offices)
Registrant’s telephone number, including area code: (i203)
i894-1345
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, par value $0.01
iCHEF
iThe NASDAQ Stock Market LLC
iPreferred
Stock Purchase Rights
iCHEF
iThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated
filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
Number of shares of common stock, par value $.01 per share, outstanding at July 24, 2020: i37,797,548
Statements in this report regarding the business of The Chefs’ Warehouse, Inc. (the “Company”) that are not historical facts are “forward-looking statements” that involve risks and uncertainties and are based on current expectations and management estimates; actual results may differ materially. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and/or could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
The risks and uncertainties which could impact these statements include, but are not limited to the following: our sensitivity to general economic conditions, including disposable income levels and changes in consumer discretionary spending; our ability to expand our operations in our existing markets and to penetrate new markets through acquisitions; we may not achieve the benefits expected from our acquisitions, which could adversely impact our business and operating results; we may have difficulty managing and facilitating our future growth; conditions beyond our control could materially affect the cost and/or availability of our specialty food products or center-of-the-plate products and/or interrupt our distribution network; our increased distribution of center-of-the-plate products, like meat, poultry and seafood, involves increased exposure to price volatility experienced by those products; our business is a low-margin business and our profit margins may be sensitive
to inflationary and deflationary pressures; because our foodservice distribution operations are concentrated in certain culinary markets, we are susceptible to economic and other developments, including adverse weather conditions, in these areas; fuel cost volatility may have a material adverse effect on our business, financial condition or results of operations; our ability to raise capital in the future may be limited; we may be unable to obtain debt or other financing, including financing necessary to execute on our acquisition strategy, on favorable terms or at all; interest charged on our outstanding debt may be adversely affected by changes in the method of determining London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with an alternative rate; our business operations and future development could be significantly disrupted if we lose key members of our management team; and significant public health epidemics or pandemics, including COVID-19, may
adversely affect our business, results of operations and financial condition. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, speak only as of the date made. A more detailed description of these and other risk factors is contained in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 24, 2020 and other reports, including this Quarterly Report on Form 10-Q, filed by the Company with the SEC since that date. The
Company is not undertaking to update any information in the foregoing report until the effective date of its future reports required by applicable laws.
Accounts
receivable, net of allowance of $i26,129 in 2020 and $i8,846 in 2019
i105,125
i175,044
Inventories,
net
i96,627
i124,056
Prepaid
expenses and other current assets
i27,711
i13,823
Total
current assets
i431,287
i453,156
Equipment,
leasehold improvements and software, net
i121,175
i92,846
Operating
lease right-of-use assets
i122,881
i127,649
Goodwill
i214,561
i197,743
Intangible
assets, net
i142,355
i138,751
Other
assets
i3,141
i3,534
Total
assets
$
i1,035,400
$
i1,013,679
LIABILITIES
AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
i60,878
$
i94,097
Accrued
liabilities
i28,368
i29,847
Short-term
operating lease liabilities
i17,968
i17,453
Accrued
compensation
i8,550
i8,033
Current
portion of long-term debt
i5,905
i721
Total
current liabilities
i121,669
i150,151
Long-term
debt, net of current portion
i397,818
i386,106
Operating
lease liabilities
i115,757
i120,572
Deferred
taxes, net
i5,069
i10,883
Other
liabilities and deferred credits
i7,770
i10,034
Total
liabilities
i648,083
i677,746
Commitments
and contingencies
i
i
Stockholders’ equity:
Preferred
Stock - $ii0.01/ par value,
ii5,000,000/ shares authorized,
iiiino///
shares issued and outstanding at June 26, 2020 and December 27, 2019
i—
i—
Common
Stock, - $ii0.01/ par value, ii100,000,000/
shares authorized, ii37,798,548/ and ii30,341,941/
shares issued and outstanding at June 26, 2020 and December 27, 2019, respectively
i378
i304
Additional
paid in capital
i298,230
i212,240
Accumulated
other comprehensive loss
(i2,309)
(i2,048)
Retained
earnings
i91,018
i125,437
Total
stockholders’ equity
i387,317
i335,933
Total
liabilities and stockholders’ equity
$
i1,035,400
$
i1,013,679
See
accompanying notes to the consolidated financial statements.
4
THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(Amounts in thousands, except share and per share amounts)
Adjustments
to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization
i9,675
i6,055
Amortization
of intangible assets
i6,720
i6,184
Provision
for allowance for doubtful accounts
i19,611
i1,914
Non-cash
operating lease expense
i463
i1,151
Deferred
taxes
(i5,814)
i1,332
Amortization
of deferred financing fees
i1,478
i1,044
Stock
compensation
i2,850
i2,003
Change
in fair value of contingent earn-out liabilities
(i6,649)
i2,795
Loss
on asset disposal
i43
i40
Changes
in assets and liabilities, net of acquisitions:
Accounts receivable
i70,483
i7,424
Inventories
i34,877
(i7,965)
Prepaid
expenses and other current assets
(i9,460)
(i640)
Accounts
payable, accrued liabilities and accrued compensation
(i43,398)
(i5,482)
Other
assets and liabilities
i1,119
(i2,845)
Net
cash provided by operating activities
i47,579
i21,890
Cash
flows from investing activities:
Capital expenditures
(i4,400)
(i8,549)
Cash
paid for acquisitions, net of cash received
(i63,450)
(i28,292)
Net
cash used in investing activities
(i67,850)
(i36,841)
Cash
flows from financing activities:
Payment of debt, finance lease and other financing obligations
(i37,439)
(i1,716)
Proceeds
from the issuance of common stock, net of issuance costs
i85,941
i—
Payment
of deferred financing fees
(i856)
i—
Proceeds
from exercise of stock options
i—
i558
Surrender
of shares to pay withholding taxes
(i2,727)
(i868)
Cash
paid for contingent earn-out liability
(i2,927)
(i200)
Borrowings
under asset-based loan facility
i100,000
i—
Payments
under asset based loan facility
(i60,000)
(i960)
Net
cash provided by (used in) financing activities
i81,992
(i3,186)
Effect
of foreign currency on cash and cash equivalents
(i130)
i21
Net
change in cash and cash equivalents
i61,591
(i18,116)
Cash
and cash equivalents-beginning of period
i140,233
i42,410
Cash
and cash equivalents-end of period
$
i201,824
$
i24,294
See
accompanying notes to the consolidated financial statements.
7
THE CHEFS’ WAREHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
Note 1 - iOperations
and Basis of Presentation
Description of Business and Basis of Presentation
The financial statements include the consolidated accounts of The Chefs’ Warehouse, Inc. (the “Company”), and its wholly-owned subsidiaries. iThe Company’s quarterly periods end on the thirteenth Friday of each quarter. Every six to seven years, the
Company will add a fourteenth week to its fourth quarter to more closely align its year-end to the calendar year.iThe Company’s business consists of ithree
operating segments: East Coast, Midwest and West Coast that aggregate into ione reportable segment, foodservice distribution, which is concentrated primarily in the United States./The Company’s customer base consists primarily of menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary
schools, bakeries, patisseries, chocolateries, cruise lines, casinos, specialty food stores, grocers and warehouse clubs.
The COVID-19 Pandemic
The COVID-19 pandemic (“COVID-19”) has had a material impact on the Company’s business and operations and those of its customers. In an effort to limit the spread of the virus, federal, state and local governments have implemented measures that have resulted in the closure of non-essential businesses in many of the markets the Company serves, which has forced its customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. State and local governments
began to ease these restrictions in mid-May however, restrictions in certain of key markets were not eased until early June. As of June 26, 2020, the majority of state and local governments with jurisdiction over markets in which the Company operates allow the Company’s customers to operate outdoor dining service and in certain markets, indoor dining service while adhering to specified social distancing and capacity restrictions. The duration and extent of restrictions imposed on the Company’s customers by federal, state and local governments is dependent on future developments regarding the pandemic including new information about the severity of the disease, trends
in infection rates, and development of effective medical treatments for the disease, among others. Due to COVID-19, the Company incurred estimated non-cash charges of approximately $i15,800 related to incremental bad debt expense and approximately $i8,800
related to incremental inventory obsolescence during the twenty-six weeks ended June 26, 2020. The adverse impact to the Company’s customer base and its market capitalization were triggering events and, accordingly, the Company performed interim goodwill and long-lived asset quantitative impairment tests during the first quarter of 2020 as described in Note 8 to these financial statements.
Consolidation
iThe
consolidated financial statements include all the accounts of the Company and its direct and indirect wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Unaudited Interim Financial Statements
i
The accompanying unaudited consolidated financial statements and the related
interim information contained within the notes to such unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules of the Securities and Exchange Commission (“SEC”) for interim information and quarterly reports on Form 10-Q. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 27, 2019 filed as part of the Company’s Annual Report on
Form 10-K, as filed with the SEC on February 24, 2020.
The unaudited consolidated financial statements appearing in this Form 10-Q have been prepared on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 24, 2020, and in the opinion of management, include all normal recurring adjustments that are necessary for the fair statement of the Company’s interim period results. The year-end consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by GAAP. Due to seasonal fluctuations,
COVID-19 and other factors, the results of operations for the thirteen and twenty-six weeks ended June 26, 2020 are not necessarily indicative of the results to be expected for the full year.
8
iThe preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from management’s estimates.
i
Guidance Adopted in Fiscal 2020
Measurement of Credit Losses on Financial Instruments: In June 2016 and as further amended in November 2018, the Financial Accounting Standards Board (the “FASB”) issued guidance which requires entities to use a
forward-looking expected loss model to estimate credit losses. It also requires additional disclosure related to credit quality of trade and other receivables, including information related to management’s estimate of credit allowances. The Company adopted this guidance on December 28, 2019. The Company analyzes customer creditworthiness, accounts receivable balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of its allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are either conducted using cash-on-delivery terms or the account is closely monitored so that agreed-upon payments are received prior to orders being released.
A failure to pay results in held or cancelled orders. The Company also estimates receivables that will ultimately be uncollectible based upon historical write-off experience. Management incorporates current macro-economic factors in existence as of the balance sheet date that may impact the food-away-from-home industry and/or its customers, and specifically, beginning in the first quarter of fiscal 2020, the impact of COVID-19. Adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Leases: In April 2020, the FASB issued guidance describing appropriate approaches entities should follow when accounting for lease concessions negotiated due to the effects of COVID-19.
The Company has negotiated rent deferrals with certain lessors that do not materially modify the amount of consideration due under the original contract terms. Consistent with the guidance, the Company elected to recognize such rent deferrals as accrued expenses. The Company will continue to recognize expense during the deferral period.
Guidance Not Yet Adopted
Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued guidance that eliminates certain exceptions
related to the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period and other simplifications and clarifications. The guidance will be effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company expects to adopt this guidance when effective and is evaluating the impact of adoption on its consolidated financial statements.
Note 2 – iRevenue
Recognition
iRevenues from product sales are recognized at the point at which control of each product is transferred to the customer. The Company’s contracts contain performance obligations which are satisfied when customers have physical possession of each product. The majority of customer orders
are fulfilled within a day and customer payment terms are typically i20 to i60 days from delivery. Shipping and handling activities are costs to fulfill the
Company’s performance obligations. These costs are expensed as incurred and presented within operating expenses on the consolidated statements of operations. The Company offers certain sales incentives to customers in the form of rebates or discounts. These sales incentives are accounted as variable consideration. The Company estimates these amounts based on the expected amount to be provided to customers and records a corresponding reduction in revenue. The Company does not expect a significant reversal in the amount of cumulative revenue recognized. Sales tax billed to customers is not included in revenue but rather recorded as a liability owed to the respective
taxing authorities at the time the sale is recognized./
9
i
The
following table presents the Company’s net sales disaggregated by principal product category:
The
Company determines its product category classification based on how the Company currently markets its products to its customers. The Company’s definition of its principal product categories may differ from the way in which other companies present similar information.
Deferred Revenue
Certain customer arrangements in the Company’s direct-to-consumer business, prepaid gift plans and gift card purchases, result in deferred revenues when cash payments are received in advance of performance. The Company
recognizes revenue on its prepaid gift plans when control of each product is transferred to the customer. Performance obligations under the Company’s prepaid gift plans are satisfied within a period of twelve months or less. Gift cards issued by the Company do not have expiration dates. The Company records a liability for unredeemed gift cards at the time gift cards are sold and the liability is relieved when the card is redeemed, the value of the card is escheated to the appropriate government agency, or through breakage. Gift card breakage is estimated based on the Company’s historical redemption experience and expected trends
in redemption patterns. Amounts recognized through breakage represent the portion of the gift card liability that is not subject to unclaimed property laws and for which the likelihood of redemption is remote. The Company recorded deferred revenues, reflected as accrued liabilities on the Company’s consolidated balance sheets, of $i1,276
and $i1,345 as of June 26, 2020 and December 27, 2019, respectively.
Right of Return
The Company’s standard terms and conditions provide customers with a right of return if the goods received are not merchantable. Customers are either issued a
replacement order at no cost, or are issued a credit for the returned goods. The Company recorded a refund liability of $i145 and $i314
as of June 26, 2020 and December 27, 2019, respectively. Refund liabilities are reflected as accrued liabilities on the consolidated balance sheets. The Company recognized a corresponding asset of $i90 and $i194
as of June 26, 2020 and December 27, 2019, respectively, for its right to recover products from customers on settling its refund liabilities. This asset is reflected as inventories, net on the consolidated balance sheets.
iSales
commissions are expensed when incurred because the amortization period is ione year or less. These costs are presented within operating expenses on the Company’s consolidated statements of operations./
10
Note
3 – iNet (Loss) Income per Share
i
The following table sets forth the computation of basic and diluted net (loss) income per common share:
Dilutive
effect of stock options and unvested common shares
i—
i321,118
i—
i352,476
Weighted
average diluted common shares outstanding
i35,759,193
i29,848,285
i32,672,876
i29,844,614
/
i
Potentially
dilutive securities that have been excluded from the calculation of diluted net (loss) income per common share because the effect is anti-dilutive are as follows:
The Company’s contingent earn-out liabilities are measured at fair value. These liabilities were estimated using Level 3 inputs. Long-term earn-out liabilities were $i5,192 and $i7,957 as
of June 26, 2020 and December 27, 2019, respectively, and are reflected as other liabilities and deferred credits on the consolidated balance sheets. The remaining short-term earn-out liabilities are reflected as accrued liabilities on the consolidated balance sheets. The fair value of contingent consideration was determined based on a probability-based approach which includes projected results, percentage probability of occurrence and the application of a discount rate to present value the payments. A significant change in projected results, discount rate, or probabilities of occurrence could result in a significantly higher or lower fair value measurement. Changes in the fair value of contingent earn-out liabilities are reflected in operating expenses on
the consolidated statements of operations.
11
i
The following table presents the changes in Level 3 contingent
earn-out liabilities:
iThe following table presents the carrying value and fair value of the Company’s convertible notes. In estimating the fair value of the convertible notes, the Company utilized Level 3 inputs including prevailing market interest rates to estimate the debt portion of the instrument and a Black Scholes
valuation model to estimate the fair value of the conversion option. The Black Scholes model utilizes the market price of the Company’s common stock, estimates of the stock’s volatility and the prevailing risk-free interest rate in calculating the fair value estimate.
On January 27, 2020, pursuant to an asset purchase agreement, the Company acquired substantially all of the assets, including certain real-estate assets, of Sid Wainer & Son (“Sid Wainer”), a specialty food and produce distributor in New England. The final
purchase price was approximately $i44,081, consisting of $i46,450 paid in cash at closing, partially offset
by $i2,369 net working capital true-up receivable. The Company will also pay additional contingent consideration, if earned, in the form of an earn-out amount which could total $i4,000 over
a two-year period. The payment of the earn-out liability is subject to the successful achievement of certain gross profit targets. The Company estimated the fair value of this contingent earn-out liability to be $i2,081 and $i490 as
of January 27, 2020 and June 26, 2020, respectively.
The Company is in the process of finalizing a valuation of the earn-out liability, and tangible and intangible assets of Sid Wainer as of the acquisition date. When applicable, these valuations require the use of Level 3 inputs. Goodwill for the Sid Wainer acquisition will be amortized over 15 years for tax purposes. The goodwill recorded primarily reflects the value of acquiring an established specialty food and produce distributor to leverage the Company’s existing products in the markets served by Sid Wainer, to supply Sid Wainer’s produce offerings to our metro New York market and
any intangible assets that do not qualify for separate recognition. The Company reflected net sales of $i12,869 and $i38,620
for the thirteen weeks and twenty-six weeks ended June 26, 2020, respectively, and an operating loss of $i4,044 and $i5,149
for the thirteen weeks and twenty-six weeks ended June 26, 2020, respectively, in its consolidated statement of operations.
iThe table below presents unaudited pro forma consolidated income statement information of the Company as if the Sid Wainer acquisition had occurred on December 29, 2018. The pro
forma results were prepared from financial information obtained from the sellers of the business, as well as information obtained during the due diligence process associated with the acquisition. The pro forma information is not necessarily indicative of the Company’s results of operations had the acquisition been completed on the above date, nor is it necessarily indicative of the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisition, any incremental costs for Sid Wainer transitioning to become a public company, and also does not reflect additional revenue opportunities following the acquisition. The pro forma information reflects amortization and depreciation of the Sid Wainer acquisition
at their respective fair values.
Additionally,
during the quarter ended March 27, 2020, the Company paid approximately $i16,356 for a specialty center-of-the plate distributor in New England.
i
The
table below sets forth the purchase price allocation of these acquisitions:
Sid Wainer
Other Acquisitions
Current assets
$
i22,960
$
i6,172
Customer
relationships
i—
i6,200
Trademarks
i3,500
i700
Goodwill
i11,571
i5,291
Fixed
assets
i19,425
i308
Right-of-use
assets
i8,259
i1,019
Lease
liabilities
(i8,259)
(i1,019)
Current
liabilities
(i11,294)
(i932)
Earn-out
liability
(i2,081)
(i1,383)
Total
consideration
$
i44,081
$
i16,356
/
The
Company recognized professional fees of $i435 in operating expenses related to the acquisitions in the first quarter of fiscal 2020.
Note 6 – iInventories
Inventories
consist primarily of finished product and are reflected net of adjustments for shrinkage, excess and obsolescence totaling $i7,541 and $i1,937 at June 26,
2020 and December 27, 2019, respectively. The Company incurred estimated inventory charges of approximately $i8,800 related to inventory obsolescence due to COVID-19 during fiscal 2020.
Note 7 – iEquipment,
Leasehold Improvements and Software
The
net book value of equipment financed under finance leases at June 26, 2020 and December 27, 2019 was $i15,934 and $i3,905,
respectively.
Note 8 – iGoodwill and Other Intangible Assets
COVID-19 has had a material impact on the Company’s customers. In an effort to limit the spread of the virus, federal, state and local governments have implemented
measures that have resulted in the closure of non-essential businesses in many of the markets the Company serves, which has forced its customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. Beginning in mid-March these actions led to a significant decrease in demand for the Company’s products. The adverse impact to the Company’s customer base and its market capitalization were triggering events during the first quarter of fiscal 2020 and accordingly, the Company performed interim goodwill and long-lived asset quantitative impairment tests as
of March 27, 2020.
Goodwill Impairment Test
The Company estimated the fair value of its reporting units using an income approach that incorporates the use of a discounted cash flow model that involves many management assumptions that are based upon future growth projections which include estimates of COVID-19’s impact on our business. Assumptions include estimates of future revenues, growth rates which take into account estimated inflation rates, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses. On the basis of these assumptions, the
Company determined that the fair values of its reporting units exceeded the net carry values of their assets and liabilities by approximately $i400,000, $i19,000
and $i14,000 for the East Coast, Midwest and West Coast reporting units, respectively. As such, goodwill was not impaired as of March 27, 2020. Management determined that there were no triggering events during the second quarter of fiscal 2020 that would require additional goodwill impairment testing.
Long-lived Impairment Test
Long-lived
assets, including other intangible assets, were tested for recoverability at the asset group level. The Company estimated the net undiscounted cash flows expected to be generated from the asset group over the expected useful of the asset group’s primary asset. Key assumptions include future revenues, growth rates, estimates of future levels of gross profit and operating profit and projected capital expenditures necessary to maintain the operating capacity of each asset group. On the basis of these assumptions, the Company determined that the undiscounted cash flows for each of the Company’s asset groups exceeded their respective carry values and therefore long-lived assets were not impaired as of March
27, 2020. Management determined that there were no triggering events during the second quarter of fiscal 2020 that would require additional testing.
Although the Company’s interim goodwill and long-lived asset impairment tests indicated no impairment existed, the impacts of COVID-19 on our business are uncertain and will depend on future developments, and as such, it is possible that another triggering event could occur that under certain circumstances could cause us to recognize an impairment charge in the future.
i
The
changes in the carrying amount of goodwill are presented as follows:
Other
intangible assets consist of customer relationships being amortized over a period ranging from four to itwenty years, trademarks being amortized over a period of one to iforty years, and non-compete
agreements being amortized over a period of two to isix years.
The
Company occasionally makes small, tuck-in acquisitions that are immaterial, both individually and in the aggregate. Therefore, increases in goodwill and gross intangible assets per the above tables may not agree to the increases of these assets as shown for specific acquisitions in Note 5 “Acquisitions.”
Amortization expense for other intangibles was $i3,422 and $i3,307
for the thirteen weeks ended June 26, 2020 and June 28, 2019, respectively, and $i6,720 and $i6,184
for the twenty-six weeks ended June 26, 2020 and June 28, 2019, respectively.
i
Estimated amortization expense for other intangible assets for the remainder of the fiscal year ending December 25, 2020 and each of the next four fiscal years and thereafter is as follows:
Total
debt obligations excluding current installments
$
i397,818
$
i386,106
/
On
June 8, 2020, the Company entered into a sixth amendment (the “Sixth Amendment”) to its senior secured term loan credit agreement (the “Credit Agreement”). Upon the consent of the lenders, the Sixth Amendment converted a portion of the term loans then outstanding of $i238,129 (the “Term Loans”) into a new tranche of term loans (the “2025 Tranche”) which among other things extended the maturity date by ithree
years and increased the fixed-rate portion of interest charged by i200 basis
15
points. The portion of the Term Loans that did not convert (the “2022 Tranche”) retained the maturity date and interest rate in effect prior to the Sixth Amendment.The Company made a prepayment
of $i35,719 on the 2025 Tranche immediately after it was established.
i
The
following table summarizes the key terms of the Term Loans:
The 2025 Tranche has a springing maturity date of June 22, 2024 if, as of that date, the
Company’s i1.875% convertible senior notes maturing on December 1, 2024 have not been repaid or refinanced by debt having a maturity date on or after December 23, 2025. The Sixth Amendment was accounted for as a debt modification. The Company incurred lender fees of $i856
which were capitalized as debt issuance costs. Third-party transaction costs of $i1,233 were expensed as incurred.
The Sixth Amendment introduced a minimum liquidity covenant which requires the Company to maintain at least $i35,000
of liquidity as of the last day of any fiscal quarter where EBITDA, as defined in the Credit Agreement, is less than $i10,000. The Company had minimum liquidity, as defined in the Credit Agreement, of $i249,068
as of June 26, 2020.
As of June 26, 2020, the Company was in compliance with all debt covenants and the Company had reserved $i16,641 of the asset-based loan facility (“ABL Facility”) for the issuance
of letters of credit. As of June 26, 2020, funds totaling $i31,828 were available for borrowing under the ABL Facility. At June 26, 2020, the weighted average interest rate charged on the Company’s senior secured term loan was approximately i5.7%
and the interest rate charged on the Company’s ABL Facility was approximately i1.4%.
Note 10 – iStockholders’
Equity
Preferred Stock Purchase Rights
On March 22, 2020, the Company’s board of directors approved a limited duration Preferred Stock Purchase Rights Agreement (the “Rights Agreement”). Under the Rights Agreement, the board of directors approved a dividend of one preferred share purchase right (a “Right”) for each share outstanding share of the
Company’s common stock to purchase one one-thousandth of a share of Series A Preferred Stock of the Company at a price of $i40.00 per Unit of Preferred Stock, subject to adjustment as provided in the Rights Agreement. The Rights will expire on March 21, 2021, unless the Rights are earlier redeemed or exchanged
by the Company or upon the occurrence of certain transactions.
Public Common Stock Offering
On May 14, 2020, the Company completed a public offering of i5,769,231 shares
of its common stock at a price of $i13.00 per share to the underwriters, to be reoffered by the underwriters at variable prices per share, which resulted in net proceeds of approximately $i74,691
after deducting underwriters’ fees, commissions and transaction expenses. In addition, the Company granted a 30-day option to purchase up to an additional i865,384 shares of its common stock at a price of $i13.00
per share to the underwriters, to be reoffered by the underwriters at variable prices per share. The option was fully exercised on June 2, 2020 and resulted in additional proceeds of $i11,250.
Equity Awards
i
The
following table reflects the activity of RSAs during the twenty-six weeks ended June 26, 2020:
The
Company granted i998,671 RSAs to its employees and directors at a weighted average grant date fair value of $i17.54
during the twenty-six weeks ended June 26, 2020. These awards are a mix of time-, market- and performance-based grants that generally vest over a range of periods up to four years. The Company recognized expense totaling $i1,999 and $i1,088
on its RSAs during the thirteen weeks ended June 26, 2020 and June 28, 2019, respectively, and $i2,850 and $i1,889
during the twenty-six weeks ended June 26, 2020 and June 28, 2019, respectively.
At June 26, 2020, the total unrecognized compensation cost for unvested RSAs was $i16,573
and the weighted-average remaining period was approximately i2.5 years. Of this total, $i12,966
related to RSAs with time-based vesting provisions and $i3,607 related to RSAs with performance-based vesting provisions. At June 26, 2020, the weighted-average remaining period for time-based vesting and performance-based vesting RSAs were approximately i2.6
years and i2.3 years, respectively.
The Company’s stock options fully vested during the first quarter of fiscal 2019. The Company recognized
expense of izero and $i114 on stock options during the thirteen weeks and twenty-six weeks ended June 28,
2019, respectively. iNo share-based compensation expense related to the Company’s RSAs or stock options has been capitalized. As of June 26, 2020, there were i1,238,118
shares available for grant under the 2019 Omnibus Equity Incentive Plan.
Note 11 – iIncome Taxes
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. The legislation provides temporary changes
to the extent to which companies can carryback net operating losses, changes to interest expense deduction limitations and other tax relief provisions.
The Company’s effective income tax rate was i35.5% and i27.5%
for the twenty-six weeks ended June 26, 2020 and June 28, 2019, respectively. The higher effective tax rate in the current fiscal year is primarily related to the Company’s current net loss forecast for fiscal 2020 which, under the CARES Act, allows the Company to claim Federal tax refunds against taxes paid in fiscal 2015 and 2017, both of which were at statutory tax rates of 35%. The Company’s income tax provision reflects the impact of an expected income tax refund receivable of $i13,054
as of June 26, 2020 which is reflected in prepaid expenses and other current assets on the Company’s consolidated balance sheet.
Note 12 – iRelated Parties
The Chefs’ Warehouse
Mid-Atlantic, LLC, a subsidiary of the Company, leases a distribution facility that is i100% owned by entities controlled by Christopher Pappas, the Company’s chairman, president and chief executive officer, and John Pappas, the Company’s
vice chairman and one of its directors, and are deemed to be affiliates of these individuals. Expense related to this facility totaled $i123 and $i109 during
the thirteen weeks ended June 26, 2020 and June 28, 2019, respectively, and $i241 and $i217
during the twenty-six weeks ended June 26, 2020 and June 28, 2019, respectively. This lease was amended during the first quarter of fiscal 2020 and expires on September 30, 2023.
Note 13 – iSupplemental Disclosures of Cash Flow Information
Cash
paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
i13,476
$
i12,174
Operating
cash flows from finance leases
$
i264
$
i40
ROU
assets obtained in exchange for lease liabilities:
Operating leases
$
i5,744
$
i146,726
Finance
leases
$
i13,980
$
i1,728
Other
non-cash investing and financing activities:
Net working capital adjustment receivable
$
i3,013
$
i—
Convertible
notes issued for acquisitions
$
i—
$
i4,000
Contingent
earn-out liabilities for acquisitions
$
i3,464
$
i2,800
/
17
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The following discussion should be read in conjunction with information included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 24, 2020. Unless otherwise indicated, the terms “Company”, “Chefs’ Warehouse”, “we”, “us” and “our” refer to The Chefs’ Warehouse, Inc. and its subsidiaries.
Business
Overview
We are a premier distributor of specialty foods in nine of the leading culinary markets in the United States. We offer more than 55,000 stock-keeping units (“SKUs”), ranging from high-quality specialty foods and ingredients to basic ingredients and staples and center-of-the-plate proteins. We serve more than 34,000 customer locations, primarily located in our sixteen geographic markets across the United States and Canada, and the majority of our customers are independent restaurants and fine dining establishments. As a result of our acquisition of Allen Brothers, Inc. (“Allen Brothers”) and our “Shop Like a Chef” online platform, we also sell certain of our products directly to consumers.
Effect of the COVID-19 Pandemic on our Business and Operations
The
COVID-19 pandemic (“COVID-19”) has had a material impact on our business and operations and those of our customers. In an effort to limit the spread of the virus, federal, state and local governments began implementing various restrictions beginning in late March that resulted in the closure of non-essential businesses in many of the markets we serve, which forced our customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. State and local governments began to ease these restrictions in mid-May however, restrictions in certain of our key markets were not eased until early June. As of June 26, 2020, the majority of state and local governments with jurisdiction over markets in which the Company operates allow the
Company’s customers to operate outdoor dining service and in certain markets, indoor dining service while adhering to specified social distancing and capacity restrictions. The duration and extent of restrictions imposed on our customers by federal, state and local governments is dependent on future developments regarding the pandemic including new information about the severity of the disease, trends in infection rates, and development of effective medical treatments for the disease, among others.
The state and local government restrictions on our customers were at their zenith during the quarter ended June 26, 2020 which has resulted in a $237.6 million decline in organic sales compared to the prior year quarter. Due to COVID-19, we incurred estimated non-cash charges of $15.8 million related to incremental bad debt expense and approximately $8.8 million
related to estimated inventory obsolescence during the twenty-six weeks ended June 26, 2020.
Our management team is responding rapidly to the changing landscape and pursuing alternate sources of revenue to mitigate the extent of sales declines in our core customer base. Our sales force is working closely with our core customers and developing solutions to help them fulfill the demand in their communities whilst complying with health and safety restrictions. We are actively entering into new business relationships with retail food outlets as they experience a sharp increase in demand. As we develop these new sales channels, we are negotiating favorable credit terms given the nature of the underlying customer base and the current market environment. In addition, our purchasing teams have worked diligently to shift our product purchases to SKUs that are in high
demand. Thus far, we have not experienced difficulties in procuring products from our suppliers.
In response to the pandemic, we expanded our direct-to-consumer product offerings by launching our “Shop Like a Chef” online home delivery platform in several of the markets we serve. We now offer products directly to consumers through our Allen Brothers and “Shop Like a Chef” online platforms.
We have implemented cost control measures during this time of demand volatility. Our variable cost structure naturally decreases as our sales decrease, however, we are also reducing our fixed cost structure. Among other actions, we have postponed planned capital expenditures, returned certain equipment on short-term rental agreements, and reduced compensation expense through salary reductions, furloughs and lay-offs as we right-size our organization
to current levels of demand.
Management determined COVID-19’s adverse impact on our operations and our market capitalization were triggering events that required us to test goodwill and long-lived assets for impairment as of March 27, 2020. No impairments were recorded as a result of these tests. Although there were no additional triggering events during the second quarter of 2020, the impacts of
18
COVID-19 on our business are uncertain and will depend on future developments, and as such, it is possible that another triggering event could occur that under certain circumstances could cause us to recognize an impairment charge in the future.
On
March 18, 2020, we drew $100.0 million on our asset-based loan facility to increase our cash on hand during the early stages of the pandemic’s impact to our business and have subsequently repaid $60.0 million of the draw.
On May 14 and June 2, 2020, we completed public offerings for a total of 6,634,615 shares of our common stock which resulted in net proceeds of approximately $85.9 million. See Note 10 “Stockholders’ Equity” to our consolidated financial statements for a full description.
On June 8, 2020, we amended our senior secured credit agreement which converted $207.0 million of the term loans then outstanding into a new tranche of term loans (the “2025 Tranche”), which, among
other things, extended the maturity date by three years and increased the fixed-rate portion of interest charged by 200 basis points. The Company made a prepayment of $35.7 million on the 2025 Tranche immediately after it was established. See Note 9 “Debt Obligations” to our consolidated financial statements for a full description.
We closed the quarter with total cash and cash equivalents of $201.8 million, and approximately $31.8 million of remaining availability under our asset-based loan facility as of June 26, 2020.
The future impact of COVID-19 on our business, operations and liquidity is difficult to predict at this time and is highly dependent upon decisions made by federal, state and local governments
and future consumer spending behavior.
Recent Acquisitions
On February 3, 2020, the Company entered into an asset purchase agreement to acquire substantially all of the assets of Cambridge Packing Co, Inc., a specialty center-of-the-plate producer and distributor in New England. The cash purchase price was approximately $16.4 million, inclusive of a $0.6 million working capital true-up receivable. The Company is required to pay additional contingent consideration, if earned, of up to $3.0 million
over a two-year period upon successful attainment of certain gross profit targets.
On January 27, 2020, the Company entered into an asset purchase agreement to acquire substantially all of the assets, including certain real-estate assets, of Sid Wainer & Son, a specialty food and produce distributor in New England. The cash purchase price was approximately $44.1 million, inclusive of a $2.4 million working capital true-up receivable. The Company is required to pay additional contingent consideration, if earned, of up to $4.0 million over a two-year period upon successful attainment of certain gross profit targets.
Management
evaluates the results of operations and cash flows using a variety of key performance indicators, including net sales compared to prior periods and internal forecasts, costs of our products and results of our cost-control initiatives, and use of operating cash. These indicators are discussed throughout the “Results of Operations” and “Liquidity and Capital Resources” sections of this MD&A.
Sales
growth from acquisitions contributed $26.7 million, or 6.5%, to sales growth. Organic sales declined $237.6 million, or 57.8%, versus the prior year period primarily due to impacts of COVID-19. Organic case count declined approximately 68.3% in our specialty category. In addition, specialty unique customers and placements declined 56.3% and 69.1%, respectively, compared to the prior year period. Pounds sold in our center-of-the-plate category decreased 51.3% compared to the prior year. Estimated inflation was 0.2% in our specialty category and was 6.7% in our center-of-the-plate category compared to the prior year period.
Gross Profit
2020
2019
$
Change
% Change
Gross profit
47,439
106,475
(59,036)
(55.4)
%
Gross profit margin
23.7
%
25.9
%
Gross
profit margin decreased approximately 222 basis points. Gross profit margins decreased 641 basis points in the Company’s specialty category and increased 212 basis points in the Company’s center-of-the-plate category compared to the prior year period. Our gross profit results include a charge of approximately $5.5 million related to estimated inventory losses from obsolescence due to the expected extended impact of COVID-19 on certain markets and customer openings.
Operating Expenses
2020
2019
$
Change
% Change
Operating expenses
72,847
90,939
(18,092)
(19.9)
%
Percentage of net sales
36.3
%
22.1
%
The
decrease in operating expenses was primarily due to lower costs associated with compensation and benefits and lower distribution related costs in the quarter. Our ratio of operating expenses to net sales was higher as a result of adverse COVID-19 impacts to our sales growth.
Interest and Other Expense
2020
2019
$
Change
% Change
Interest and other expense
5,773
4,851
922
19.0
%
Interest
and other expense increased primarily due to $1.2 million in one-time third-party costs incurred during the second quarter of 2020 in connection with the extension of a majority of our senior secured term loans and the interest charged on our Convertible Senior Notes issued on November 22, 2019, partially offset by lower effective interest rates charged on our outstanding debt.
Provision for Income Taxes
2020
2019
$
Change
% Change
Provision for income taxes
(10,847)
2,939
(13,786)
(469.1)
%
Effective tax rate
34.8
%
27.5
%
The higher
effective tax rate is primarily related to our current net loss forecast for fiscal 2020 which allows us to claim tax refunds against taxes paid in fiscal 2015 and 2017, both of which were at statutory tax rates of 35%.
Sales growth from acquisitions contributed $68.6 million, or 8.9%, to sales growth. Organic sales declined $261.1 million,
or 34.0%, versus the prior year period primarily due to impacts of COVID-19. Organic case count declined approximately 38.5% in our specialty category. In addition, specialty unique customers and placements declined 30.0% and 40.8%, respectively, compared to the prior year period. Pounds sold in our center-of-the-plate category decreased 32.4% compared to the prior year. Estimated deflation was 0.9% in our specialty category and inflation was 5.1% in our center-of-the-plate category compared to the prior year period.
Gross Profit
2020
2019
$
Change
% Change
Gross profit
138,340
196,664
(58,324)
(29.7)
%
Gross profit margin
24.0
%
25.6
%
Gross
profit margin decreased approximately 157 basis points. Gross profit margins decreased 425 basis points in the Company’s specialty category and increased 172 basis points in the Company’s center-of-the-plate category compared to the prior year period. Our gross profit results include a charge of approximately $8.8 million related to estimated inventory losses from obsolescence due to impacts of COVID-19.
Operating Expenses
2020
2019
$
Change
% Change
Operating expenses
180,764
174,978
5,786
3.3
%
Percentage of net sales
31.4
%
22.8
%
The
increase in operating expenses relates primarily to our recent acquisitions and an estimated non-cash charge of approximately $15.8 million related to incremental bad debt expense as a result COVID-19, partially offset by a decrease in non-cash charges due to changes in the fair value of our contingent earn-out liabilities and a reduction in variable costs due to the impacts of COVID-19 on our business. Total operating expenses for the twenty-six weeks ended June 26, 2020 includes a $6.6 million credit due to a reduction in the fair value of our contingent earn-out liabilities compared to a charge of $2.8 million for the twenty-six weeks ended June 28, 2019. Our ratio of operating expenses to net sales was higher as a result of adverse COVID-19 impacts to our sales growth and a 314 basis point increase in non-cash charges related to bad debt expense, partially offset by
a 152 basis point decrease in non-cash charges related to changes in the fair value of our contingent earn-out liabilities.
Interest and Other Expense
2020
2019
$
Change
% Change
Interest and other expense
10,939
9,436
1,503
15.9
%
Interest
and other expense increased primarily due to $1.2 million in one-time third-party costs incurred during the second quarter of 2020 in connection with the extension of a majority of our senior secured term loans and the interest charged on our Convertible Senior Notes issued on November 22, 2019, partially offset by lower effective interest rates charged on our outstanding debt.
Provision for Income Taxes
2020
2019
$
Change
% Change
Provision for income taxes
(18,944)
3,370
(22,314)
(662.1)
%
Effective tax rate
35.5
%
27.5
%
21
The higher
effective tax rate is primarily related to our current net loss forecast for fiscal 2020 which allows us to claim tax refunds against taxes paid in fiscal 2015 and 2017, both of which were at statutory tax rates of 35%.
LIQUIDITY AND CAPITAL RESOURCES
We finance our day-to-day operations and growth primarily with cash flows from operations, borrowings under our senior secured credit facilities and other indebtedness, operating leases, trade payables and equity financing.
Indebtedness
The following table presents selected financial information on our indebtedness (in thousands):
Borrowings
outstanding on asset-based loan facility
$
40,000
$
—
Finance leases and other financing obligations
$
16,092
$
3,905
As of June 26,
2020, we have various floating- and fixed-rate debt instruments with varying maturities for an aggregate principal amount of $396.4 million.
Liquidity
The following table presents selected financial information on liquidity (in thousands):
Working capital,excluding cash and cash equivalents
$
107,794
$
162,772
Availability
under asset-based loan facility
$
31,828
$
133,359
We anticipate capital expenditures, excluding cash paid for acquisitions, for fiscal 2020 will be in the range of $10.0 million to $12.0 million which is down from our original estimate of $38.0 million to $42.0 million. The decrease is a result of us postponing certain investments due to COVID-19. We believe our existing balances of cash and cash equivalents, working capital and the availability under our asset-based loan facility, are sufficient to satisfy our working capital needs, capital expenditures,
debt service and other liquidity requirements associated with our current operations over the next 12 months.
Cash Flows
The following table presents selected financial information on cash flows (in thousands):
Net cash provided by operations was $47.6 million for the twenty-six weeks ended June 26, 2020 consisting of a net loss of $34.4 million offset by $28.4 million of non-cash charges and cash generated from working capital of $53.6 million. The increase in non-cash charges of $5.9 million is primarily driven by an increase in non-cash bad debt expense due to COVID-19, partially offset by a $6.6 million credit due to the reduction in the fair
value of our contingent earn-out liabilities in the second quarter of 2020. The cash generated from working capital increase of $63.1 million is primarily driven by the impacts of reduced demand due to COVID-19.
22
Net cash used in investing activities was $67.9 million for the twenty-six weeks ended June 26, 2020, driven by $63.5 million in cash used to fund acquisitions and $4.4 million in capital expenditures which included implementations of our Enterprise Resource Planning system.
Net cash provided by financing activities was $82.0 million for the twenty-six weeks ended June 26, 2020, driven by $85.9 million net proceeds
from our common stock offering and $40.0 million of net draws on our asset-based loan facility, partially offset by payments of debt and finance lease obligations of $37.4 million.
Seasonality
Excluding our direct-to-consumer business, we generally do not experience any material seasonality. However, our sales and operating results may vary from quarter to quarter due to factors such as changes in our operating expenses, management’s ability to execute our operating and growth strategies, personnel changes, demand for our products, supply shortages, weather patterns and general economic conditions.
Our direct-to-consumer business is subject to seasonal fluctuations, with direct-to-consumer center-of-the-plate protein sales typically higher during the holiday season in our fourth quarter;
accordingly, a disproportionate amount of operating cash flows from this portion of our business is generated by our direct-to-consumer business in the fourth quarter of our fiscal year. Despite a significant portion of these sales occurring in the fourth quarter, there are operating expenses, principally advertising and promotional expenses, throughout the year.
Inflation
Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our customers. The impact of inflation and deflation on food, labor, energy and occupancy costs can significantly
affect the profitability of our operations.
Off-Balance Sheet Arrangements
As of June 26, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies and Estimates
The preparation of the Company’s consolidated financial statements requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal
of the Company’s financial condition and results and require its most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the following: (i) determining our allowance for doubtful accounts, (ii) inventory valuation, with regard to determining inventory balance adjustments for excess and obsolete inventory, (iii) business combinations, (iv) valuing goodwill and intangible assets, (v) vendor rebates and other promotional incentives, (vi) self-insurance reserves, (vii) accounting for income taxes and (viii) contingent earn-out liabilities. Our critical accounting policies and estimates are described in the Form 10-K filed with the SEC on February 24, 2020. Pursuant to our adoption of Accounting Standards Update 2016-13 Financial Instruments
- Credit Losses: Measurement of Credit Losses on Financial Instruments on December 28, 2019, our accounting policy for determining our allowance for doubtful accounts has been changed as follows:
Allowance for Doubtful Accounts
We analyze customer creditworthiness, accounts receivable balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of our allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are either conducted using cash-on-delivery terms or the account is closely monitored so that agreed-upon payments are received prior to orders being released. A failure to pay results in held or cancelled orders. We also estimate receivables that will
ultimately be uncollectible based upon historical write-off experience. Management incorporates current macro-economic factors in existence as of the balance sheet date that may impact the food-away-from-home industry and/or its customers, and specifically, beginning in the first quarter of fiscal 2020, the impact of the COVID-19 pandemic. We may be required to increase or decrease our allowance for doubtful accounts due to various factors, including the overall economic environment and particular circumstances of individual customers.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
As of June 26, 2020, we had an aggregate $242.4 million of indebtedness outstanding under the Term Loan and ABL Facility that bore interest at variable rates. A 100 basis point increase in market interest rates would decrease our after tax earnings by approximately $1.6 million per annum, holding other variables constant.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation
of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 26, 2020.
Changes in Internal Control over Financial Reporting
There were no changes
in our internal control over financial reporting during the quarter ended June 26, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in legal proceedings, claims and litigation arising out of the
ordinary conduct of our business. Although we cannot assure the outcome, management presently believes that the result of such legal proceedings, either individually or in the aggregate, will not have a material adverse effect on our consolidated financial statements, and no material amounts have been accrued in our consolidated financial statements with respect to these matters.
ITEM 1A. RISK FACTORS
Except as stated below, there have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. included in our Annual Report on Form 10-K for the year ended December 27, 2019 filed with the SEC on February 24,
2020. In addition to the information contained herein, you should consider the risk factors disclosed in our Annual Report on Form 10-K.
Significant public health epidemics or pandemics, including COVID-19, may adversely affect our business, results of operations and financial condition.
A public health epidemic or pandemic can significantly impact our business or those of our core customers or suppliers, particularly if located in geographies in which we have significant operations. Such events could significantly impact the food-away-from-home industry and other industries that are sensitive to changes in consumer discretionary spending habits. In addition, our operations could be disrupted if we were required to quarantine employees that work at our various distribution centers and processing facilities.
For
instance, the recent outbreak of COVID-19 and its development into a pandemic is resulting in governmental authorities in many locations where we operate, and in which our customers are present and suppliers operate, to impose mandatory closures, seek voluntary closures and impose restrictions on, or advisories with respect to, travel, business operations and public gatherings or interactions. Among other matters, these actions have required or strongly urged various venues where foodservice products are served, including restaurants and hotels, to reduce or discontinue operations, which has and will continue to adversely affect demand in the foodservice industry, including demand for our products and services. In addition, the perceived risk of infection and health risk associated with COVID-19, and the illness of many individuals across the globe, is resulting in many of the same effects intended by such governmental authorities to stop the spread of COVID-19. These
events have had, and could continue to have, an adverse impact on numerous aspects of our business, financial condition and results of operations including, but not limited to, our growth, product costs, supply chain disruptions, labor shortages, logistics constraints, customer demand for our products and industry demand generally, consumer spending, our liquidity, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally. The extent to which the COVID-19 pandemic impacts our financial condition or results of operations is uncertain and will depend on future developments including new information that may emerge on the severity of the disease, the extent of the outbreak, federal, state and local government responses, trends in infection rates, and development of effective medical treatments for the disease,among others.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Total Number
of Shares
Repurchased(1)
Average Price Paid
Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs
(1)During
the thirteen weeks ended June 26, 2020, we withheld 1,846 shares of our common stock to satisfy tax withholding requirements related to restricted shares of our common stock awarded to our officers and key employees resulting from either elections under 83(b) of the Internal Revenue Code of 1986, as amended, or upon vesting of such awards.
Sixth
Amendment to Credit Agreement, dated June 8, 2020, by and among Dairyland USA Corporation and Chefs’ Warehouse Parent, LLC, as borrowers, The Chefs’ Warehouse, Inc., certain other subsidiaries, as guarantors, the lenders party thereto and Jefferies Finance LLC, as administrative agent and collateral agent. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 8, 2020)
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL
Instance Document – the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover
Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on July 29, 2020.
