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.
The COVID-19 Pandemic
The COVID-19 pandemic (“Pandemic”) has had a material impact on the Company’s business and operations and those of its customers. In an effort to limit the spread of the virus, federal, state and local governments implemented measures that resulted in the temporary closure of non-essential businesses in many of the markets the Company serves, which has forced its customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. State and local governments began to ease these restrictions in mid-May, however, the severity of indoor and outdoor dining restrictions have varied throughout the year depending on the extent of outbreaks and actions taken by the federal, state and local governments. The duration and extent of restrictions imposed on the Company’s customers by federal, state and local governments is dependent on future developments regarding the Pandemic including new information about the severity of the disease, trends in infection rates, and development of effective medical treatments for the disease, among others. Due to the Pandemic’s adverse impact on our customers’ operations and purchasing behavior, the Company incurred estimated non-cash charges of approximately $15,800 related to incremental bad debt expense and approximately $14,600 related to incremental inventory obsolescence during the fifty-two weeks ended December 25, 2020. The adverse impact to the Company’s customer base and market capitalization at the onset of the Pandemic were considered triggering events and, accordingly, the Company performed interim goodwill and long-lived asset quantitative impairment tests during the first quarter of 2020, as described in Note 9 to these financial statements, the results of which indicated that goodwill or long-lived assets were not impaired.
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 2020
Measurement of Credit Losses on Financial Instruments: In June 2016 and as further amended in November 2018, the Financial Accounting Standards Board (the “FASB”) issued guidance which requires entities to use a forward-looking expected loss model to estimate credit losses. It also requires additional disclosure related to credit quality of trade and other receivables, including information related to management’s estimate of credit allowances. The Company adopted this guidance on December 28, 2019. The Company analyzes customer creditworthiness, accounts receivable balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of its allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are either conducted using cash-on-delivery terms or the account is closely monitored so that agreed-upon payments are received prior to orders being released. A failure to pay results in held or cancelled orders. The Company also estimates receivables that will ultimately be uncollectible based upon historical write-off experience. Management incorporates current macro-economic factors in existence as of the balance sheet date that may impact the food-away-from-home industry and/or its customers, and specifically, beginning in the first quarter of fiscal 2020, the impact of the Pandemic. Adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Leases: In April 2020, the FASB issued guidance describing approaches entities should follow when accounting for lease concessions negotiated due to the effects of the Pandemic. The Company has negotiated rent deferrals with certain lessors that do not materially modify the amount of consideration due under the original contract terms. Consistent with the guidance, the
Company elected to recognize such rent deferrals as accrued expenses. The Company continues to recognize expense during the deferral period.
Guidance Not Yet Adopted
Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued guidance that eliminates certain exceptions related to the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period and other simplifications and clarifications. The guidance will be effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company expects to adopt this guidance when effective. Upon adoption, the Company may recognize additional income tax benefits during interim periods in which interim losses exceed full year projections due to provisions in the guidance that remove loss limitation rules.
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity: In August 2020, the FASB issued guidance that simplifies the accounting models for financial instruments with characteristics of debt and equity. The amendments in the guidance result in fewer instances in which an embedded conversion feature must be accounted for separately from its host contract. This guidance will be effective for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company expects to adopt this guidance on December 26, 2020. The Company’s existing convertible debt instruments are not bifurcated and as such adoption will have no impact on ts 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 – Reclassifications
On September 1, 2020, the Company received a comment letter from the staff of the SEC’s Division of Corporation Finance (“SEC”) with respect to the Company’s annual report on Form 10-K for the year ended December 27, 2019, requesting information regarding the Company’s presentation of food processing costs and separate presentation of selling, general and administrative expenses from other operating expenses.
Food Processing Costs
The Company’s food processing costs represent the costs to cut and package products, primarily beef products, for sale to the Company’s customer base. The costs associated with food processing are normally incurred immediately prior to shipment and thus, historically, the Company treated these costs as handling expenses and presented them within operating expenses on its consolidated statements of operations. The Company has also separately disclosed its food processing costs, excluding depreciation expense, in the notes to its annual consolidated financial statements. Upon further consideration and discussions with the SEC, the Company concluded that food processing costs are more fairly presented as cost of sales and such costs should include depreciation expense associated with equipment and facilities used in food processing activities. Accordingly, the Company has reclassified its food processing costs from operating expenses to cost of sales. In accordance with Staff Accounting Bulletin (“SAB”) No. 99 “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, the Company evaluated the impact of the reclassification and determined that the impact was not material to its consolidated financial statements for any prior annual or interim period. See Note 3 “Summary of Significant Accounting Policies” for a full description of the components of costs of sales and food processing costs.
Selling, General and Administrative Expenses
In response to the SEC’s comment, the Company revised its presentation of total operating expenses such that selling, general and administrative expenses are presented separately from other operating expenses. Furthermore, management has reclassified gain/loss from asset disposal, which was previously presented as a non-operating expense, to other operating expenses. See Note 3 “Summary of Significant Accounting Policies” for a full description of the components of selling, general and
administrative expenses and other expenses.
The aggregate impact of the above reclassifications on prior periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
December 27, 2019
|
|
December 28, 2018
|
|
As Reported
|
|
Reclass
|
|
As Restated
|
|
As Reported
|
|
Reclass
|
|
As Restated
|
Net sales
|
$
|
1,591,834
|
|
|
$
|
—
|
|
|
$
|
1,591,834
|
|
|
$
|
1,444,609
|
|
|
$
|
—
|
|
|
$
|
1,444,609
|
|
Cost of sales
|
1,185,481
|
|
|
19,785
|
|
|
1,205,266
|
|
|
1,077,562
|
|
|
18,131
|
|
|
1,095,693
|
|
Gross profit
|
406,353
|
|
|
(19,785)
|
|
|
386,568
|
|
|
367,047
|
|
|
(18,131)
|
|
|
348,916
|
|
Operating expenses
|
355,585
|
|
|
(355,585)
|
|
|
—
|
|
|
318,289
|
|
|
(318,289)
|
|
|
—
|
|
Selling, general and administrative expenses
|
—
|
|
|
329,542
|
|
|
329,542
|
|
|
—
|
|
|
298,102
|
|
|
298,102
|
|
Other operating expenses
|
—
|
|
|
6,359
|
|
|
6,359
|
|
|
—
|
|
|
2,225
|
|
|
2,225
|
|
Operating income
|
50,768
|
|
|
(101)
|
|
|
50,667
|
|
|
48,758
|
|
|
(169)
|
|
|
48,589
|
|
Interest expense
|
18,264
|
|
|
—
|
|
|
18,264
|
|
|
20,745
|
|
|
—
|
|
|
20,745
|
|
Loss on asset disposal
|
101
|
|
|
(101)
|
|
|
—
|
|
|
169
|
|
|
(169)
|
|
|
—
|
|
Income before income taxes
|
32,403
|
|
|
—
|
|
|
32,403
|
|
|
27,844
|
|
|
—
|
|
|
27,844
|
|
Provision for income tax expense
|
8,210
|
|
|
—
|
|
|
8,210
|
|
|
7,442
|
|
|
—
|
|
|
7,442
|
|
Net income
|
$
|
24,193
|
|
|
$
|
—
|
|
|
$
|
24,193
|
|
|
$
|
20,402
|
|
|
$
|
—
|
|
|
$
|
20,402
|
|
Note 3 – 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, although in response to the Pandemic our credit terms have been temporarily tightened to a maximum of 30 days for the majority of our customers. 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 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
December 28, 2018
|
Center-of-the-Plate
|
$
|
533,813
|
|
|
48.0
|
%
|
|
$
|
711,980
|
|
|
44.7
|
%
|
|
$
|
629,038
|
|
|
43.5
|
%
|
Dry Goods
|
150,631
|
|
|
13.6
|
%
|
|
260,976
|
|
|
16.4
|
%
|
|
239,326
|
|
|
16.6
|
%
|
Pastry
|
135,913
|
|
|
12.2
|
%
|
|
221,041
|
|
|
13.9
|
%
|
|
199,990
|
|
|
13.8
|
%
|
Cheeses and Charcuterie
|
107,915
|
|
|
9.7
|
%
|
|
158,834
|
|
|
10.0
|
%
|
|
151,640
|
|
|
10.5
|
%
|
Produce
|
80,920
|
|
|
7.3
|
%
|
|
17,955
|
|
|
1.1
|
%
|
|
13,850
|
|
|
1.0
|
%
|
Dairy and Eggs
|
38,172
|
|
|
3.4
|
%
|
|
110,740
|
|
|
7.0
|
%
|
|
106,768
|
|
|
7.4
|
%
|
Oils and Vinegars
|
40,389
|
|
|
3.6
|
%
|
|
80,155
|
|
|
5.0
|
%
|
|
76,313
|
|
|
5.3
|
%
|
Kitchen Supplies
|
23,878
|
|
|
2.2
|
%
|
|
30,153
|
|
|
1.9
|
%
|
|
27,684
|
|
|
1.9
|
%
|
Total
|
$
|
1,111,631
|
|
|
100
|
%
|
|
$
|
1,591,834
|
|
|
100
|
%
|
|
$
|
1,444,609
|
|
|
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.
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 $2,558 and $1,345 as of December 25, 2020 and December 27, 2019, respectively.
Right of Return
The Company’s standard terms and conditions provide customers with a right of return if the goods received are not merchantable. Customers are either issued a replacement order at no cost, or are issued a credit for the returned goods. The Company recorded a refund liability of $174 and $314 as of December 25, 2020 and December 27, 2019, respectively. Refund liabilities are reflected as accrued liabilities on the Company’s consolidated balance sheets. The Company recognized a corresponding asset of $107 and $194 as of December 25, 2020 and December 27, 2019, respectively, for its right to recover products from customers on settling its refund liabilities. This asset is reflected as inventories, net on the 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 selling, general and administrative 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, and 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 $18,682, $19,785 and $18,131 for fiscal 2020, 2019 and 2018, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include facilities costs, product shipping and handling costs, warehouse costs, and other selling, general and administrative costs. Shipping and handling costs included in selling, general and administrative expenses were $78,152, $85,620 and $79,143 for fiscal 2020, 2019 and 2018, respectively.
Other Operating Expenses
Other operating expenses includes expenses primarily related to changes in the fair value of the Company’s earn-out liabilities, gains and losses on asset disposals, asset impairments and certain third-party deal costs incurred in connection with business acquisitions or financing arrangements.
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 and macro-economic factors in existence as of the balance sheet date that may impact the food-away-from-home industry and/or its customers, and specifically, beginning in the first quarter of fiscal 2020, the impact of the Pandemic.
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 25, 2020, December 27, 2019 and December 28, 2018, the recorded purchase incentives totaled approximately $12,678, $21,769 and $19,731, 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 right-of-use (“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 selling, general and administrative 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 $14,087 at December 25, 2020 and $15,203 at December 27, 2019.
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 adverse impact to the Company’s customer base and market capitalization at the onset of the Pandemic were considered triggering events during the first quarter of fiscal 2020, and accordingly, the Company performed a long-lived asset recoverability test as of March 27, 2020 (more fully described in Note 9) the results of which indicated no impairment. The Company has not recorded any impairment of long-lived assets in fiscal 2020, 2019 or 2018.
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 $1,429 and $1,363 of such unamortized costs as of December 25, 2020 and December 27, 2019, 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 $7,172 and $9,207 of such unamortized costs as of December 25, 2020 and December 27, 2019, 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 $3,426 for the fiscal year ended December 25, 2020, $2,168 for the fiscal year ended December 27, 2019 and $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 term loan debt repricing.
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 other 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. The adverse impact to the Company’s customer base and market capitalization at the onset of the Pandemic were considered triggering events during the first quarter of fiscal 2020, and accordingly, the Company performed a long-lived asset recoverability test as of March 27, 2020 (more fully described in Note 9) the results of which indicated no impairment.
During the fourth quarter of fiscal 2020, the Company recorded a $24,200 impairment charge, $17,545 net of tax, to write-down the value of its Del Monte and Bassian Farms trademarks. See Note 9 for more information. There have been no other events or changes in circumstances during fiscal 2020, 2019 or 2018, indicating that the carrying value of the Company’s 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.
The adverse impact to the Company’s customer base and market capitalization at the onset of the Pandemic were considered triggering events during the first quarter of fiscal 2020, and accordingly, the Company performed an interim goodwill impairment test as of March 27, 2020 (more fully described in Note 9) the results of which indicated no impairment.
For its annual goodwill impairment test performed during the fourth quarter of fiscal 2020, 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 which include estimates for the duration of the Pandemic’s impact on the Company’s customers. Assumptions include estimates of future revenue based upon budget projections and growth 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.
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.
There have been no events or changes in circumstances during fiscal 2020, 2019 or 2018, 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 $720, $1,268 and $1,097, respectively, for fiscal 2020, 2019 and 2018.
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. As of December 25, 2020 and December 27, 2019, the Company had valuation allowances of $2,261 and $907, respectively, relating to certain net operating losses that may not be realizable in the future based on taxable income forecasts and certain state net operating loss limitations.
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. The Company releases disproportionate tax effects from accumulated other comprehensive income as individual items are liquidated.
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:
a)quoted prices for similar assets in active markets;
b)quoted prices for identical or similar assets in inactive markets;
c)inputs other than quoted prices that are observable for the asset; and
d)inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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 4 – Net Income per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 25, 2020
|
|
December 27, 2019
|
|
December 28, 2018
|
Net (loss) income per share:
|
|
|
|
|
|
Basic
|
$
|
(2.46)
|
|
|
$
|
0.82
|
|
|
$
|
0.71
|
|
Diluted
|
$
|
(2.46)
|
|
|
$
|
0.81
|
|
|
$
|
0.70
|
|
Weighted average common shares:
|
|
|
|
|
|
Basic
|
33,716,157
|
|
|
29,532,342
|
|
|
28,703,265
|
|
Diluted
|
33,716,157
|
|
|
30,073,338
|
|
|
29,678,919
|
|
Reconciliation of net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 25, 2020
|
|
December 27, 2019
|
|
December 28, 2018
|
Numerator:
|
|
|
|
|
|
Net (loss) income
|
$
|
(82,903)
|
|
|
$
|
24,193
|
|
|
$
|
20,402
|
|
Add effect of dilutive securities:
|
|
|
|
|
|
Interest on convertible notes, net of tax
|
—
|
|
|
207
|
|
|
362
|
|
Adjusted net (loss) income
|
$
|
(82,903)
|
|
|
$
|
24,400
|
|
|
$
|
20,764
|
|
Denominator:
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
33,716,157
|
|
|
29,532,342
|
|
|
28,703,265
|
|
Dilutive effect of stock options and unvested common shares
|
—
|
|
|
211,050
|
|
|
270,520
|
|
Dilutive effect of convertible notes
|
—
|
|
|
329,946
|
|
|
705,134
|
|
Weighted average diluted common shares outstanding
|
33,716,157
|
|
|
30,073,338
|
|
|
29,678,919
|
|
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 25, 2020
|
|
December 27, 2019
|
|
December 28, 2018
|
Restricted share awards
|
505,568
|
|
|
132,861
|
|
|
42
|
|
Stock options
|
115,639
|
|
|
—
|
|
|
—
|
|
Convertible notes
|
3,484,788
|
|
|
76,384
|
|
|
—
|
|
Note 5 – 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. The Pandemic’s impact on the Company’s revenue growth and profitability resulted in a significant reduction in the fair value of its contingent earn-out liabilities. The Company the value of Changes in the fair value of contingent earn-out liabilities are reflected in other 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
|
|
Sid Wainer
|
|
Other Acquisitions
|
|
Total
|
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
|
|
Acquisition value
|
—
|
|
|
—
|
|
|
—
|
|
|
2,081
|
|
|
1,383
|
|
|
3,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
—
|
|
|
—
|
|
|
(2,250)
|
|
|
—
|
|
|
(1,677)
|
|
|
(3,927)
|
|
Changes in fair value
|
—
|
|
|
(4,544)
|
|
|
(4,631)
|
|
|
(1,570)
|
|
|
(734)
|
|
|
(11,479)
|
|
Balance December 25, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,076
|
|
|
$
|
511
|
|
|
$
|
1,169
|
|
|
$
|
2,756
|
|
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 $2,556 and $7,957 as of December 25, 2020 and December 27, 2019, 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 25, 2020 and December 27, 2019 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 10). 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 25, 2020
|
|
December 27, 2019
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Convertible Senior Notes
|
$
|
150,000
|
|
|
$
|
163,204
|
|
|
$
|
150,000
|
|
|
$
|
165,000
|
|
Convertible Unsecured Note
|
$
|
4,000
|
|
|
$
|
4,290
|
|
|
$
|
4,000
|
|
|
$
|
4,282
|
|
Note 6 – Acquisitions
Sid Wainer
On January 27, 2020, pursuant to an asset purchase agreement, the Company acquired substantially all of the assets, including certain real-estate assets, of Sid Wainer & Son (“Sid Wainer”), a specialty food and produce distributor in New England. The final purchase price was approximately $44,081, consisting of $46,450 paid in cash at closing, partially offset by a $2,369 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 $4,000 over a two-year period. The payment of the earn-out liability is subject to the successful achievement of certain gross profit targets. The Company estimated the fair value of this contingent earn-out liability to be $511 and $2,081 as of December 25, 2020 and January 27, 2020, respectively.
Trademarks were valued at fair value using Level 3 inputs and are being amortized over 15 years. Goodwill for the Sid Wainer acquisition will be amortized over 15 years for tax purposes. The goodwill recorded primarily reflects the value of acquiring an established specialty food and produce distributor to leverage the Company’s existing products in the markets served by Sid Wainer, to supply Sid Wainer’s produce offerings to the Company’s metro New York market and any intangible assets that do not qualify for separate recognition. The Company reflected net sales of $89,638 and an operating loss of $9,598 for the fifty-two weeks ended December 25, 2020 in its consolidated statement of operations related to the Sid Wainer acquisition.
The table below presents unaudited pro forma consolidated income statement information of the Company as if the Sid Wainer acquisition had occurred on December 29, 2018. The pro forma results were prepared from financial information obtained from the sellers of the business, as well as information obtained during the due diligence process associated with the acquisition. The pro forma information is not necessarily indicative of the Company’s results of operations had the acquisition been completed on the above date, nor is it necessarily indicative of the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisition, any incremental costs for Sid Wainer transitioning to become a public company, and also does not reflect additional revenue opportunities following the acquisition. The pro forma information reflects amortization and depreciation of the Sid Wainer acquisition at their respective fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
Net sales
|
|
|
|
|
$
|
1,124,409
|
|
|
$
|
1,814,304
|
|
(Loss) income before income taxes
|
|
|
|
|
$
|
(124,611)
|
|
|
$
|
34,445
|
|
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.
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 is being 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 table below sets forth the purchase price allocation of these and other acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sid Wainer
|
|
Bassian
|
|
Other Acquisitions
|
Current assets
|
$
|
22,960
|
|
|
$
|
6,657
|
|
|
$
|
6,795
|
|
Customer relationships
|
—
|
|
|
15,530
|
|
|
6,638
|
|
Trademarks
|
3,500
|
|
|
4,610
|
|
|
700
|
|
Non-compete agreements
|
—
|
|
|
1,000
|
|
|
—
|
|
Goodwill
|
11,571
|
|
|
13,065
|
|
|
5,892
|
|
Fixed assets
|
19,425
|
|
|
856
|
|
|
308
|
|
Other assets
|
—
|
|
|
10
|
|
|
—
|
|
|
|
|
|
|
|
Right-of-use assets
|
8,259
|
|
|
—
|
|
|
1,019
|
|
Lease liabilities
|
(8,259)
|
|
|
—
|
|
|
(1,019)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
(11,294)
|
|
|
(2,501)
|
|
|
(1,300)
|
|
Earn-out liability
|
(2,081)
|
|
|
(7,450)
|
|
|
(1,383)
|
|
Other long-term liabilities
|
—
|
|
|
—
|
|
|
(499)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
$
|
44,081
|
|
|
$
|
31,777
|
|
|
$
|
17,151
|
|
The Company recognized professional fees of $435 and $235 in other operating expenses related to acquisitions in fiscal 2020 and 2019, respectively. During the years ended December 25, 2020 and December 27, 2019, the Company also paid approximately $16,851 and $300, respectively, on other strategic acquisitions.
Note 7 – 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 $9,013 and $1,937 at December 25, 2020 and December 27, 2019, respectively.
Note 8 – Equipment, Leasehold Improvements and Software
Equipment, leasehold improvements and software as of December 25, 2020 and December 27, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
December 25, 2020
|
|
December 27, 2019
|
Land
|
|
Indefinite
|
|
$
|
5,020
|
|
|
$
|
1,170
|
|
Buildings
|
|
20 years
|
|
15,685
|
|
|
1,360
|
|
Machinery and equipment
|
|
5 - 10 years
|
|
24,900
|
|
|
21,718
|
|
Computers, data processing and other equipment
|
|
3 - 7 years
|
|
14,207
|
|
|
12,686
|
|
Software
|
|
3 - 7 years
|
|
33,063
|
|
|
29,305
|
|
Leasehold improvements
|
|
1- 40 years
|
|
68,747
|
|
|
70,903
|
|
Furniture and fixtures
|
|
7 years
|
|
3,412
|
|
|
3,309
|
|
Vehicles
|
|
5 - 7 years
|
|
21,873
|
|
|
6,410
|
|
Other
|
|
7 years
|
|
88
|
|
|
95
|
|
Construction-in-process
|
|
|
|
8,115
|
|
|
9,200
|
|
|
|
|
|
195,110
|
|
|
156,156
|
|
Less: accumulated depreciation and amortization
|
|
|
|
(79,662)
|
|
|
(63,310)
|
|
Equipment, leasehold improvements and software, net
|
|
|
|
$
|
115,448
|
|
|
$
|
92,846
|
|
Construction-in-process at December 25, 2020 and at December 27, 2019 related primarily to the implementation of the Company’s Enterprise Resource Planning (“ERP”) system. The rollout of its ERP system will continue through fiscal 2021. The net book value of equipment financed under finance leases at December 25, 2020 and December 27, 2019 was $14,705 and $3,905, respectively. No interest expense was capitalized during the fiscal years ended December 25, 2020, December 27, 2019 and December 28, 2018.
The components of depreciation and amortization expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 25, 2020
|
|
December 27, 2019
|
|
December 28, 2018
|
Depreciation expense
|
$
|
14,984
|
|
|
$
|
9,535
|
|
|
$
|
7,142
|
|
Software amortization
|
$
|
4,790
|
|
|
$
|
3,793
|
|
|
$
|
3,154
|
|
Note 9 – Goodwill and Other Intangible Assets
The Pandemic has had a material impact on the Company’s customers. In an effort to limit the spread of the virus, federal, state and local governments implemented measures that resulted in the temporary closure of non-essential businesses in many of the markets the Company serves, which forced its customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. Beginning in mid-March, these actions led to a significant decrease in demand for the Company’s products. The adverse impact to the Company’s customer base and market capitalization at the onset of the Pandemic were considered triggering events during the first quarter of fiscal 2020, and accordingly, the Company performed interim goodwill and long-lived asset quantitative impairment tests as of March 27, 2020.
Interim Goodwill Impairment Test
The Company estimated the fair value of its reporting units using an income approach that incorporates the use of a discounted cash flow model that involves many management assumptions that are based upon future growth projections which include estimates of the Pandemic’s impact on our business. Assumptions include estimates of future revenues, growth rates which include estimates for the duration of the Pandemic’s impact on the Company’s customers, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses. On the basis of these assumptions, the Company determined that the fair values of its reporting units exceeded the net carry values of their assets and liabilities. As such, goodwill was not impaired as of March 27, 2020.
Interim Long-lived Impairment Test
Long-lived assets, including other intangible assets, were tested for recoverability at the asset group level. The Company
estimated the net undiscounted cash flows expected to be generated from the asset group over the expected useful of the asset group’s primary asset. Key assumptions include future revenues, growth rates, estimates of future levels of gross profit and operating profit and projected capital expenditures necessary to maintain the operating capacity of each asset group. On the basis of these assumptions, the Company determined that the undiscounted cash flows for each of the Company’s asset groups exceeded their respective carry values and therefore long-lived assets were not impaired as of March 27, 2020.
During the fourth quarter of fiscal 2020, the Company performed its annual goodwill impairment test, the results of which indicated that fair values of its reporting units exceeded their respective net carry values and as such goodwill was not impaired.
Also during the fourth quarter of fiscal 2020, the Company committed to a plan to shift its brand strategy to leverage its Allen Brothers brand in its west coast region and determined its Del Monte, Ports Seafood and Bassian Farms trademarks did not fit the Company’s long-term strategic objectives. This brand transition is planned to begin in the second quarter of fiscal 2021. The Company assessed these trademarks for impairment and used the relief of royalty method to determine fair value. Significant assumptions used include future sales forecasts, royalty rates and discount rates. As a result of the assessment, the Company recorded a $24,200 impairment charge, $17,545 net of tax, to write-down the value of its Del Monte and Bassian Farms trademarks. There were no other triggering events during fiscal 2020 that would require the Company to test the recoverability of its long-lived assets.
The impacts of the Pandemic on the Company’s business are uncertain and will depend on future developments, and as such, it is possible that another triggering event could occur that under certain circumstances could cause the Company to recognize an impairment charge in the future.
The changes in the carrying amount of goodwill are presented as follows:
|
|
|
|
|
|
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
|
|
|
|
Acquisitions
|
17,104
|
|
Foreign currency translation
|
17
|
|
Carrying amount as of December 25, 2020
|
$
|
214,864
|
|
Other intangible assets as of December 25, 2020 and December 27, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Remaining Amortization Period
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Amount
|
December 25, 2020
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
128 months
|
|
$
|
141,679
|
|
|
$
|
(55,135)
|
|
|
$
|
86,544
|
|
Non-compete agreements
|
|
37 months
|
|
8,579
|
|
|
(7,752)
|
|
|
827
|
|
Trademarks
|
|
209 months
|
|
44,520
|
|
|
(20,174)
|
|
|
24,346
|
|
Total
|
|
|
|
$
|
194,778
|
|
|
$
|
(83,061)
|
|
|
$
|
111,717
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for other intangibles was $13,502, $12,663 and $11,910 for the fiscal years ended December 25, 2020, December 27, 2019 and December 28, 2018, respectively.
As of December 25, 2020, estimated amortization expense for other intangible assets for each of the next five fiscal years and thereafter is as follows:
|
|
|
|
|
|
2021
|
$
|
12,163
|
|
2022
|
10,901
|
|
2023
|
9,872
|
|
2024
|
9,528
|
|
2025
|
9,369
|
|
Thereafter
|
59,884
|
|
Total
|
$
|
111,717
|
|
Note 10 – Debt Obligations
Debt obligations as of December 25, 2020 and December 27, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
Senior secured term loan
|
|
$
|
201,553
|
|
|
$
|
238,129
|
|
Convertible senior notes
|
|
150,000
|
|
|
150,000
|
|
Asset-based loan facility
|
|
40,000
|
|
|
—
|
|
Finance lease and other financing obligations
|
|
15,798
|
|
|
3,905
|
|
Convertible unsecured note
|
|
4,000
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred finance fees and original issue discount
|
|
(7,172)
|
|
|
(9,207)
|
|
Total debt obligations
|
|
404,179
|
|
|
386,827
|
|
Less: current installments
|
|
(6,095)
|
|
|
(721)
|
|
Total debt obligations excluding current installments
|
|
$
|
398,084
|
|
|
$
|
386,106
|
|
Maturities of the Company’s debt, excluding finance leases, for each of the next five years and thereafter at December 25, 2020 are as follows:
|
|
|
|
|
|
2021
|
$
|
1,712
|
|
2022
|
72,878
|
|
2023
|
5,712
|
|
2024
|
151,712
|
|
2025
|
163,539
|
|
Thereafter
|
—
|
|
Total
|
$
|
395,553
|
|
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 was 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.
On June 8, 2020, the Company entered into a sixth amendment (the “Sixth Amendment”) to its Term Loan Credit Agreement. Upon the consent of the lenders, the Sixth Amendment converted a portion of the term loans then outstanding of $238,129 (the “Term Loans”) into a new tranche of term loans (the “2025 Tranche”) which among other things extended the maturity date by three years and increased the fixed-rate portion of interest charged by 200 basis points. The portion of the Term Loans that did not convert (the “2022 Tranche”) retained the maturity date and interest rate in effect prior to the Sixth Amendment. The Company made a prepayment of $35,719 on the 2025 Tranche immediately after it was established.
The following table summarizes the key terms of the Term Loans as of December 25, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans
|
|
Principal Outstanding
|
|
Interest Rate
|
|
Maturity Date
|
|
Scheduled Principal Payments
|
2022 Tranche
|
|
$
|
31,166
|
|
|
LIBOR + 3.5%
|
|
June 22, 2022
|
|
none
|
2025 Tranche
|
|
$
|
170,387
|
|
|
LIBOR + 5.5%
|
|
June 22, 2025
|
|
0.25% per quarter
|
The 2025 Tranche has a springing maturity date of June 22, 2024 if, as of that date, the Company’s 1.875% convertible senior notes maturing on December 1, 2024 have not been repaid or refinanced by debt having a maturity date on or after December 23, 2025. The Sixth Amendment was accounted for as a debt modification. The Company incurred lender fees of $856 which were capitalized as debt issuance costs. Third-party transaction costs of $1,233 were expensed as incurred.
The Sixth Amendment introduced a minimum liquidity covenant which requires the Company to maintain at least $35,000 of liquidity as of the last day of any fiscal quarter where EBITDA, as defined in the Credit Agreement, is less than $10,000. The Company had minimum liquidity, as defined in the Credit Agreement, of $248,852 as of December 25, 2020.
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 weighted average interest rate on the Term Loans at December 25, 2020 was 5.3%.
The Term Loan Facility contains affirmative covenants, negative covenants and events of default customary for a term loan B facility of this type, as more particularly described in the Term Loan Credit Agreement. As of December 25, 2020, 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 Company incurred transaction costs of $877 which were capitalized as deferred financing fees to be amortized over the term of the ABL.
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 interest rate on the ABL at December 25, 2020 was 1.9%.
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.
As of December 25, 2020, the Company was in compliance with all debt covenants and the Company had reserved $20,141 of the ABL for the issuance of letters of credit. As of December 25, 2020, funds totaling $50,282 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 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.
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.
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 11 – Stockholders’ Equity
Preferred Stock Purchase Rights
On March 22, 2020, the Company’s board of directors approved a limited duration Preferred Stock Purchase Rights Agreement (the “Rights Agreement”). Under the Rights Agreement, the board of directors approved a dividend of one preferred share purchase right (a “Right”) for each share outstanding share of the Company’s common stock to purchase one one-thousandth of a share of Series A Preferred Stock of the Company at a price of $40.00 per Unit of Preferred Stock, subject to adjustment as provided in the Rights Agreement. The Rights will expire on March 21, 2021, unless the Rights are earlier redeemed or exchanged by the Company or upon the occurrence of certain transactions.
Public Common Stock Offering
On May 14, 2020, the Company completed a public offering of 5,769,231 shares of its common stock at a price of $13.00 per share to the underwriters, to be reoffered by the underwriters at variable prices per share, which resulted in net proceeds of approximately $74,691 after deducting underwriters’ fees, commissions and transaction expenses. In addition, the Company granted a 30-day option to purchase up to an additional 865,384 shares of its common stock at a price of $13.00 per share to the underwriters, to be reoffered by the underwriters at variable prices per share. The option was fully exercised on June 2, 2020 and resulted in additional proceeds of $11,250.
Conversion of Convertible Subordinated Notes
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.
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 25, 2020, there were 1,562,724 shares available for grant.
Stock compensation expense was $9,292, $4,399 and $4,094 for the fiscal years ended December 25, 2020, December 27, 2019 and December 28, 2018, respectively. The related tax benefit for stock-based compensation was $133, $883 and $864 for the fiscal years ended December 25, 2020, December 27, 2019 and December 28, 2018, respectively.
The following table reflects the activity of RSAs during the fiscal year ended December 25, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 27, 2019
|
|
286,917
|
|
|
$
|
29.94
|
|
|
426,740
|
|
|
$
|
26.01
|
|
|
26,952
|
|
|
$
|
30.16
|
|
Granted
|
|
799,371
|
|
|
13.91
|
|
|
187,806
|
|
|
30.85
|
|
|
30,318
|
|
|
27.70
|
|
Vested
|
|
(167,883)
|
|
|
27.88
|
|
|
(144,556)
|
|
|
20.36
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(17,087)
|
|
|
28.73
|
|
|
(469,990)
|
|
|
30.35
|
|
|
(30,318)
|
|
|
27.70
|
|
Unvested at December 25, 2020
|
|
901,318
|
|
|
$
|
16.14
|
|
|
—
|
|
|
$
|
—
|
|
|
26,952
|
|
|
$
|
30.16
|
|
The fair value of RSAs vested during the fiscal years ended December 25, 2020, December 27, 2019 and December 28, 2018, was $8,109, $3,742 and $2,936, respectively.
These awards are a mix of time-, market- and performance-based grants awarded to key employees and non-employee directors that generally vest over a range of periods up to four-years. The market- and performance-based RSAs generally 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%.
During the fourth quarter of fiscal 2020, the Company modified its 2018 performance-awards and certain 2018 time-based awards such that they vested on December 17, 2020. The modifications affected seventeen employees and resulted in incremental stock compensation expense of $1,999. Concurrent with these modifications, the Company also cancelled its 2020 and 2019 performance-based awards and its 2020 market-based equity awards.
At December 25, 2020, the total unrecognized compensation cost for the Company’s unvested RSAs was $9,523 to be recognized over a weighted-average period of approximately 1.9 years. Of this total, $9,180 related to RSAs with time-based vesting provisions to be recognized over a weighted average period of 1.9 years and $343 related to RSAs with performance- or market-based vesting provisions to be recognized over a weighted average period of 1.5 years.
The following table summarizes stock option activity during the fiscal year ended December 25, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted Average
Remaining Contractual
Term (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 27, 2019
|
|
115,639
|
|
|
$
|
20.23
|
|
|
$
|
2,051
|
|
|
6.2
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding December 25, 2020
|
|
115,639
|
|
|
$
|
20.23
|
|
|
$
|
423
|
|
|
5.2
|
Exercisable at December 25, 2020
|
|
115,639
|
|
|
20.23
|
|
|
$
|
423
|
|
|
5.2
|
The Company issues new shares upon the exercise of stock options. The Company recognized expense of zero, $114 and $601 on stock options during the fiscal years ended December 25, 2020, December 27, 2019 and December 28, 2018, respectively. These awards fully vested during fiscal 2019. No compensation expense related to the Company’s RSAs or stock options has been capitalized.
Note 12 – Leases
The components of net lease cost for the fiscal year ended December 25, 2020 and December 27, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 25, 2020
|
|
December 27, 2019
|
|
|
Operating lease cost
|
$
|
27,521
|
|
|
$
|
27,415
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
Amortization of right-of-use asset
|
4,166
|
|
|
308
|
|
|
|
Interest expense on lease liabilities
|
552
|
|
|
96
|
|
|
|
Total finance lease cost
|
$
|
4,718
|
|
|
$
|
404
|
|
|
|
Short-term lease cost
|
2,475
|
|
|
2,143
|
|
|
|
Variable lease cost
|
1,990
|
|
|
2,707
|
|
|
|
Sublease income
|
(96)
|
|
|
(514)
|
|
|
|
Total lease cost, net
|
$
|
36,608
|
|
|
$
|
32,155
|
|
|
|
Total rent expense for operating leases for the fiscal years ended December 28, 2018 was $29,202. Total depreciation expense for finance leases for the fiscal years ended December 28, 2018 was $52.
The maturities of the Company’s lease liabilities for each of the next five fiscal years and thereafter at December 25, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Related Party Real Estate
|
|
Third Party Real Estate
|
|
Vehicles and Equipment
|
|
Total
|
|
Vehicles and Equipment
|
2021
|
$
|
499
|
|
|
$
|
14,118
|
|
|
$
|
9,925
|
|
|
$
|
24,542
|
|
|
$
|
4,905
|
|
2022
|
509
|
|
|
13,518
|
|
|
8,160
|
|
|
22,187
|
|
|
3,814
|
|
2023
|
387
|
|
|
12,462
|
|
|
5,751
|
|
|
18,600
|
|
|
2,942
|
|
2024
|
—
|
|
|
11,418
|
|
|
2,190
|
|
|
13,608
|
|
|
2,411
|
|
2025
|
—
|
|
|
10,457
|
|
|
1,039
|
|
|
11,496
|
|
|
1,880
|
|
Thereafter
|
—
|
|
|
87,307
|
|
|
—
|
|
|
87,307
|
|
|
1,307
|
|
Total
|
$
|
1,395
|
|
|
$
|
149,280
|
|
|
$
|
27,065
|
|
|
$
|
177,740
|
|
|
$
|
17,259
|
|
Less interest
|
|
|
|
|
|
|
(51,440)
|
|
|
(1,461)
|
|
Present value
|
|
|
|
|
|
|
$
|
126,300
|
|
|
$
|
15,798
|
|
Supplemental balance sheet information related to finance leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
December 25, 2020
|
|
December 27, 2019
|
Short-term finance lease liabilities
|
Current portion of long-term debt
|
$
|
4,383
|
|
|
$
|
721
|
|
Long-term finance lease liabilities
|
Long-term debt, net of current portion
|
$
|
11,415
|
|
|
$
|
3,184
|
|
At December 25, 2020, the weighted-average lease term for operating and finance leases was 10.3 years and 4.5 years, respectively. At December 25, 2020, the weighted-average discount rate for operating and finance leases was 6.3% and 3.7%, respectively.
As of December 25, 2020, the Company is contractually obligated to make payments of approximately $30,174, related to a distribution facility that has not commenced. Accordingly, the Company has not recognized ROU assets or lease liabilities associated with this lease.
Note 13 – Income Taxes
In response to the Pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. The legislation provides temporary changes to the extent to which companies can carryback net operating losses, changes to interest expense deduction limitations, raised the corporate charitable contribution deduction limitation to 25% of taxable income and other tax relief provisions. In December 2020 the Consolidated Appropriations Act, 2021, was signed into law, however, its provisions did not have a material impact on the Company.
The Company’s effective income tax rate was 32.9% and 25.3% for the fifty-two weeks ended December 25, 2020 and December 27, 2019, respectively. The higher effective tax rate in the current fiscal year is primarily related to the Company’s current net loss forecast for fiscal 2020 which, under the CARES Act, allows the Company to claim Federal tax refunds against prior year taxes paid, including taxes paid in fiscal 2015 and 2017, both of which were at statutory tax rates of 35%. The Company’s income tax provision reflects the impact of an expected income tax refund receivable of $21,250 as of December 25, 2020 which is reflected in prepaid expenses and other current assets on the Company’s consolidated balance sheet.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
December 28, 2018
|
Current income tax (benefit) expense:
|
|
|
|
|
|
|
Federal
|
|
$
|
(21,877)
|
|
|
$
|
4,003
|
|
|
$
|
2,945
|
|
|
|
|
|
|
|
|
State
|
|
(408)
|
|
|
2,144
|
|
|
1,943
|
|
Total current income tax (benefit) expense
|
|
(22,285)
|
|
|
6,147
|
|
|
4,888
|
|
Deferred income tax (benefit) expense:
|
|
|
|
|
|
|
Federal
|
|
(10,740)
|
|
|
1,617
|
|
|
2,363
|
|
Foreign
|
|
50
|
|
|
17
|
|
|
(472)
|
|
State
|
|
(7,728)
|
|
|
429
|
|
|
663
|
|
Total deferred income tax (benefit) expense
|
|
(18,418)
|
|
|
2,063
|
|
|
2,554
|
|
Total income tax (benefit) expense
|
|
$
|
(40,703)
|
|
|
$
|
8,210
|
|
|
$
|
7,442
|
|
Income tax (benefit) expense differed from amounts computed using the statutory federal income tax rate due to the following reasons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
December 28, 2018
|
Statutory U.S. Federal tax
|
|
$
|
(25,957)
|
|
|
$
|
6,805
|
|
|
$
|
5,847
|
|
Differences due to:
|
|
|
|
|
|
|
State and local taxes, net of federal benefit
|
|
(6,414)
|
|
|
2,078
|
|
|
1,906
|
|
Change in valuation allowance
|
|
1,354
|
|
|
95
|
|
|
523
|
|
Changes in tax rates
|
|
24
|
|
|
(95)
|
|
|
(432)
|
|
Federal NOL rate differential
|
|
(5,212)
|
|
|
—
|
|
|
—
|
|
Stock compensation
|
|
(102)
|
|
|
(676)
|
|
|
(197)
|
|
Other
|
|
(4,396)
|
|
|
3
|
|
|
(205)
|
|
Income tax (benefit) expense
|
|
$
|
(40,703)
|
|
|
$
|
8,210
|
|
|
$
|
7,442
|
|
Deferred tax assets and liabilities at December 25, 2020 and December 27, 2019 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
Deferred tax assets:
|
|
|
|
|
Receivables and inventory
|
|
$
|
10,944
|
|
|
$
|
4,468
|
|
|
|
|
|
|
Self-insurance reserves
|
|
2,210
|
|
|
1,957
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
15,413
|
|
|
1,393
|
|
|
|
|
|
|
|
|
|
|
|
Debt discount and interest
|
|
3,093
|
|
|
—
|
|
Stock compensation
|
|
1,686
|
|
|
1,894
|
|
|
|
|
|
|
Charitable contribution carryforward
|
|
3,166
|
|
|
368
|
|
Operating lease liabilities
|
|
34,460
|
|
|
37,740
|
|
Other
|
|
1,307
|
|
|
414
|
|
Total deferred tax assets
|
|
72,279
|
|
|
48,234
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Property & equipment
|
|
(11,289)
|
|
|
(5,218)
|
|
Goodwill and intangible assets
|
|
(17,709)
|
|
|
(15,192)
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
(2,071)
|
|
|
(2,905)
|
|
Operating lease right-of-use assets
|
|
(31,414)
|
|
|
(34,895)
|
|
Total deferred tax liabilities
|
|
(62,483)
|
|
|
(58,210)
|
|
Valuation allowance
|
|
(2,261)
|
|
|
(907)
|
|
Total net deferred tax asset (liability)
|
|
$
|
7,535
|
|
|
$
|
(10,883)
|
|
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 2017 through 2020 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 2020. For state tax purposes, the 2016 through 2020 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.
The Company considered all available positive and negative evidence to determine if based on the weight of such evidence, a valuation allowance is needed. At December 25, 2020, the Company had a valuation allowance of $2,261, which consisted of $892 and $1,369 against foreign and certain state net operating loss carryforwards, respectively, as they are not expected to be fully realizable in the future. Despite the loss for the year ended December 25, 2020 as a direct impact of the Pandemic, the Company considered the substantial amount of taxable income available in carryback years under applicable tax law, strong history of earnings, no history of tax attributes expiring before utilization, reversing taxable temporary differences scheduled to reverse within the reversal period of the respective deferred tax assets, the long term and indefinite nature of tax attributes on hand, and forecasts of future taxable income in determining a valuation allowance is not needed on the remaining deferred tax assets. However, the impacts of the Pandemic on the Company’s business are uncertain and will depend on future developments, and as such, it is possible that under certain circumstances the Company may be required to recognize a valuation allowance in the future.
The Company’s Canada net operating loss carryforward of $1,139 expires at various dates between fiscal 2038 and 2040. The Company’s state net operating loss carryforwards of $7,082 expire at various dates, the earliest of which expire in fiscal 2023 while others are indefinite-lived. The Company’s federal net operating loss carry forward of $7,192 is indefinite-lived and its charitable contributions carry forward expires in fiscal 2025.
The Company’s foreign subsidiaries had operating (loss) income before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
December 28, 2018
|
Foreign subsidiaries operating (loss) income before income taxes
|
|
$
|
(4,231)
|
|
|
$
|
18
|
|
|
$
|
(3,223)
|
|
The Company is permanently reinvesting 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 25, 2020 and December 27, 2019, the Company did not have any material uncertain tax positions.
Note 14 – Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
December 28, 2018
|
Cash paid for income taxes, net of cash received
|
|
$
|
308
|
|
|
$
|
6,046
|
|
|
$
|
4,825
|
|
Cash paid for interest
|
|
$
|
18,182
|
|
|
$
|
16,271
|
|
|
$
|
16,955
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
25,090
|
|
|
$
|
25,302
|
|
|
$
|
—
|
|
Operating cash flows from finance leases
|
|
$
|
3,856
|
|
|
$
|
96
|
|
|
$
|
—
|
|
ROU assets obtained in exchange for lease liabilities:
|
|
|
|
|
|
|
Operating leases
|
|
$
|
7,201
|
|
|
$
|
155,027
|
|
|
$
|
—
|
|
Finance leases
|
|
$
|
16,063
|
|
|
$
|
4,183
|
|
|
$
|
—
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of subordinated notes and accrued interest into common stock
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earn-out liabilities for acquisitions
|
|
$
|
3,464
|
|
|
$
|
7,929
|
|
|
$
|
1,414
|
|
Convertible notes issued for acquisitions
|
|
$
|
—
|
|
|
$
|
4,000
|
|
|
$
|
—
|
|
Note 15 – 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 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. As a result of the Pandemic, the Company’s matching contributions were temporarily suspended as of March 31, 2020. 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 $720, $1,268 and $1,097, respectively, for fiscal 2020, 2019 and 2018.
Note 16 – 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 $488 for fiscal 2020, $433 for fiscal 2019 and $533 for fiscal 2018. This lease was amended during the first quarter of fiscal 2020 and expires on September 30, 2023.
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.
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, owned an 8.33% ownership interest in Old World Provisions, which supplied products to the Company after the Del Monte acquisition. The Company purchased approximately $474 of products from Old World Provisions during the sixteen weeks ended April 20, 2018. Mr. J. DeBenedetti was not involved in the day-to-day management of Old World Provisions.
Note 17 – 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 $1,684 and $1,220 at December 25, 2020 and December 27, 2019, respectively.
The Company’s self-insurance reserves for its automobile liability program totaled $3,450 and $2,818 at December 25, 2020 and December 27, 2019, respectively. Self-insurance reserves for workers’ compensation totaled $7,696 and $7,082 at
December 25, 2020 and December 27, 2019, respectively.
Workforce
As of December 25, 2020, approximately 7% 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 2021 and 2025. Approximately 2% of the Company’s employees are under a collective bargaining agreement that expires in fiscal 2021.
Note 18 – Valuation Reserves
The following tables summarize the activity in our valuation accounts during the fiscal years ended December 25, 2020, December 27, 2019 and December 28, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Additions Charged to Expense
|
|
Deductions
|
|
Balance at End of Period
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
$
|
8,846
|
|
|
$
|
21,372
|
|
|
$
|
(6,191)
|
|
|
$
|
24,027
|
|
December 27, 2019
|
|
7,460
|
|
|
4,981
|
|
|
(3,595)
|
|
|
8,846
|
|
December 28, 2018
|
|
8,026
|
|
|
3,790
|
|
|
(4,356)
|
|
|
7,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for deferred tax assets
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
$
|
907
|
|
|
$
|
1,354
|
|
|
$
|
—
|
|
|
$
|
2,261
|
|
December 27, 2019
|
|
812
|
|
|
95
|
|
|
—
|
|
|
907
|
|
December 28, 2018
|
|
289
|
|
|
523
|
|
|
—
|
|
|
812
|
|
Note 19 – Quarterly Results (unaudited)
The quarterly results of the Company for the fiscal years ended December 25, 2020 and December 27, 2019, including the impacts of the reclassifications described in Note 2, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2020 (1)
|
|
|
Q1 (2)
|
|
Q2
|
|
Q3
|
|
Q4 (3)
|
Net sales
|
|
$
|
375,431
|
|
|
$
|
200,496
|
|
|
$
|
254,030
|
|
|
$
|
281,674
|
|
Gross profit
|
|
85,488
|
|
|
43,426
|
|
|
60,362
|
|
|
58,875
|
|
Operating loss
|
|
(17,058)
|
|
|
(25,409)
|
|
|
(11,925)
|
|
|
(48,268)
|
|
Loss before income taxes
|
|
(22,182)
|
|
|
(31,181)
|
|
|
(16,631)
|
|
|
(53,612)
|
|
Net loss
|
|
(14,085)
|
|
|
(20,334)
|
|
|
(11,427)
|
|
|
(37,057)
|
|
Basic net loss per share
|
|
(0.48)
|
|
|
(0.62)
|
|
|
(0.31)
|
|
|
(1.02)
|
|
Diluted net loss per share
|
|
(0.48)
|
|
|
(0.62)
|
|
|
(0.31)
|
|
|
(1.02)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
Net sales
|
|
$
|
357,027
|
|
|
$
|
411,420
|
|
|
$
|
396,880
|
|
|
$
|
426,507
|
|
Gross profit
|
|
85,471
|
|
|
101,677
|
|
|
96,994
|
|
|
102,426
|
|
Operating profit
|
|
6,116
|
|
|
15,530
|
|
|
10,624
|
|
|
18,397
|
|
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
|
|
(1)The Company’s results for fiscal 2020 were materially adversely impacted due to the Pandemic.
(2)The Company began reflecting the results of the Sid Wainer acquisition in the first quarter of 2020.
(3)Includes $24,200 intangible asset impairment charge.