QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number: 001-35249
THE CHEFS’ WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
Delaware
20-3031526
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
100 East Ridge Road
Ridgefield, Connecticut06877
(Address of principal executive offices)
Registrant’s telephone number, including area code: (203) 894-1345
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01
CHEF
The 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. Yes☒ 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). Yes☒ 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.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
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 ☐ No ☒
Number of shares of common stock, par value $.01 per share, outstanding at July 31, 2023: 39,665,691
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 the Secured Overnight Financing Rate (“SOFR”); 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 the COVID-19 pandemic, 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 28, 2023 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 $23,673 in 2023 and $20,733 in 2022
301,375
260,167
Inventories, net
291,917
245,693
Prepaid expenses and other current assets
60,735
56,200
Total current assets
713,619
720,860
Property and equipment, net
205,535
185,728
Operating lease right-of-use assets
182,215
156,629
Goodwill
348,951
287,120
Intangible assets, net
195,785
155,703
Other assets
4,884
3,256
Total assets
$
1,650,989
$
1,509,296
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
198,087
$
163,397
Accrued liabilities
71,739
54,325
Short-term operating lease liabilities
23,104
19,428
Accrued compensation
28,486
34,167
Current portion of long-term debt
12,017
12,428
Total current liabilities
333,433
283,745
Long-term debt, net of current portion
709,073
653,504
Operating lease liabilities
175,142
151,406
Deferred taxes, net
7,294
6,098
Other liabilities and deferred credits
3,072
13,034
Total liabilities
1,228,014
1,107,787
Commitments and contingencies
Stockholders’ equity:
Preferred Stock - $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding at June 30, 2023 and December 30, 2022
—
—
Common Stock - $0.01 par value, 100,000,000 shares authorized, 39,665,691 and 38,599,390 shares issued and outstanding at June 30, 2023 and December 30, 2022, respectively
396
386
Additional paid-in capital
347,861
337,947
Accumulated other comprehensive loss
(1,911)
(2,185)
Retained earnings
76,629
65,361
Total stockholders’ equity
422,975
401,509
Total liabilities and stockholders’ equity
$
1,650,989
$
1,509,296
See accompanying notes to the condensed consolidated financial statements
4
THE CHEFS’ WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands, except share and per share amounts)
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
June 30, 2023
June 24, 2022
Net sales
$
881,820
$
648,104
$
1,601,465
$
1,160,207
Cost of sales
673,376
492,100
1,223,313
886,690
Gross profit
208,444
156,004
378,152
273,517
Selling, general and administrative expenses
179,042
124,487
335,179
234,573
Other operating expenses, net
4,062
3,883
5,734
5,046
Operating income
25,340
27,634
37,239
33,898
Interest expense
12,006
4,465
22,012
8,830
Income before income taxes
13,334
23,169
15,227
25,068
Provision for income tax expense
3,467
6,254
3,959
6,768
Net income
$
9,867
$
16,915
$
11,268
$
18,300
Other comprehensive income:
Foreign currency translation adjustments
193
(74)
274
51
Comprehensive income
$
10,060
$
16,841
$
11,542
$
18,351
Net income per share:
Basic
$
0.26
$
0.46
$
0.30
$
0.49
Diluted
$
0.25
$
0.42
$
0.29
$
0.47
Weighted average common shares outstanding:
Basic
37,634,127
37,100,968
37,570,595
37,018,044
Diluted
45,604,297
42,053,453
38,201,408
41,896,379
See accompanying notes to the condensed consolidated financial statements
5
THE CHEFS’ WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Amounts in thousands, except share amounts)
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Retained
Earnings
Total
Shares
Amount
Balance December 30, 2022
38,599,390
$
386
$
337,947
$
(2,185)
$
65,361
$
401,509
Net income
—
—
—
—
1,401
1,401
Stock compensation
998,777
10
4,780
—
—
4,790
Cumulative translation adjustment
—
—
—
81
—
81
Shares surrendered to pay tax withholding
(54,036)
(1)
(1,828)
—
—
(1,829)
Balance March 31, 2023
39,544,131
$
395
$
340,899
$
(2,104)
$
66,762
$
405,952
Net income
—
—
—
—
9,867
9,867
Stock compensation
53,543
—
4,704
—
—
4,704
Shares issued for acquisitions
75,008
1
2,495
—
—
2,496
Cumulative translation adjustment
—
—
—
193
—
193
Shares surrendered to pay tax withholding
(6,991)
—
(237)
—
—
(237)
Balance June 30, 2023
39,665,691
$
396
$
347,861
$
(1,911)
$
76,629
$
422,975
Balance December 24, 2021
37,887,675
$
380
$
314,242
$
(2,022)
$
37,611
$
350,211
Net income
—
—
—
—
1,385
1,385
Stock compensation
433,115
4
3,039
—
—
3,043
Warrants issued for acquisitions
—
—
1,701
—
—
1,701
Cumulative translation adjustment
—
—
—
125
—
125
Shares surrendered to pay tax withholding
(64,329)
(1)
(2,039)
—
—
(2,040)
Balance March 25, 2022
38,256,461
$
383
$
316,943
$
(1,897)
$
38,996
$
354,425
Net income
—
—
—
—
16,915
16,915
Stock compensation
16,131
—
2,939
—
—
2,939
Cumulative translation adjustment
—
—
—
(74)
—
(74)
Shares surrendered to pay tax withholding
(15,137)
—
(518)
—
—
(518)
Balance June 24, 2022
38,257,455
$
383
$
319,364
$
(1,971)
$
55,911
$
373,687
See accompanying notes to the condensed consolidated financial statements
6
THE CHEFS’ WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
Cash flows from operating activities:
Net income
$
11,268
$
18,300
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
15,682
11,755
Amortization of intangible assets
10,456
6,819
Provision for allowance for doubtful accounts
3,311
1,817
Non-cash operating lease expense
1,812
1,076
Provision for deferred income taxes
990
5,004
Amortization of deferred financing fees
1,813
1,009
Stock compensation
10,581
5,982
Change in fair value of contingent earn-out liabilities
1,092
3,628
Intangible asset impairment
1,838
—
Loss on asset disposal
22
17
Changes in assets and liabilities, net of acquisitions:
Accounts receivable
(9,854)
(24,659)
Inventories
(35,450)
(30,569)
Prepaid expenses and other current assets
(2,435)
106
Accounts payable, accrued liabilities and accrued compensation
453
19,733
Other assets and liabilities
(796)
(237)
Net cash provided by operating activities
10,783
19,781
Cash flows from investing activities:
Capital expenditures
(23,155)
(23,490)
Cash paid for acquisitions, net of cash acquired
(119,580)
(52,007)
Net cash used in investing activities
(142,735)
(75,497)
Cash flows from financing activities:
Payment of debt, finance lease and other financing obligations
(11,680)
(2,769)
Payment of deferred financing fees
—
(406)
Surrender of shares to pay withholding taxes
(2,115)
(2,558)
Cash paid for contingent earn-out liability
(3,210)
(2,000)
Borrowings under asset-based loan facility
50,000
—
Net cash provided by (used in) financing activities
32,995
(7,733)
Effect of foreign currency on cash and cash equivalents
(251)
100
Net change in cash and cash equivalents
(99,208)
(63,349)
Cash and cash equivalents-beginning of period
158,800
115,155
Cash and cash equivalents-end of period
$
59,592
$
51,806
See accompanying notes to the condensed consolidated financial statements
7
THE CHEFS’ WAREHOUSE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
Note 1 - Operations and Basis of Presentation
Description of Business and Basis of Presentation
The financial statements include the condensed consolidated accounts of The Chefs’ Warehouse, Inc. (the “Company”), and its wholly-owned subsidiaries. The 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. Fiscal 2022 contained a fourteenth week in the fourth quarter. The Company’s business consists of three operating segments: East, Midwest and West that aggregate into one 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.
Consolidation
The unaudited condensed 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
The accompanying unaudited condensed consolidated financial statements and the related interim information contained within the notes to such unaudited condensed 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 condensed 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 30, 2022 filed as part of the Company’s Annual Report on Form 10-K, as filed with the SEC on February 28, 2023.
The unaudited condensed 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 28, 2023, 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 and other factors, the results of operations for the thirteen and twenty-six weeks ended June 30, 2023 are not necessarily indicative of the results to be expected for the full year.
The 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.
Note 2 – Summary of Significant Accounting Policies
Revenue Recognition
Revenues 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 14 to 60 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 selling, general and administrative expenses on the condensed 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
8
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.
The following table presents the Company’s net sales disaggregated by principal product category:
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
June 30, 2023
June 24, 2022
Center-of-the-Plate
$
336,459
38.2
%
$
284,286
43.9
%
$
642,764
40.1
%
$
523,062
45.1
%
Dry Goods
162,653
18.4
%
91,852
14.2
%
284,168
17.7
%
160,648
13.8
%
Pastry
122,240
13.9
%
67,408
10.4
%
211,239
13.2
%
117,803
10.2
%
Cheese and Charcuterie
75,892
8.6
%
52,778
8.1
%
130,020
8.1
%
91,166
7.9
%
Produce
65,994
7.5
%
72,889
11.2
%
127,827
8.0
%
130,043
11.2
%
Dairy and Eggs
60,372
6.8
%
36,735
5.7
%
105,985
6.6
%
63,686
5.5
%
Oils and Vinegars
37,539
4.3
%
27,842
4.3
%
64,137
4.0
%
48,867
4.2
%
Kitchen Supplies
20,671
2.3
%
14,314
2.2
%
35,325
2.3
%
24,932
2.1
%
Total
$
881,820
100
%
$
648,104
100
%
$
1,601,465
100
%
$
1,160,207
100
%
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.
Food Processing Costs
Food processing costs include but are not limited to direct labor and benefits, applicable overhead and depreciation of equipment and facilities used in food processing activities. Food processing costs included in cost of sales were $16,615 and $9,398 for the thirteen weeks ended June 30, 2023 and June 24, 2022, respectively, and $28,289 and $18,434 for the twenty-six weeks ended June 30, 2023 and June 24, 2022, respectively.
Immaterial Correction of Prior Period Disclosures
During the first quarter of fiscal 2023 and subsequent to the issuance of the fiscal year 2022 consolidated financial statements, immaterial errors were identified in the weighted average remaining amortization period of intangible assets, the intangible asset amortization schedule and the debt maturity schedule.The weighted average remaining amortization period for customer relationships, non-compete agreements and trademarks were previously disclosed as 232 months, 73 months and 250 months instead of 117 months, 25 months and 165 months, respectively. This had a corresponding immaterial impact on the intangible asset amortization schedule.
In addition, the debt maturity schedule previously included the $40,000 due upon maturity of the asset-based loan facility in the thereafter total instead of in the 2027 total. Further, the Company omitted that the asset-based loan facility and term loan are classified as Level 2 within the fair value hierarchy. These immaterial errors and omissions have been corrected in Note 4 “Fair Value Measurements”, Note 8 “Goodwill and Other Intangible Assets” and Note 9 “Debt Obligations”, within these condensed consolidated financial statements.
Note 3 – Net Income per Share
The following table sets forth the computation of basic and diluted net income per common share:
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
June 30, 2023
June 24, 2022
Net income per share:
Basic
$
0.26
$
0.46
$
0.30
$
0.49
Diluted
$
0.25
$
0.42
$
0.29
$
0.47
Weighted average common shares:
Basic
37,634,127
37,100,968
37,570,595
37,018,044
Diluted
45,604,297
42,053,453
38,201,408
41,896,379
9
Reconciliation of net income per common share:
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
June 30, 2023
June 24, 2022
Numerator:
Net income
$
9,867
$
16,915
$
11,268
$
18,300
Add effect of dilutive securities
Interest on convertible notes, net of tax
1,397
719
—
1,365
Net income available to common shareholders
$
11,264
$
17,634
$
11,268
$
19,665
Denominator:
Weighted average basic common shares outstanding
37,634,127
37,100,968
37,570,595
37,018,044
Dilutive effect of unvested common shares
521,102
263,071
564,119
296,538
Dilutive effect of stock options and warrants
56,251
73,381
66,694
56,817
Dilutive effect of convertible notes
7,392,817
4,616,033
—
4,524,980
Weighted average diluted common shares outstanding
45,604,297
42,053,453
38,201,408
41,896,379
Potentially dilutive securities that have been excluded from the calculation of diluted net income per common share because the effect is anti-dilutive are as follows:
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
June 30, 2023
June 24, 2022
Restricted share awards (“RSAs”)
46,746
106,571
29,717
83,001
Convertible notes
—
—
7,392,817
91,053
Note 4 – Fair Value Measurements
Assets and Liabilities Measured at Fair Value
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 $928 and $10,483 as of June 30, 2023 and December 30, 2022, respectively, and are reflected as other liabilities and deferred credits on the condensed consolidated balance sheets. The remaining short-term earn-out liabilities are reflected as accrued liabilities on the condensed 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 other operating expenses, net on the condensed consolidated statements of operations.
The following table presents the changes in Level 3 contingent earn-out liabilities:
Total
Balance December 30, 2022
$
17,294
Acquisition value
5,835
Cash payments
(4,250)
Changes in fair value
1,092
Balance June 30, 2023
$
19,971
10
Fair Value of Financial Instruments
The carrying amounts reported in the Company’s condensed consolidated balance sheets for accounts receivable and accounts payable approximate fair value due to the immediate to short-term nature of these financial instruments. The fair values of the asset-based loan facility and term loan approximated their book values as of June 30, 2023 and December 30, 2022 as these instruments had variable interest rates that reflected current market rates available to the Company and are classified as Level 2 fair value measurements.
The following table presents the carrying value and fair value of the Company’s convertible notes and GreenLeaf Note. The fair value of the Company’s 2028 Convertible Senior Notes was based on Level 1 inputs. In estimating the fair value of its 2024 Convertible Senior Notes and Convertible Unsecured Note, 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. The fair value of the GreenLeaf Note was determined based upon observable market prices of similar debt instruments. The Convertible Unsecured Note matured on June 29, 2023 and was repaid in full.
June 30, 2023
December 30, 2022
Fair Value Hierarchy
Carrying Value
Fair Value
Carrying Value
Fair Value
2028 Convertible Senior Notes
Level 1
$
287,500
$
302,338
$
287,500
$
292,531
2024 Convertible Senior Notes
Level 3
$
39,684
$
41,070
$
41,684
$
43,723
GreenLeaf Note
Level 2
$
10,000
$
9,706
$
—
$
—
Convertible Unsecured Note
Level 3
$
—
$
—
$
4,000
$
4,345
Note 5 – Acquisitions
GreenLeaf
On May 1, 2023, the Company entered into a stock purchase agreement to acquire substantially all of the equity interests of Oakville Produce Partners, LLC (“GreenLeaf”), a leading produce and specialty food distributor in Northern California. The final purchase price was $86,124 consisting of $72,157 paid in cash at closing, $1,471 paid upon settlement of a net working capital true-up, the issuance of a $10,000 unsecured note and 75,008 shares of the Company’s common stock with an approximate value of $2,496 based on the trading price of the Company’s common stock on the date of acquisition. The acquisition was partially funded by a $40,000 incremental draw on the Company’s asset-based loan facility. The Company’s purchase price allocation is preliminary and is subject to revision pending the valuation of goodwill and intangible assets acquired. This valuation is incomplete as of June 30, 2023 as the Company is currently in the process of completing its assessment of valuation inputs and assumptions. When applicable, these valuations require the use of Level 3 inputs. All goodwill for the GreenLeaf acquisition will be amortized over 15 years for tax purposes. The goodwill recorded primarily reflects the value of acquiring an established specialty produce distributor to leverage the Company’s existing products in the markets served by GreenLeaf and any intangible assets that do not qualify for separate recognition, including assembled workforce. The intangible assets acquired consisted of customer relationships and trademarks valued at $27,760 and $2,900, respectively, as of the acquisition date. The customer relationships and trademarks are being amortized over 10 years.
Hardie’s Fresh Foods
On March 20, 2023, pursuant to an asset purchase agreement, the Company acquired substantially all of the assets of Hardie’s F&V, LLC (“Hardie’s Fresh Foods”), a specialty produce distributor with operations in Texas. The initial purchase price was approximately $42,070, consisting of $38,000 paid in cash at closing, subject to customary net working capital adjustments, and an earn-out liability valued at approximately $4,070 as of the acquisition date. If earned, the earn-out liability could total up to $10,000 over a two-year period. The payment of the earn-out liability is subject to the successful achievement of certain EBITDA targets. The Company’s purchase price allocation is preliminary and is subject to revision pending the valuation of goodwill and intangible assets acquired. This valuation is incomplete as of June 30, 2023 as the Company is currently in the process of completing its assessment of valuation inputs and assumptions as well as opening working capital. When applicable, these valuations require the use of Level 3 inputs. All goodwill for the Hardie’s Fresh Foods acquisition will be amortized over 15 years for tax purposes. The goodwill recorded primarily reflects the value of acquiring an established specialty produce distributor to leverage the Company’s existing products in the markets served by Hardie’s Fresh Foods and any intangible
11
assets that do not qualify for separate recognition, including assembled workforce. The intangible assets acquired consisted of customer relationships and trademarks valued at $13,800 and $3,600, respectively, as of the acquisition date. The customer relationships and trademarks are being amortized over 10 years, and 5 years, respectively.
Other Fiscal 2023 Acquisitions
During the twenty-six weeks ended June 30, 2023, the Company completed three other acquisitions for an aggregate initial purchase price of approximately $16,851, consisting of $12,971 paid in cash at closing, subject to customary working capital adjustments, earn-out liabilities valued at approximately of $1,665 as of the dates of acquisition, and $2,215 of deferred payments. If earned, these earn-out liabilities could total up to $2,562 in the aggregate. The Company’s aggregate purchase price allocation is preliminary and is subject to revision pending the valuations of goodwill and intangible assets acquired. This valuation is incomplete as of June 30, 2023 as the Company is currently in the process of completing its assessment of valuation inputs and assumptions as well as opening working capital. When applicable, these valuations require the use of Level 3 inputs. All goodwill of $5,891 will be amortized over 15 years for tax purposes. The intangible assets acquired consisted of customer relationships valued at $4,276 as of the acquisition dates. The customer relationships are being amortized over 10 years.
The Company reflected net sales and income before income taxes in its condensed consolidated statement of operations related to the fiscal 2023 acquisitions as follows:
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 30, 2023
June 30, 2023
Net sales
$
100,181
$
120,403
Income before income taxes
$
4,428
$
6,188
Chef Middle East
On November 1, 2022, pursuant to a share sale and purchase agreement, the Company acquired substantially all of the shares of Chef Middle East LLC (“CME”), a specialty food distributor with operations in the United Arab Emirates, Qatar and Oman. The final purchase price was approximately $116,515, consisting of $108,749 paid in cash at closing, $166 paid upon settlement of a net working capital true-up, and an earn-out liability valued at $7,600 as of the date of acquisition. If earned, the earn-out liability could total up to $10,000 over a two-year period. The measurement period adjustments recorded through the second quarter of fiscal 2023 resulted in a goodwill increase of $735, a decrease in inventories of $735, an increase in the earn-out liability of $100, an increase in accrued liabilities of $313, a decrease in other assets of $82, and a decrease in deferred tax liabilities of $35. The valuation of tangible and intangible assets acquired has been completed as of June 30, 2023. The intangible assets acquired consists of customer relationships, trademarks, and non-compete agreements valued at $25,800, $11,400, and $320, respectively, as of the acquisition date. The customer relationships, trademarks, and non-compete agreements are being amortized over 10, 15, and 3 years, respectively.
Pro forma Financial Information
The table below presents unaudited pro forma condensed consolidated income statement information of the Company as if the GreenLeaf and Hardie’s Fresh Foods acquisitions had occurred on December 25, 2021, and the CME acquisition had occurred on December 26, 2020. 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 acquisitions. The pro forma information is not necessarily indicative of the Company’s results of operations had the acquisitions 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 acquisitions, any incremental costs for transitioning to become a public company, and also does not reflect additional revenue opportunities following the acquisitions. The pro forma information reflects amortization and depreciation of the acquisitions at their respective fair value. CME did not have a pro forma impact during the thirteen and twenty-six weeks ended June 30, 2023 as it was included in the condensed consolidated results of operations for the entire period.
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
June 30, 2023
June 24, 2022
Net sales
$
892,161
$
788,182
$
1,695,649
$
1,435,104
Income before income taxes
$
13,617
$
28,513
$
16,752
$
39,144
12
The table below sets forth the total assets acquired and liabilities assumed:
Chef Middle East
Hardie’s Fresh Foods
GreenLeaf
Other Acquisitions
Current assets
$
84,076
$
27,479
$
16,068
$
9,783
Customer relationships
25,800
13,800
27,760
4,276
Trademarks
11,400
3,600
2,900
—
Non-compete agreements
320
—
—
—
Goodwill
24,548
7,990
46,055
5,891
Fixed assets
16,953
5,582
2,477
497
Other assets
859
854
104
—
Deferred tax liability
(3,600)
—
—
(241)
Right-of-use assets
5,321
13,303
2,026
3,258
Lease liabilities
(5,321)
(13,303)
(2,026)
(3,258)
Current liabilities
(43,841)
(17,235)
(9,240)
(3,336)
Other long-term liabilities
—
—
—
(19)
Total
$
116,515
$
42,070
$
86,124
$
16,851
The Company recognized professional fees related to acquisition activities of $1,385 and $1,019 during the thirteen weeks ended June 30, 2023 and June 24, 2022, respectively, and $2,628 and $1,862 during the twenty-six weeks ended June 30, 2023 and June 24, 2022, respectively, presented within otheroperating expenses, net on the condensed consolidated statements of operations.
Note 6 – Inventories
Inventories consist primarily of finished product and are reflected net of adjustments for shrinkage, excess and obsolescence to approximate their net realizable value totaling $10,187 and $9,198 at June 30, 2023 and December 30, 2022, respectively.
Note 7 – Property and Equipment
Property and equipment as of June 30, 2023 and December 30, 2022 consisted of the following:
Useful Lives
June 30, 2023
December 30, 2022
Land
Indefinite
$
5,542
$
5,542
Buildings
20 years
40,704
39,893
Machinery and equipment
5 - 10 years
34,722
32,107
Computers, data processing and other equipment
3 - 7 years
20,326
18,475
Software
3 - 7 years
48,544
42,609
Leasehold improvements
1 - 40 years
124,386
94,245
Furniture and fixtures
7 years
3,883
3,825
Vehicles
5 - 10 years
34,810
31,462
Construction-in-process
21,987
36,583
334,904
304,741
Less: accumulated depreciation and amortization
(129,369)
(119,013)
Property and equipment, net
$
205,535
$
185,728
Construction-in-process at June 30, 2023 related primarily to the build-out of the Company’s Richmond, CA and Gibbstown, NJ distribution facilities and at December 30, 2022 related primarily to the build-out of the Company’s Miami, Dallas and Richmond, CA distribution facilities and the implementation of the Company’s Enterprise Resource Planning system. The net book value of equipment financed under finance leases at June 30, 2023 and December 30, 2022 was $12,572 and $11,579, respectively.
13
The components of depreciation and amortization expense were as follows:
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
June 30, 2023
June 24, 2022
Depreciation expense
$
7,132
$
4,385
$
12,674
$
8,800
Software amortization
$
1,539
$
1,481
$
3,008
$
2,955
$
8,671
$
5,866
$
15,682
$
11,755
Note 8 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill are presented as follows:
Carrying amount as of December 30, 2022
$
287,120
Goodwill adjustments (1)
1,859
Acquisitions
59,936
Foreign currency translation
36
Carrying amount as of June 30, 2023
$
348,951
(1) The goodwill adjustments represent measurement period adjustments related to certain acquisitions completed in the prior year.
Other intangible assets as of June 30, 2023 and December 30, 2022 consisted of the following:
June 30, 2023
Weighted-Average Remaining Amortization Period
Gross Carrying Amount
Accumulated Amortization
Net Amount
Customer relationships
111 months
$
249,628
$
(93,433)
$
156,195
Trademarks
148 months
57,655
(18,484)
39,171
Non-compete agreements
21 months
8,899
(8,480)
419
Total
$
316,182
$
(120,397)
$
195,785
December 30, 2022
Weighted-Average Remaining Amortization Period
Gross Carrying Amount
Accumulated Amortization
Net Amount
Customer relationships
117 months
$
205,608
$
(85,447)
$
120,161
Trademarks
165 months
51,137
(16,201)
34,936
Non-compete agreements
25 months
8,899
(8,293)
606
Total
$
265,644
$
(109,941)
$
155,703
Amortization expense for other intangibles was $5,759 and $3,463 for the thirteen weeks ended June 30, 2023 and June 24, 2022, respectively, and $10,456 and $6,819 for the twenty-six weeks ended June 30, 2023 and June 24, 2022, respectively.
The Company recognized a customer relationships intangible asset impairment charge of $1,838 related to the loss of a significant Hardie’s Fresh Foods customer post acquisition. The Company’s valuation of the Hardie’s Fresh Foods’ customer list intangible asset as of the acquisition date, a Level 3 measurement, was based on an income approach using the excess earnings method which requires significant assumptions including future sales forecasts and a discount rate. The impairment charge was measured by reducing its assumption of future sales for the significant customer lost post-acquisition to zero.The impairment charge is presented within other operating expenses, net on the condensed consolidated statements of operations.
14
Estimated amortization expense for other intangible assets for the remainder of the fiscal year ending December 29, 2023 and each of the next four fiscal years and thereafter is as follows:
2023
$
10,940
2024
21,428
2025
21,130
2026
21,017
2027
20,449
Thereafter
100,821
Total
$
195,785
Note 9 – Debt Obligations
Debt obligations as of June 30, 2023 and December 30, 2022 consisted of the following:
Weighted Average Effective Interest Rate at June 30, 2023
Maturity
June 30, 2023
December 30, 2022
Senior secured term loans
10.61
%
August 2029
$
297,750
$
299,250
2028 Convertible senior notes
2.77
%
December 2028
287,500
287,500
2024 Convertible senior notes
2.34
%
December 2024
39,684
41,684
Asset-based loan facility
6.80
%
March 2027
90,000
40,000
Finance leases and other financing obligations
5.38
%
Various
24,528
13,548
Convertible unsecured note
—
%
June 2023
—
4,000
Unamortized deferred costs and premium
(18,372)
(20,050)
Total debt obligations
721,090
665,932
Less: current installments
(12,017)
(12,428)
Total debt obligations excluding current installments
$
709,073
$
653,504
In connection with the GreenLeaf acquisition, the Company issued a $10,000 unsecured note bearing interest of 4.47%. The principal on the unsecured note is due in two equal installments on April 30, 2024 and 2025 and is presented under the caption “Finance leases and other financing obligations” in the table above. The convertible unsecured note matured on June 29, 2023 and was repaid in full, including all accrued interest, for $4,049 in cash.
Maturities of the Company’s debt, excluding finance leases, for the remainder of the fiscal year ending December 29, 2023 and each of the next four fiscal years and thereafter is as follows:
2023
$
1,500
2024
47,684
2025
8,000
2026
3,000
2027
93,000
Thereafter
571,750
Total
$
724,934
15
The net carry value of the Company’s convertible notes as of June 30, 2023 and December 30, 2022 was:
June 30, 2023
December 30, 2022
Principal Amount
Unamortized Deferred Costs and Premium
Net Amount
Principal Amount
Unamortized Deferred Costs and Premium
Net Amount
2028 Convertible Senior Notes
$
287,500
$
(6,303)
$
281,197
$
287,500
$
(6,876)
$
280,624
2024 Convertible Senior Notes
39,684
(278)
39,406
41,684
(373)
41,311
Convertible Unsecured Note
—
—
—
4,000
—
4,000
Total
$
327,184
$
(6,581)
$
320,603
$
333,184
$
(7,249)
$
325,935
The components of interest expense on the Company’s convertible notes were as follows:
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
June 30, 2023
June 24, 2022
Coupon interest
$
1,893
$
938
$
3,792
$
1,875
Amortization of deferred costs and premium
333
224
668
448
Total interest
$
2,226
$
1,162
$
4,460
$
2,323
As of June 30, 2023, the Company had reserved $24,170 of the asset-based loan facility for the issuance of letters of credit and funds totaling $85,830 were available for borrowing.
Note 10 – Stockholders’ Equity
Equity Awards
The following table reflects the activity of RSAs during the twenty-six weeks ended June 30, 2023:
Time-based
Performance-based
Market-based
Shares
Weighted Average Grant Date Fair Value
Shares
Weighted Average Grant Date Fair Value
Shares
Weighted Average Grant Date Fair Value
Unvested at December 30, 2022
464,972
$
31.74
335,425
$
32.25
333,114
$
30.30
Granted
224,634
32.71
742,744
33.17
87,942
28.84
Vested
(208,936)
31.76
—
—
—
—
Forfeited
(3,000)
34.48
—
—
—
—
Unvested at June 30, 2023
477,670
$
32.17
1,078,169
$
32.88
421,056
$
30.00
The Company granted 1,055,320 RSAs to its employees at a weighted average grant date fair value of $32.71 during the twenty-six weeks ended June 30, 2023. These awards are a mix of time-, market- and performance-based grants that generally vest over a range of periods up to five years. The Company recognized expense totaling $4,704 and $2,939 on its RSAs during the thirteen weeks ended June 30, 2023 and June 24, 2022, respectively, and $9,494 and $5,982 during the twenty-six weeks ended June 30, 2023 and June 24, 2022, respectively.
At June 30, 2023, the total unrecognized compensation cost for unvested RSAs was $34,735 and the weighted-average remaining period was approximately 1.3 years. Of this total, $12,783 related to RSAs with time-based vesting provisions and $21,952 related to RSAs with performance- and market-based vesting provisions. At June 30, 2023, the weighted-average remaining period for time-based vesting and performance-based vesting RSAs were approximately 2.2 years and 0.7 years, respectively.
No share-based compensation expense related to the Company’s RSAs or stock options has been capitalized. As of June 30, 2023, there were 1,088,116 shares available for grant under the 2019 Omnibus Equity Incentive Plan.
16
The following table summarizes stock option activity during the twenty-six weeks ended June 30, 2023:
Shares
Weighted Average Exercise Price
Aggregate Intrinsic Value
Weighted Average Remaining Contractual Term (in years)
Outstanding December 30, 2022
112,232
$
20.23
$
1,465
3.2
Exercised
—
—
Outstanding June 30, 2023
112,232
$
20.23
$
1,743
2.7
Exercisable at June 30, 2023
112,232
20.23
$
1,743
2.7
In connection with the CME acquisition, the Company issued stock awards to certain members of the CME management team
which were classified as liabilities. These awards vest over a period of up to 4 years. Stock-based compensation expense for
these awards was $544 and $0 during the thirteen weeks ended June 30, 2023 and June 24, 2022, respectively, and $1,087 and $0 during the twenty-six weeks ended June 30, 2023 and June 24, 2022, respectively. The fair value of these awards was $1,450 and $362 as of June 30, 2023 and December 30, 2022, respectively, and is presented within Other liabilities and deferred credits on the Company’s condensed consolidated balance sheets.
Note 11 – Related Parties
The Chefs’ Warehouse Mid-Atlantic, LLC, a subsidiary of the Company, leases a distribution facility that is 100% 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 $123 during the thirteen weeks ended June 30, 2023 and June 24, 2022, and $246 during the twenty-six weeks ended June 30, 2023 and June 24, 2022.
Note 12 – Income Taxes
The Company’s effective tax rate was 26.0% and 27.0% for the thirteen weeks and twenty-six weeks-ended June 30, 2023 and June 24, 2022, respectively. The effective tax rate varies from the 21% statutory rate primarily due to state taxes. The lower effective tax rate for the thirteen weeks and twenty-six weeks-ended June 30, 2023 was primarily driven by a greater mix of foreign earnings that are subject to tax rates below the US statutory rate of 21%. The Company’s income tax provision reflects the impact of an expected income tax refund receivable of $21,250 as of June 30, 2023 which is reflected in prepaid expenses and other current assets on the Company’s consolidated balance sheet.
Note 13 – Supplemental Disclosures of Cash Flow Information
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
Supplemental cash flow disclosures:
Cash paid (received) for income taxes
$
10,673
$
(239)
Cash paid for interest, net of cash received
$
20,266
$
7,718
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
18,591
$
13,837
Operating cash flows from finance leases
$
336
$
223
Other non-cash investing and financing activities
ROU assets obtained in exchange for lease liabilities:
Operating leases
$
42,182
$
20,116
Finance leases
$
3,684
$
411
Other non-cash investing and financing activities:
Warrants issued for acquisitions
$
—
$
1,701
Common stock issued for acquisitions
$
2,496
$
—
Unsecured notes issued for acquisitions
$
10,000
$
—
Contingent earn-out liabilities for acquisitions
$
5,835
$
1,200
17
Note 14 – Subsequent Events
On July 7, 2023 the Company entered into a sixth amendment to the ABL Credit Agreement which increased the aggregate commitments to $300,000, up from $200,000, maturing on March 11, 2027.
18
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 condensed 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 28, 2023. 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 the leading culinary markets in the United States and the Middle East. 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 40,000 customer locations, primarily located in our 23 geographic markets across the United States, Middle East and Canada, and the majority of our customers are independent restaurants and fine dining establishments. We also sell certain of our products directly to consumers through our Allen Brothers and “Shop Like a Chef” retail channels.
Recent Acquisitions
On May 1, 2023, the Company entered into a stock purchase agreement to acquire substantially all of the equity interests of Oakville Produce Partners, LLC (“GreenLeaf”), a leading produce and specialty food distributor in Northern California. The final purchase price was $86.1 million consisting of $72.2 million paid in cash at closing, $1.5 million paid upon settlement of a net working capital true-up, the issuance of a $10.0 million unsecured note, and 75,008 shares of the Company’s common stock with an approximate value of $2.5 million.
On March 20, 2023, pursuant to an asset purchase agreement, we acquired substantially all of the assets of Hardie’s F&V, LLC (“Hardie’s Fresh Foods”), a specialty produce distributor with operations in Texas. The initial purchase price was approximately $42.1 million, consisting of $38.0 million paid in cash at closing, subject to customary working capital adjustments, and an earn-out liability valued at approximately $4.1 million as of the acquisition date. If earned, the earn-out liability could total up to $10.0 million over a two-year period.
During the twenty-six weeks ended June 30, 2023 , the Company completed three other acquisitions for an aggregate purchase price of approximately $16.9 million, consisting of $13.0 million paid in cash at closing, subject to customer working capital adjustments, earn-out liabilities valued at approximately of $1.7 million as of the dates of acquisition, and $2.2 million of deferred payments. If earned, the earn-out liabilities could total up to $2.6 million in the aggregate.
19
RESULTS OF OPERATIONS
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
June 30, 2023
June 24, 2022
Net sales
$
881,820
$
648,104
$
1,601,465
$
1,160,207
Cost of sales
673,376
492,100
1,223,313
886,690
Gross profit
208,444
156,004
378,152
273,517
Selling, general and administrative expenses
179,042
124,487
335,179
234,573
Other operating expenses, net
4,062
3,883
5,734
5,046
Operating income
25,340
27,634
37,239
33,898
Interest expense
12,006
4,465
22,012
8,830
Income before income taxes
13,334
23,169
15,227
25,068
Provision for income tax expense
3,467
6,254
3,959
6,768
Net income
$
9,867
$
16,915
$
11,268
$
18,300
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.
Thirteen Weeks Ended June 30, 2023 Compared to Thirteen Weeks Ended June 24, 2022
Net Sales
2023
2022
$ Change
% Change
Net sales
$
881,820
$
648,104
$
233,716
36.1
%
Organic growth contributed $52.6 million, or 8.1%, to sales growth and the remaining sales growth of $181.1 million, or 28.0%, resulted from acquisitions. Organic case count increased approximately 10.0% in our specialty category. In addition, specialty unique customers and placements increased 8.7% and 11.9%, respectively, compared to the prior year period. Organic pounds sold in our center-of-the-plate category increased 5.9% compared to the prior year. Estimated inflation was 5.7% in our specialty category and 1.1% in our center-of-the-plate category compared to the prior year period.
Gross Profit
2023
2022
$ Change
% Change
Gross profit
$
208,444
$
156,004
$
52,440
33.6
%
Gross profit margin
23.6
%
24.1
%
Gross profit dollars increased primarily as a result of increased sales and price inflation. Gross profit margin decreased approximately 43 basis points. Gross profit margins decreased 70 basis points in the Company’s specialty category and decreased 174 basis points in the Company’s center-of-the-plate category. Estimated inflation was 5.7% in the Company’s specialty category and 1.1% in the center-of-the-plate category compared to the prior year period. Gross profit margins decreased primarily due to product mix changes versus prior year, including the growth in hospitality related product sales and lower gross profit dollars per unit in certain protein categories due to price change volatility during the latter part of the second quarter of 2023.
Selling, General and Administrative Expenses
2023
2022
$ Change
% Change
Selling, general and administrative expenses
$
179,042
$
124,487
$
54,555
43.8
%
Percentage of net sales
20.3
%
19.2
%
The increase in selling, general and administrative expenses was primarily due to higher depreciation and amortization driven primarily by acquisitions and higher costs associated with compensation and benefits, facilities costs, and distribution costs to
20
support sales growth. Our ratio of selling, general and administrative expenses to net sales increased 110 basis points due to increased near-term costs associated with our investments in facilities and acquisitions.
Other Operating Expenses, Net
2023
2022
$ Change
% Change
Other operating expenses, net
$
4,062
$
3,883
$
179
4.6
%
Other operating expense increased by approximately $0.2 million primarily due to an impairment on customer relationship intangible assets of $1.8 million related to the loss of a significant Hardie’s Fresh Foods customer post acquisition and a $1.0 million increase in third-party deal costs incurred in connection with business acquisitions and financing arrangements, partially offset by non-cash charges of $0.7 million for changes in the fair value of our contingent earn-out liabilities compared to non-cash charges of $3.3 million in the prior year.
Interest Expense
2023
2022
$ Change
% Change
Interest expense
$
12,006
$
4,465
$
7,541
168.9
%
Interest expense increased primarily driven by higher principal amounts of outstanding debt due to our 2028 convertible notes issued on December 13, 2022, our term loan refinancing on August 23, 2022, an increase in amounts drawn on our asset-based loan facility and higher rates of interest charged on the variable rate portion of our outstanding debt.
Provision for Income Taxes
2023
2022
$ Change
% Change
Provision for income tax expense
$
3,467
$
6,254
$
(2,787)
(44.6)
%
Effective tax rate
26.0
%
27.0
%
The lower effective tax rate for the thirteen weeks ended June 30, 2023 was primarily driven by a greater mix of foreign earnings that are subject to tax rates below the US statutory rate of 21%.
Twenty-Six Weeks Ended June 30, 2023 Compared to Twenty-Six Weeks Ended June 24, 2022
Net Sales
2023
2022
$ Change
% Change
Net sales
$
1,601,465
$
1,160,207
$
441,258
38.0
%
Organic growth contributed $140.5 million, or 12.1%, to sales growth and the remaining sales growth of $300.8 million, or 25.9%, resulted from acquisitions. Organic case count increased approximately 33.2% in our specialty category. In addition, specialty unique customers and placements increased 14.3% and 14.3%, respectively, compared to the prior year period. Organic pounds sold in our center-of-the-plate category increased 9.8% compared to the prior year. Estimated inflation was 5.6% in our specialty category and 2.1% in our center-of-the-plate category compared to the prior year period.
Gross Profit
2023
2022
$ Change
% Change
Gross profit
378,152
273,517
104,635
38.3
%
Gross profit margin
23.6
%
23.6
%
Gross profit dollars increased primarily as a result of sales growth and price inflation. Gross profit margin increased approximately 4 basis points. Gross profit margins decreased 12 basis points in the Company’s specialty category and decreased 126 basis points in the Company’s center-of-the-plate category. Estimated inflation was 5.6% in our specialty category and 2.1% in our center-of-the-plate category compared to the prior year period. Our gross margins were relatively consistent with the prior year period with the specialty category profitability offsetting some margin compression in our center-of-the-plate category.
21
Selling, General and Administrative Expenses
2023
2022
$ Change
% Change
Selling, general and administrative expenses
335,179
234,573
100,606
42.9
%
Percentage of net sales
20.9
%
20.2
%
The increase in selling, general and administrative expenses was primarily due to higher depreciation and amortization and higher costs associated with compensation and benefits, facilities costs, and fuel costs to support sales growth. Our ratio of selling, general and administrative expenses to net sales increased by 70 due to increased near-term costs associated with our investments in facilities and acquisitions.
Other Operating Expenses, Net
2023
2022
$ Change
% Change
Other operating expenses, net
5,734
5,046
688
13.6
%
The increase in net other operating expense relates primarily to an impairment on customer relationship intangible assets of $1.8 million related to the loss of a significant Hardie’s Fresh Foods customer post acquisition and a $1.4 million increase in third-party deal costs incurred in connection with business acquisitions and financing arrangements, partially offset by non-cash charges of $1.1 million for changes in the fair value of our contingent earn-out liabilities in the current period compared to non-cash credits of $3.6 million in the prior year period.
Interest Expense
2023
2022
$ Change
% Change
Interest expense
22,012
8,830
13,182
149.3
%
Interest expense increased primarily driven by higher principal amounts of outstanding debt due to our 2028 convertible notes issued on December 13, 2022, our term loan refinancing on August 23, 2022, an increase in amounts drawn on our asset-based loan facility and higher rates of interest charged on the variable rate portion of our outstanding debt.
Provision for Income Taxes
2023
2022
$ Change
% Change
Provision for income tax expense
3,959
6,768
(2,809)
(41.5)
%
Effective tax rate
26.0
%
27.0
%
The lower effective tax rate for the twenty-six weeks ended June 30, 2023 was primarily driven by a greater mix of foreign earnings that are subject to tax rates below the US statutory rate of 21%.
22
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):
June 30, 2023
December 30, 2022
Senior secured term loan
$
297,750
$
299,250
Total convertible debt
327,184
333,184
Borrowings outstanding on asset-based loan facility
90,000
40,000
Finance leases and other financing obligations
24,528
13,548
Total
$
739,462
$
685,982
As of June 30, 2023, we have various floating- and fixed-rate debt instruments with varying maturities for an aggregate principal amount of $714.9 million.
In connection with the GreenLeaf acquisition, we issued a $10.0 million unsecured note which bears interest of 4.47%. The principal on the unsecured note is due in two equal installments on April 30, 2024 and 2025. Our convertible unsecured note matured on June 29, 2023 and was repaid in full, including all accrued interest, for $4,049 in cash.
On July 7, 2023 we entered into a sixth amendment to the ABL Credit Agreement which increased the aggregate commitments to $300.0 million, up from $200.0 million, maturing on March 11, 2027.
Liquidity
The following table presents selected financial information on liquidity (in thousands):
June 30, 2023
December 30, 2022
Cash and cash equivalents
$
59,592
$
158,800
Working capital,excluding cash and cash equivalents
320,594
278,315
Availability under asset-based loan facility
85,830
135,827
Total
$
466,016
$
572,942
We expect our capital expenditures, excluding cash paid for acquisitions, for fiscal 2023 will be approximately $50.0 million to $60.0 million. 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):
Twenty-Six Weeks Ended
June 30, 2023
June 24, 2022
Net income
$
11,268
$
18,300
Non-cash charges
$
47,597
$
37,107
Changes in working capital
$
(48,082)
$
(35,626)
Net cash provided by operating activities
$
10,783
$
19,781
Net cash used in investing activities
$
(142,735)
$
(75,497)
Net cash provided by (used in) financing activities
$
32,995
$
(7,733)
23
Net cash provided by operations was $10.8 million for the twenty-six weeks ended June 30, 2023 compared to net cash provided by operating activities of $19.8 million for the twenty-six weeks ended June 24, 2022. The decrease in cash provided by operating activities was primarily due to the working capital growth of $12.5 million versus the prior year period which was driven by a strategic decision to pull forward inventory purchases of certain product categories during the first half of fiscal 2023. We expect our inventory levels to normalize during the remainder of the year. The increase in cash used for working capital growth was partially offset by increased net income, net of non-cash charges, in the current year of $58.9 million compared to $55.4 million in the prior year period.
Net cash used in investing activities was $142.7 million for the twenty-six weeks ended June 30, 2023, driven $119.6 million in cash paid for acquisitions and capital expenditures of $23.2 million.
Net cash provided by financing activities was $33.0 million for the twenty-six weeks ended June 30, 2023 driven by $50.0 million of net borrowings on our ABL facility and other revolving credit facilities, partially offset by $11.7 million of payments of debt and other financing obligations, including finance leases, $3.2 million of earn-out payments classified as financing activities and $2.1 million paid for shares surrendered to pay tax withholding related to the vesting of equity incentive plan awards.
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.
Critical Accounting Policies and Estimates
The preparation of the Company’s condensed 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 and estimates 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 and estimates 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) self-insurance reserves, (vi) accounting for income taxes and (vii) contingent earn-out liabilities. Our critical accounting policies and estimates are described in the Form 10-K filed with the SEC on February 28, 2023.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate market risk relates primarily to our long-term debt. As of June 30, 2023, we had aggregate indebtedness outstanding of $387.8 million that bore interest at variable rates. A 100 basis point increase in market interest rates would decrease our after tax earnings by approximately $2.9 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 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company is currently integrating CME and fiscal 2023 acquisitions into its overall system of internal control over financial reporting and, if necessary, will make appropriate changes as it integrates CME and fiscal 2023 acquisitions into the Company's overall internal control over financial reporting process.
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 condensed consolidated financial statements, and no material amounts have been accrued in our condensed consolidated financial statements with respect to these matters.
ITEM 1A. RISK FACTORS
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 30, 2022 filed with the SEC on February 28, 2023. In addition to the information contained herein, you should consider the risk factors disclosed in our Annual Report on Form 10-K.
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
April 1, 2023 to April 28, 2023
1,914
$
34.05
—
—
April 29, 2023 to May 26, 2023
4,635
33.78
—
—
May 27, 2023 to June 30, 2023
442
33.71
—
—
Total
6,991
$
33.85
—
—
(1)During the twenty-six weeks ended June 30, 2023, we withheld 6,991 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
25
resulting from either elections under 83(b) of the Internal Revenue Code of 1986, as amended, or upon vesting of such awards.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
During the quarterly period covered by this report, our directors and officers (as defined in Rule 16a-1(f) of the Securities Exchange Act, of 1934, as amended) adopted, terminated or modified the following Rule 10b5-1 or or non-Rule
10b5-1 trading arrangements (as defined in Item 408 of Regulation S-K):
Name
Title
Type of Trading Arrangement
Security
Action
Date of Action
Duration of Trading Arrangement
Aggregate Number of Securities Covered
Tim McCauley
Chief Accounting Officer
Rule 10b-5 Plan to Sell
Common Stock
Adoption
June 5, 2023
Up to October 2, 2025
18,000
Each trading arrangement reported above is subject to a number of conditions, including as to the price at which, and
the timing of when,purchases and/or sales may occur, and it is possible that any trading arrangement may not result in the purchase and/or sale of any or all of the aggregate number of securities covered by such trading arrangement during the term of the trading arrangement. Additionally, these trading arrangements are subject to modification or termination in accordance with applicable law.
Amendment No. 6, dated as of July 7, 2023, to the ABL Facility.
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.
†
Filed herewith
27
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 August 2, 2023.
