NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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. The Company’s business consists of three operating segments: East Coast, Midwest and West Coast that aggregate into one reportable segment, food product distribution, which is concentrated 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 and specialty food stores.
Consolidation
The 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.
Guidance Adopted in Fiscal 2019
Leases: In February 2016, the Financial Accounting Standard Board (“FASB”) issued guidance (“ASC 842”) to increase the transparency and comparability among organizations by recognizing right-of-use assets (“ROU assets”) and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted ASC 842 on December 29, 2018, using an optional transition method that allows entities to initially apply the new lease standard at the adoption date. Under this approach, comparative periods are not restated. The Company adopted a package of practical expedients that allowed the Company to:
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•
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apply hindsight in determining the lease term of its leases;
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•
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not reassess whether any expired or existing contracts are or contain leases;
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•
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not reassess the lease classification of any expired or existing leases; and
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•
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not reassess initial direct costs for any existing leases.
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The use of hindsight in assessing lease term resulted in a $2,027 cumulative effect adjustment, net of tax, to opening retained earnings. Adoption had a material impact on the Company’s consolidated balance sheet as a result of recognizing ROU assets and lease liabilities for its operating leases of $118,031 and $126,309, respectively, but it did not materially impact the Company’s consolidated statements of operations or debt covenants. There has been no significant change to the accounting for finance leases.
Comprehensive Income: In February 2018, the FASB issued guidance that permits a Company to reclassify the stranded tax effects in accumulated other comprehensive income resulting from the enactment of H.R. 1, originally known as the Tax Cuts and Jobs Act (the “Tax Act”), to retained earnings. The Company elected to not reclassify such amounts to retained earnings. The Company releases disproportionate tax effects from accumulated other comprehensive income as individual items are liquidated. The Company adopted this guidance on December 29, 2018 and adoption did not have a material impact on the Company’s consolidated financial statements.
Implementation Costs Incurred in a Cloud Computing Arrangement Service Contract: In August 2018, the FASB issued guidance that aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred to obtain or develop internal-use software. The Company adopted this guidance prospectively on December 29, 2018 and adoption did not have a material impact on the Company’s consolidated financial statements.
Guidance Not Yet Adopted
Measurement of Credit Losses on Financial Instruments: In June 2016 and as further amended in November 2018, 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 and adoption did not have a material impact on its consolidated financial statements.
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 is effect 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.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with generally accepted accounting principles requires it to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Estimates are used in determining, among other items, the allowance for doubtful accounts, inventory valuation adjustments, self-insurance reserves for group medical insurance, workers’ compensation insurance and automobile liability insurance, future cash flows associated with impairment testing for intangible assets (including goodwill) and long-lived assets, useful lives for intangible assets, stock-based compensation, contingent earn-out liabilities and tax reserves. Actual results could differ from 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 20 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 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.
The following table presents the Company’s net sales disaggregated by principal product category:
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December 27, 2019
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December 28, 2018
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December 29, 2017
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Center-of-the-Plate
|
$
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711,979
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44.7
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%
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$
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629,038
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43.5
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%
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$
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580,025
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44.6
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%
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Dry Goods
|
278,930
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17.5
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%
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253,176
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17.5
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%
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224,323
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17.2
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%
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Pastry
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221,041
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13.9
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%
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199,990
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13.8
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%
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176,672
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13.6
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%
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Cheeses and Charcuterie
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158,834
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10.0
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%
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151,640
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10.5
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%
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133,024
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10.2
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%
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Dairy and Eggs
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110,740
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7.0
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%
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106,768
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7.4
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%
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90,613
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7.0
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%
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Oils and Vinegars
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80,156
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5.0
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%
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76,313
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5.3
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%
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71,962
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5.5
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%
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Kitchen Supplies
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30,154
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1.9
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%
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27,684
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2.0
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%
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24,901
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1.9
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%
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Total
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$
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1,591,834
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|
100
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%
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$
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1,444,609
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|
|
100
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%
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$
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1,301,520
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|
|
100
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%
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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
reduced 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 $1,345 and $1,496 as of December 27, 2019 and December 28, 2018, 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 $314 and $303 as of December 27, 2019 and December 28, 2018, respectively. Refund liabilities are reflected as accrued liabilities on the Company’s consolidated balance sheets. The Company recognized a corresponding asset of $194 and $191 as of December 27, 2019 and December 28, 2018, respectively, for its right to recover products from customers on settling its refund liabilities. This asset is reflected as inventories, net on the Company’s consolidated balance sheets.
Contract Costs
Sales commissions are expensed when incurred because the amortization period is one year or less. These costs are presented within operating expenses on the Company’s consolidated statements of operations.
Cost of Sales
The Company records cost of sales based upon the net purchase price paid for a product, including applicable freight charges incurred to deliver the product to the Company’s warehouse.
Operating Expenses
Operating expenses include the costs of facilities, product shipping and handling costs, warehousing costs, protein processing costs, selling and general administrative activities. Shipping and handling costs included in operating expenses were $85,620, $79,143 and $70,108 for fiscal 2019, 2018 and 2017, respectively. Protein processing costs included in operating expenses were $17,530, $15,907 and $13,058 for fiscal 2019, 2018 and 2017, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of less than three months to be cash equivalents. The Company periodically maintains balances at financial institutions which may exceed Federal Deposit Insurance Corporation insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
Accounts Receivable
Accounts receivable consist of trade receivables from customers and are recorded net of an allowance for doubtful accounts. The allowance for doubtful accounts is determined based upon a number of specific criteria, such as whether a customer has filed for or been placed into bankruptcy, has had accounts referred to outside parties for collections or has had accounts significantly past due. The allowance also covers short paid invoices the Company deems to be uncollectable as well as a portion of trade accounts receivable balances projected to become uncollectable based upon historic patterns.
Inventories
Inventories consist primarily of finished goods, food and related food products held for resale and are valued at the lower of cost or market. Our different entities record inventory using a mixture of first-in, first-out and average cost, which we believe approximates first-in, first-out. The Company adjusts inventory balances for excess and obsolete inventories to approximate their net realizable value.
Vendor Rebates and Other Promotional Incentives
The Company receives consideration and product purchase credits from certain vendors that the Company accounts for as a reduction of cost of sales. There are several types of cash consideration received from vendors. The purchase incentive is primarily in the form of a specified amount per pound or per case, or an amount for year-over-year growth. For the years ended December 27, 2019, December 28, 2018 and December 29, 2017, the recorded purchase incentives totaled approximately $21,769, $19,731 and $17,265, respectively.
Concentrations of Credit Risks
Financial instruments that subject the Company to concentrations of credit risk consist of cash, temporary cash investments and trade receivables. The Company’s policy is to deposit its cash and temporary cash investments with major financial institutions. The Company distributes its food and related products to a customer base that consists primarily of leading menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolateries, cruise lines, casinos and specialty food stores. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions. The Company generally does not require collateral. However, the Company, in certain instances, has obtained personal guarantees from certain customers. There is no significant balance with any individual customer.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost and are depreciated on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term.
Leases
The Company leases various distribution centers, office facilities, vehicles and equipment. The Company determines if an arrangement contains a lease at contract inception. An arrangement is or contains a lease if the agreement identifies an asset, implicitly or explicitly, that the Company has the right to use over a period of time. If an arrangement contains a lease, the Company classifies the lease as either an operating lease or as a finance lease based on the five criteria defined in ASC 842.
Lease liabilities are recognized at commencement date based on the present value of the remaining lease payments over the lease term. The corresponding ROU asset is recognized for the same amount as the lease liability adjusted for any payments made at or before the commencement date, any lease incentives received, and any initial direct costs. The Company’s lease agreements may include options to renew, extend or terminate the lease. These clauses are included in the initial measurement of the lease liability when at lease commencement the Company is reasonably certain that it will exercise such options. The discount rate used is based on the Company’s incremental borrowing rate since the implicit rate in the Company’s leases is not readily determinable.
Operating lease expense is recognized on a straight-line basis over the lease term and presented within operating expenses on the Company’s consolidated statements of operations. Finance lease ROU assets are amortized on a straight-line basis over the shorter of the useful life of the asset or the lease term. Interest expense on the finance lease liability is recognized using the effective interest rate method and is presented within interest expense on the Company’s consolidated statements of operations. Variable rent payments related to both operating and finance leases are expensed as incurred. The Company’s variable lease payments primarily consist of real estate taxes, maintenance and usage charges. The Company made an accounting policy election to combine lease and non-lease components (maintenance, taxes and insurance) when measuring lease liabilities for vehicle and equipment leases.
The Company has elected to exclude short-term leases from the recognition requirements of ASC 842. A lease is short-term if, at the commencement date, it has a term of less than or equal to one year. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term.
Software Costs
The Company capitalizes certain computer software licenses and software implementation costs that are included in software costs in its consolidated balance sheets. These costs were incurred in connection with developing or obtaining computer software for internal use if it has a useful life in excess of one year, in accordance with Accounting Standards Codification (“ASC”) 350-40 “Internal-Use Software.” Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task that it previously did not perform. Internal use
software is amortized on a straight-line basis over a three to seven year period. Capitalized costs include direct acquisitions as well as software and software development acquired under capitalized leases and internal labor where appropriate. Capitalized software purchases and related development costs, net of accumulated amortization, were $15,203 at December 27, 2019 and $12,469 at December 28, 2018.
Impairment of Long-Lived Assets
Long-lived assets, other than goodwill, are reviewed for impairment in accordance with ASC 360-10-35-15, “Impairment or Disposal of Long-Lived Assets” which only requires testing whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If any indicators are present, a recoverability test is performed by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If the net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not recoverable), an additional step is performed that determines the fair value of the asset and the Company records an impairment, if any. The Company has not recorded any impairment of long-lived assets in fiscal 2019, 2018 or 2017.
Convertible Debt
The Company evaluates debt instruments with embedded conversion features in accordance with ASC 815 “Derivatives and Hedging” and ASC 470 “Debt” both of which provide several criteria that determine whether a conversion feature must be bifurcated from its debt host and accounted as a separate financial instrument. An entity is not required to bifurcate if the conversion feature is indexed to its own stock, meets all equity classification criteria and does not contain a beneficial conversion feature. The Company determined that bifurcation of its convertible debt instruments was not required and recognized the principal amount of these instruments as debt in its consolidated balance sheets.
Debt Issuance Costs
Certain up-front costs associated with the Company’s asset based loan facility are capitalized and included in other non-current assets in the Company’s consolidated balance sheets. The Company had $1,363 and $1,765 of such unamortized costs as of December 27, 2019 and December 28, 2018, respectively. Costs associated with the issuance of other debt instruments are capitalized and presented as a direct deduction from the carrying amount of the underlying debt liability. The Company had $9,207 and $5,893 of such unamortized costs as of December 27, 2019 and December 28, 2018, respectively. These costs are amortized over the terms of the related debt instruments by the effective interest rate method. Amortization of debt issuance costs was $2,168 for the fiscal year ended December 27, 2019, $3,155 for the fiscal year ended December 28, 2018, inclusive of a $1,081 write-off of unamortized deferred financing fees as a result of the Company’s debt repricing (more fully described in Note 9 “Debt Obligations”) and $2,084 for the fiscal year ended December 29, 2017.
Business Combinations
The Company accounts for acquisitions in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed are recorded in the accompanying consolidated balance sheets at their estimated fair values, as of the acquisition date. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred and presented in operating expenses in the Company’s consolidated results of operations. Results of operations are included in the Company’s financial statements from the date of acquisition.
Intangible Assets
The intangible assets recorded by the Company consist of customer relationships, covenants not to compete and trademarks which are amortized over their useful lives on a schedule that approximates the pattern in which economic benefits of the intangible assets are consumed. Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If any indicators are present, a recoverability test is performed by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. Undiscounted cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections. If the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted cash flow model. There have been no events or changes in circumstances during fiscal 2019, 2018 or 2017, indicating that the carrying value of our finite-lived intangible assets are not recoverable.
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the fair value of identifiable net assets acquired in accordance with ASC 350, “Intangibles-Goodwill and Other.” The Company’s business consists of three operating segments: East Coast, Midwest and West Coast and these operating segments represent our reporting units. The Company evaluates the recoverability of goodwill at each of its reporting units annually in the fourth quarter, or more frequently when circumstances indicate an impairment may have occurred. A goodwill impairment loss, if any, would be recognized for the amount by which a reporting unit’s carrying value exceeded its fair value. The Company has the option to evaluate goodwill impairment using a qualitative or quantitative analysis.
For the fiscal year ended December 27, 2019, the Company assessed the recoverability of goodwill using a qualitative analysis and determined that it is more likely than not that the fair value of its reporting units exceeded their respective carry values. The qualitative analysis considered various factors including macroeconomic conditions, market conditions, industry trends, cost factors and financial performance, among others.
For the fiscal year ended December 28, 2018, the Company tested goodwill for impairment using a quantitative analysis. The Company estimated the fair value of its reporting units using an income approach and determined the fair value of its reporting units substantially exceeded their respective carry values. The Company’s income approach incorporates the use of a discounted cash flow methodology that involves many management assumptions that are based upon future growth projections. Assumptions include estimates of future revenue based upon budget projections and growth rates which take into account estimated inflation rates. The Company develops estimates of future levels of gross and operating profits and projected capital expenditures. This methodology includes the use of estimated discount rates based upon industry and competitor analysis as well as other factors. The Company also performed a reconciliation of its market capitalization and the estimate of the aggregate fair value of its reporting units, including consideration of a control premium.
There have been no events or changes in circumstances during fiscal 2019, 2018 or 2017, indicating that goodwill may be impaired.
Employee Benefit Programs
The Company sponsors a defined contribution plan covering substantially all full-time employees (the “401(k) Plan”). The Company recognized expense related to the 401(k) Plan totaling $1,268, $1,097 and $1,172, respectively, for fiscal 2019, 2018 and 2017.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes.” Deferred tax assets or liabilities are recorded to reflect the future tax consequences of temporary differences between the financial reporting basis of assets and liabilities and their tax basis at each year-end. These amounts are adjusted, as appropriate, to reflect enacted changes in tax rates expected to be in effect when the temporary differences reverse. The Company estimates its ability to recover deferred tax assets within the jurisdiction from which they arise. This evaluation considers several factors, including results of recent operations, future taxable income, scheduled reversal of deferred tax liabilities, and tax planning strategies. The Company follows certain provisions of ASC 740, “Income Taxes” which established a single model to address accounting for uncertain tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company evaluates uncertain tax positions, if any, by determining if it is more likely than not to be sustained upon examination by the tax authorities. The Company records uncertain tax positions when it is estimable and probable that such liabilities have been incurred. The Company, when required, will accrue interest and penalties related to income tax matters in income tax expense.
Commitments and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes and environmental matters, as well as commitments under contractual and other commercial obligations. The Company recognizes liabilities for contingencies and commitments when a loss is probable and can be reasonably estimated.
Contingent Earn-out Liabilities
The Company accounts for contingent consideration relating to business combinations as a liability and an increase to goodwill at the date of the acquisition and continually remeasures the liability at each balance sheet date by recording changes in the fair
value through the consolidated statements of operations. The Company determines the fair value of contingent consideration based on future operating projections under various potential scenarios, including the use of Monte Carlo simulations, and weighs the probability of these outcomes. The ultimate settlement of contingent earn-out liabilities relating to business combinations may be for amounts which are materially different from the amounts initially recorded and may cause volatility in the Company’s results of operations.
Stock-Based Compensation
The Company measures stock-based compensation at the grant date based on the fair value of the award. Restricted stock awards (“RSAs”) and performance share units are valued based on the fair value of the stock on the grant date. The related compensation expense is recognized over the service period on a straight-line basis and reduced by forfeitures when they occur. Compensation expense on performance share units reflects the estimated probable outcome at the end of the performance period. The fair value of stock options and RSAs with market conditions is determined based on a Monte Carlo simulation in order to simulate a range of possible future stock prices for the Company’s common stock. For awards subject to graded vesting, the Company ensures that the compensation expense recognized is at least equal to the vested portion of the award.
Self-Insurance Reserves
The Company maintains a self-insured group medical program. The program contains individual stop loss thresholds of $275 per incident and aggregate stop loss thresholds based upon the average number of employees enrolled in the program throughout the year. The amount in excess of the self-insured levels is fully insured by third party insurers. Liabilities associated with this program are estimated in part by considering historical claims experience and medical cost trends. Projections of future loss expenses are inherently uncertain because of the random nature of insurance claims occurrences and could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
The Company maintains an insurance program for its automobile liability and workers’ compensation insurance subject to deductibles or self-insured retentions of $500 per occurrence. The amounts in excess of the deductibles are fully insured by third party insurers. Liabilities associated with this program are estimated in part by considering historical claims experience and cost trends. Projections of future loss expenses are inherently uncertain because of the random nature of insurance claims occurrences and could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Assets and Liabilities Measured at Fair Value
The Company accounts for certain assets and liabilities at fair value. The Company categorizes each of its fair value measurements in one of the following three levels based on the lowest level input that is significant to the fair value measurement in its entirety:
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities include the following:
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|
a)
|
quoted prices for similar assets in active markets;
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b)
|
quoted prices for identical or similar assets in inactive markets;
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|
|
c)
|
inputs other than quoted prices that are observable for the asset; and
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|
|
d)
|
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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If the asset has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset.
Level 3 - Inputs to the valuation methodology are unobservable (i.e., supported by little or no market activity) and significant to the fair value measure.
Note 3 – Net Income per Share
The following table sets forth the computation of basic and diluted earnings per share:
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|
|
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|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 27, 2019
|
|
December 28, 2018
|
|
December 29, 2017
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.82
|
|
|
$
|
0.71
|
|
|
$
|
0.55
|
|
Diluted
|
$
|
0.81
|
|
|
$
|
0.70
|
|
|
$
|
0.54
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
Basic
|
29,532,342
|
|
|
28,703,265
|
|
|
26,118,482
|
|
Diluted
|
30,073,338
|
|
|
29,678,919
|
|
|
27,424,526
|
|
Reconciliation of net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 27, 2019
|
|
December 28, 2018
|
|
December 29, 2017
|
Numerator:
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|
|
|
|
|
|
|
|
Net income
|
$
|
24,193
|
|
|
$
|
20,402
|
|
|
$
|
14,366
|
|
Add effect of dilutive securities
|
|
|
|
|
|
|
|
|
Interest on convertible notes, net of tax
|
207
|
|
|
362
|
|
|
536
|
|
Adjusted net income
|
$
|
24,400
|
|
|
$
|
20,764
|
|
|
$
|
14,902
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
29,532,342
|
|
|
28,703,265
|
|
|
26,118,482
|
|
Dilutive effect of stock options and unvested common shares
|
211,050
|
|
|
270,520
|
|
|
68,670
|
|
Dilutive effect of convertible notes
|
329,946
|
|
|
705,134
|
|
|
1,237,374
|
|
Weighted average diluted common shares outstanding
|
30,073,338
|
|
|
29,678,919
|
|
|
27,424,526
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 27, 2019
|
|
December 28, 2018
|
|
December 29, 2017
|
Restricted Share Awards (“RSAs”)
|
132,861
|
|
|
42
|
|
|
84,511
|
|
Stock options
|
—
|
|
|
—
|
|
|
201,799
|
|
Convertible notes
|
76,384
|
|
|
—
|
|
|
—
|
|
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. 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 Company’s consolidated statements of operations.
The following table presents the changes in Level 3 contingent earn-out liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Del Monte
|
|
Fells Point
|
|
Bassian
|
|
Other Acquisitions
|
|
Total
|
Balance December 29, 2017
|
$
|
649
|
|
|
$
|
4,579
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,228
|
|
Acquisition value
|
—
|
|
|
—
|
|
|
—
|
|
|
1,414
|
|
|
1,414
|
|
Cash payments
|
—
|
|
|
(3,000
|
)
|
|
—
|
|
|
—
|
|
|
(3,000
|
)
|
Changes in fair value
|
(649
|
)
|
|
2,070
|
|
|
—
|
|
|
27
|
|
|
1,448
|
|
Balance December 28, 2018
|
—
|
|
|
3,649
|
|
|
—
|
|
|
1,441
|
|
|
5,090
|
|
Acquisition value
|
—
|
|
|
—
|
|
|
7,450
|
|
|
479
|
|
|
7,929
|
|
Cash payments
|
(200
|
)
|
|
(3,000
|
)
|
|
—
|
|
|
(1,000
|
)
|
|
(4,200
|
)
|
Changes in fair value
|
200
|
|
|
3,895
|
|
|
507
|
|
|
1,277
|
|
|
5,879
|
|
Balance December 27, 2019
|
$
|
—
|
|
|
$
|
4,544
|
|
|
$
|
7,957
|
|
|
$
|
2,197
|
|
|
$
|
14,698
|
|
In May 2019, the Company fully settled its Del Monte earn-out liability for $200. The long-term portion of contingent earn-out liabilities was $7,957 and $2,792 as of December 27, 2019 and December 28, 2018, respectively, and are reflected as other liabilities and deferred credits on the Company’s consolidated balance sheets. The remaining short-term portion of earn-out liabilities are reflected as accrued liabilities on the Company’s consolidated balance sheets. Contingent earn-out liability payments in excess of the acquisition date fair value of the underlying contingent earn-out liability are classified as operating activities on the Company’s consolidated statements of cash flows and all other such payments are classified as financing activities.
Fair Value of Financial Instruments
The carrying amounts reported in the Company’s 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 December 27, 2019 and December 28, 2018 as these instruments had variable interest rates that reflected current market rates available to the Company.
The following table presents the carrying value and fair value of the Company’s convertible notes (more fully described in Note 9). In estimating the fair value of its 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 options. 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 estimates.
|
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
Carrying Value
|
|
Fair Value
|
Convertible Senior Notes
|
$
|
150,000
|
|
|
$
|
165,000
|
|
Convertible Unsecured Note
|
$
|
4,000
|
|
|
$
|
4,282
|
|
Note 5 – Acquisitions
Bassian
On February 25, 2019, pursuant to an asset purchase agreement, the Company acquired substantially all of the assets of Bassian Farms, Inc. and certain affiliated entities (“Bassian”), a specialty center-of-the-plate distributor based in northern California. The aggregate purchase price for the transaction was approximately $31,777, including $27,990 paid in cash at closing and the issuance of a $4,000 unsecured convertible note, partially offset by the settlement of a net working capital true-up. The Company will also pay additional contingent consideration, if earned, in the form of an earn-out amount which could total $9,000 over a four-year period. The payment of the contingent 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 $7,957 and $7,450 as of December 27, 2019 and February 25, 2019, respectively.
Customer relationships, non-compete agreements and trademarks are valued at fair value using Level 3 inputs and are being amortized over 15, 5 and 10 years, respectively. Goodwill for the Bassian acquisition will be amortized over 15 years for tax purposes. The goodwill recorded primarily reflects the value of acquiring an established center-of-the-plate distributor to grow the Company's center-of-the-plate product category in the West Coast region, as well as any intangible assets that do not qualify
for separate recognition. The Company recognized professional fees of $235 in operating expenses related to the Bassian acquisition.
The table below sets forth the purchase price allocation of the Bassian acquisition:
|
|
|
|
|
|
|
|
Bassian
|
Current assets
|
|
$
|
6,657
|
|
Customer relationships
|
|
15,530
|
|
Trademarks
|
|
4,610
|
|
Non-compete agreement
|
|
1,000
|
|
Goodwill
|
|
13,065
|
|
Fixed assets
|
|
856
|
|
Other assets
|
|
10
|
|
Current liabilities
|
|
(2,501
|
)
|
Earn-out liability
|
|
(7,450
|
)
|
Total consideration
|
|
$
|
31,777
|
|
The Company reflected net sales of $49,908 for Bassian in its consolidated statement of operations for the fifty-two weeks ended December 27, 2019. The Company has determined that separate disclosure of Bassian earnings is impracticable due to the integration of the Bassian business into the Company's operations in the San Francisco market.
During the years ended December 27, 2019 and December 28, 2018, the Company also paid approximately $300 and $13,401, respectively, on small strategic acquisitions.
Note 6 – Inventories
Inventories consist primarily of finished product. Our entities record inventory using a mixture of first-in, first-out and average cost, which we believe approximates first-in, first-out. Inventory is reflected net of adjustments for shrinkage, excess and obsolescence totaling $1,937 and $1,921 at December 27, 2019 and December 28, 2018, respectively.
Note 7 – Equipment, Leasehold Improvements and Software
Equipment, leasehold improvements and software as of December 27, 2019 and December 28, 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
December 27, 2019
|
|
December 28, 2018
|
Land
|
|
Indefinite
|
|
$
|
1,170
|
|
|
$
|
1,170
|
|
Buildings
|
|
20 years
|
|
1,360
|
|
|
1,292
|
|
Machinery and equipment
|
|
5-10 years
|
|
21,718
|
|
|
17,837
|
|
Computers, data processing and other equipment
|
|
3-7 years
|
|
12,686
|
|
|
11,244
|
|
Software
|
|
3-7 years
|
|
29,305
|
|
|
22,779
|
|
Leasehold improvements
|
|
1-40 years
|
|
70,903
|
|
|
60,565
|
|
Furniture and fixtures
|
|
7 years
|
|
3,309
|
|
|
3,268
|
|
Vehicles
|
|
5-7 years
|
|
6,410
|
|
|
2,769
|
|
Other
|
|
7 years
|
|
95
|
|
|
95
|
|
Construction-in-process
|
|
|
|
9,200
|
|
|
15,757
|
|
|
|
|
|
156,156
|
|
|
136,776
|
|
Less: accumulated depreciation and amortization
|
|
|
|
(63,310
|
)
|
|
(51,500
|
)
|
Equipment, leasehold improvements and software, net
|
|
|
|
$
|
92,846
|
|
|
$
|
85,276
|
|
Construction-in-process at December 27, 2019 related primarily to the implementation of the Company’s Enterprise Resource Planning (“ERP”) system and at December 28, 2018 related primarily to the implementation of the Company’s ERP system and the buildout of the Company’s headquarters in Ridgefield, CT. The buildout of the Company’s headquarters was completed during fiscal 2019. The rollout of its ERP system will continue through fiscal 2020. The net book value of equipment financed under finance leases at December 27, 2019 and December 28, 2018 was $3,905 and $388, respectively. No interest expense was capitalized during the fiscal years ended December 27, 2019, December 28, 2018 and December 29, 2017.
The components of depreciation and amortization expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 27, 2019
|
|
December 28, 2018
|
|
December 29, 2017
|
Depreciation expense
|
$
|
9,535
|
|
|
$
|
7,142
|
|
|
$
|
6,708
|
|
Software amortization
|
$
|
3,793
|
|
|
$
|
3,154
|
|
|
$
|
1,808
|
|
Note 8 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill are presented as follows:
|
|
|
|
|
Carrying amount as of December 29, 2017
|
$
|
173,202
|
|
Goodwill adjustments (1)
|
3,283
|
|
Acquisitions
|
7,839
|
|
Foreign currency translation
|
(44
|
)
|
Carrying amount as of December 28, 2018
|
184,280
|
|
Acquisitions
|
13,424
|
|
Foreign currency translation
|
39
|
|
Carrying amount as of December 27, 2019
|
$
|
197,743
|
|
|
|
(1)
|
The goodwill adjustments primarily relate to the Fells Point acquisition.
|
Other intangible assets consist of customer relationships being amortized over a period ranging from four to twenty years, trademarks being amortized over a period of one to forty years, and non-compete agreements being amortized over a period of two to six years.
Other intangible assets as of December 27, 2019 and December 28, 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Remaining Amortization Period
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
December 27, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
134 months
|
|
$
|
135,226
|
|
|
$
|
(45,454
|
)
|
|
$
|
89,772
|
|
Non-compete agreements
|
|
49 months
|
|
8,579
|
|
|
(7,479
|
)
|
|
1,100
|
|
Trademarks
|
|
193 months
|
|
64,505
|
|
|
(16,626
|
)
|
|
47,879
|
|
Total
|
|
|
|
$
|
208,310
|
|
|
$
|
(69,559
|
)
|
|
$
|
138,751
|
|
December 28, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
137 months
|
|
$
|
119,488
|
|
|
$
|
(36,185
|
)
|
|
$
|
83,303
|
|
Non-compete agreements
|
|
54 months
|
|
7,579
|
|
|
(7,251
|
)
|
|
328
|
|
Trademarks
|
|
213 months
|
|
59,862
|
|
|
(13,460
|
)
|
|
46,402
|
|
Total
|
|
|
|
$
|
186,929
|
|
|
$
|
(56,896
|
)
|
|
$
|
130,033
|
|
Amortization expense for other intangibles was $12,663, $11,910 and $12,033 for the fiscal years ended December 27, 2019, December 28, 2018 and December 29, 2017, respectively.
As of December 27, 2019, estimated amortization expense for other intangible assets for each of the next five fiscal years and thereafter is as follows:
|
|
|
|
|
2020
|
$
|
12,849
|
|
2021
|
12,844
|
|
2022
|
12,064
|
|
2023
|
11,036
|
|
2024
|
10,696
|
|
Thereafter
|
79,262
|
|
Total
|
$
|
138,751
|
|
Note 9 – Debt Obligations
Debt obligations as of December 27, 2019 and December 28, 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
Senior secured term loan
|
|
$
|
238,129
|
|
|
$
|
239,745
|
|
Convertible senior notes
|
|
150,000
|
|
|
—
|
|
Convertible unsecured note
|
|
4,000
|
|
|
—
|
|
Finance lease and other financing obligations
|
|
3,905
|
|
|
193
|
|
Asset-based loan facility
|
|
—
|
|
|
44,185
|
|
Deferred finance fees and original issue discount
|
|
(9,207
|
)
|
|
(5,893
|
)
|
Total debt obligations
|
|
386,827
|
|
|
278,230
|
|
Less: current installments
|
|
(721
|
)
|
|
(61
|
)
|
Total debt obligations excluding current installments
|
|
$
|
386,106
|
|
|
$
|
278,169
|
|
Maturities of the Company’s debt, excluding finance leases, for each of the next five years and thereafter at December 27, 2019 are as follows:
|
|
|
|
|
2020
|
$
|
—
|
|
2021
|
—
|
|
2022
|
238,129
|
|
2023
|
4,000
|
|
2024
|
150,000
|
|
Thereafter
|
—
|
|
Total
|
$
|
392,129
|
|
Senior Secured Term Loan Credit Facility
On June 22, 2016, the Company refinanced its debt structure by entering into a credit agreement (the “Term Loan Credit Agreement”) with a group of lenders for which Jefferies Finance LLC acts as administrative agent and collateral agent. The Term Loan Credit Agreement provides for a senior secured term loan B facility (the “Term Loan Facility”) in an aggregate amount of $305,000 (the loans outstanding under the Term Loan Facility, the “Term Loans”) maturing on June 22, 2022. Additionally, the Term Loan Facility includes an accordion which permits the Company to request that the lenders extend additional Term Loans in an aggregate principal amount of up to $50,000 (less the aggregate amount of certain indebtedness incurred to finance acquisitions) plus an unlimited amount subject to the Company’s Total Leverage Ratio not exceeding 4.90:1.00 on a pro forma basis. Borrowings were used to repay the Company’s senior secured notes, as well as the prior term loan and revolving credit facility. Remaining funds were used for capital expenditures, permitted acquisitions, working capital and general corporate purposes of the Company.
On December 13, 2017, the Company completed a repricing of the Term Loan Facility to reduce Applicable Rate (as defined in the Term Loan Credit Agreement) from 475 basis points to 400 basis points over the London Inter-bank Offered Rate (“LIBOR”). In connection with the repricing, the Company paid debt financing costs of $761 which were capitalized as deferred financing charges.
On July 6, 2018, the Company made a $47,100 prepayment and is no longer required to make quarterly amortization payments on the Term Loans. On November 16, 2018, the Company completed a repricing of the Term Loan Facility to reduce the Applicable Rate from 400 basis points to 350 basis points over LIBOR. In connection with the repricing, the Company paid debt financing costs of $626 which were capitalized as deferred financing charges. The Company wrote off unamortized deferred financing fees of $1,081 as a result of this repricing.
The interest charged on the Term Loans, will be equal to a spread plus, at the Company’s option, either the Base Rate (as defined in the Term Loan Credit Agreement) or LIBOR for one, two, three, six or (if consented to by the lenders) twelve-month interest periods chosen by the Company. The interest rate on the Term Loans at December 27, 2019 was 5.2%.
The Term Loan Facility contains customary affirmative covenants, negative covenants (including restrictions, subject to customary exceptions, on incurring debt or liens, paying dividends, repaying payment subordinated and junior lien debt,
disposing assets, and making investments and acquisitions), and events of default for a term loan B facility of this type, as more particularly described in the Term Loan Credit Agreement. As of December 27, 2019, the Company was in compliance with all debt covenants under the Term Loan Credit Agreement.
Asset-Based Loan Facility
On June 29, 2018, the Company entered into a credit agreement (the “ABL Credit Agreement”) with a group of lenders for which BMO Harris Bank, N.A. acts as administrative agent. The ABL Credit Agreement provides for an asset-based loan facility (the “ABL”) in the aggregate amount of up to $150,000. Borrowings under the ABL will be used, and are expected to be used, for capital expenditures, permitted acquisitions, working capital and general corporate purposes of the Company. Availability under the ABL will be limited to a borrowing base equal to the lesser of: (i) the aggregate amount of commitments or (ii) the sum of specified percentages of eligible receivables and eligible inventory, minus certain availability reserves. The co-borrowers under the ABL are entitled on one or more occasions, subject to the satisfaction of certain conditions, to request an increase in the commitments under the ABL in an aggregate principal amount of up to $25,000. The ABL matures on the earlier of June 29, 2023 and 90 days prior to the maturity date of the Company’s Term Loan Facility.
The interest rate charged on borrowing under the ABL is equal to a spread plus, at the Company’s option, either the Base Rate (as defined in the ABL Credit Agreement) or LIBOR (except for swingline loans) for one, two, three, six or (if consented to by the lenders) twelve-month, interest periods chosen by the Company. The Company will pay certain recurring fees with respect to the ABL, including fees on unused lender commitments.
The ABL Credit Agreement contains customary affirmative covenants, negative covenants and events of default as more particularly described in the ABL Credit Agreement. The Company is required to comply with a minimum consolidated fixed charge coverage ratio of 1:1 if the amount of availability under the ABL falls below $10,000 or 10% of the borrowing base.
The Company incurred transaction costs of $877 which were capitalized as deferred financing fees to be amortized over the term of the ABL. On July 6, 2018, the Company borrowed $47,100 under the ABL and made an equivalent prepayment on its Term Loans. On November 22, 2019, the Company fully paid all borrowings outstanding under the ABL and there was no balance outstanding as of December 27, 2019. The weighted average interest rate on our ABL borrowings was approximately 3.7% during fiscal 2019.
As of December 27, 2019, the Company was in compliance with all debt covenants and the Company had reserved $16,641 of the ABL for the issuance of letters of credit. As of December 27, 2019, funds totaling $133,359 were available for borrowing under the ABL.
Convertible Senior Notes
On November 22, 2019, the Company issued $150,000 aggregate principal amount of 1.875% Convertible Senior Notes (the “Senior Notes”). The Senior Notes were issued pursuant to an indenture, dated as of November 22, 2019 (the “Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Approximately $43,225 of the net proceeds were used to repay all outstanding borrowings under the ABL and the Company intends to use the remainder for working capital and general corporate purposes, which may include future acquisitions.
The Senior Notes bear interest of 1.875% per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2020. At any time before the close of business on the scheduled trading day immediately before the maturity date, the Senior Notes will be convertible at the option of holders into shares of the Company’s common stock, together with cash in lieu of any fractional share, at an initial conversion price of approximately $44.20 per share. The conversion price is subject to adjustments upon the occurrence of certain events. The Senior Notes will mature on December 1, 2024, unless earlier converted or repurchased in accordance with their terms.
The Company may not redeem the Senior Notes at its option prior to maturity. In addition, if the Company undergoes a fundamental change, as described in the Indenture, holders may require the Company to repurchase for cash all or part of their Senior Notes at a repurchase price equal to 100% of the principal amount of the Senior Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the required repurchase date.
The Company incurred transaction costs of approximately $5,082 which were capitalized as deferred financing fees to be amortized over the term of the Senior Notes.
Convertible Unsecured Note
On February 25, 2019, the Company issued a $4,000 convertible unsecured note (the “Unsecured Note”), maturing on June 29, 2023, to Bassian Farms, Inc. (the “Holder”) as partial consideration in the Bassian acquisition. The interest rate charged on the Unsecured Note is 4.5% per annum and increases to 5.0% after the two-year anniversary of the closing date. The Company may, in certain instances beginning eighteen months after issuance of the Unsecured Note, redeem the Unsecured Note in whole or in part for cash or convert the Unsecured Note into shares of the Company’s common stock at the conversion price of $43.93 per share. After the two-year anniversary of the closing date, the Holder may convert the Unsecured Note into shares of the Company’s common stock at the conversion price. Upon a change of control event, the Holder may convert the Unsecured Note into shares of the Company’s common stock at the conversion price or redeem the Unsecured Note for cash.
Note 10 – Stockholders’ Equity
On July 25, 2018, the holders of the $36,750 principal amount of convertible subordinated notes that were issued in connection with the Company’s acquisition of Del Monte Capitol Meat Company converted these notes and related accrued interest of $265 into 1,246,272 shares of the Company’s common stock.
On December 19, 2017, the Company completed a public offering of 1,900,000 shares of its common stock which resulted in net proceeds of approximately $34,020 after deducting underwriters’ fees, commissions and transaction expenses.
Equity Incentive Plan
On May 17, 2019, the Company’s stockholders approved the 2019 Omnibus Equity Incentive Plan (the “2019 Plan”). Concurrently, the 2011 Omnibus Equity Incentive Plan (the “2011 Plan”) was terminated and any shares remaining available for new grants under the 2011 Plan share reserve were extinguished. The purpose of the 2019 Plan is to promote the interests of the Company and its stockholders by (i) attracting and retaining key officers, employees and directors of, and consultants to, the Company and its Subsidiaries and Affiliates; (ii) motivating such individuals by means of performance-related incentives to achieve long-range performance goals; (iii) enabling such individuals to participate in the long-term growth and financial success of the Company; (iv) encouraging ownership of stock in the Company by such individuals; and (v) linking their compensation to the long-term interests of the Company and its stockholders.
The 2019 Plan is administered by the Compensation and Human Capital Committee (the “Committee”) of the Board of Directors and allows for the issuance of stock options, stock appreciation rights (“SARs”), RSAs, restricted share units, performance awards, or other stock-based awards. Stock option exercise prices are fixed by the Committee but shall not be less than the fair market value of a common share on the date of the grant of the option, except in the case of substitute awards. Similarly, the grant price of an SAR may not be less than the fair market value of a common share on the date of the grant. The Committee will determine the expiration date of each stock option and SAR, but in no case shall the stock option or SAR be exercisable after the expiration of 10 years from the date of the grant. The 2019 Plan provides for 2,600,000 shares available for grant. As of December 27, 2019, there were 2,222,088 shares available for grant.
Stock compensation expense was $4,399, $4,094 and $3,018 for the fiscal years ended December 27, 2019, December 28, 2018 and December 29, 2017, respectively. The related tax benefit for stock-based compensation was $883, $864 and $1,283 for the fiscal years ended December 27, 2019, December 28, 2018 and December 29, 2017, respectively.
The following table reflects the activity of RSAs during the fiscal years ended December 27, 2019 and December 28, 2018:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date Fair Value
|
Unvested at December 29, 2017
|
|
329,761
|
|
|
$
|
16.69
|
|
Granted
|
|
311,957
|
|
|
23.62
|
|
Vested
|
|
(113,482
|
)
|
|
17.60
|
|
Forfeited
|
|
(1,506
|
)
|
|
17.13
|
|
Unvested at December 28, 2018
|
|
526,730
|
|
|
$
|
20.60
|
|
Granted
|
|
384,531
|
|
|
34.44
|
|
Vested
|
|
(115,459
|
)
|
|
21.32
|
|
Forfeited
|
|
(55,193
|
)
|
|
20.46
|
|
Unvested at December 27, 2019
|
|
740,609
|
|
|
$
|
27.68
|
|
The fair value of RSAs vested during the fiscal years ended December 27, 2019, December 28, 2018 and December 29, 2017, was $3,742, $2,936 and $1,703, respectively.
These awards are a mix of time-, market- and performance-based grants awarded to key employees and non-employee directors which vest over a range of periods of up to five-years. The market- and performance-based RSAs cliff vest, if at all, after the conclusion of a three-year performance period and vesting is subject to the award recipient’s continued service to the Company as of the vesting date. The number of performance-based RSAs that ultimately vest is based on the Company’s attainment of certain profitability and return on invested capital targets.
During fiscal 2019, the Company awarded market-based RSAs that vest based on the Company’s attainment of an average closing trade price of the Company’s common stock of $39.86 per share, based on an average of 20 consecutive trading days. The grant date fair value of these market-based performance awards was determined using a Monte Carlo simulation in order to simulate a range of possible future stock prices. Key assumptions used included a risk-free interest rate of 2.2% and expected volatility of 44.6%.
At December 27, 2019, the total unrecognized compensation cost for these unvested RSAs was $9,600 to be recognized over a weighted-average period of approximately 2.3 years. Of this total, $6,150 related to RSAs with time-based vesting provisions to be recognized over a weighted average period of 2.6 years and $3,450 related to RSAs with performance-based vesting provisions to be recognized over a weighted average period of 1.9 years.
The following table summarizes stock option activity during the fiscal years ended December 27, 2019 and December 28, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted Average
Remaining Contractual
Term (in years)
|
Outstanding December 29, 2017
|
|
191,808
|
|
|
$
|
20.23
|
|
|
$
|
33
|
|
|
8.2
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Outstanding December 28, 2018
|
|
191,808
|
|
|
$
|
20.23
|
|
|
$
|
2,129
|
|
|
7.2
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(76,169
|
)
|
|
20.23
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding December 27, 2019
|
|
115,639
|
|
|
$
|
20.23
|
|
|
$
|
2,051
|
|
|
6.2
|
Exercisable at December 27, 2019
|
|
115,639
|
|
|
20.23
|
|
|
$
|
2,051
|
|
|
6.2
|
The Company issues new shares upon the exercise of stock options. The Company recognized expense of $114, $601 and $557 on stock options during the fiscal years ended December 27, 2019, December 28, 2018 and December 29, 2017, respectively. These awards fully vested during fiscal 2019. No compensation expense related to the Company’s RSAs or stock options has been capitalized.
Note 11 – Leases
The components of net lease cost for the fiscal year ended December 27, 2019 were as follows:
|
|
|
|
|
Operating lease cost
|
$
|
27,415
|
|
Finance lease cost:
|
|
Amortization of right-of-use asset
|
308
|
|
Interest expense on lease liabilities
|
96
|
|
Total finance lease cost
|
$
|
404
|
|
Short-term lease cost
|
2,143
|
|
Variable lease cost
|
2,707
|
|
Sublease income
|
(514
|
)
|
Total lease cost, net
|
$
|
32,155
|
|
The maturities of the Company’s lease liabilities for each of the next five fiscal years and thereafter at December 27, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Related Party Real Estate
|
|
Third Party Real Estate
|
|
Vehicles and Equipment
|
|
Total
|
|
Vehicles and Equipment
|
2020
|
$
|
365
|
|
|
$
|
13,637
|
|
|
$
|
11,660
|
|
|
$
|
25,662
|
|
|
$
|
880
|
|
2021
|
—
|
|
|
13,332
|
|
|
9,368
|
|
|
22,700
|
|
|
874
|
|
2022
|
—
|
|
|
13,106
|
|
|
7,324
|
|
|
20,430
|
|
|
841
|
|
2023
|
—
|
|
|
12,210
|
|
|
4,948
|
|
|
17,158
|
|
|
747
|
|
2024
|
—
|
|
|
11,160
|
|
|
1,762
|
|
|
12,922
|
|
|
645
|
|
Thereafter
|
—
|
|
|
97,685
|
|
|
802
|
|
|
98,487
|
|
|
610
|
|
Total
|
$
|
365
|
|
|
$
|
161,130
|
|
|
$
|
35,864
|
|
|
$
|
197,359
|
|
|
$
|
4,597
|
|
Less interest
|
|
|
|
|
|
|
(59,334
|
)
|
|
(692
|
)
|
Present value
|
|
|
|
|
|
|
$
|
138,025
|
|
|
$
|
3,905
|
|
Supplemental balance sheet information related to finance leases was as follows:
|
|
|
|
|
|
|
Balance Sheet Location
|
December 27, 2019
|
Short-term finance lease liabilities
|
Current portion of long-term debt
|
$
|
721
|
|
Long-term finance lease liabilities
|
Long-term debt, net of current portion
|
$
|
3,184
|
|
At December 27, 2019, the weighted-average lease term for operating and finance leases was 13.8 years and 5.4 years, respectively. At December 27, 2019, the weighted-average discount rate for operating and finance leases was 6.3% and 5.0%, respectively.
As of December 27, 2019, the Company is contractually obligated to make payments of approximately $5,307, related to long-term leases for several vehicles and a distribution and processing facility that have not commenced. Accordingly, the Company has not recognized ROU assets or lease liabilities associated with these leases.
The Company’s future minimum lease payments as of December 28, 2018, in accordance with legacy lease accounting standards, under non-cancelable operating and finance lease agreements were as follows:
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
2019
|
$
|
24,666
|
|
|
$
|
56
|
|
2020
|
23,047
|
|
|
55
|
|
2021
|
19,918
|
|
|
50
|
|
2022
|
17,838
|
|
|
42
|
|
2023
|
14,876
|
|
|
4
|
|
Thereafter
|
47,330
|
|
|
—
|
|
Total minimum lease payments
|
$
|
147,675
|
|
|
207
|
|
Less interest
|
|
|
(49
|
)
|
Present value of capital lease obligations
|
|
|
$
|
158
|
|
Total rent expense for operating leases for the fiscal years ended December 28, 2018 and December 29, 2017 was $29,202 and $26,678, respectively. Total depreciation expense for finance leases for the fiscal years ended December 28, 2018 and December 29, 2017 was $52 and $64, respectively
Note 12 – Income Taxes
The provision for income taxes consists of the following for the fiscal years ended December 27, 2019, December 28, 2018 and December 29, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
December 29, 2017
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,003
|
|
|
$
|
2,945
|
|
|
$
|
3,342
|
|
State
|
|
2,144
|
|
|
1,943
|
|
|
1,403
|
|
Total current income tax expense
|
|
6,147
|
|
|
4,888
|
|
|
4,745
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
Federal
|
|
1,617
|
|
|
2,363
|
|
|
(1,059
|
)
|
Foreign
|
|
17
|
|
|
(472
|
)
|
|
215
|
|
State
|
|
429
|
|
|
663
|
|
|
141
|
|
Total deferred income tax expense (benefit)
|
|
2,063
|
|
|
2,554
|
|
|
(703
|
)
|
Total income tax expense
|
|
$
|
8,210
|
|
|
$
|
7,442
|
|
|
$
|
4,042
|
|
Income tax expense for the fiscal years ended December 27, 2019, December 28, 2018 and December 29, 2017 differed from amounts computed using the statutory federal income tax rate due to the following reasons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
December 29, 2017
|
Statutory U.S. Federal tax
|
|
$
|
6,805
|
|
|
$
|
5,847
|
|
|
$
|
6,443
|
|
Differences due to:
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of federal benefit
|
|
2,078
|
|
|
1,906
|
|
|
1,112
|
|
Change in valuation allowance
|
|
95
|
|
|
523
|
|
|
289
|
|
Impact of the Tax Act
|
|
—
|
|
|
—
|
|
|
(3,573
|
)
|
Stock compensation
|
|
(676
|
)
|
|
(197
|
)
|
|
162
|
|
Other
|
|
(92
|
)
|
|
(637
|
)
|
|
(391
|
)
|
Income tax expense
|
|
$
|
8,210
|
|
|
$
|
7,442
|
|
|
$
|
4,042
|
|
Deferred tax assets and liabilities at December 27, 2019 and December 28, 2018 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
Deferred tax assets:
|
|
|
|
|
|
|
Receivables and inventory
|
|
$
|
4,468
|
|
|
$
|
3,978
|
|
Accrued expenses
|
|
170
|
|
|
1,835
|
|
Self-insurance reserves
|
|
1,957
|
|
|
2,050
|
|
Net operating loss carryforwards
|
|
1,393
|
|
|
1,749
|
|
Stock compensation
|
|
1,894
|
|
|
1,670
|
|
Operating lease liabilities
|
|
37,740
|
|
|
—
|
|
Other
|
|
612
|
|
|
803
|
|
Total deferred tax assets
|
|
48,234
|
|
|
12,085
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Property & equipment
|
|
(5,218
|
)
|
|
(3,446
|
)
|
Intangible assets
|
|
(15,192
|
)
|
|
(13,197
|
)
|
Contingent earn-out liabilities
|
|
(1,526
|
)
|
|
(3,179
|
)
|
Prepaid expenses and other
|
|
(1,379
|
)
|
|
(1,052
|
)
|
Operating lease right-of-use assets
|
|
(34,895
|
)
|
|
—
|
|
Total deferred tax liabilities
|
|
(58,210
|
)
|
|
(20,874
|
)
|
Valuation allowance
|
|
(907
|
)
|
|
(812
|
)
|
Total net deferred tax liability
|
|
$
|
(10,883
|
)
|
|
$
|
(9,601
|
)
|
The deferred tax provision results from the effects of net changes during the year in deferred tax assets and liabilities arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company files income tax returns in the U.S. Federal and various state and local jurisdictions as well as the Canadian Federal and provincial districts. For Federal income tax purposes, the 2016 through 2019 tax years remain open for examination by the tax authorities under the normal three-year statute of limitations and the fact that we have not yet filed our tax return for 2019. For state tax purposes, the 2015 through 2019 tax years remain open for examination by the tax authorities under a four-year statute of limitations. The Company records interest and penalties, if any, in income tax expense.
At December 27, 2019, the Company had a valuation allowance of $907 which consisted of a full valuation allowance on the Company’s Canada net operating loss carryforward of $732, offset by a $267 reduction in deferred tax liabilities related to indefinite-lived intangible assets acquired in 2013, and a valuation allowance of $442 against the Company’s state net operating loss carryforwards. The valuation allowances on net operating loss carryforwards are necessary as they are not expected be be fully realizable in the future. The Company’s Canada net operating loss carryforward expires at various dates between fiscal 2036 and 2038 and the Company’s state net operating loss carryforwards expire at various dates between fiscal 2019 and 2038.
For financial reporting purposes, the Company’s foreign subsidiaries had operating income before income taxes of $18 for the fiscal year ended December 27, 2019 and net operating losses before income taxes of $3,223 and $1,520 for the fiscal years ended December 28, 2018 and December 29, 2017, respectively. The Company is permanently reinvested in the earnings of it’s foreign operations which are disregarded for US tax purposes. In addition, the US tax consequences and foreign withholding taxes on any future remittances are immaterial.
As of December 27, 2019 and December 28, 2018, the Company did not have any material uncertain tax positions.
Note 13 – Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
December 29, 2017
|
Cash paid for income taxes, net of cash received
|
|
$
|
6,046
|
|
|
$
|
4,825
|
|
|
$
|
333
|
|
Cash paid for interest
|
|
$
|
16,271
|
|
|
$
|
16,955
|
|
|
$
|
20,796
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
25,302
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating cash flows from finance leases
|
|
$
|
96
|
|
|
$
|
—
|
|
|
$
|
—
|
|
ROU assets obtained in exchange for lease liabilities:
|
|
|
|
|
|
|
Operating leases
|
|
$
|
155,027
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance leases
|
|
$
|
4,183
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Sinking funds used to retire debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,939
|
|
Conversion of subordinated notes and accrued interest into common stock
|
|
$
|
—
|
|
|
$
|
37,015
|
|
|
$
|
—
|
|
Common stock issued for acquisitions
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,300
|
|
Contingent earn-out liabilities for acquisitions
|
|
$
|
7,929
|
|
|
$
|
1,414
|
|
|
$
|
4,445
|
|
Convertible notes issued for acquisitions
|
|
$
|
4,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 14 – Employee Benefit Plans
Employee Tax-Deferred Savings Plan
The Company offers a 401(k) Plan to eligible employees that provides for tax-deferred salary deductions for eligible employees. Employees may choose to make voluntary contributions of their annual compensation to the 401(k) Plan, limited to an annual maximum amount as set periodically by the Internal Revenue Service. The Company provides discretionary matching contributions equal to 50 percent of the employee’s contribution amount, up to a maximum of six percent of the employee’s annual salary, capped at $2.5 per employee per year. Matching contributions begin vesting after one year and are fully vested after five years. Employee contributions are fully vested when made. Under the 401(k) Plan there is no option available to the employee to receive or purchase the Company’s common stock. Matching contributions under the 401(k) Plan were $1,268, $1,097 and $1,172, respectively, for fiscal 2019, 2018 and 2017.
Note 15 – Related Parties
The Company follows the guidance in ASC 850, “Related Party Disclosure”, which requires the disclosure of material related party transactions other than compensation arrangements, expense allowances, or other similar items that occur in the ordinary course of business.
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 was $433 for fiscal 2019 and $533 for fiscal 2018 and 2017. This lease was amended during the first quarter of fiscal 2019 and expires on September 30, 2020.
The Company purchases products from ConAgra Foods, Inc. of which Steve Goldstone, a Director of the Company, was a member of the board of directors through September 20, 2018. The Company purchased approximately $662 worth of products from ConAgra Foods, Inc. through September 20, 2018 of fiscal 2018 and $701 during fiscal 2017.
John DeBenedetti was a prior owner of Del Monte and served on the Company’s board of directors through April 20, 2018 at which point he ceased to be a related party. John DeBenedetti, indirectly through TJ Investments, LLC, owns an 8.33% ownership interest in Old World Provisions, which has been supplying products to the Company since the Del Monte acquisition. The Company purchased approximately $474 of products from Old World Provisions during the sixteen weeks ended April 20, 2018 and $1,713 during fiscal 2017. Mr. J. DeBenedetti was not involved in the day-to-day management of Old World Provisions. With the acquisition of Del Monte, the Company leased two warehouse facilities from certain prior owners
of Del Monte, including John DeBenedetti. The first property is located in American Canyon, CA and is owned by TJ Management Co. LLC, an entity owned 50% by John DeBenedetti. The Company paid rent on this facility totaling $73 during the sixteen weeks ended April 20, 2018 and $219 during fiscal 2017. The second property is located in West Sacramento, CA and is owned by David DeBenedetti and Victoria DeBenedetti, the parents of John DeBenedetti. The Company paid rent on this facility totaling $78 during the sixteen weeks ended April 20, 2018 and $234 during fiscal 2017.
Note 16 – Commitments and Contingencies
Legal Contingencies
The Company is involved in various legal proceedings. The Company establishes reserves for specific legal proceedings when it determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management has also identified certain other legal matters where the Company believes an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. The Company does not believe that there is a reasonable possibility of material loss or loss in excess of the amount that the Company has accrued. The Company recognizes legal fees related to any ongoing legal proceeding as incurred.
Tax Audits
The Company is involved in various tax matters, with respect to some of which the outcome is uncertain. These audits may result in the assessment of additional taxes that are subsequently resolved with authorities or potentially through the courts.
Risk Management Programs
The Company’s self-insurance reserves for its medical program totaled $1,220 and $946 at December 27, 2019 and December 28, 2018, respectively.
The Company’s self-insurance reserves for its automobile liability program totaled $2,818 and $1,436 at December 27, 2019 and December 28, 2018, respectively. Self-insurance reserves for workers’ compensation totaled $7,082 and $8,812 at December 27, 2019 and December 28, 2018, respectively.
Workforce
As of December 27, 2019, approximately 8% of the Company’s employees are represented by unions, all of whom are operating under collective bargaining agreements which expire at various times between fiscal 2020 and 2022. Approximately 5% of the Company’s employees are under a collective bargaining agreement that expires in fiscal 2020.
Note 17 – Valuation Reserves
The following tables summarize the activity in our valuation accounts during the fiscal years ended December 27, 2019, December 28, 2018 and December 29, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Additions Charged to Expense
|
|
Deductions
|
|
Balance at End of Period
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
$
|
7,460
|
|
|
$
|
4,981
|
|
|
$
|
(3,595
|
)
|
|
$
|
8,846
|
|
December 28, 2018
|
|
8,026
|
|
|
3,790
|
|
|
(4,356
|
)
|
|
7,460
|
|
December 29, 2017
|
|
6,848
|
|
|
4,061
|
|
|
(2,883
|
)
|
|
8,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for deferred tax assets
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
$
|
812
|
|
|
$
|
95
|
|
|
$
|
—
|
|
|
$
|
907
|
|
December 28, 2018
|
|
289
|
|
|
523
|
|
|
—
|
|
|
812
|
|
December 29, 2017
|
|
—
|
|
|
289
|
|
|
—
|
|
|
289
|
|
Note 18 – Quarterly Results (unaudited)
The quarterly results of the Company for the fiscal years ended December 27, 2019 and December 28, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
|
|
Q1 (1)
|
|
Q2
|
|
Q3
|
|
Q4
|
Net sales
|
|
$
|
357,027
|
|
|
$
|
411,420
|
|
|
$
|
396,880
|
|
|
$
|
426,507
|
|
Gross profit
|
|
90,189
|
|
|
106,475
|
|
|
101,993
|
|
|
107,696
|
|
Operating profit
|
|
6,150
|
|
|
15,536
|
|
|
10,648
|
|
|
18,434
|
|
Income before income taxes
|
|
1,565
|
|
|
10,685
|
|
|
6,107
|
|
|
14,046
|
|
Net income
|
|
1,134
|
|
|
7,746
|
|
|
4,425
|
|
|
10,888
|
|
Basic net income per share
|
|
0.04
|
|
|
0.26
|
|
|
0.15
|
|
|
0.37
|
|
Diluted net income per share
|
|
0.04
|
|
|
0.26
|
|
|
0.15
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2018
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
Net sales
|
|
$
|
318,615
|
|
|
$
|
370,442
|
|
|
$
|
361,496
|
|
|
$
|
394,056
|
|
Gross profit
|
|
79,522
|
|
|
93,240
|
|
|
91,993
|
|
|
102,292
|
|
Operating profit
|
|
5,740
|
|
|
14,948
|
|
|
10,268
|
|
|
17,802
|
|
Income (loss) before income taxes
|
|
761
|
|
|
9,537
|
|
|
5,592
|
|
|
11,954
|
|
Net income (loss)
|
|
544
|
|
|
6,819
|
|
|
4,157
|
|
|
8,882
|
|
Basic net income (loss) per share
|
|
0.02
|
|
|
0.24
|
|
|
0.14
|
|
|
0.30
|
|
Diluted net income (loss) per share
|
|
0.02
|
|
|
0.24
|
|
|
0.14
|
|
|
0.30
|
|
|
|
(1)
|
The Company began reflecting the results of the Bassian acquisition in the first quarter of 2019.
|
Note 19 – Subsequent Events
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-plate producer and distributor in New England. The purchase price was approximately $17,002 paid in cash at closing and is subject to a customary working capital true-up. The Company is required to pay additional contingent consideration, if earned, of up to $3,000 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 purchase price was approximately $46,450 paid in cash at closing and is subject to a customary working capital true-up. The Company is required to pay additional contingent consideration, if earned, of up to $4,000 over a two-year period upon successful attainment of certain gross profit targets.
The Company has not provided the preliminary purchase price allocations for these acquisitions as the initial accounting for them is incomplete.