The following discussion should be read in conjunction with information included in Item 8 of this report. Unless otherwise indicated, the terms "Company", "
Chefs' Warehouse", "we", "us", and "our" refer to The Chefs' Warehouse, Inc.and its subsidiaries.
Overview and recent developments
We are a premier distributor of specialty foods in the leading culinary markets in
the United States. We offer more than 50,000 SKUs, ranging from high-quality specialty foods and ingredients to basic ingredients and staples, produce and center-of-the-plate proteins. We serve more than 35,000 core customer locations, primarily located in our nineteen geographic markets across the United Statesand Canada, and the majority of our customers are independent restaurants and fine dining establishments. Our Allen Brothers subsidiary sells certain of our center-of-the-plate products directly to consumers. We expanded our direct-to-consumer product offerings in fiscal 2020 by launching our "Shop Like a Chef" online home delivery platform in several of the markets we serve. We believe several key differentiating factors of our business model have enabled us to execute our strategy consistently and profitably across our expanding customer base. These factors consist of a portfolio of distinctive and hard-to-find specialty food products, an extensive selection of center-of-the-plate proteins, a highly trained and motivated sales force, strong sourcing capabilities, a fully integrated warehouse management system, a highly sophisticated distribution and logistics platform and a focused, seasoned management team. In recent years, our sales to existing and new customers have increased through the continued growth in demand for specialty food and center-of-the-plate products in general; increased market share driven by our large percentage of sophisticated and experienced sales professionals, our high-quality customer service and our extensive breadth and depth of product offerings, including, as a result of our acquisitions; the expansion of our existing distribution centers; our entry into new distribution centers, including the construction of new distribution centers in San Francisco, Toronto, Dallas, Los Angelesand Miami; and the import and sale of our proprietary brands. Through these efforts, we believe that we have been able to expand our customer base, enhance and diversify our product selections, broaden our geographic penetration and increase our market share.
Effect of the COVID-19 pandemic on our business and operations
The COVID-19 pandemic ("Pandemic") has had and continues to have an adverse impact on numerous aspects of our business and those of our customers including, but not limited to, demand for our products, cost inflation and labor shortages. Despite these challenges, we continued to provide our core customers with high touch service, executed on our cost control measures and returned to profitability during the second quarter of fiscal 2021. Furthermore, as of
December 24, 2021, we had $157.8 millionof working capital, including $115.2 millionof cash and cash equivalents, on our balance sheet and $109.5 millionof availability on our asset-based loan facility. Our liquidity position, puts us in a strategic position to invest in growth and take advantage of business development opportunities as we continue to recover from the Pandemic. The extent to which the Pandemic will impact our financial condition or results of operations is uncertain and will depend on future developments including new information that may emerge on the severity or transmissibility of the disease, new variants, government responses, trends in infection rates, development and distribution of effective medical treatments and vaccines, and future consumer spending behavior, among others.
Recent significant acquisitions
January 27, 2020, we entered into an asset purchase agreement to acquire 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 cash purchase price was approximately $44.1 million, inclusive of a $2.4 millionworking capital true-up. We are required to pay additional contingent consideration, if earned, of up to $4.0 millionover a two-year period upon successful attainment of certain gross profit targets. On February 3, 2020, we entered into an asset purchase agreement to acquire substantially all of the assets of Cambridge Packing Co, Inc.("Cambridge"), a specialty center-of-the-plate producer and distributor in New England. The cash purchase price was approximately $16.4 million, inclusive of a $0.6 millionworking capital true-up. We are required to pay additional 32 --------------------------------------------------------------------------------
contingent consideration, if won, of up to
February 25, 2019, pursuant to an asset purchase agreement, we acquired substantially all of the assets of Bassian Farms, Inc.and related entities ("Bassian"), a specialty center-of-the-plate distributor based in northern California. The aggregate purchase price for the transaction was approximately $31.8 million, consisting of $28.0 millionin cash paid at closing and the issuance of a $4.0 millionunsecured convertible note, partially offset by the settlement of a net working capital true-up. We are also required to pay additional contingent consideration, if earned, which could total $9.0 millionover a four-year period. The payment of the earn-out liability is subject to the successful achievement of certain gross profit targets.
During the second quarter of fiscal 2021, we committed to a plan to shift our brand strategy to leverage our Allen Brothers brand in our
New Englandmarket and determined our Cambridge trademark did not fit our long-term strategic objectives. As a result, we recognized a $0.6 millionimpairment charge, $0.4 millionnet of tax, to fully write-down the net book value of our Cambridge trademark. During the fourth quarter of fiscal 2020, we committed to a plan to shift our brand strategy to leverage our Allen Brothers brand in our west coast region and determined that our Del Monte, Ports Seafoodand Bassian Farmstrademarks did not fit our long-term strategic objectives. This brand transition began in the second quarter of fiscal 2021. As a result, we recorded a $24.2 millionimpairment charge, $17.5 millionnet of tax, to write-down the value of our Del Monteand Bassian Farmstrademarks.
Our growth strategies and outlook
We continue to invest in our people, facilities and technology in an effort to achieve the following objectives and maintain our premier position within the specialty foodservice distribution market:
• expansion of the sales and service territory; •operational excellence and high level of customer service; •expanded purchasing programs and improved purchasing power; •product innovation and the introduction of new product categories; •operational efficiency through system improvements; and •reduced operating costs by centralizing general and administrative functions.
Our growth has allowed us to improve upon our organization's infrastructure, open new distribution facilities and pursue selective acquisitions. Over the last several years, we have increased our distribution capacity to approximately 2.5 million square feet in 40 distribution facilities as of
February 11, 2022. From fiscal 2019 through the end of fiscal 2021, we have invested significantly in acquisitions, infrastructure and management.
Key factors affecting our performance
Due to our focus on menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolateries, cruise lines, casinos and specialty food stores, our results of operations are materially impacted by the success of the food-away-from-home industry in
the United Statesand Canada, which is materially impacted by general economic conditions, weather, discretionary spending levels and consumer confidence. When economic conditions deteriorate, our customers' businesses are negatively impacted as fewer people eat away-from-home and those who do spend less money. As economic conditions begin to improve, our customers' businesses historically have likewise improved, which contributes to improvements in our business. Similarly, the direct-to-consumer business of our Allen Brothers subsidiary is significantly dependent on consumers' discretionary spending habits, and weakness or uncertainty in the economy could lead to consumers buying less from Allen Brothers. Volatile food costs may have a direct impact upon our profitability. Prolonged periods of product cost inflation may have a negative impact on our profit margins and results of operations to the extent we are unable to pass on all or a portion of such product cost increases to our customers. In addition, product cost inflation may negatively impact consumer discretionary spending decisions within our customers' establishments, which could adversely impact our sales. Conversely, our profit levels may be negatively impacted during periods of product cost deflation even though our gross profit as a percentage of sales may remain relatively constant. However, some of our products, particularly certain of our center-of-the-plate protein items, are priced on a "cost plus" markup, which helps mitigate the negative impact of deflation. 33 -------------------------------------------------------------------------------- Given our wide selection of product categories, as well as the continuous introduction of new products, we can experience shifts in product sales mix that have an impact on net sales and gross profit margins. This mix shift is most significantly impacted by the introduction of new categories of products in markets that we have more recently entered, the shift in product mix resulting from acquisitions, as well as the continued growth in item penetration on higher velocity items such as dairy products. The foodservice distribution industry is fragmented but consolidating, and we have supplemented our internal growth through selective strategic acquisitions. We believe that the consolidation trends in the foodservice distribution industry will continue to present acquisition opportunities for us, which may allow us to grow our business at a faster pace than we would otherwise be able to grow the business organically.
In addition to evaluating our operating profit, our management team analyzes our performance based on growth in net sales, gross profit and gross profit margin.
•Net sales growth. Our net sales growth is driven principally by changes in volume and, to a lesser degree, changes in price related to the impact of inflation in commodity prices and product mix. In particular, product cost inflation and deflation impacts our results of operations and, depending on the amount of inflation or deflation, such impact may be material. For example, inflation may increase the dollar value of our sales, and deflation may cause the dollar value of our sales to fall despite our unit sales remaining constant or growing. •Gross profit and gross profit margin. Our gross profit and gross profit as a percentage of net sales, or gross profit margin, are driven principally by changes in volume and fluctuations in food and commodity prices and our ability to pass on any price increases to our customers in an inflationary environment and maintain or increase gross profit margin when our costs decline. Our gross profit margin is also a function of the product mix of our net sales in any period. Given our wide selection of product categories, as well as the continuous introduction of new products, we can experience shifts in product sales mix that have an impact on net sales and gross profit margins. This mix shift is most significantly impacted by the introduction of new categories of products in markets that we have more recently entered, impact of product mix from acquisitions, as well as the continued growth in item penetration on higher velocity items such as dairy products.
Key financial definitions
•Net sales: Net sales consist primarily of sales of specialty products, produce, center-of-the-plate proteins and other food products to independently-owned restaurants and other high-end foodservice customers, which we report net of certain group discounts and customer sales incentives. Net sales also include direct-to-consumer sales on our e-commerce platforms. •Cost of sales: Cost of sales include the net purchase price paid for products sold, plus the cost of transportation necessary to bring the product to our distribution facilities 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. Our cost of sales may not be comparable to other similar companies within our industry. •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. •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. •Interest expense: Interest and other expense consists primarily of interest on our outstanding indebtedness and, as applicable, the amortization or write-off of deferred financing fees. 34
Results of Operations Fiscal Years Ended December 24, 2021 December 25, 2020 December 27, 2019 Net sales
$ 1,745,757 $ 1,111,631 $ 1,591,834Cost of sales 1,355,272 863,480 1,205,266 Gross profit 390,485 248,151 386,568 Selling, general and administrative expenses 379,252 336,394 329,542 Other operating expenses 422 14,417 6,359 Operating income (loss) 10,811 (102,660) 50,667 Interest and other expense, net 17,587 20,946 18,264 (Loss) income before income taxes (6,776) (123,606) 32,403 Provision for income tax (benefit) expense (1,853) (40,703) 8,210 Net (loss) income $ (4,923) $ (82,903) $ 24,193 Fiscal Year Ended December 24, 2021Compared to Fiscal Year Ended December 25, 2020Net Sales 2021 2020 $ Change % Change Net sales $ 1,745,757 $ 1,111,631 $ 634,12657.0 % Organic growth contributed $574.2 million, or 51.6%, to sales growth in the year primarily driven by our recovery from the Pandemic. The remaining growth of $59.9 million, or 5.4%, resulted from acquisitions. Organic case count increased approximately 33.8% in our specialty category. In addition, specialty unique customers and placements increased 26.1% and 31.6%, respectively, compared to the prior year. Pounds sold in our center-of-the-plate category increased 28.2% compared to the prior year. Estimated inflation was 9.6% in our specialty category and 18.1% in our center-of-the-plate category compared to fiscal 2020. Gross Profit 2021 2020 $ Change % Change Gross profit $ 390,485 $ 248,151 $ 142,33457.4 % Gross profit margin 22.4 % 22.3 % Gross profit increased primarily due to increased sales volumes. Gross profit margin increased approximately 4 basis points. Gross profit margins increased 379 basis points in the Company's specialty category and decreased 350 basis points in the Company's center-of-the-plate category compared to the prior year period. Our prior year gross profit results include a charge of approximately $14.6 millionrelated to estimated inventory losses from obsolescence due to the Pandemic's impact on our customers' purchasing behavior.
Selling, general and administrative expenses
2021 2020 $ Change % Change Selling, general and administrative expenses 379,252 336,394 42,858 12.7 % Percentage of net sales 21.7 % 30.3 % The increase in selling, general and administrative expense relates primarily to increased sales volumes and acquisitions. Our prior year results include an estimated non-cash charge of approximately
$15.8 millionto bad debt expense incurred during the first quarter of fiscal 2020 at the onset of the Pandemic. Our ratio of selling, general and administrative expenses to net sales was lower as a result of sales growth. 35 --------------------------------------------------------------------------------
Other operating expenses, net
2021 2020 $ Change % Change Other operating expenses 422 14,417 (13,995) (97.1) % The decrease in net other operating expenses relates primarily to a
$24.2 millionimpairment charge for Del Monte and Bassian trademarks as a result of a shift in brand strategy to leverage our Allen Brothers brand in our west coast region during the fourth quarter of fiscal 2020 and non-cash credits of $1.3 millionfor changes in the fair value of our contingent earn-out liabilities in the fiscal 2021 period compared to non-cash credits of $11.5 millionin the prior year period. Interest Expense 2021 2020 $ Change % Change Interest expense 17,587 20,946 $ (3,359)(16.0) % Interest expense decreased primarily due to $1.2 millionin one-time third-party costs incurred during the second quarter of 2020 in connection with the extension of a majority of our senior secured term loans and lower effective interest rates charged on our outstanding debt as a result of the $50.0 millionaggregate principal amount of Convertible Senior Notes issued on March 1, 2021which were used to repay higher interest rate debt.
Provision for tax benefit
2021 2020 $
Change % Change
Provision for tax benefit (1,853) (40,703)
Effective tax rate 27.3 % 32.9 % The higher effective tax rate in the prior period is primarily related to the carryback of a portion of our fiscal 2020 net taxable loss which allowed us to claim tax refunds against taxes paid in fiscal 2015 and 2017, both of which were at statutory tax rates of 35%. Fiscal Year Ended
December 25, 2020Compared to Fiscal Year Ended December 27, 2019Net Sales 2020 2019 $ Change % Change Net sales $ 1,111,631 $ 1,591,834 $ (480,203)(30.2) % Sales growth from acquisitions contributed $136.5 million, or 8.6%, to sales growth. Organic sales declined $616.7 million, or 38.8%, versus the prior year primarily due to impacts of the Pandemic. Organic case count declined approximately 43.5% in our specialty category. In addition, specialty unique customers and placements declined 30.4% and 43.6%, respectively, compared to the prior year. Pounds sold in our center-of-the-plate category decreased 38.0% compared to the prior year. Estimated deflation was 0.3% in our specialty category and inflation of 3.5% in our center-of-the-plate category compared to fiscal 2019. Gross Profit 2020 2019 $ Change % Change Gross profit 248,151 386,568 $ (138,417)(35.8) % Gross profit margin 22.3 % 24.3 % Gross profit decreased primarily due to decreased sales volumes. Gross profit margin decreased approximately 196 basis points. Gross profit margins decreased 441 basis points in the Company's specialty category and increased 117 basis points in the Company's center-of-the-plate category compared to the prior year period. Our gross profit results include a charge of approximately $14.6 millionrelated to estimated inventory losses from obsolescence due to the Pandemic's impact on our customers' purchasing behavior. 36 --------------------------------------------------------------------------------
Selling, general and administrative expenses
2020 2019 $ Change % Change Selling, general and administrative expenses 336,394 329,542 6,852 2.1 % Percentage of net sales 30.3 % 20.7 % The increase in selling, general and administrative expense relates primarily to our recent acquisitions and an estimated non-cash charge of approximately
$15.8 millionto bad debt expense incurred during the first quarter of fiscal 2020 at the onset of the Pandemic, partially offset by cost measures implemented during the year in response to the Pandemic's adverse impact on demand for our products. Our ratio of selling, general and administrative expenses to net sales was higher as a result of the Pandemic's adverse impacts on our sales growth and a 161 basis point increase in non-cash charges related to bad debt expense.
Other operating expenses, net
2020 2019 $ Change % Change Other operating expenses 14,417 6,359 8,058 126.7 % The increase in other operating expenses relates primarily to a
$24.2 millionimpairment charge on Del Monte and Bassian trademarks and non-cash credits of $11.5 millionfor changes in the fair value of our contingent earn-out liabilities compared to non-cash charges of $5.9 millionin the prior year period. Interest Expense 2020 2019 $ Change % Change Interest expense 20,946 18,264 $ 2,68214.7 % Interest and other expense increased primarily due to $1.2 millionin one-time third-party costs incurred during the second quarter of 2020 in connection with the extension of a majority of our senior secured term loans and the full year impact of interest charged on our Convertible Senior Notes issued on November 22, 2019.
Provision for income tax (benefits)
$ Change % Change
Provision for income tax (benefit) expense (40,703) 8,210
$ (48,913)(595.8) % Effective tax rate 32.9 % 25.3 % The higher effective tax rate is primarily related to our net taxable loss for fiscal 2020 which allows us to claim tax refunds against taxes paid in fiscal 2015 and 2017, both of which were at statutory tax rates of 35%.
Cash and capital resources
We fund our ongoing operations and growth primarily through operating cash flow, borrowings under our senior secured credit facilities and other indebtedness, operating leases, trade and equity financing.
The following table presents selected financial information on our indebtedness (in thousands): December 24, 2021 December 25, 2020 December 27, 2019 Senior secured term loan $ 168,675 $ 201,553 $ 238,129 Total convertible debt $ 204,000 $ 154,000 $ 154,000 Borrowings outstanding on asset-based loan facility $ 20,000 $ 40,000 $ - Finance leases and other financing obligations $ 11,602 $ 15,798 $ 3,905 37
-------------------------------------------------------------------------------- As of
December 24, 2021, we have various floating- and fixed-rate debt instruments with varying maturities for an aggregate principal amount of $392.7 million. See Note 9 "Debt Obligations" to our consolidated financial statements for a full description of our debt instruments. On March 1, 2021, the we issued $50.0 millionaggregate principal amount of 1.875% Convertible Senior Notes at a premium which were offered as an additional issuance of our $150.0 millionConvertible Senior Notes due 2024 issued on November 22, 2019. Net proceeds were used to repay all outstanding borrowings under the our 2022 tranche of senior secured term loans of $31.2 millionand repay a portion of borrowings outstanding under our asset-based loan facility. We incurred transaction costs of approximately $1.4 millionwhich were capitalized as deferred financing fees to be amortized over the term of the underlying debt. On June 8, 2020, we amended our senior secured credit agreement which converted $238.1 millionof the term loans then outstanding into a new tranche of term loans (the "2025 Tranche"), which, among other things, extended the maturity date by three years and increased the fixed-rate portion of interest charged by 200 basis points. The Company made a prepayment of $35.7 millionon the 2025 Tranche immediately after it was established. See Note 9 "Debt Obligations" to our consolidated financial statements for a full description. On March 18, 2020, we drew $100.0 millionon our asset-based loan facility to increase our cash on hand during the early stages of the Pandemic's impact to our business and have subsequently repaid $80.0 millionof the draw. On November 22, 2019, we issued $150.0 millionaggregate principal amount of 1.875% Convertible Senior Notes (the "Senior Notes"). Approximately $43.2 millionof the net proceeds were used to repay all borrowings then outstanding under our ABL and the remainder was used for working capital, general corporate purposes and acquisitions. A portion of the interest rate charged on our Term Loan is currently based on LIBOR and, at our option, a component of the interest charged on the borrowings outstanding on our ABL, if any, may bear interest rates based on LIBOR. LIBOR has been the subject of reform and was expected to phase out by the end of fiscal 2021, however, on November 30, 2020, the ICE Benchmark Administration Limited("ICE") announced plans to delay the phase out of LIBOR to June 30, 2023. The consequences of the discontinuation of LIBOR cannot be entirely predicted but could impact the interest expense we incur on these debt instruments. We will negotiate alternatives to LIBOR with our lenders before LIBOR ceases to be a widely available reference rate.
The following table presents selected financial information on liquidity (in thousands): December 24, 2021 December 25, 2020 December 27, 2019 Cash and cash equivalents $ 115,155 $ 193,281 $ 140,233 Working capital,(1) excluding cash and cash equivalents $ 157,787 $ 94,279 $ 162,772 Availability under asset-based loan facility $ 109,459 $ 50,282 $ 90,015
(1) We define working capital as current assets less current liabilities.
We believe our existing balances of cash and cash equivalents, working capital and the availability under our asset-based loan facility, are sufficient to satisfy our working capital needs, capital expenditures, debt service and other liquidity requirements associated with our current operations over the next twelve months.
Our capital expenditures, excluding cash paid for acquisitions, were approximately
Cash Flows Fiscal Year Ended December 24, 2021 December 25, 2020 December 27, 2019 Net (loss) income $ (4,923) $ (82,903) $ 24,193 Non-cash charges $ 47,372 $ 62,509 $ 47,625 Changes in working capital $ (62,348) $ 63,275 $ (26,811) Cash (used in) provided by operating activities $ (19,899) $ 42,881 $ 45,007
Cash flows used in investing activities $ (48,991) $
(67,968) $ (44,154) Cash (used in) provided by financing activities $ (9,222) $ 78,056 $ 96,947 Fiscal Year 2021 Cash Flows Net cash used in operations was
$19.9 millionfor fiscal 2021 consisting of a $4.9 millionnet loss and and investments in working capital of $62.3 million, partially offset by $47.4 millionof non-cash charges. Non-cash charges decreased predominately due to the $24.2 millionwrite down of Del Monte and Bassian trademarks in fiscal 2020. The cash used in working capital of $62.3 millionis primarily driven by reinvestment in working capital to support growth. Net cash used in investing activities was $49.0 millionin fiscal 2021 driven by $38.8 millionin capital expenditures which included the build-outs of our Los Angeles, New Englandand Miamidistribution facilities. We used $10.2 millionin cash to fund several acquisitions. Net cash used in financing activities was $9.2 millionfor fiscal 2021 driven by $37.6 millionof payments made on senior term loans and finance lease obligations and a $20.0 millionpayment on our asset-based loan facility, partially offset by $51.8 millionof proceeds from the issuance of additional convertible senior notes. Fiscal Year 2020 Cash Flows Net cash provided by operations was $42.9 millionfor fiscal 2020 consisting of a $82.9 millionnet loss, offset by $62.5 millionof non-cash charges and an increase in working capital of $63.3 million. Non-cash charges increased predominately due to the $24.2 millionwrite down of Del Monte and Bassian trademarks. The increase in working capital of $63.3 millionis primarily driven by negotiating favorable credit terms with our customers and suppliers and maintaining lower inventory balances as a result of reduced demand due to the Pandemic. Net cash used in investing activities was $68.0 millionin fiscal 2020 driven by $7.0 millionin capital expenditures which included implementations of our Enterprise Resource Planning ("ERP") system. We used $60.9 millionin cash to fund acquisitions, the most significant of which were Sid Wainerand Cambridge.
Net cash provided by financing activities was
Excluding our Allen Brothers direct-to-consumer business, we generally do not experience any material seasonality. However, our sales and operating results may vary from quarter to quarter due to factors such as changes in our operating expenses, management's ability to execute our operating and growth strategies, personnel changes, demand for our products, supply shortages, weather patterns and general economic conditions. Our Allen Brothers direct-to-consumer business is subject to seasonal fluctuations, with direct-to-consumer center-of-the-plate protein sales typically higher during the holiday season in our fourth quarter; accordingly, a disproportionate amount of operating cash flows from this portion of our business is generated by our direct-to-consumer business in the fourth quarter of our fiscal year. Despite a significant portion of these sales occurring in the fourth quarter, there are operating expenses, principally advertising and promotional expenses, throughout the year.
The pandemic has had a significant impact on our business and operations as well as those of our customers. Our net sales were most impacted during the second quarter of fiscal 2020 when, in an effort to limit the spread of the virus, federal, state,
39 -------------------------------------------------------------------------------- and local governments began implementing various restrictions that resulted in the closure of non-essential businesses in many of the markets we serve, which forced our customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations.
Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our customers. The impact of inflation on food, labor, energy and occupancy costs can significantly affect the profitability of our operations.
Significant contractual commitments and obligations
The following table summarizes our contractual obligations and commercial commitments to
Payments due per period (1, 2)
Less than One 1-3 4-5 Total Year Years Years Thereafter (In thousands) Indebtedness
$ 403,991 $ 5,662 $ 234,790 $ 163,539$ - Finance lease obligations $ 12,748 $ 3,834 $ 5,553 $ 3,192 $ 169Pension exit liabilities $ 1,861 $ 170 $ 375 $ 428 $ 888Long-term operating leases $ 216,423 $ 24,726 $ 38,167 $ 27,644 $ 125,886Total $ 635,023 $ 34,392 $ 278,885 $ 194,803 $ 126,943(1)Interest on our various outstanding debt instruments is included in the above table, except for our Term Loans and ABL, which have floating interest rates. At December 24, 2021, we had borrowings of $168.7 millionunder our Term Loans and $20.0 millionunder our ABL. See Note 9 "Debt Obligations" to our consolidated financial statements for further information on our debt instruments. (2)The table above excludes $6.9 millionof total contingent earn-out liabilities related to certain acquisitions as of December 24, 2021and approximately $10.0 millionof lease payments related leases for distribution facilities that do not commence until fiscal 2022. We had outstanding letters of credit of approximately $20.5 millionand $20.1 millionat December 24, 2021and December 25, 2020, respectively. Substantially all of our assets are pledged as collateral to secure our borrowings under our credit facilities.
Off-balance sheet arrangements
Critical accounting policies
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The
SEChas defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and require our most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the following: (i) determining our allowance for doubtful accounts, (ii) inventory valuation, with regard to determining inventory balance adjustments for excess and obsolete inventory, (iii) business combinations, (iv) valuing goodwill and intangible assets, (v) self-insurance reserves, (vi) accounting for income taxes and (vii) contingent earn-out liabilities. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies.
Allowance for doubtful accounts
We analyze customer creditworthiness, customer account balances, payment history, payment terms and bad debt history
40 -------------------------------------------------------------------------------- levels when evaluating the adequacy of our allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are either conducted using cash-on-delivery terms or the account is closely monitored so that agreed-upon payments are received prior to orders being released. A failure to pay results in held or cancelled orders. We also estimate receivables that will ultimately be uncollectible based upon historical write-off experience. Management incorporates current macro-economic factors in existence as of the balance sheet date that may impact the food-away-from-home industry and/or its customers, and specifically, beginning in the first quarter of fiscal 2020, the impact of the Pandemic. We may be required to increase or decrease our allowance for doubtful accounts due to various factors, including the overall economic environment and particular circumstances of individual customers. Our accounts receivable balance was
$172.5 millionand $96.4 million, net of the allowance for doubtful accounts of $20.3 millionand $24.0 million, as of December 24, 2021and December 25, 2020, respectively. Inventory Valuation We adjust our inventory balances for excess and obsolete inventories. These adjustments are primarily based upon customer demand, inventory age, specifically identified inventory items and overall economic conditions. A sudden and unexpected change in consumer preferences or change in overall economic conditions could result in a significant change to these adjustments that could require a corresponding charge to earnings. We actively manage our inventory levels as we seek to minimize the risk of loss and have consistently achieved a relatively high level of inventory turnover. As a result of the impacts of the Pandemic on our customer demand we incurred additional inventory valuation charges of $14.6 millionin fiscal 2020.
We account for acquisitions in accordance with Accounting Standards Codification Topic 805 "Business Combinations." Assets acquired and liabilities assumed are recorded at their estimated fair values, as of the acquisition date. The judgments made in determining the estimated fair value of assets acquired and liabilities assumed, including estimated useful life, may have a material impact on our consolidated balance sheet and may materially impact the amount of depreciation and amortization expense recognized in periods subsequent to the acquisition. We determine the fair value of intangible assets using an income approach and, when appropriate, we engage a third party valuation firm. Generally, we utilize the multi-period excess earnings method to determine the fair value of customer relationships and the relief from royalty method to determine the fair value of tradenames. These valuation methods contain significant assumptions and estimates including forecasts of expected future cash flows and discount rates. Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill.
We are required to test goodwill for impairment at each of our reporting units annually, or more frequently when circumstances indicate an impairment may have occurred. We have elected to perform our annual tests for indications of goodwill impairment during the fourth quarter of each fiscal year.
Goodwillis tested at the reporting unit level, which is an operating segment or a component of an operating segment. When analyzing whether to aggregate components into single reporting units, management considers whether each component has similar economic characteristics. We have evaluated the economic characteristics of our different geographic markets, including our recently acquired businesses, along with the similarity of the operations and margins, nature of the products, type of customer and methods of distribution of products and the regulatory environment in which we operate and concluded that the business consists of three operating segments: East Coast, Midwest and West Coastand these operating segments represent our reporting units. In testing goodwill for impairment, we may elect to perform a qualitative assessment to evaluate whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount. The qualitative analysis considers various factors including macroeconomic conditions, market conditions, industry trends, cost factors and financial performance, among others. If our qualitative assessment indicates that goodwill impairment is more likely than not, we proceed to perform a quantitative assessment to determine the fair value of the reporting unit. When a quantitative analysis is required, we estimate the fair value of our 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. Assumptions include estimates of future revenue based upon budget projections and growth rates which include estimates for the duration of the Pandemic's impact on the Company's customers. We develop estimates of future levels of gross and operating profits and projected capital expenditures. This methodology includes the use of estimated discount rates 41 -------------------------------------------------------------------------------- based upon industry and competitor analysis as well as other factors. A goodwill impairment loss, if any, would be recognized for the amount by which a reporting unit's carrying value exceeds its fair value.
For the year ended
Due to the Pandemic's adverse impact on our business in fiscal 2020, we performed an interim quantitative goodwill impairment test as of
March 27, 2020and concluded that goodwill was not impaired. We performed our annual goodwill impairment test during the fourth quarter of fiscal 2020 using a quantitative analysis, the results of which indicated that goodwill was not impaired. Total goodwill as of December 24, 2021and December 25, 2020was $221.8 millionand $214.9 million, respectively.
Definite life intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The cash flows expected to be generated by the related assets are estimated over the useful life of the assets based on discounted projections. If the assessment indicates that the carrying amount of the asset may not be recoverable, the potential impairment is assessed based on a discounted cash flow model.
During the second quarter of fiscal 2021, we committed to a plan to shift our brand strategy to leverage the Allen Brothers brand in our
New Englandregion and determined the Cambridge trademark did not fit our long-term strategic objectives. As a result, we recognized a $0.6 millionimpairment charge, $0.4 millionnet of tax, to fully write-down the net book value of our Cambridge trademark During the fourth quarter of fiscal 2020, we committed to a plan to shift our brand strategy to leverage our Allen Brothers brand in our west coast region and determined our Del Monte, Ports Seafoodand Bassian Farmstrademarks did no fit our long-term strategic objectives. This brand transition began 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, we recorded a $24.2 millionimpairment charge, $17.5 millionnet of tax, to write-down the value of our Del Monteand Bassian Farmstrademarks. There have been no other events or changes in circumstances during fiscal 2021 or 2020 indicating that the carrying value of our finite-lived intangible assets are not recoverable. Total finite-lived intangible assets as of December 24, 2021and December 25, 2020were $104.7 millionand $111.7 million, respectively. The assessment of the recoverability of goodwill and intangible assets contain uncertainties requiring management to make assumptions and to apply judgment to estimate economic factors and the profitability of future operations. Actual results could differ from these assumptions and projections, resulting in us revising our assumptions and, if required, recognizing an impairment loss.
We maintain a self-insured group medical program. The program contains individual stop loss thresholds of
$300 thousandper 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. We are self-insured for workers' compensation and automobile liability to deductibles or self-insured retentions of $500 thousandper occurrence. The amounts in excess of our 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.
The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes primarily reflects a combination of income earned and taxed in the various
U.S.federal and state jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent 42 --------------------------------------------------------------------------------
differences between accounting and tax items, accruals or accrual adjustments for unrecognized tax benefits, and our change in the earnings mix of these tax jurisdictions all affect the effective tax rate global.
We estimate our ability to recover deferred tax assets within the jurisdiction from which they arise. This evaluation considers several factors, including recent results of operations, scheduled reversal of deferred tax liabilities, future taxable income and tax planning strategies. As of
December 24, 2021and December 25, 2020, we had valuation allowances of $2.0 millionand $2.3 million, 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.
Conditional commitments related to price supplements
We account for contingent consideration relating to business combinations as a liability and an increase to goodwill at the date of the acquisition and continually remeasure the liability at each balance sheet date by recording changes in the fair value through our consolidated statements of operations. We determine the fair value of contingent consideration based on future operating projections under various potential scenarios, including the use of
Monte Carlosimulations, and weight 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 our results of operations. Management has discussed the development and selection of these critical accounting policies with our board of directors, and the board of directors has reviewed the above disclosure. Our consolidated financial statements contain other items that require estimation, but are not as critical as those discussed above. These other items include our calculations for bonus accruals, depreciation and amortization. Changes in estimates and assumptions used in these and other items could have an effect on our consolidated financial statements.
Recent accounting pronouncements
See Note 1 "Operations and Basis of Presentation" to our consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our consolidated financial statements. 43
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