What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-02-28 · 54 added, 125 removed, 206 unchanged (46% of the section changed)

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Overview and Recent Developments

We are a premier distributor of specialty foods in the leading culinary markets in the United States and the Middle East.

We are a premier distributor of specialty foods in the leading culinary markets in the United States, the Middle East and Canada.

We offer more than 70,000 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 40,000 core customer locations, primarily located in our twenty-three geographic markets across the United States, Middle East and Canada, and the majority of our customers are independent restaurants and fine dining establishments.

We serve more than 44,000 Core Customer locations, primarily located in our twenty-three geographic markets across the United States, the Middle East and 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.

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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 Pandemic had and could again 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.

Recent Major Acquisitions

On December 28, 2021, pursuant to an asset purchase agreement, the Company acquired substantially all of the assets of CGC Holdings, Inc.

(“Capital Seaboard”), a specialty seafood and produce distributor in Maryland.

The purchase price was approximately $31,036, consisting of $28,000 paid in cash at closing, common stock warrants valued at $1,701, and $1,335 paid upon settlement of a net working capital true-up.

On November 1, 2022, pursuant to a share sale and purchase agreement, the Company acquired substantially all of the shares of Chef Middle East LLC (“CME”), a specialty food distributor with operations in the United Arab Emirates, Qatar and Oman.

The purchase price was approximately $108,749, paid in cash at closing.

The Company is in the process of finalizing a valuation of tangible and intangible assets of CME as of the acquisition date.

The Company will also pay additional contingent consideration, if earned, in the form of an earn-out amount which could total $10,000 over a two-year period upon successful attainment of certain gross profit targets.

Transition of Trademarks

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 England market and determined our Cambridge trademark did not fit our long-term strategic objectives.

As a result, we recognized a $0.6 million impairment charge, $0.4 million net 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 Seafood and Bassian Farms trademarks 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 million impairment charge, $17.5 million net of tax, to write-down the value of our Del Monte and Bassian Farms trademarks.

On May 1, 2023, we acquired substantially all of the equity interests of Oakville Produce Partners, LLC (“GreenLeaf”), a leading produce and specialty food distributor in Northern California.

The final purchase price was $88.2 million consisting of $72.2 million paid in cash at closing, $3.5 million paid upon settlement of a net working capital true-up, the issuance of a $10.0 million unsecured note and 75,008 shares of the Company’s common stock with an approximate value of $2.5 million based on the trading price of the Company’s common stock on the date of acquisition.

On March 20, 2023, we acquired substantially all of the assets of Hardie’s F&V, LLC (“Hardie’s”), a specialty produce distributor with operations in Texas.

The final purchase price was approximately $41.4 million, consisting of $38.0 million paid in cash at closing, $0.6 million received upon settlement of a net working capital true-up and an earn-out liability valued at approximately $4.0 million as of the acquisition date.

If earned, the earn-out liability could total up to $10.0 million over a two-year period.

On November 1, 2022, we acquired substantially all of the shares of Chef Middle East LLC (“CME”), a specialty food distributor with operations in the United Arab Emirates, Qatar and Oman.

The final purchase price was approximately $116.5 million, consisting of $108.7 million paid in cash at closing, $0.2 million paid upon settlement of a net working capital true-up, and an earn-out liability valued at $7.6 million as of the date of acquisition.

The earn-out liability was earned and paid in full during the fourth quarter of fiscal 2023 for a total of $10.0 million.

Our Growth Strategies and Outlook

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Over the last several years, we have increased our distribution capacity to approximately 3.0 million square feet in 52 distribution facilities as of February 14, 2024.

From fiscal 2020 through the end of fiscal 2022, we have invested significantly in acquisitions, infrastructure and management.

Over the period from fiscal 2021 through fiscal 2023, we have invested significantly in acquisitions, infrastructure and management.

Key Factors Affecting Our Performance

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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.

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

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Results of Operations

This discussion focuses on our fiscal 2023 results, compared with fiscal 2022 results.

The discussion of our fiscal 2022 results, compared with fiscal 2021 results, can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 30, 2022.

Fiscal Years Ended

December 30, 2022 December 24, 2021 December 25, 2020

(in thousands) December 29, 2023 December 30, 2022 December 24, 2021

Net sales $ 3,433,763 $ 2,613,399 $ 1,745,757

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Other operating expenses 8,773 14,679 422

Operating income (loss) 85,738 10,811 (102,660)

Operating income 100,943 85,738 10,811

Interest and other expense, net 45,474 43,849 17,587

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Net sales $ 3,433,763 $ 2,613,399 $ 820,364 31.4 %

Organic growth contributed $561.6 million, or 32.2%, to sales growth in the year primarily driven by our recovery from the Pandemic.

The remaining growth of $306.1 million, or 17.5%, resulted from acquisitions.

The incremental 53rd week of the fiscal year ended December 30, 2022 contributed approximately 2.0% to the annual sales growth.

Organic case count increased approximately 27.6% in our specialty category.

In addition, specialty unique customers and placements increased 26.8% and 35.7%, respectively, compared to the prior year.

Pounds sold in our center-of-the-plate category increased 16.1% compared to the prior year.

Estimated inflation was 15.0% in our specialty category and 8.0% in our center-of-the-plate category compared to fiscal 2021.

2022 2021 $ Change % Change

Gross profit $ 618,636 $ 390,485 $ 228,151 58.4 %

Gross profit margin 23.7 % 22.4 %

Gross profit increased primarily due to increased sales volumes.

Gross profit margin increased approximately 130 basis points.

Gross profit margins decreased 50 basis points in the Company’s specialty category and increased 181 basis points in the Company’s center-of-the-plate category compared to the prior year period.

Higher inflation compressed margin rates in the specialty categories, while margin rates in the center-of-the-plate category were benefited from the reopening of favorable margin markets in fiscal 2022.

Selling, General and Administrative Expenses

2022 2021 $ Change % Change

Selling, general and administrative expenses 518,219 379,252 138,967 36.6 %

Percentage of net sales 19.8 % 21.7 %

The increase in selling, general and administrative expenses was primarily due to higher costs associated with compensation and benefits, facilities costs, and fuel costs to support sales growth.

Our ratio of selling, general and administrative expenses to net sales decreased predominately due to sales growth which contributing to improved fixed cost leverage.

Other Operating Expenses, Net

2022 2021 $ Change % Change

Other operating expenses 14,679 422 14,257 3,378.4 %

The increase in net other operating expenses relates primarily to non-cash charges of $8.5 million for changes in the fair value of our contingent earn-out liabilities in fiscal 2022 compared to non-cash credits of $1.3 million in the prior year period and a year over year increase of $5.7 million primarily related to third-party deal costs incurred in connection with business acquisitions and financing arrangements.

The prior year period also includes a $0.6 million impairment of Cambridge trademarks as a result of a shift in brand strategy to leverage our Allen Brothers brand in our New England region during the second quarter of fiscal 2021.

Interest Expense

2022 2021 $ Change % Change

Interest expense 43,849 17,587 $ 26,262 149.3 %

Interest expense increased primarily due to the $14.3 million loss on debt extinguishment from the refinancing of our senior convertible debt and term loan and certain third-party transaction fees of $4.5 million.

Additionally, we had higher amounts of debt outstanding and increases in the variable portion of interest rates charged on our outstanding debt during fiscal 2022.

Provision for Income Tax Expense (Benefit)

2022 2021 $ Change % Change

Provision for income tax expense (benefit) 14,139 (1,853) $ 15,992 (863.0) %

Effective tax rate 33.8 % 27.3 %

The effective tax rate in the current period increased primarily due to the $14.1 million loss on debt extinguishment from the refinancing of our senior convertible debt, which was not tax deductible.

Fiscal Year Ended December 24, 2021 Compared to Fiscal Year Ended December 25, 2020

2021 2020 $ Change % Change

Net sales $ 1,745,757 $ 1,111,631 $ 634,126 57.0 %

Organic growth contributed $574.2 million, or 51.6%, to sales growth in the year primarily driven by our recovery from the Pandemic.

Organic growth contributed $214.6 million, or 8.2%, to sales growth.

The remaining growth of $605.7 million, or 23.2%, resulted from acquisitions.

The incremental 53rd week of the fiscal year ended December 30, 2022 contributed approximately 2.0% to fiscal 2022.

Organic case count increased approximately 9.5% in our specialty category.

In addition, specialty unique customers and placements increased 12.9% and 12.1%, respectively, compared to the prior year.

Pounds sold in our center-of-the-plate category increased 28.2% compared to the prior year.

Pounds sold in our center-of-

the-plate category increased 6.3% compared to the prior year.

Estimated inflation was 3.0% in our specialty category and 2.7% in our center-of-the-plate category compared to fiscal 2022.

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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 million related to estimated inventory losses from obsolescence due to the Pandemic’s impact on our customers’ purchasing behavior.

Gross profit margin increased approximately 7 basis points based on the volume mix between specialty and center-of-the-plate category sales.

Gross profit margins decreased 57 basis points in the Company’s specialty category and decreased 57 basis points in the Company’s center-of-the-plate category compared to the prior year period.

Overall, our gross margins were relatively consistent with the prior year period.

Selling, General and Administrative Expenses

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Percentage of net sales 20.5 % 19.8 %

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 million to 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.

The increase in selling, general and administrative expenses was primarily due to higher depreciation and amortization and higher costs associated with compensation, including benefits and facilities costs to support sales growth.

Our ratio of selling, general and administrative expenses to net sales increased by 70 basis points due to increased near-term costs associated with our investments in facilities and acquisitions.

Other Operating Expenses, Net

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Other operating expenses $ 8,773 $ 14,679 $ (5,906) (40.2) %

The decrease in net other operating expenses relates primarily to a $24.2 million impairment 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 million for changes in the fair value of our contingent earn-out liabilities in the fiscal 2021 period compared to non-cash credits of $11.5 million in the prior year period.

The decrease in other operating expenses relates primarily to non-cash charges of $3.1 million for changes in the fair value of our contingent earn-out liabilities in fiscal 2023 compared to non-cash charges of $8.5 million in the prior year period and a year over year decrease of $2.3 million primarily related to third-party deal costs incurred in connection with business acquisitions and financing arrangements.

The decrease was partially offset by an impairment on customer relationship intangible assets of $1.8 million related to the loss of a significant Hardie’s customer post acquisition.

Interest Expense

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Interest expense $ 45,474 $ 43,849 $ 1,625 3.7 %

Interest expense decreased primarily due to $1.2 million in one-time third-party costs incurred during the second quarter of 2020 in connection with the extension of a majority of our senior secured term loans and lower effective interest rates charged on our outstanding debt as a result of the $50.0 million aggregate principal amount of Convertible Senior Notes issued on March 1, 2021 which were used to repay higher interest rate debt.

Provision for Income Tax Benefit

Interest expense increased primarily due to higher principal amounts of outstanding debt due to our 2028 convertible notes issued on December 13, 2022, our term loan refinancing on August 23, 2022, an increase in amounts drawn on our asset-based loan facility and higher rates of interest charged on the variable rate portion of our outstanding debt.

Provision for Income Tax Expense

2023 2022 $ Change % Change

Provision for income tax benefit (1,853) (40,703) $ 38,850 (95.4) %

Provision for income tax expense $ 20,879 $ 14,139 $ 6,740 47.7 %

Effective tax rate 37.6 % 33.8 %

The higher effective tax rate in fiscal 2020 is primarily related to our net taxable loss for fiscal 2020 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%.

The effective tax rate in the current period increased primarily driven by current period for return-to-provision adjustments of approximately $2.1 million identified in the completion of our fiscal 2022 tax return and the impact of those adjustments on the fiscal 2023 annual effective tax rate.

Liquidity and Capital Resources

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Total convertible debt $ 327,184 $ 333,184 $ 204,000

Borrowings outstanding on asset-based loan facility and revolving credit facilities $ 42,217 $ 20,000 $ 40,000

Borrowings outstanding on asset-based loan facility $ 100,000 $ 40,000 $ 20,000

Finance leases and other financing obligations $ 31,892 $ 13,548 $ 11,602

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Recent Significant Financing Transactions

On November 1, 2023, we announced a two-year share repurchase program in an amount up to $100.0 million targeting $25.0 million to $100.0 million of share repurchases by the end of fiscal 2025.

On July 7, 2023, we increased the aggregate commitments on our asset-based loan facility to $300.0 million.

On December 13, 2022, we issued $287.5 million aggregate principal amount of 2.375% Convertible Senior Notes (the “2028 Convertible Notes”).

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Arrangement and third-party transaction costs of $4.5 million were expensed as incurred.

On March 11, 2022, we entered into a third amendment to our asset-based loan facility which increased the aggregate commitments from $150.0 million to $200.0 million.

On March 1, 2021, we issued $50.0 million aggregate principal amount of our 2024 Convertible Senior Notes at a premium which were offered as an additional issuance of our $150.0 million Convertible 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 million and repay a portion of borrowings outstanding under our asset-based loan facility.

Net proceeds were used to repay all outstanding borrowings under our 2022 tranche of senior secured term loans of $31.2 million and repay a portion of borrowings outstanding under our asset-based loan facility.

We incurred transaction costs of approximately $1.4 million which were capitalized as deferred financing fees to be amortized over the term of the underlying debt.

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See Note 4 “Fair Value Measurements” to our consolidated financial statements for details on our contingent earn-out liabilities outstanding as of December 29, 2023.

Fiscal Year Ended

December 30, 2022 December 24, 2021 December 25, 2020

Net income (loss) $ 27,750 $ (4,923) $ (82,903)

Non-cash charges $ 93,325 $ 47,372 $ 62,509

Changes in working capital $ (97,941) $ (62,348) $ 63,275

Fiscal Years Ended

(in thousands) December 29, 2023 December 30, 2022 December 24, 2021

Cash provided by (used in) operating activities $ 61,639 $ 23,134 $ (19,899)

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Cash provided by (used in) financing activities $ 9,010 $ 253,215 $ (9,222)

Fiscal Year 2022 Cash Flows

Net cash provided by operations was $23.1 million for the fiscal year ended December 30, 2022 compared to net cash used in operating activities of $19.9 million for the fiscal year ended December 24, 2021.

The increase in cash provided by operating activities was primarily due to the increased net income, net of non-cash charges, in the current year of $121.1 million compared to $42.4 million in the prior year period.

This improvement in cash-based profitability is primarily due to a 49.7% increase in sales compared to the prior year period.

The sales growth also resulted in higher working capital (increased accounts receivable and inventory partially offset by higher accounts payable).

The working capital growth of $35.6 million versus the prior year period partially offset the favorable impact of increased cash-based profitability.

The Company’s increased working capital investment in the current year is the result of rapid sales growth driven by our recovery from the pandemic.

We expect working capital growth to moderate in the future as sales growth normalizes.

Net cash used in investing activities was $232.0 million in fiscal 2022 driven by $186.2 million in cash to fund acquisitions and $45.8 million in capital expenditures which includes the purchase of our distribution facility in Columbus, Ohio.

Net cash provided by financing activities was $253.2 million for fiscal 2022 driven primarily by $587.5 million of proceeds from debt issuances and $20.2 million of incremental borrowings under our asset-based loan facility and other revolving credit facilities, partially offset by payments made on debt obligations of $331.1 million and $19.0 million of deferred financing costs.

Fiscal Year 2021 Cash Flows

Net cash used in operations was $19.9 million for fiscal 2021 consisting of a $4.9 million net loss and and investments in working capital of $62.3 million, partially offset by $47.4 million of non-cash charges.

Non-cash charges decreased predominately due to the $24.2 million write down of Del Monte and Bassian trademarks in fiscal 2020.

The cash used in working capital of $62.3 million is primarily driven by reinvestment in working capital to support growth.

Net cash used in investing activities was $49.0 million in fiscal 2021 driven by $38.8 million in capital expenditures which included the build-outs of our Los Angeles, New England and Miami distribution facilities.

We used $10.2 million in cash to fund several acquisitions.

Net cash used in financing activities was $9.2 million for fiscal 2021 driven by $37.6 million of payments made on senior term loans and finance lease obligations and a $20.0 million payment on our asset-based loan facility, partially offset by $51.8 million of proceeds from the issuance of additional convertible senior notes.

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 had a material impact on our business and operations and those of our customers.

Our net sales were most significantly impacted during the second quarter of fiscal 2020 when, in an effort to limit the spread of the virus, federal, state 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 cash provided by operating activities is predominately driven by net sales to our customers.

Our cash used in operating activities is primarily driven by our payments to suppliers for our inventory, employee compensation, payments to support our facilities, our distribution network, interest on our indebtedness, payments to tax authorities and other general corporate expenditures.

Net cash provided by operations was $61.6 million for the fiscal year ended December 29, 2023 compared to $23.1 million for the fiscal year ended December 30, 2022.

The increase in cash provided by operating activities was primarily due to a reduction in working capital requirements as we returned to more moderate growth in fiscal 2023 compared to fiscal 2022.

Fiscal 2022 working capital investment was unusually high due to the rapid recovery from the pandemic.

Net cash used in investing activities was $179.3 million in fiscal 2023 driven by $121.9 million in cash to fund acquisitions and $57.4 million in capital expenditures.

Net cash provided by financing activities was $9.0 million for fiscal 2023 driven primarily by $60.0 million of incremental borrowing on our asset-based loan facility, partially offset by payments made on debt obligations of $31.2 million, earn-out payments of $11.6 million, finance lease payments of $4.3 million, $2.1 million of shares surrendered to pay withholding taxes and $1.7 million of deferred financing costs.

Off-Balance Sheet Arrangements

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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.

goodwill and intangible assets and (v) accounting for income taxes.

For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies.

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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.

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 trade names.

These valuation methods contain significant assumptions and estimates including forecasts of expected future cash flows and discount rates.

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The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill.

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 Carlo simulation models, 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.

Valuation of Goodwill and Intangible Assets

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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 fiscal year ended December 30, 2022 and December 24, 2021, 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.

For the fiscal years ended December 29, 2023 and December 30, 2022, 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.

Total goodwill as of December 29, 2023 and December 30, 2022 was $356.0 million and $287.1 million, respectively.

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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.

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 England region and determined the Cambridge trademark did not fit our long-term strategic objectives.

During fiscal 2023, we incurred a customer relationships intangible asset impairment charge of $1.8 million, $1.3 million net of tax, related to the loss of a significant Hardie’s Fresh Foods customer post acquisition.

During fiscal 2021, we committed to a plan to shift our brand strategy to leverage the Allen Brothers brand in our New England region and determined the Cambridge trademark did not fit our long-term strategic objectives.

As a result, we recognized a $0.6 million impairment charge, $0.4 million net of tax, to fully write-down the net book value of our Cambridge trademark.

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Actual results could differ from these assumptions and projections, resulting in us revising our assumptions and, if required, recognizing an impairment loss.

Self-Insurance Reserves

We maintain a self-insured group medical program.

The program contains individual stop loss thresholds of $300 thousand 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.

We are self-insured for workers’ compensation and automobile liability to deductibles or self-insured retentions of $500 thousand per 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.

The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws.

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As of December 29, 2023 and December 30, 2022, we had valuation allowances of $2.1 million and $1.6 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.

Contingent Earn-out Liabilities

We determine the fair value of contingent consideration based on future operating projections under various potential scenarios, including the use of Monte Carlo simulations, and weight the probability of these outcomes.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis