US Foods Holding Corp. - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-37786
![usflogowithouttagrgbweba04.jpg](https://www.sec.gov/Archives/edgar/data/0001665918/000166591819000173/usflogowithouttagrgbweba04.jpg)
US FOODS HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware | 26-0347906 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
9399 W. Higgins Road, Suite 100
Rosemont, IL 60018
(847) 720-8000
(Address, including Zip Code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | USFD | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
219,421,457 shares of the registrant's common stock were outstanding as of October 31, 2019.
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q (this “Quarterly Report”) which are not historical in nature are “forward-looking statements” within the meaning of the federal securities laws. These statements often include words such as “believe,” “expect,” “project,” “anticipate,” “intend,” “plan,” “outlook,” “estimate,” “target,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecast,” “mission,” “strive,” “more,” “goal,” or similar expressions and are based upon various assumptions and our experience in the industry, as well as historical trends, current conditions, and expected future developments. However, you should understand that these statements are not guarantees of performance or results, and there are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from those expressed in the forward-looking statements, including, among others:
• cost inflation/deflation and commodity volatility; |
• competition; |
• reliance on third-party suppliers and interruption of product supply or increases in product costs; |
• changes in our relationships with customers and group purchasing organizations; |
• ability to increase or maintain sales to independent restaurants; |
• effective integration of acquired businesses; |
• achievement of expected benefits from cost savings initiatives; |
• increases in fuel costs; |
• economic factors affecting consumer confidence and discretionary spending; |
• changes in consumer eating habits; |
• reputation in the industry; |
• labor relations and costs and continued access to qualified and diverse labor; |
• cost and pricing structures; |
• changes in tax laws and regulations and resolution of tax disputes; |
• environmental, health and safety and other government regulation; |
• product liability claims; |
• adverse judgments or settlements resulting from litigation; |
• disruption of existing technologies and implementation of new technologies; |
• cybersecurity incidents and other technology disruptions; |
• management of retirement benefits and pension obligations; |
• extreme weather conditions, natural disasters and other catastrophic events; |
• risks associated with intellectual property, including potential infringement; |
• indebtedness and restrictions under agreements governing indebtedness; |
• interest rate increases; and |
• factors relating to ownership of our common stock. |
For a detailed discussion of these and other risks, uncertainties and factors, see Part I, Item 1A— “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 (the “2018 Annual Report”).
All forward-looking statements contained in this Quarterly Report speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements.
Comparisons of results between current and prior periods are not intended to express any future trends, or indications of future performance, and should be viewed only as historical data.
TABLE OF CONTENTS | ||
Page No. | ||
Part I. Financial Information | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Part II. Other Information | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
US FOODS HOLDING CORP. | |||||||
CONSOLIDATED BALANCE SHEETS | |||||||
(In millions, except par value) | |||||||
September 28, 2019 | December 29, 2018 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 90 | $ | 104 | |||
Accounts receivable, less allowances of $30 and $29 | 1,548 | 1,347 | |||||
Vendor receivables, less allowances of $5 and $3 | 199 | 106 | |||||
Inventories—net | 1,468 | 1,279 | |||||
Prepaid expenses | 101 | 106 | |||||
Assets held for sale | 1 | 7 | |||||
Assets of discontinued operations | 142 | — | |||||
Other current assets | 11 | 30 | |||||
Total current assets | 3,560 | 2,979 | |||||
Property and equipment—net | 2,029 | 1,842 | |||||
Goodwill | 4,728 | 3,967 | |||||
Other intangibles—net | 983 | 324 | |||||
Deferred tax assets | — | 7 | |||||
Other assets | 226 | 67 | |||||
Total assets | $ | 11,526 | $ | 9,186 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Cash overdraft liability | $ | 227 | $ | 157 | |||
Accounts payable | 1,645 | 1,359 | |||||
Accrued expenses and other current liabilities | 511 | 454 | |||||
Liabilities of discontinued operations | 27 | — | |||||
Current portion of long-term debt | 136 | 106 | |||||
Total current liabilities | 2,546 | 2,076 | |||||
Long-term debt | 4,788 | 3,351 | |||||
Deferred tax liabilities | 294 | 298 | |||||
Other long-term liabilities | 341 | 232 | |||||
Total liabilities | 7,969 | 5,957 | |||||
Commitments and contingencies (Note 19) | |||||||
Shareholders’ equity: | |||||||
Common stock, $0.01 par value—600 shares authorized; 219 and 217 issued and outstanding as of September 28, 2019 and December 29, 2018, respectively | 2 | 2 | |||||
Additional paid-in capital | 2,825 | 2,780 | |||||
Retained earnings | 824 | 531 | |||||
Accumulated other comprehensive loss | (94 | ) | (84 | ) | |||
Total shareholders’ equity | 3,557 | 3,229 | |||||
Total liabilities and shareholders' equity | $ | 11,526 | $ | 9,186 |
See Notes to Consolidated Financial Statements (Unaudited).
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US FOODS HOLDING CORP. | |||||||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | |||||||||||||||
(In millions, except per share data)* | |||||||||||||||
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Net sales | $ | 6,531 | $ | 6,153 | $ | 19,005 | $ | 18,134 | |||||||
Cost of goods sold | 5,375 | 5,045 | 15,655 | 14,920 | |||||||||||
Gross profit | 1,156 | 1,108 | 3,350 | 3,214 | |||||||||||
Operating expenses: | |||||||||||||||
Distribution, selling and administrative costs | 968 | 929 | 2,837 | 2,725 | |||||||||||
Restructuring costs | — | — | — | 1 | |||||||||||
Total operating expenses | 968 | 929 | 2,837 | 2,726 | |||||||||||
Operating income | 188 | 179 | 513 | 488 | |||||||||||
Other expense (income)—net | 1 | (3 | ) | (3 | ) | (9 | ) | ||||||||
Interest expense—net | 43 | 42 | 127 | 133 | |||||||||||
Income before income taxes | 144 | 140 | 389 | 364 | |||||||||||
Income tax provision | 39 | 26 | 97 | 57 | |||||||||||
Income from continuing operations | 105 | 114 | 292 | 307 | |||||||||||
Income from discontinued operations—net of tax | 1 | — | 1 | — | |||||||||||
Net income | 106 | 114 | 293 | 307 | |||||||||||
Other comprehensive income—net of tax: | |||||||||||||||
Changes in retirement benefit obligations | 3 | — | 5 | 26 | |||||||||||
Unrecognized (loss) gain on interest rate swaps | (1 | ) | 2 | (15 | ) | 14 | |||||||||
Comprehensive income | $ | 108 | $ | 116 | $ | 283 | $ | 347 | |||||||
Net income per share—basic: | |||||||||||||||
Continuing operations | $ | 0.48 | $ | 0.53 | $ | 1.33 | $ | 1.42 | |||||||
Discontinued operations | 0.01 | — | 0.01 | — | |||||||||||
Net income per share | $ | 0.49 | $ | 0.53 | $ | 1.34 | $ | 1.42 | |||||||
Net income per share—diluted: | |||||||||||||||
Continuing operations | $ | 0.47 | $ | 0.52 | $ | 1.33 | $ | 1.41 | |||||||
Discontinued operations | 0.01 | — | 0.01 | — | |||||||||||
Net income per share | $ | 0.48 | $ | 0.52 | $ | 1.34 | $ | 1.41 | |||||||
Weighted-average common shares outstanding | |||||||||||||||
Basic | 218 | 217 | 218 | 216 | |||||||||||
Diluted | 220 | 218 | 219 | 218 |
(*) Prior year amounts may have been rounded to conform with the current year presentation.
See Notes to Consolidated Financial Statements (Unaudited).
2
US FOODS HOLDING CORP. | ||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||
Number of Common Shares | Common Shares at Par Value | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | |||||||||||||||||
BALANCE—December 29, 2018 | 217 | $ | 2 | $ | 2,780 | $ | 531 | $ | (84 | ) | $ | 3,229 | ||||||||||
Share-based compensation expense | — | — | 6 | — | — | 6 | ||||||||||||||||
Proceeds from employee stock purchase plan | — | — | 5 | — | — | 5 | ||||||||||||||||
Exercise of stock options | 1 | — | 6 | — | — | 6 | ||||||||||||||||
Tax withholding payments for net share-settled equity awards | — | — | (2 | ) | — | — | (2 | ) | ||||||||||||||
Changes in retirement benefit obligations, net of income tax | — | — | — | — | 1 | 1 | ||||||||||||||||
Unrecognized loss on interest rate swaps, net of income tax | — | — | — | — | (6 | ) | (6 | ) | ||||||||||||||
Net income | — | — | — | 71 | — | 71 | ||||||||||||||||
BALANCE—March 30, 2019 | 218 | 2 | 2,795 | 602 | (89 | ) | 3,310 | |||||||||||||||
Share-based compensation expense | — | — | 9 | — | — | 9 | ||||||||||||||||
Proceeds from employee stock purchase plan | — | — | 5 | — | — | 5 | ||||||||||||||||
Exercise of stock options | 1 | — | 5 | — | — | 5 | ||||||||||||||||
Tax withholding payments for net share-settled equity awards | — | — | (3 | ) | — | — | (3 | ) | ||||||||||||||
Changes in retirement benefit obligations, net of income tax | — | — | — | — | 1 | 1 | ||||||||||||||||
Unrecognized loss on interest rate swaps, net of income tax | — | — | — | — | (8 | ) | (8 | ) | ||||||||||||||
Net income | — | — | — | 116 | — | 116 | ||||||||||||||||
BALANCE—June 29, 2019 | 219 | 2 | 2,811 | 718 | (96 | ) | 3,435 | |||||||||||||||
Share-based compensation expense | — | — | 7 | — | — | 7 | ||||||||||||||||
Proceeds from employee stock purchase plan | — | — | 5 | — | — | 5 | ||||||||||||||||
Exercise of stock options | — | — | 2 | — | — | 2 | ||||||||||||||||
Changes in retirement benefit obligations, net of income tax | — | — | — | — | 3 | 3 | ||||||||||||||||
Unrecognized loss on interest rate swaps, net of income tax | — | — | — | — | (1 | ) | (1 | ) | ||||||||||||||
Net income | — | — | — | 106 | — | 106 | ||||||||||||||||
BALANCE—September 28, 2019 | 219 | $ | 2 | $ | 2,825 | $ | 824 | $ | (94 | ) | $ | 3,557 |
See Notes to Consolidated Financial Statements (Unaudited).
3
US FOODS HOLDING CORP. | ||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) | ||||||||||||||||||||||
(In millions)* | ||||||||||||||||||||||
Number of Common Shares | Common Shares at Par Value | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | |||||||||||||||||
BALANCE—December 30, 2017 | 215 | $ | 2 | $ | 2,720 | $ | 124 | $ | (95 | ) | $ | 2,751 | ||||||||||
Share-based compensation expense | — | — | 7 | — | — | 7 | ||||||||||||||||
Proceeds from employee stock purchase plan | — | — | 4 | — | — | 4 | ||||||||||||||||
Exercise of stock options | 1 | — | 7 | — | — | 7 | ||||||||||||||||
Changes in retirement benefit obligations, net of income tax | — | — | — | — | 1 | 1 | ||||||||||||||||
Unrecognized gain on interest rate swaps, net of income tax | — | — | — | — | 9 | 9 | ||||||||||||||||
Net income | — | — | — | 67 | — | 67 | ||||||||||||||||
BALANCE—March 31, 2018 | 216 | 2 | 2,738 | 191 | (85 | ) | 2,846 | |||||||||||||||
Share-based compensation expense | — | — | 10 | — | — | 10 | ||||||||||||||||
Proceeds from employee stock purchase plan | — | — | 6 | — | — | 6 | ||||||||||||||||
Exercise of stock options | 1 | — | 9 | — | — | 9 | ||||||||||||||||
Tax withholding payments for net share-settled equity awards | — | — | (5 | ) | — | — | (5 | ) | ||||||||||||||
Changes in retirement benefit obligations, net of income tax | — | — | — | — | 25 | 25 | ||||||||||||||||
Unrecognized gain on interest rate swaps, net of income tax | — | — | — | — | 3 | 3 | ||||||||||||||||
Net income | — | — | — | 126 | — | 126 | ||||||||||||||||
BALANCE—June 30, 2018 | 217 | 2 | 2,758 | 317 | (57 | ) | 3,020 | |||||||||||||||
Share-based compensation expense | — | — | 3 | — | — | 3 | ||||||||||||||||
Proceeds from employee stock purchase plan | — | — | 5 | — | — | 5 | ||||||||||||||||
Exercise of stock options | — | — | 3 | — | — | 3 | ||||||||||||||||
Tax withholding payments for net share-settled equity awards | — | — | (1 | ) | — | — | (1 | ) | ||||||||||||||
Unrecognized gain on interest rate swaps, net of income tax | — | — | — | — | 2 | 2 | ||||||||||||||||
Net income | — | — | — | 114 | — | 114 | ||||||||||||||||
BALANCE—September 29, 2018 | 217 | $ | 2 | $ | 2,768 | $ | 431 | $ | (55 | ) | $ | 3,146 |
(*) Prior year amounts may have been rounded to conform with the current year presentation.
See Notes to Consolidated Financial Statements (Unaudited).
4
US FOODS HOLDING CORP. | |||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | |||||||
(In millions)* | |||||||
39 Weeks Ended | |||||||
September 28, 2019 | September 29, 2018 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 293 | $ | 307 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Income from discontinued operations, net of tax | (1 | ) | — | ||||
Depreciation and amortization | 260 | 250 | |||||
Gain on disposal of property and equipment—net | (1 | ) | (1 | ) | |||
Amortization of deferred financing costs | 3 | 6 | |||||
Deferred tax provision | 7 | 50 | |||||
Share-based compensation expense | 22 | 20 | |||||
Provision for doubtful accounts | 14 | 13 | |||||
Changes in operating assets and liabilities: | |||||||
Increase in receivables | (162 | ) | (174 | ) | |||
Increase in inventories—net | (22 | ) | (93 | ) | |||
Decrease (increase) in prepaid expenses and other assets | 14 | (28 | ) | ||||
Increase in accounts payable and cash overdraft liability | 160 | 264 | |||||
Decrease in accrued expenses and other liabilities | (29 | ) | (170 | ) | |||
Net cash provided by operating activities of continuing operations | 558 | 444 | |||||
Net cash provided by operating activities of discontinued operations | 1 | — | |||||
Net cash provided by operating activities | 559 | 444 | |||||
Cash flows from investing activities: | |||||||
Acquisition of business—net of cash | (1,829 | ) | — | ||||
Proceeds from sales of property and equipment | 9 | 3 | |||||
Purchases of property and equipment | (157 | ) | (168 | ) | |||
Net cash used in investing activities | (1,977 | ) | (165 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from debt borrowings | 5,084 | 2,987 | |||||
Principal payments on debt and financing leases | (3,654 | ) | (3,321 | ) | |||
Contingent consideration paid for business acquisitions | — | (2 | ) | ||||
Payment for debt financing costs and fees | (42 | ) | (1 | ) | |||
Proceeds from employee stock purchase plan | 15 | 15 | |||||
Proceeds from exercise of stock options | 13 | 18 | |||||
Tax withholding payments for net share-settled equity awards | (5 | ) | (6 | ) | |||
Net cash provided by (used in) financing activities | 1,411 | (310 | ) | ||||
Net decrease in cash, cash equivalents and restricted cash | (7 | ) | (31 | ) | |||
Cash, cash equivalents and restricted cash—beginning of period | 105 | 119 | |||||
Cash, cash equivalents and restricted cash—end of period | $ | 98 | $ | 88 | |||
Supplemental disclosures of cash flow information: | |||||||
Interest paid—net of amounts capitalized | $ | 112 | $ | 118 | |||
Income taxes paid—net | 116 | 65 | |||||
Property and equipment purchases included in accounts payable | 21 | 16 | |||||
Leased assets obtained in exchange for financing lease liabilities | 77 | 82 | |||||
Leased assets obtained in exchange for operating lease liabilities | 11 | — | |||||
Cashless exercise of stock options | 1 | 1 |
(*) Prior year amounts may have been rounded to conform with the current year presentation.
See Notes to Consolidated Financial Statements (Unaudited).
5
US FOODS HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Amounts in tables in millions, except per share data, unless otherwise noted)
1. | OVERVIEW AND BASIS OF PRESENTATION |
US Foods Holding Corp., a Delaware corporation, and its consolidated subsidiaries are referred to in these consolidated financial statements and notes as “we,” “our,” “us,” the “Company,” or “US Foods.” US Foods Holding Corp. conducts all of its operations through its wholly owned subsidiary US Foods, Inc. (“USF”) and its subsidiaries. All of the Company’s indebtedness, as further described in Note 12, Debt, is a direct obligation of USF and its subsidiaries.
Business Description—The Company, through USF, operates in one business segment in which it markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States. These customers include independently owned single and multi-unit restaurants, regional concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations.
Basis of Presentation—The Company operates on a 52 or 53 week fiscal year, with all periods ending on a Saturday. When a 53 week fiscal year occurs, the Company reports the additional week in the fiscal fourth quarter. Fiscal years 2019 and 2018 are both 52 week fiscal years. Fiscal year 2020 will be a 53 week fiscal year.
The consolidated financial statements included in this Quarterly Report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements and notes prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures included in this Quarterly Report are adequate to make the information presented not misleading. These interim consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes included in the 2018 Annual Report. Prior year amounts may have been rounded to conform with the current year presentation in millions.
The consolidated interim financial statements reflect all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results that might be achieved for the full fiscal year.
2. | RECENT ACCOUNTING PRONOUNCEMENTS |
Recently Adopted Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Income Statement, Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income. This new guidance permits an entity to reclassify the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. The Company adopted this guidance as of the beginning of fiscal year 2019 and elected not to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Accounting Standards Codification (“ASC”) 840, Leases, and has issued subsequent amendments to Topic 842. The Company adopted Topic 842 on December 30, 2018, the effective and initial application date, using the modified retrospective approach. The Company elected from the package of practical expedients permitted under the transition guidance within Topic 842, which, among other things, allowed the Company to carry forward the historical lease classification. Adoption of Topic 842 resulted in the recording of additional net lease assets and lease liabilities of approximately $100 million, as of December 30, 2018. The initial adoption of Topic 842 did not materially impact the Company’s Consolidated Statement of Comprehensive Income and Consolidated Statement of Cash Flows. The Company has revised its relevant policies and procedures, as applicable, to meet the new accounting, reporting and disclosure requirements of Topic 842. See Note 14, Leases.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which provides new guidance on the accounting for implementation, set-up, and other upfront costs incurred in a hosted cloud computing arrangement. Under the new guidance, entities will apply the same criteria for capitalizing implementation costs as they would for an internal-use software license arrangement. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. This ASU can be adopted prospectively to eligible costs
6
incurred on or after the date of adoption or retrospectively. The Company does not expect the adoption of the guidance under the new standard to materially affect its financial position or results of operations.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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. ASU 2016-13 was further amended in November 2018 by ASU 2018-19, Codification Improvements to Topic 236, Financial Instrument-Credit Losses. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of the provisions of the new standard to materially affect its financial position or results of operations.
3. | REVENUE RECOGNITION |
The Company recognizes revenue when the performance obligation is satisfied, which occurs when a customer obtains control of the promised goods or services. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these goods or services. The Company generates substantially all of its revenue from the distribution and sale of food and food-related products and recognizes revenue when title and risk of loss passes and the customer accepts the goods, which occurs at delivery. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of revenue at the time the revenue is recognized. Sales taxes invoiced to customers and remitted to governmental authorities are excluded from net sales. Shipping and handling costs are treated as fulfillment costs and included in distribution, selling and administrative costs.
At September 28, 2019, the Company did not have any material outstanding performance obligations, contract liabilities or capitalized contract acquisition costs. Customer receivables, which are included in accounts receivable, less allowances in the Company’s Consolidated Balance Sheets, were $1.5 billion and $1.3 billion as of September 28, 2019 and December 29, 2018, respectively.
The Company has certain customer contracts under which incentives are paid upfront to its customers. These payments have become industry practice and are not related to financing any customer’s business, nor are they associated with any distinct good or service to be received from any customer. These incentive payments are capitalized in prepaid expenses and other assets and amortized as a reduction of revenue over the life of the contract or as goods or services are transferred to the customer. The Company’s contract assets for these upfront payments were $31 million and $37 million included in prepaid expenses in the Company’s Consolidated Balance Sheets as of September 28, 2019 and December 29, 2018, respectively, and $38 million and $28 million included in other assets in the Company’s Consolidated Balance Sheets as of September 28, 2019 and December 29, 2018, respectively.
The following table presents the disaggregation of revenue for each of the Company’s principal product categories:
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Meats and seafood | $ | 2,352 | $ | 2,198 | $ | 6,849 | $ | 6,484 | |||||||
Dry grocery products | 1,100 | 1,070 | 3,254 | 3,181 | |||||||||||
Refrigerated and frozen grocery products | 1,054 | 979 | 3,076 | 2,896 | |||||||||||
Dairy | 689 | 646 | 1,955 | 1,906 | |||||||||||
Equipment, disposables and supplies | 628 | 594 | 1,822 | 1,722 | |||||||||||
Beverage products | 352 | 337 | 1,029 | 991 | |||||||||||
Produce | 356 | 329 | 1,020 | 954 | |||||||||||
Net sales | $ | 6,531 | $ | 6,153 | $ | 19,005 | $ | 18,134 |
4. | BUSINESS ACQUISITIONS |
On September 13, 2019, USF completed the $1.8 billion all cash acquisition of five foodservice companies (the “Food Group”) from Services Group of America, Inc.: Food Services of America, Inc., Systems Services of America, Inc., Amerifresh, Inc., Ameristar Meats, Inc. and GAMPAC Express, Inc. The acquisition of the Food Group expands the Company’s network in the West and Northwest parts of the United States.
USF financed the acquisition with borrowings under a new $1.5 billion incremental senior secured term loan facility, as further described in Note 12, Debt, and with borrowings under its revolving credit facilities. The assets, liabilities and results of operations of the Food Group have been included in the Company’s consolidated financial statements since the date the acquisition was completed.
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As a condition to receiving regulatory clearance for the acquisition from the Federal Trade Commission, USF divested three Food Group distribution facilities (the "Divested Assets"). The total amount of proceeds received from the October 11, 2019 sale of the Divested Assets at closing was $94 million, which, together with approximately $21 million in holdback funds and expected working capital adjustments, approximates the fair value of the Divested Assets. The assets and liabilities of the Divested Assets are included in assets of discontinued operations and liabilities of discontinued operations, respectively, in the Company's Consolidated Balance Sheets. The operating results of the Divested Assets from the date the acquisition was completed through September 28, 2019 are included in income from discontinued operations—net of tax in the Company's Consolidated Statements of Comprehensive Income.
The following table summarizes the preliminary purchase price allocation recognized for the acquisition based on preliminary estimates of the fair value of the assets acquired and the liabilities assumed. The allocation is dependent upon certain valuation and other analyses and studies that have not yet been completed. Accordingly, the preliminary purchase price allocation is subject to further adjustment as additional information becomes available and final valuations are completed. There can be no assurances that these final valuations and additional analyses and studies will not result in significant changes to the preliminary estimates of fair value set forth below.
Preliminary Purchase Price Allocation | ||||
Accounts receivable | $ | 145 | ||
Inventories | 166 | |||
Assets of discontinued operations | 142 | |||
Other current assets | 7 | |||
Property and equipment | 200 | |||
Goodwill(1) | 761 | |||
Other intangibles(2) | 691 | |||
Other assets | 47 | |||
Accounts payable | (200 | ) | ||
Accrued expenses and other current liabilities | (61 | ) | ||
Liabilities of discontinued operations | (27 | ) | ||
Other long-term liabilities, including financing leases | (42 | ) | ||
Cash paid for acquisition | $ | 1,829 |
(1) | Goodwill recognized is primarily attributable to expected synergies from the combined company, as well as intangible assets that do not qualify for separate recognition. The acquired goodwill is deductible for U.S. federal income tax purposes. |
(2) | Other intangible assets consist of customer relationships of $652 million with estimated useful lives of 15 years and indefinite-lived brand names and trademarks of $39 million. |
Net sales and net income for the Food Group (exclusive of the Divested Assets, as the sales and net income of the Divested Assets are reflected in discontinued operations, which have been included in the Company’s Consolidated Statements of Comprehensive Income since the date the acquisition was completed), were $132 million and $1 million, during the 13 weeks and 39 weeks ended September 28, 2019, respectively. Acquisition related costs included in distribution, selling and administrative costs in the Company’s Consolidated Statements of Comprehensive Income were $17 million and $10 million for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively, and $35 million and $10 million for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively.
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The following table presents the Company’s unaudited pro forma consolidated net sales, net income and earnings per share (“EPS”) for the 13 weeks and 39 weeks ended September 28, 2019 and September 29, 2018, respectively. The unaudited pro forma financial information includes the historical results of operations of the Company and the Food Group, giving effect to the acquisition and related financing as if they had occurred as of December 31, 2017, which was the first day of the Company’s fiscal year 2018.
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||||
Pro forma net sales | $ | 7,195 | $ | 6,907 | $ | 21,086 | $ | 20,265 | ||||||||
Pro forma net income | $ | 123 | $ | 120 | $ | 305 | $ | 294 | ||||||||
Pro forma earnings per share: | ||||||||||||||||
Basic | $ | 0.56 | $ | 0.55 | $ | 1.40 | $ | 1.36 | ||||||||
Diluted | $ | 0.56 | $ | 0.55 | $ | 1.39 | $ | 1.35 |
The unaudited pro forma financial information for all periods presented above excludes the results of operations related to the Divested Assets, as the results of operations related to the Divested Assets are reflected as discontinued operations. Unaudited net sales, net income and EPS related to the Divested Assets for the 13 weeks and 39 weeks ended September 28, 2019 and September 29, 2018, respectively, are as follows:
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||||
Pro forma net sales | $ | 114 | $ | 136 | $ | 372 | $ | 390 | ||||||||
Pro forma net income | $ | 3 | $ | 4 | $ | 6 | $ | 8 | ||||||||
Pro forma earnings per share: | ||||||||||||||||
Basic | $ | 0.02 | $ | 0.02 | $ | 0.03 | $ | 0.04 | ||||||||
Diluted | $ | 0.01 | $ | 0.02 | $ | 0.03 | $ | 0.04 |
The unaudited pro forma financial information above includes adjustments for: (1) incremental depreciation expense related to fair value increases of certain acquired property and equipment, (2) amortization expense related to the fair value of intangible assets acquired, (3) interest expense related to the borrowings under the new incremental senior secured term loan facility and revolving credit facilities used to finance the acquisition, (4) the elimination of acquisition-related costs that were included in the Company’s historical results, and (5) adjustments to the income tax provision based on pro forma results of operations. No effect has been given to potential synergies, operating efficiencies or costs arising from the integration of the Food Group with our previously existing operations. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the date indicated. Further, the pro forma financial information does not purport to project the Company’s future consolidated results of operations following the acquisition.
5. | RESTRICTED CASH |
Restricted cash primarily consists of cash on deposit with financial institutions as collateral for certain letters of credit. Cash, cash equivalents and restricted cash as presented in the Company's Consolidated Statements of Cash Flows as of September 28, 2019 and December 29, 2018 consisted of the following:
September 28, 2019 | December 29, 2018 | ||||||
Cash and cash equivalents | $ | 90 | $ | 104 | |||
Restricted cash—included in other assets | 8 | 1 | |||||
Total cash, cash equivalents and restricted cash | $ | 98 | $ | 105 |
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6. | INVENTORIES |
The Company’s inventories, consisting mainly of food and food-related products, are primarily considered finished goods. Inventory costs include the purchase price of the product, freight costs to deliver it to the Company’s distribution facilities, and depreciation and labor related to processing facilities and equipment, and are net of certain cash or non-cash consideration received from vendors. The Company assesses the need for valuation allowances for slow-moving, excess and obsolete inventories by estimating the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions.
The Company records inventories at the lower of cost or market, using the last-in, first-out (“LIFO”) method. The base year values of beginning and ending inventories are determined using the inventory price index computation method. This links current costs to original costs in the base year when the Company adopted LIFO. As of September 28, 2019 and December 29, 2018, LIFO reserves in the Company’s Consolidated Balance Sheets were $143 million and $130 million, respectively. As a result of changes in LIFO reserves, cost of goods sold increased $1 million and decreased $9 million for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively, and increased $13 million and decreased $1 million for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively.
7. | ACCOUNTS RECEIVABLE FINANCING PROGRAM |
Under its accounts receivable financing facility (the “ABS Facility”), USF sells, on a revolving basis, eligible receivables to a wholly owned, special purpose, bankruptcy remote subsidiary (the “Receivables Company”). The Receivables Company, in turn, grants a continuing security interest in all of its right, title and interest in the eligible receivables to the administrative agent, for the benefit of the lenders. The Company consolidates the Receivables Company and, consequently, the transfer of the eligible receivables is a transaction internal to the Company and the eligible receivables have not been derecognized from the Company’s Consolidated Balance Sheets. Included in the Company’s accounts receivable balance as of September 28, 2019 and December 29, 2018 was approximately $1.1 billion and $1.0 billion, respectively, of eligible receivables held as collateral in support of the ABS Facility. See Note 12, Debt, for a further description of the ABS Facility.
8. | ASSETS HELD FOR SALE |
The Company classifies its closed facilities as assets held for sale at the time management commits to a plan to sell the facility, the facility is actively marketed and available for immediate sale, and the sale is expected to be completed within one year. Due to market conditions, certain facilities may be classified as assets held for sale for more than one year while the Company continues to actively market the facilities. The change in assets held for sale for the 39 weeks ended September 28, 2019 was as follows:
Balance as of December 29, 2018 | $ | 7 | ||
Assets sold | (6 | ) | ||
Balance as of September 28, 2019 | $ | 1 |
During the 39 weeks ended September 28, 2019, two closed distribution facilities and an excess parcel of land were sold for aggregate proceeds of $6 million, which approximated their aggregate carrying values.
9. | PROPERTY AND EQUIPMENT |
Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years. Property and equipment under financing leases and leasehold improvements are amortized on a straight-line basis over the remaining terms of the related leases or the estimated useful lives of the assets, if reasonably assured the Company will purchase the assets at the end of the lease terms. As of September 28, 2019 and December 29, 2018, property and equipment-net included accumulated depreciation of $2,288 million and $2,117 million, respectively. Depreciation expense was $75 million for both the 13 weeks ended September 28, 2019 and September 29, 2018, and $228 million and $220 million for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively.
10. | GOODWILL AND OTHER INTANGIBLES |
Goodwill includes the cost of acquired businesses in excess of the fair value of the tangible and other intangible net assets acquired. Other intangible assets include customer relationships, noncompete agreements, the brand names comprising the Company’s portfolio of exclusive brands, and trademarks. Brand names and trademarks are indefinite-lived intangible assets and, accordingly, are not subject to amortization, but are subject to impairment assessments as described below.
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Customer relationships and noncompete agreements are intangible assets with definite lives and are carried at the acquired fair value, less accumulated amortization. Customer relationships and noncompete agreements are amortized over the estimated useful lives (which are 2 to 15 years). Amortization expense was $12 million and $10 million for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively, and $32 million and $30 million for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively.
Goodwill and other intangibles—net consisted of the following:
September 28, 2019 | December 29, 2018 | ||||||
Goodwill | $ | 4,728 | $ | 3,967 | |||
Other intangibles—net | |||||||
Customer relationships—amortizable: | |||||||
Gross carrying amount | $ | 806 | $ | 154 | |||
Accumulated amortization | (116 | ) | (85 | ) | |||
Net carrying value | 690 | 69 | |||||
Noncompete agreements—amortizable: | |||||||
Gross carrying amount | 3 | 3 | |||||
Accumulated amortization | (2 | ) | (1 | ) | |||
Net carrying value | 1 | 2 | |||||
Brand names and trademarks—not amortizing | 292 | 253 | |||||
Total other intangibles—net | $ | 983 | $ | 324 |
The increase in goodwill and other intangible assets as of September 28, 2019 is attributable to the Food Group acquisition, as described in Note 4, Business Acquisitions.
The Company assesses goodwill and other intangible assets with indefinite lives for impairment annually, or more frequently if events occur that indicate an asset may be impaired. For goodwill and indefinite-lived intangible assets, the Company’s policy is to assess for impairment as of the beginning of each fiscal third quarter. For intangible assets with definite lives, the Company assesses impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. The Company completed its most recent annual impairment assessment for goodwill and indefinite-lived intangible assets as of June 30, 2019, the first day of the third quarter of fiscal year 2019, with no impairments noted.
11. | FAIR VALUE MEASUREMENTS |
The Company follows the accounting standards for fair value, under which fair value is a market-based measurement, not an entity-specific measurement. The Company’s fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
• | Level 1—observable inputs, such as quoted prices in active markets |
• | Level 2—observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active or inactive markets that are observable either directly or indirectly, or other inputs that are observable or can be corroborated by observable market data |
• | Level 3—unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions |
Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented below.
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The Company’s assets and liabilities measured at fair value on a recurring basis as of September 28, 2019 and December 29, 2018, aggregated by the level in the fair value hierarchy within which those measurements fall, were as follows:
September 28, 2019 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities | |||||||||||||||
Interest rate swaps | $ | — | $ | 2 | $ | — | $ | 2 | |||||||
December 29, 2018 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | |||||||||||||||
Money market funds | $ | 1 | $ | — | $ | — | $ | 1 | |||||||
Interest rate swaps | — | 19 | — | 19 | |||||||||||
$ | 1 | $ | 19 | $ | — | $ | 20 |
There were no significant assets or liabilities in the Company's Consolidated Balance Sheets measured at fair value on a nonrecurring basis. Business acquisitions are recorded at fair value as further described in Note 4, Business Acquisitions.
Recurring Fair Value Measurements
Money Market Funds
Money market funds include highly liquid investments with a maturity of three or fewer months. They are valued using quoted market prices in active markets and are classified under Level 1 within the fair value hierarchy.
Derivative Financial Instruments
The Company uses interest rate swaps, designated as cash flow hedges, to manage its exposure to interest rate movements in connection with its variable-rate Initial Term Loan Facility (as defined in Note 12, Debt).
On August 1, 2017, USF entered into four-year interest rate swap agreements with a notional amount of $1.1 billion, reducing to $825 million in the fourth year. These swaps effectively converted approximately half of the principal amount of the Initial Term Loan Facility from a variable to a fixed rate loan.
On May 31, 2019, an interest rate swap agreement with a notional amount of $367 million was terminated, and the Company received cash proceeds of $1 million, the fair value of the interest rate swap on the termination date. The proceeds were recorded as cash provided by operating activities in the Company's Consolidated Statement of Cash Flows. The $1 million gain from the termination of the interest rate swap agreement remains in accumulated other comprehensive loss and is being amortized to interest expense through July 31, 2021, the remaining term of the original interest rate swap agreement.
After giving effect to the termination of the interest rate swap agreement, the remaining interest rate swap agreements collectively have a notional value of $733 million, reducing to $550 million on July 31, 2020. The Company pays an aggregate effective rate of 3.70% on the notional amount of the Initial Term Loan Facility covered by the interest rate swap agreements, comprised of 1.70% plus a spread of 2.00% (see Note 12, Debt).
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The Company records its interest rate swaps in its Consolidated Balance Sheets at fair value, based on projections of cash flows and future interest rates. The determination of fair value includes the consideration of any credit valuation adjustments necessary, giving consideration to the creditworthiness of the respective counterparties and the Company. The following table presents the balance sheet location and fair value of the interest rate swaps as of September 28, 2019 and December 29, 2018:
Fair Value | |||||||||
Balance Sheet Location | September 28, 2019 | December 29, 2018 | |||||||
Derivatives designated as hedging instruments | |||||||||
Interest rate swaps | Other current assets | $ | — | $ | 8 | ||||
Interest rate swaps | Other assets | — | 11 | ||||||
Total assets | — | 19 | |||||||
Interest rate swaps | Other long-term liabilities | 2 | — | ||||||
Net position | $ | 2 | $ | 19 |
Gains and losses on the interest rate swaps are initially recorded in accumulated other comprehensive loss and reclassified to interest expense during the period in which the hedged transaction affects income. The following table presents the effect of the Company’s interest rate swaps in its Consolidated Statements of Comprehensive Income for the 13 weeks and 39 weeks ended September 28, 2019 and September 29, 2018:
Derivatives in Cash Flow Hedging Relationships | Amount of (Loss) Gain Recognized in Accumulated Other Comprehensive Loss, net of tax | Location of Amounts Reclassified from Accumulated Other Comprehensive Loss | Amount of Gain Reclassified from Accumulated Other Comprehensive Loss to Income, net of tax | |||||||
For the 13 weeks ended September 28, 2019 | ||||||||||
Interest rate swaps | $ | — | Interest expense—net | $ | (1 | ) | ||||
For the 13 weeks ended September 29, 2018 | ||||||||||
Interest rate swaps | $ | 2 | Interest expense—net | $ | (1 | ) | ||||
For the 39 weeks ended September 28, 2019 | ||||||||||
Interest rate swaps | $ | (11 | ) | Interest expense—net | $ | (4 | ) | |||
For the 39 weeks ended September 29, 2018 | ||||||||||
Interest rate swaps | $ | 14 | Interest expense—net | $ | (1 | ) |
During the next twelve months, the Company estimates that a de minimis amount will be reclassified from accumulated other comprehensive loss to income.
Other Fair Value Measurements
The carrying value of cash, restricted cash, accounts receivable, cash overdraft liability, accounts payable and accrued expenses approximate their fair values due to their short-term maturities.
The fair value of the Company’s total debt approximated its carrying value of $4.9 billion and $3.5 billion as of September 28, 2019 and December 29, 2018, respectively. The fair value of the Company’s 5.88% unsecured Senior Notes due June 15, 2024 (the “Senior Notes”), was $0.6 billion as of both September 28, 2019 and December 29, 2018, based upon the closing market prices of the Senior Notes on both dates, and is classified under Level 2 of the fair value hierarchy. The fair value of the balance of the Company’s debt is primarily classified under Level 3 of the fair value hierarchy, with fair value estimated based upon a combination of the cash outflows expected under these debt facilities, interest rates that are currently available to the Company for debt with similar terms, and estimates of the Company’s overall credit risk.
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12. | DEBT |
Total debt consisted of the following:
Debt Description | Maturity | Interest Rate as of September 28, 2019 | September 28, 2019 | December 29, 2018 | |||||||||
ABL Facility | May 31, 2024 | 3.48% | $ | 138 | $ | 81 | (1) | ||||||
ABS Facility | September 21, 2022 | 2.98% | 215 | 275 | (2) | ||||||||
Initial Term Loan Facility (net of $5 of unamortized deferred financing costs) | June 27, 2023 | 4.11% | 2,129 | 2,145 | |||||||||
Incremental Term Loan Facility (net of $36 of unamortized deferred financing costs) | September 13, 2026 | 4.04% | 1,464 | — | |||||||||
Senior Notes (net of $5 of unamortized deferred financing costs) | June 15, 2024 | 5.88% | 595 | 595 | |||||||||
Obligations under financing leases | 2019–2026 | 2.00% - 6.17% | 375 | 352 | |||||||||
Other debt | 2021–2031 | 5.75% - 9.00% | 8 | 9 | |||||||||
Total debt | 4,924 | 3,457 | |||||||||||
Current portion of long-term debt | (136 | ) | (106 | ) | |||||||||
Long-term debt | $ | 4,788 | $ | 3,351 |
(1) | Consists of outstanding borrowings under our former asset based senior secured revolving credit facility, which was refinanced with a new facility in May 2019 (as described below). |
(2) | Consists of outstanding borrowings under the ABS Facility prior to its refinancing in September 2019 (as described below). |
At September 28, 2019, after considering interest rate swaps that fixed the interest rate on $733 million of principal of the Initial Term Loan Facility described below, approximately 65% of the Company’s total debt was at a floating rate.
ABL Facility—On May 31, 2019, USF completed a refinancing of its asset based senior secured revolving credit facility with a new asset based senior secured revolving credit facility (the “ABL Facility”). The ABL Facility provides USF with loan commitments having a maximum aggregate principal amount of $1,700 million, comprised of (1) $1,400 million of commitments effective as of May 31, 2019 and (2) $300 million of commitments that may become effective, at USF's election, at any time on or prior to November 30, 2019. The ABL Facility includes subfacilities for the issuance of up to $800 million of letters of credit and up to $170 million of swing line loans. Extensions of credit under the ABL Facility are subject to availability under a “borrowing base” comprised of various percentages of the value of certain eligible accounts receivable, inventory, transportation equipment and cash and cash equivalents, which also serve as collateral for borrowings under the ABL Facility.
Borrowings under the ABL Facility bear interest, at USF's periodic election, at a rate equal to the sum of an alternative base rate (“ABR”), as defined under the ABL Facility, plus a margin ranging from 0% to 0.50%, or the sum of a London Interbank Offered Rate (“LIBOR”) plus a margin ranging from 1.00% to 1.50%, in each case based on USF’s excess availability under the ABL Facility. The margin under the ABL Facility as of September 28, 2019 was 0.25% for ABR loans and 1.25% for LIBOR loans. The ABL Facility also carries a commitment fee of 0.25% per annum on the average unused amount of the commitments under the ABL Facility.
The ABL Facility is scheduled to mature on May 31, 2024, subject to a springing maturity date in the event that more than $300 million of aggregate principal amount of indebtedness under the Initial Term Loan Facility, the Incremental Term Loan Facility or the Senior Notes remains outstanding on a date that is 60 days prior to the maturity date for the Initial Term Loan Facility, the Incremental Term Loan Facility or the Senior Notes, respectively.
The ABL Facility is secured by certain designated receivables not pledged under the ABS Facility, as well as inventory and certain transportation equipment owned by USF. Additionally, lenders under the ABL Facility have a second priority interest in all of the capital stock of USF and its domestic subsidiaries, as defined under the ABL Facility, and substantially all other non-real estate assets of USF and its subsidiaries not pledged under the ABS Facility.
The Company incurred $4 million of lender fees and third-party costs in connection with the ABL Facility refinancing which were capitalized as deferred financing costs. These deferred financing costs, along with $1 million of unamortized deferred financing costs related to the former asset based senior secured revolving credit facility, will be amortized through May 31, 2024, the ABL Facility maturity date.
As of September 28, 2019, USF had $138 million of outstanding borrowings, and had issued letters of credit totaling $300 million, under the ABL Facility. Outstanding letters of credit included: (1) $230 million issued in favor of certain commercial insurers to secure USF’s obligations with respect to its self-insurance program, (2) $69 million issued to secure USF’s obligations with respect
14
to certain real estate leases, and (3) $1 million issued for other obligations. There was available capacity under the ABL Facility of $962 million as of September 28, 2019.
ABS Facility—On September 20, 2019, USF completed a refinancing of the ABS Facility. The maximum borrowing capacity under the ABS Facility is $800 million. As of September 28, 2019, USF had $215 million of outstanding borrowings under the ABS Facility. The Company, at its option, can request additional borrowings up to the maximum commitment, provided sufficient eligible receivables are available as collateral. There was available capacity under the ABS Facility of $570 million as of September 28, 2019.
The ABS Facility bears interest at LIBOR plus a margin of 0.95%, and carries an unused commitment fee of 0.35% or 0.45% based on USF's utilization of the ABS Facility. The ABS Facility is scheduled to mature on September 21, 2022. The Company incurred $1 million of lender fees and third-party costs in connection with the ABS Facility refinancing, which were capitalized as deferred financing costs and will be amortized through September 21, 2022, the ABS Facility maturity date.
Term Loan Facilities
The Term Loan Credit Agreement, dated as of May 11, 2011 (as amended, the “Term Loan Credit Agreement’), provides USF with a senior secured term loan (the "Initial Term Loan Facility") and the right to request incremental senior secured term loan commitments.
Initial Term Loan Facility
The Initial Term Loan Facility had an outstanding balance of $2.1 billion as of September 28, 2019. The table above reflects the interest rate on the unhedged portion of the Initial Term Loan Facility as of September 28, 2019. The effective interest rate of the portion of the Initial Term Loan Facility subject to interest rate hedging agreements was 3.70% as of September 28, 2019.
Incremental Term Loan Facility
USF entered into a new incremental term loan in an aggregate principal amount of $1.5 billion under the Term Loan Credit Agreement (the “Incremental Term Loan Facility”) to finance a portion of the purchase price for its acquisition of the Food Group.
Borrowings under the Incremental Term Loan Facility bear interest at a rate per annum equal to, at USF’s option, either the sum of LIBOR plus a margin of 2.00%, or the sum of a base rate plus a margin of 1.00%. The Incremental Term Loan Facility amortizes in equal quarterly installments at a rate per annum (expressed as a percentage of the original principal amount) of 1.00%, subject to customary adjustments in the event of any prepayment, with the balance due upon maturity. Principal repayments of $3.8 million are payable quarterly, with the balance due at maturity.
The Incremental Term Loan Facility is scheduled to mature on September 13, 2026. Borrowings under the Incremental Term Loan Facility may be voluntarily prepaid without penalty or premium, other than customary breakage costs related to prepayments of LIBOR-based borrowings and a 1.00% premium in the case of any “repricing transaction” within six months of the closing date. The Incremental Term Loan Facility may require mandatory repayments if certain assets are sold.
USF’s obligations under the Incremental Term Loan Facility are guaranteed by certain of USF’s subsidiaries, and those obligations and guarantees are secured by all the capital stock of USF and its subsidiaries and substantially all the non-real estate assets of USF and certain of its subsidiaries not pledged under the ABS Facility.
Restrictive Covenants
USF's credit agreements and indentures contain customary covenants. These include, among other things, covenants that restrict USF’s ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends, or engage in mergers or consolidations. As of September 28, 2019, USF had $1.2 billion of restricted payment capacity under these covenants, and approximately $2.4 billion of its net assets were restricted considering the net deferred tax assets and intercompany balances that eliminate in consolidation.
13. | RESTRUCTURING LIABILITIES |
The Company periodically closes or consolidates distribution facilities and implements initiatives in its ongoing efforts to reduce costs and improve operating effectiveness. In connection with these activities, the Company may incur various costs including multiemployer pension withdrawal liabilities, severance and other employee separation costs. Net restructuring costs were de minimis during the 39 weeks ended September 28, 2019 and $1 million during the 39 weeks ended September 29, 2018. Net restructuring liabilities were $1 million and $2 million as of September 28, 2019 and December 29, 2018, respectively.
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14. | LEASES |
The Company leases certain distribution and warehouse facilities, office facilities, fleet vehicles, and office and warehouse equipment. The Company determines if an arrangement is a lease at inception and recognizes a financing or operating lease liability and right-of-use (“ROU”) asset in the Company’s Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. For the Company’s leases that do not provide an implicit borrowing rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The lease terms may include options to extend, terminate or buy out the lease. When it is reasonably certain that the Company will exercise these options, they are included in ROU assets and the estimated lease liabilities. Leases with an initial term of 12 months or less are not recorded in the Company's Consolidated Balance Sheets. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. For office and warehouse equipment leases, the Company accounts for the lease and non-lease components as a single lease component. Variable lease payments that do not depend on an index or a rate, such as insurance and property taxes, are excluded from the measurement of the lease liability and are recognized as variable lease cost when the obligation for that payment is incurred.
The following table presents the location of the ROU assets and lease liabilities in the Company’s Consolidated Balance Sheet as of September 28, 2019:
Leases | Consolidated Balance Sheet Location | September 28, 2019 | ||||
Assets | ||||||
Operating | Other assets | $ | 136 | |||
Financing | Property and equipment-net(1) | 353 | ||||
Total leased assets | $ | 489 | ||||
Liabilities | ||||||
Current: | ||||||
Operating | Accrued expenses and other current liabilities | $ | 37 | |||
Financing | Current portion of long-term debt | 99 | ||||
Noncurrent: | ||||||
Operating | Other long-term liabilities | 126 | ||||
Financing | Long-term debt | 276 | ||||
Total lease liabilities | $ | 538 |
(1) | Financing lease assets are recorded net of accumulated amortization of $257 million as of September 28, 2019. |
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The following table presents the location of lease costs in the Company's Consolidated Statement of Comprehensive Income:
13 Weeks Ended | 39 Weeks Ended | |||||||||
Lease Cost | Statement of Comprehensive Income Location | September 28, 2019 | September 28, 2019 | |||||||
Operating lease cost | Distribution, selling and administrative costs | $ | 7 | $ | 21 | |||||
Financing lease cost: | ||||||||||
Amortization of leased assets | Distribution, selling and administrative costs | 21 | 60 | |||||||
Interest on lease liabilities | Interest expense-net | 3 | 9 | |||||||
Variable lease cost | Distribution, selling and administrative costs | 2 | 5 | |||||||
Net lease cost | $ | 33 | $ | 95 |
Future lease payments under lease agreements as of September 28, 2019 were as follows:
Maturity of Lease Liabilities | Operating Leases | Financing Leases | Total | |||||||||
Remainder of 2019 | $ | 11 | $ | 34 | $ | 45 | ||||||
2020 | 47 | 105 | 152 | |||||||||
2021 | 39 | 83 | 122 | |||||||||
2022 | 34 | 60 | 94 | |||||||||
2023 | 29 | 57 | 86 | |||||||||
2024 | 7 | 40 | 47 | |||||||||
After 2024 | 25 | 26 | 51 | |||||||||
Total lease payments | 192 | 405 | 597 | |||||||||
Less amount representing interest | (29 | ) | (30 | ) | (59 | ) | ||||||
Present value of lease liabilities | $ | 163 | $ | 375 | $ | 538 |
Future minimum lease payments in effect as of December 29, 2018 under noncancelable lease arrangements, as determined prior to the adoption of Topic 842, were as follows:
Future Minimum Lease Payments(1) | Operating Leases | Financing Leases | Total | |||||||||
2019 | $ | 34 | $ | 95 | $ | 129 | ||||||
2020 | 34 | 84 | 118 | |||||||||
2021 | 30 | 71 | 101 | |||||||||
2022 | 27 | 54 | 81 | |||||||||
2023 | 23 | 43 | 66 | |||||||||
After 2023 | 7 | 38 | 45 | |||||||||
Total lease payments | 155 | 385 | 540 | |||||||||
Less amount representing interest | (4 | ) | (33 | ) | (37 | ) | ||||||
Present value of minimum lease payments | $ | 151 | $ | 352 | $ | 503 |
(1) | Information in this table has been conformed to the current year presentation under Topic 842. |
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Other information related to lease agreements for the 39 weeks ended September 28, 2019 was as follows:
39 Weeks Ended | ||||
Cash Paid For Amounts Included In Measurement of Liabilities | September 28, 2019 | |||
Operating cash flows from operating leases | $ | 24 | ||
Operating cash flows from financing leases | 9 | |||
Financing cash flows from financing leases | 49 |
Lease Term and Discount Rate | September 28, 2019 | ||
Weighted-average remaining lease term (years): | |||
Operating leases | 5.80 | ||
Financing leases | 5.30 | ||
Weighted-average discount rate: | |||
Operating leases | 4.6 | % | |
Financing leases | 3.5 | % |
15. | RETIREMENT PLANS |
The Company has defined benefit and defined contribution retirement plans for its employees and provides certain postretirement health and welfare benefits to eligible retirees and their dependents.
The components of net periodic pension benefit costs (credits) for Company sponsored defined benefit plans were as follows:
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Components of net periodic pension benefit costs (credits) | |||||||||||||||
Service cost | $ | 1 | $ | 1 | $ | 2 | $ | 2 | |||||||
Interest cost | 10 | 10 | 28 | 28 | |||||||||||
Expected return on plan assets | (13 | ) | (13 | ) | (37 | ) | (39 | ) | |||||||
Amortization of net loss | 1 | — | 3 | 2 | |||||||||||
Settlements | 3 | — | 3 | — | |||||||||||
Net periodic pension benefit costs (credits) | $ | 2 | $ | (2 | ) | $ | (1 | ) | $ | (7 | ) |
Other postretirement net periodic benefit costs were de minimis for both the 13 weeks and 39 weeks ended September 28, 2019 and September 29, 2018.
The service cost component of net periodic pension benefit credits is included in distribution, selling and administrative costs, while the other components of net periodic pension benefit credits are included in other expense (income)—net, respectively, in the Company's Consolidated Statements of Comprehensive Income.
In the third quarter of 2019, the Company amended its defined benefit plan to offer certain terminated plan participants with vested benefits the opportunity to elect to receive an immediate lump sum payment. In addition, the Company intends to spin-off certain active participants with small accrued benefits and retirees into a separate plan and terminate that plan in order to allow those participants the ability to receive an immediate lump sum payout, with any remaining liabilities transferring to an insurance company through the purchase by the Company of an annuity contract. Estimated pension obligation settlement payments related to these transactions of approximately $75 million will be paid from pension plan assets through a combination of lump sum payments and purchased annuities. The Company expects to incur non-cash settlement charges of approximately $19 million in fiscal year 2019, including approximately $16 million in the fourth quarter when the settlements in connection with these transactions are expected to be paid. The $3 million of settlement charges incurred during the third quarter of fiscal year 2019 relate to ordinary course lump sum payment elections as provided under the current plan. Settlement charges are included in other expense (income)—net in the Company's Consolidated Statements of Comprehensive Income.
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The Company does not expect to make a significant contribution to its Company sponsored defined benefit plans in fiscal year 2019.
Certain employees are eligible to participate in the Company's 401(k) savings plan. The Company made employer matching contributions to the 401(k) plan of $13 million and $11 million for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively, and $38 million and $36 million for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively.
The Company is also required to contribute to various multiemployer pension plans under certain of its collective bargaining agreements. The Company’s contributions to these plans were $10 million and $9 million for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively, and $28 million and $27 million for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively.
16. | EARNINGS PER SHARE |
The Company computes EPS in accordance with ASC 260, Earnings per Share. Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding.
Diluted EPS is computed using the weighted average number of shares of common stock, plus the effect of potentially dilutive securities. Stock options, non-vested restricted shares with forfeitable dividend rights, restricted stock units, and employee stock purchase plan deferrals are considered potentially dilutive securities.
The following table sets forth the computation of basic and diluted EPS:
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Numerator: | |||||||||||||||
Income from continuing operations | $ | 105 | $ | 114 | $ | 292 | $ | 307 | |||||||
Income from discontinued operations | 1 | — | 1 | — | |||||||||||
Net income | $ | 106 | $ | 114 | $ | 293 | $ | 307 | |||||||
Denominator: | |||||||||||||||
Weighted-average common shares outstanding | 218 | 217 | 218 | 216 | |||||||||||
Dilutive effect of share-based awards | 2 | 1 | 1 | 2 | |||||||||||
Weighted-average dilutive shares outstanding | 220 | 218 | 219 | 218 | |||||||||||
Basic earnings per share: | |||||||||||||||
Continuing operations | $ | 0.48 | $ | 0.53 | $ | 1.33 | $ | 1.42 | |||||||
Discontinued operations | 0.01 | — | 0.01 | — | |||||||||||
Net income per share | $ | 0.49 | $ | 0.53 | $ | 1.34 | $ | 1.42 | |||||||
Diluted earnings per share: | |||||||||||||||
Continuing operations | $ | 0.47 | $ | 0.52 | $ | 1.33 | $ | 1.41 | |||||||
Discontinued operations | 0.01 | — | 0.01 | — | |||||||||||
Net income per share | $ | 0.48 | $ | 0.52 | $ | 1.34 | $ | 1.41 | |||||||
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17. | CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS |
The following table presents changes in accumulated other comprehensive loss by component for the periods presented:
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Accumulated other comprehensive loss components | |||||||||||||||
Retirement benefit obligations: | |||||||||||||||
Balance as of beginning of period (1) | $ | (95 | ) | $ | (77 | ) | $ | (97 | ) | $ | (103 | ) | |||
Reclassification adjustments: | |||||||||||||||
Amortization of net loss(2) (3) | 1 | — | 3 | 2 | |||||||||||
Settlements(2)(3) | 3 | — | 3 | — | |||||||||||
Pension remeasurement(4) | — | — | — | 33 | |||||||||||
Total before income tax | 4 | — | 6 | 35 | |||||||||||
Income tax provision | 1 | — | 1 | 9 | |||||||||||
Current period comprehensive income, net of tax | 3 | — | 5 | 26 | |||||||||||
Balance as of end of period(1) | $ | (92 | ) | $ | (77 | ) | $ | (92 | ) | $ | (77 | ) | |||
Interest rate swaps: | |||||||||||||||
Balance as of beginning of period (1) | $ | (1 | ) | $ | 20 | $ | 13 | $ | 8 | ||||||
Change in fair value of interest rate swaps | (1 | ) | 3 | (15 | ) | 20 | |||||||||
Amounts reclassified to interest expense—net | (1 | ) | (1 | ) | (5 | ) | (1 | ) | |||||||
Total before income tax | (2 | ) | 2 | (20 | ) | 19 | |||||||||
Income tax (benefit) provision | (1 | ) | — | (5 | ) | 5 | |||||||||
Current period comprehensive (loss) income, net of tax | (1 | ) | 2 | (15 | ) | 14 | |||||||||
Balance as of end of period(1) | $ | (2 | ) | $ | 22 | $ | (2 | ) | $ | 22 | |||||
Accumulated other comprehensive loss as of end of period(1) | $ | (94 | ) | $ | (55 | ) | $ | (94 | ) | $ | (55 | ) |
(1) | Amounts are presented net of tax. |
(2) | Included in the computation of net periodic benefit costs. See Note 15, Retirement Plans, for additional information. |
(3) | Included in other expense (income)—net in the Consolidated Statements of Comprehensive Income. |
(4) | Resulting from a $35 million incremental contribution to the Company's defined benefit pension plan in fiscal year 2018. |
18. | INCOME TAXES |
The determination of the Company’s overall effective income tax rate requires the use of estimates. The effective income tax rate reflects the income earned and taxed in various United States federal and state jurisdictions based on enacted tax law, permanent differences between book and tax items, tax credits and the Company’s change in relative income in each jurisdiction.
The Company estimated its annual effective income tax rate for the full fiscal year and applied the annual effective income tax rate to the results of the 39 weeks ended September 28, 2019 and September 29, 2018 for purposes of determining its year-to-date tax provision.
For the 13 weeks ended September 28, 2019, the Company's effective income tax rate of 27% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax expense of $2 million primarily related to a change in valuation allowance. For the 13 weeks ended September 29, 2018, the Company's effective income tax rate of 19% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of $4 million primarily related to the adjustments finalizing provisional amounts recorded as of December 30, 2017 in connection with the reduction of the federal corporate income tax rate under the Tax Act and a tax benefit of $4 million primarily related to the reduction of an unrecognized tax benefit due to the receipt of an affirmative written consent from the Internal Revenue Service (the "IRS") to change a method of accounting.
For the 39 weeks ended September 28, 2019, the Company's effective income tax rate of 25% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of $3 million primarily related to excess tax benefits associated with share-based compensation. For the 39 weeks ended September 29, 2018, the Company's effective income tax rate of 16% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete
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tax items included a tax benefit of $21 million primarily related to the reduction of an unrecognized tax benefit due to the receipt of an affirmative written consent from the IRS to change a method of accounting, a tax benefit of $6 million primarily related to excess tax benefits associated with share-based compensation and a tax benefit of $8 million primarily related to the adjustments finalizing provisional amounts recorded as of December 30, 2017 in connection with the reduction of the federal corporate income tax rate under the Tax Act.
19. | COMMITMENTS AND CONTINGENCIES |
Purchase Commitments—The Company enters into purchase orders with vendors and other parties in the ordinary course of business and has a limited number of purchase contracts with certain vendors that require it to buy a predetermined volume of products. As of September 28, 2019, the Company had $959 million of purchase orders and purchase contract commitments to be purchased in the remainder of fiscal year 2019 and $55 million of information technology commitments through May 2024 that are not recorded in the Company's Consolidated Balance Sheets.
To minimize fuel cost risk, the Company enters into forward purchase commitments for a portion of its projected diesel fuel requirements. As of September 28, 2019, the Company had diesel fuel forward purchase commitments totaling $106 million through February 2021. Additionally, as of September 28, 2019, the Company had electricity forward purchase commitments totaling $5 million through December 2021. The Company does not measure its forward purchase commitments for fuel and electricity at fair value, as the amounts under contract meet the physical delivery criteria in the normal purchase exception.
Legal Proceedings—The Company is subject to a number of legal proceedings arising in the normal course of business. These legal proceedings, whether pending, threatened or unasserted, if decided adversely to or settled by the Company, may result in liabilities material to its financial position, results of operations, or cash flows. The Company has recognized provisions with respect to the proceedings, where appropriate, in its Consolidated Balance Sheets. It is possible that the Company could be required to make expenditures, in excess of the established provisions, in amounts that cannot be reasonably estimated. However, the Company believes that the ultimate resolution of these proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
20. | BUSINESS INFORMATION |
The Company’s consolidated results represent the operating results of its one business segment based on how the Company’s chief operating decision maker, the Chief Executive Officer, views the business for purposes of evaluating performance and making operating decisions.
The Company markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States. The Company uses a centralized management structure, and its strategies and initiatives are implemented and executed consistently across the organization to maximize value to the organization as a whole. The Company uses shared resources for sales, procurement, and general and administrative activities across each of its distribution facilities and operations. The Company’s distribution facilities form a single network to reach its customers; it is common for a single customer to make purchases from several different distribution facilities. Capital projects, whether for cost savings or generating incremental revenue, are evaluated based on estimated economic returns to the organization as a whole.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
(Dollar amounts presented in millions, unless otherwise noted)
The following discussion and analysis should be read together with the accompanying unaudited consolidated financial statements and the notes thereto included in this Quarterly Report and the audited consolidated financial statements and the notes thereto in our 2018 Annual Report. The following discussion and analysis contain certain financial measures that are not required by, or presented in accordance with, GAAP. We believe these non-GAAP measures provide meaningful supplemental information about our operating performance because they exclude amounts that our management does not consider part of our core operations when assessing our performance and underlying trends. Information regarding reconciliations of and the rationale for these measures is discussed under “Non-GAAP Reconciliations” below.
Overview
Our mission is to be First In Food. We strive to inspire and empower chefs and foodservice operators to bring great food experiences to consumers. This mission is supported by our strategy of Great Food. Made Easy., which centers on providing our customers a broad and innovative offering of high-quality products, as well as a comprehensive suite of industry-leading e-commerce, technology, and business solutions. We operate as one business with standardized business processes, shared systems infrastructure, and an organizational model that optimizes national scale with local execution, allowing us to manage the business as a single operating segment. We have centralized activities where scale matters and our local field structure focuses on customer facing activities.
We supply approximately 300,000 customer locations nationwide. These customer locations include independently owned single and multi-unit restaurants, regional restaurant concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations. We provide approximately 450,000 fresh, frozen, and dry food stock-keeping units, or SKUs, as well as non-food items, sourced from approximately 6,000 suppliers. Approximately 4,500 sales associates manage customer relationships at local, regional, and national levels. They are supported by sophisticated marketing and category management capabilities, as well as a sales support team that includes world-class chefs and restaurant operations consultants, new business development managers and others that help us provide more comprehensive service to our customers. Our extensive network of more than 70 distribution facilities and fleet of approximately 7,000 trucks allow us to operate efficiently and to provide high levels of customer service. This operating model allows us to leverage our nationwide scale and footprint while executing locally.
Operating Metrics
Case growth—Case growth, by customer type (e.g., independent restaurants) is reported as of a point in time. Customers periodically are reclassified, based on changes in size or other characteristics, and when those changes occur, the respective customer’s historical volume follows its new classification.
Organic growth—Organic growth includes growth from operating business that has been reflected in our results of operations for at least 12 months.
Highlights
Food Group Acquisition—On September 13, 2019, USF completed the $1.8 billion all cash acquisition of the Food Group. The acquisition of the Food Group expands the Company’s network in the West and Northwest parts of the United States. The assets, liabilities and results of operations of the Food Group have been included in the Company’s consolidated financial statements since the date the acquisition was completed.
Financial Highlights—Total case volume for the 13 weeks and 39 weeks ended September 28, 2019 increased 3.0% and 2.0%, respectively. Independent restaurant case growth was 6.3% and 5.5% for the 13 weeks and 39 weeks ended September 28, 2019, respectively. Net sales increased 6.1% and 4.8% for the 13 weeks and 39 weeks ended September 28, 2019, respectively, primarily due to the increase in organic case volume and year-over-year inflation in multiple product categories, including grocery, produce and beef. The inclusion of the Food Group with our operations contributed net sales of $132 million for the 13 weeks and 39 weeks ended September 28, 2019.
Gross profit increased $48 million, or 4.3%, to $1,156 million for the 13 weeks ended September 28, 2019, and increased $136 million, or 4.2%, to $3,350 million for the 39 weeks ended September 28, 2019, primarily as a result of the impact of margin expansion initiatives, the inclusion of the Food Group with our operations, and an increase in organic case volume, which were partially offset by unfavorable year-over-year LIFO adjustments.
As a percentage of net sales, gross profit was 17.7% for the 13 weeks ended September 28, 2019, as compared to 18.0% for the prior year period, and was 17.6% for the for the 39 weeks ended September 28, 2019, as compared to 17.7% for the prior year period.
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Total operating expenses increased $39 million, or 4.2%, to $968 million for the 13 weeks ended September 28, 2019 and increased $111 million, or 4.1%, to $2,837 million for the 39 weeks ended September 28, 2019, primarily as a result of higher wage costs, primarily distribution related, the inclusion of the Food Group with our operations, and acquisition-related costs, which were partially offset by the positive impact of expense control initiatives.
Outlook
Our outlook for fiscal year 2019 is set forth in the 2018 Annual Report. Our strategy includes a continued focus on executing our growth strategies, adding value for and differentiating ourselves with our customers, and driving continued operational improvement in our business.
Results of Operations
The following table presents selected historical results of operations for the periods indicated*:
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Consolidated Statements of Operations Data: | |||||||||||||||
Net sales | $ | 6,531 | $ | 6,153 | $ | 19,005 | $ | 18,134 | |||||||
Cost of goods sold | 5,375 | 5,045 | 15,655 | 14,920 | |||||||||||
Gross profit | 1,156 | 1,108 | 3,350 | 3,214 | |||||||||||
Operating expenses: | |||||||||||||||
Distribution, selling and administrative costs | 968 | 929 | 2,837 | 2,725 | |||||||||||
Restructuring costs | — | — | — | 1 | |||||||||||
Total operating expenses | 968 | 929 | 2,837 | 2,726 | |||||||||||
Operating income | 188 | 179 | 513 | 488 | |||||||||||
Other expense (income)—net | 1 | (3 | ) | (3 | ) | (9 | ) | ||||||||
Interest expense—net | 43 | 42 | 127 | 133 | |||||||||||
Income before income taxes | 144 | 140 | 389 | 364 | |||||||||||
Income tax provision | 39 | 26 | 97 | 57 | |||||||||||
Income from continuing operations | 105 | 114 | 292 | 307 | |||||||||||
Income from discontinued operations—net of tax | 1 | — | 1 | — | |||||||||||
Net income | $ | 106 | $ | 114 | $ | 293 | $ | 307 | |||||||
Percentage of Net Sales: | |||||||||||||||
Gross profit | 17.7 | % | 18.0 | % | 17.6 | % | 17.7 | % | |||||||
Distribution, selling and administrative costs | 14.8 | % | 15.1 | % | 14.9 | % | 15.0 | % | |||||||
Operating expenses | 14.8 | % | 15.1 | % | 14.9 | % | 15.0 | % | |||||||
Operating income | 2.9 | % | 2.9 | % | 2.7 | % | 2.7 | % | |||||||
Net income | 1.6 | % | 1.9 | % | 1.5 | % | 1.7 | % | |||||||
Adjusted EBITDA(1) | 4.7 | % | 4.6 | % | 4.5 | % | 4.4 | % | |||||||
Other Data: | |||||||||||||||
Cash flows—operating activities | $ | 165 | $ | 133 | $ | 559 | $ | 444 | |||||||
Cash flows—investing activities | (1,875 | ) | (49 | ) | (1,977 | ) | (165 | ) | |||||||
Cash flows—financing activities | 1,711 | (96 | ) | 1,411 | (310 | ) | |||||||||
Capital expenditures | 47 | 51 | 157 | 168 | |||||||||||
EBITDA(1) | 275 | 267 | 777 | 747 | |||||||||||
Adjusted EBITDA(1) | 307 | 283 | 859 | 806 | |||||||||||
Adjusted net income(1) | 143 | 127 | 378 | 341 | |||||||||||
Free cash flow(2) | 118 | 82 | 402 | 276 |
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(*) | Prior year amounts may have been rounded to conform with the current year presentation. |
(1) | EBITDA is defined as net income, plus interest expense—net, income tax provision, and depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for: (1) restructuring costs (benefits) and tangible asset impairments; (2) share-based compensation expense; (3) the non-cash impact of LIFO reserve adjustments; (4) business transformation costs; and (5) other gains, losses, or charges as specified in the agreements governing our indebtedness. Adjusted net income is defined as net income excluding the items used to calculate Adjusted EBITDA listed above and further adjusted for the tax effect of the exclusions and discrete tax items. Effective as of the fiscal third quarter 2019, we revised the definition of Adjusted net income to also exclude the effect of intangible asset amortization expense. Prior year amounts have been revised to conform with the current year presentation. EBITDA, Adjusted EBITDA, and Adjusted net income as presented in this Quarterly Report are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. They are not measurements of our performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP. For additional information, see the discussion under the caption “Non-GAAP Reconciliations” below. |
(2) | Free cash flow is defined as cash flows provided by operating activities less capital expenditures. Free cash flow as presented in this Quarterly Report is a supplemental measure of our liquidity that is not required by, or presented in accordance with, GAAP. It is not a measurement of our liquidity under GAAP and should not be considered as an alternative to cash flows provided by operating activities or any other liquidity measures derived in accordance with GAAP. For additional information, see the discussion under the caption “Non-GAAP Reconciliations” below. |
Non-GAAP Reconciliations
We provide EBITDA, Adjusted EBITDA, Adjusted net income and Free cash flow as supplemental measures to GAAP measures regarding our operational performance and liquidity. These non-GAAP financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP.
We believe EBITDA and Adjusted EBITDA provide meaningful supplemental information about our operating performance because they exclude amounts that we do not consider part of our core operating results when assessing our performance.
We believe that Adjusted net income is a useful measure of operating performance for both management and investors because it excludes items that are not reflective of our core operating performance and provides an additional view of our operating performance including depreciation, interest expense, and income taxes on a consistent basis from period to period. We believe that Adjusted net income may be used by investors, analysts and other interested parties to facilitate period-over-period comparisons and provides additional clarity as to how factors and trends impact our operating performance.
Management uses these non-GAAP financial measures (1) to evaluate our historical and prospective financial performance as well as our performance relative to our competitors as they assist in highlighting trends, (2) to set internal sales targets and spending budgets, (3) to measure operational profitability and the accuracy of forecasting, (4) to assess financial discipline over operational expenditures, and (5) as an important factor in determining variable compensation for management and employees. EBITDA and Adjusted EBITDA are also used in connection with certain covenants and activity restrictions under the agreements governing our indebtedness. We also believe these and similar non-GAAP financial measures are frequently used by securities analysts, investors, and other interested parties to evaluate companies in our industry.
We use Free cash flow as a supplemental measure to GAAP measures regarding the liquidity of our operations. We measure Free cash flow as cash flows provided by operating activities less capital expenditures. We believe that Free cash flow is a useful financial metric to assess our ability to pursue business opportunities and investments. Free cash flow is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows provided by operating activities.
We caution readers that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA, Adjusted net income, and Free cash flow may not be the same as similar measures used by other companies. Not all companies and analysts calculate EBITDA, Adjusted EBITDA, Adjusted net income or Free cash flow in the same manner. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by presenting the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.
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The following table reconciles EBITDA, Adjusted EBITDA, Adjusted net income and Free cash flow to the most directly comparable GAAP financial performance and liquidity measures for the periods indicated*:
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Net income | $ | 106 | $ | 114 | $ | 293 | $ | 307 | |||||||
Interest expense—net | 43 | 42 | 127 | 133 | |||||||||||
Income tax provision | 39 | 26 | 97 | 57 | |||||||||||
Depreciation expense | 75 | 75 | 228 | 220 | |||||||||||
Amortization expense | 12 | 10 | 32 | 30 | |||||||||||
EBITDA | 275 | 267 | 777 | 747 | |||||||||||
Adjustments: | |||||||||||||||
Restructuring costs(1) | — | — | — | 1 | |||||||||||
Share-based compensation expense(2) | 7 | 3 | 22 | 20 | |||||||||||
LIFO reserve change(3) | 1 | (9 | ) | 13 | (1 | ) | |||||||||
Business transformation costs(4) | 3 | 3 | 6 | 18 | |||||||||||
Income from discontinued operations(5) | (1 | ) | — | (1 | ) | — | |||||||||
Food Group acquisition-related costs and other(6) | 22 | 19 | 42 | 21 | |||||||||||
Adjusted EBITDA | 307 | 283 | 859 | 806 | |||||||||||
Depreciation expense(7) | (75 | ) | (75 | ) | (228 | ) | (220 | ) | |||||||
Interest expense—net | (43 | ) | (42 | ) | (127 | ) | (133 | ) | |||||||
Income tax provision, as adjusted(7)(8) | (46 | ) | (39 | ) | (126 | ) | (112 | ) | |||||||
Adjusted net income(7) | $ | 143 | $ | 127 | $ | 378 | $ | 341 | |||||||
Free cash flow | |||||||||||||||
Cash flows from operating activities | $ | 165 | $ | 133 | $ | 559 | $ | 444 | |||||||
Capital expenditures | (47 | ) | (51 | ) | (157 | ) | (168 | ) | |||||||
Free cash flow | $ | 118 | $ | 82 | $ | 402 | $ | 276 |
(*) | Prior year amounts may have been rounded to conform with the current year presentation. |
(1) | Consists primarily of severance and related costs and organizational realignment costs. |
(2) | Share-based compensation expense for stock and option awards and discounts provided under employee stock purchase plan. |
(3) | Represents the non-cash impact of LIFO reserve adjustments. |
(4) | Consists primarily of costs related to significant process and systems redesign across multiple functions. |
(5) | Consists of income net of income taxes from the Divested Assets. |
(6) | Includes Food Group acquisition-related costs of $17 million and $10 million for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively, and $35 million and $10 million for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively. Also includes gains, losses or costs as specified under the agreements governing our indebtedness |
(7) | Effective as of the fiscal third quarter 2019, we revised the definition of Adjusted net income to exclude the effect of intangible asset amortization expense. Prior year amounts have been revised to conform with the current year presentation. |
(8) | Represents our income tax provision adjusted for the tax effect of pre-tax items excluded from Adjusted net income and the removal of applicable discrete tax items. Applicable discrete tax items include changes in tax laws or rates, changes related to prior year unrecognized tax benefits, discrete changes in valuation allowances, and excess tax benefits associated with share-based compensation. The tax effect of pre-tax items excluded from Adjusted net income is computed using a corporate income tax rate after considering the impact of permanent differences and valuation allowances. |
A reconciliation between the GAAP income tax provision and the income tax provision, as adjusted, is as follows*:
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
GAAP income tax provision | $ | 39 | $ | 26 | $ | 97 | $ | 57 | |||||||
Tax impact of pre-tax income adjustments(1) | 10 | 7 | 27 | 22 | |||||||||||
Discrete tax items | (3 | ) | 6 | 2 | 33 | ||||||||||
Income tax provision, as adjusted | $ | 46 | $ | 39 | $ | 126 | $ | 112 |
(*) | Prior year amounts may have been rounded to conform with the current year presentation. |
(1) | Effective as of the fiscal third quarter 2019, we revised the definition of Adjusted net income to exclude the effect of intangible asset amortization expense. Prior year amounts have been revised to conform with the current year presentation |
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Comparison of Results
13 Weeks Ended September 28, 2019 and September 29, 2018
Highlights
• | Total case volume increased 3.0% and independent restaurant case volume increased 6.3% in 2019. |
• | Net sales increased $378 million, or 6.1%, to $6,531 million in 2019. |
• | Operating income increased $9 million, or 5.0%, to $188 million in 2019. As a percentage of net sales, operating income was 2.9% in both 2019 and 2018. |
• | Net income was $106 million in 2019, compared to $114 million in 2018. |
• | Adjusted EBITDA increased $24 million, or 8.5%, to $307 million in 2019. As a percentage of net sales, Adjusted EBITDA was 4.7% in 2019, compared to 4.6% in 2018. |
Net Sales
Total case volume increased 3.0% in 2019. The increase reflected growth with independent restaurants of 6.3%. Organic case volume increased 0.9% and organic independent restaurant case volume increased 4.2% .
Net sales increased $378 million, or 6.1%, to $6,531 million in 2019, comprised of a $185 million, or 3.0%, increase in case volume and a $193 million, or 3.1%, increase in the overall net sales rate per case. Sales of private brands represented approximately 36% and 35% of net sales in 2019 and 2018, respectively. The Food Group contributed net sales of $132 million in 2019.
The increase in net sales rate per case of 3.1% primarily reflects year-over-year inflation in multiple product categories, including grocery, produce and beef, which benefited net sales since a significant portion of our sales is based on markups over product cost.
Gross Profit
Gross profit increased $48 million, or 4.3%, to $1,156 million in 2019, primarily as a result of the impact of margin expansion initiatives, the inclusion of the Food Group with our operations, and an increase in organic case volume, which were partially offset by unfavorable year-over-year LIFO adjustments. Our LIFO method of inventory costing resulted in expense of $1 million in 2019 compared to a benefit of $9 million in 2018, primarily as a result of higher inflation in multiple product categories in 2019 compared to 2018. Gross profit as a percentage of net sales was 17.7% in 2019, as compared to 18.0% in 2018.
Operating Expenses
Operating expenses, comprised of distribution, selling and administrative and restructuring costs, increased $39 million, or 4.2%, to $968 million in 2019. Operating expenses as a percentage of net sales were 14.8% in 2019, as compared to 15.1% in 2018. The increase in operating expenses included $35 million of higher wage and related costs, primarily distribution related, the inclusion of the Food Group with our operations, and $7 million of higher acquisition-related costs, which were partially offset by the positive impact of expense control initiatives.
Operating Income
Operating income increased $9 million, or 5.0%, to $188 million in 2019. Operating income as a percentage of net sales was 2.9% in both 2019 and 2018. The change in operating income was due to the factors discussed in the relevant sections above.
Other Expense (Income)—Net
Other expense (income)—net includes components of net periodic pension benefit credits, exclusive of the service cost component associated with our defined benefit and other postretirement plans. We recognized other expense—net of $1 million in 2019, including $3 million of non-cash settlement charges resulting from lump sum payments to former participants in our defined benefit pension plan. We recognized other income—net of $3 million in 2018.
Interest Expense—Net
Interest expense—net increased $1 million to $43 million in 2019, primarily due to borrowings incurred to finance the acquisition of the Food Group, partially offset by lower average revolving credit facility borrowings.
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Income Tax Provision
For the 13 weeks ended September 28, 2019, our effective income tax rate of 27% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax expense of $2 million primarily related to a change in valuation allowance. For the 13 weeks ended September 29, 2018, our effective income tax rate of 19% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of $4 million primarily related to the adjustments finalizing provisional amounts recorded as of December 30, 2017 in connection with the reduction of the federal corporate income tax rate under the Tax Act and a tax benefit of $4 million primarily related to the reduction of an unrecognized tax benefit due to the receipt of an affirmative written consent from the IRS to change a method of accounting.
Net Income
Our net income was $106 million in 2019 as compared to $114 million in 2018. The decrease in net income was due to the relevant factors discussed above.
39 Weeks Ended September 28, 2019 and September 29, 2018
Highlights
• | Total case volume increased 2.0% and independent restaurant case volume increased 5.5% in 2019. |
• | Net sales increased $871 million, or 4.8%, to $19,005 million in 2019. |
• | Operating income increased $25 million, or 5.1%, to $513 million in 2019. As a percentage of net sales, operating income was 2.7% in both 2019 and 2018. |
• | Net income was $293 million in 2019, compared to $307 million in 2018. |
• | Adjusted EBITDA increased $53 million, or 6.6%, to $859 million in 2019. As a percentage of net sales, Adjusted EBITDA was 4.5% in 2019, compared to 4.4% in 2018. |
Net Sales
Total case volume increased 2.0% in 2019. The increase reflects growth with independent restaurants of 5.5%. Organic case volume increased 1.3% and organic independent restaurant case volume increased 4.8%.
Net sales increased $871 million, or 4.8%, to $19,005 million in 2019, comprised of a $372 million, or 2.0%, increase in case volume and a $499 million, or 2.8%, increase in the overall net sales rate per case. Sales of private brands represented approximately 35% and 34% of net sales in 2019 and 2018, respectively. The Food Group contributed net sales of $132 million in 2019.
The increase in net sales rate per case of 2.8% primarily reflects year-over-year inflation. We experienced year-over-year inflation in multiple product categories, including grocery, poultry, beef and produce, which benefited net sales since a significant portion of our sales is based on markups over product cost.
Gross Profit
Gross profit increased $136 million, or 4.2%, to $3,350 million in 2019, primarily as a result of the impact of margin expansion initiatives, an increase in organic case volume, and the inclusion of the Food Group with our operations, which were partially offset by unfavorable year-over-year LIFO adjustments. Our LIFO method of inventory costing resulted in expense of $13 million in 2019 compared to a benefit of $1 million in 2018, primarily as a result of higher inflation in multiple product categories in 2019 compared to 2018. Gross profit as a percentage of net sales was 17.6% in 2019, as compared to 17.7% in 2018.
Operating Expenses
Operating expenses, comprised of distribution, selling and administrative and restructuring costs, increased $111 million, or 4.1%, to $2,837 million in 2019. Operating expenses as a percentage of net sales were 14.9% in 2019, as compared to 15.0% in 2018. The increase in operating expenses included $77 million of higher wage and related costs, primarily distribution related, $25 million of higher acquisition-related costs, the inclusion of the Food Group with our operations, and $8 million of higher other distribution related costs, which were partially offset by the positive impact of expense control initiatives.
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Operating Income
Operating income increased $25 million, or 5.1%, to $513 million in 2019. Operating income as a percentage of net sales was 2.7% in both 2019 and 2018. The change in operating income was due to the factors discussed in the relevant sections above.
Other Expense (Income)—Net
Other expense (income)—net includes components of net periodic pension benefit credits, exclusive of the service cost component associated with our defined benefit and other postretirement plans. We recognized other income—net of $3 million in 2019, net of $3 million of non-cash settlement charges resulting from lump sum payments to former participants in our defined benefit pension plan. We recognized other income—net of $9 million in 2018.
Interest Expense—Net
Interest expense—net decreased $6 million to $127 million in 2019, primarily due to lower average debt levels in 2019, which were partially offset by borrowings incurred to finance the acquisition of the Food Group.
Income Tax Provision
For the 39 weeks ended September 28, 2019, our effective income tax rate of 25% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of $3 million primarily related to excess tax benefits associated with share-based compensation. For the 39 weeks ended September 29, 2018, our effective income tax rate of 16% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of $21 million primarily related to the reduction of an unrecognized tax benefit due to the receipt of an affirmative written consent from the IRS to change a method of accounting, a tax benefit of $6 million primarily related to excess tax benefits associated with share-based compensation and a tax benefit of $8 million primarily related to the adjustments finalizing provisional amounts recorded as of December 30, 2017 in connection with the reduction of the federal corporate income tax rate under the Tax Act.
Net Income
Our net income was $293 million in 2019 as compared to $307 million in 2018. The decrease in net income was due to the relevant factors discussed above.
Liquidity and Capital Resources
Our ongoing operations and strategic objectives require working capital and continuing capital investment. Our primary sources of liquidity include cash provided by operations, as well as access to capital from bank borrowings and other types of debt and financing arrangements.
Indebtedness
As of September 28, 2019, the aggregate carrying value of our indebtedness was $4,924 million, net of $46 million of unamortized deferred financing costs.
As of September 28, 2019, we had aggregate commitments for additional borrowings under the ABL Facility and the ABS Facility of $1,547 million, of which $1,532 million was available based on our borrowing base.
We completed a refinancing of the ABL Facility on May 31, 2019. The ABL Facility provides us with loan commitments having a maximum aggregate principal amount of $1,700 million, comprised of (1) $1,400 million of commitments effective as of May 31, 2019 and (2) $300 million of commitments that may become effective, at our election, at any time on or prior to November 30, 2019. The ABL Facility includes subfacilities for the issuance of up to $800 million of letters of credit and up to $170 million of swing line loans. As of September 28, 2019, we had $138 million of outstanding borrowings and had issued letters of credit totaling $300 million under the ABL Facility. There was available capacity of $962 million under the ABL Facility based on our borrowing base as of September 28, 2019.
We completed a refinancing of the ABS Facility on September 20, 2019. The maximum borrowing capacity under the ABS Facility is $800 million. We had outstanding borrowings under the ABS Facility of $215 million as of September 28, 2019. There was available capacity of $570 million under the ABS Facility based on our borrowing base as of September 28, 2019.
The Initial Term Loan Facility had a carrying value of $2,129 million, net of $5 million of unamortized deferred financing costs, as of September 28, 2019. The Incremental Term Loan Facility had a carrying value of $1,464 million, net of $36 million of unamortized deferred financing costs, as of September 28, 2019.
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The Senior Notes had a carrying value of $595 million, net of $5 million of unamortized deferred financing costs, as of September 28, 2019. We also had $375 million of obligations under financing leases for transportation equipment and building leases as of September 28, 2019.
We believe that the combination of cash generated from operations, together with borrowing capacity under the agreements governing our indebtedness and other financing arrangements, will be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements for the next 12 months.
As of September 28, 2019, USF had $1.2 billion of restricted payment capacity under its credit facilities and approximately $2.4 billion of its net assets were restricted after considering the net deferred tax assets and intercompany balances that are eliminated in consolidation. As of September 28, 2019, we were in compliance with all of our debt covenants.
Every quarter, we review rating agency changes for all of the lenders that have a continuing obligation to provide us with funding. We are not aware of any facts that indicate our lenders will not be able to comply with the contractual terms of their agreements with us. We continue to monitor the credit markets generally and the strength of our lender counterparties.
See Note 12, Debt, in our consolidated financial statements for a further description of our indebtedness.
Cash Flows
The following table presents condensed highlights from our Consolidated Statements of Cash Flows for the periods presented*:
39 Weeks Ended | |||||||
September 28, 2019 | September 29, 2018 | ||||||
Net income | $ | 293 | $ | 307 | |||
Changes in operating assets and liabilities | (39 | ) | (201 | ) | |||
Other adjustments | 305 | 338 | |||||
Net cash provided by operating activities | 559 | 444 | |||||
Net cash used in investing activities | (1,977 | ) | (165 | ) | |||
Net cash provided by (used in) financing activities | 1,411 | (310 | ) | ||||
Net decrease in cash, cash equivalents and restricted cash | (7 | ) | (31 | ) | |||
Cash, cash equivalents and restricted cash—beginning of period | 105 | 119 | |||||
Cash, cash equivalents and restricted cash—end of period | $ | 98 | $ | 88 |
(*) Prior year amounts may have been rounded to conform with the current year presentation.
Operating Activities
Cash flows provided by operating activities increased $115 million to $559 million for the 39 weeks ended September 28, 2019. The year-over-year increase was primarily driven by $70 million of contributions to our defined benefit pension plan in 2018 which did not reoccur during the current year, along with improved business performance.
Investing Activities
Cash flows used in investing activities for the 39 weeks ended September 28, 2019 included the $1.8 billion cash purchase price for the acquisition of the Food Group. Cash flows used in investing activities for the 39 weeks ended September 28, 2019 and September 29, 2018 included cash expenditures of $157 million and $168 million, respectively, on property and equipment for fleet replacement and investments in information technology, as well as new construction and/or expansion of distribution facilities. During the 39 weeks ended September 28, 2019, we sold two closed distribution facilities and an excess parcel of land for aggregate proceeds of $6 million.
We expect total capital additions in fiscal year 2019 to be between $345 million and $355 million, inclusive of approximately $75 million in fleet financing leases. We expect to fund our capital expenditures with available cash or cash generated from operations.
Financing Activities
Cash flows provided by financing activities for the 39 weeks ended September 28, 2019 included aggregate borrowings of $1.5 billion under the Incremental Term Loan Facility and approximately $330 million in borrowings under the ABL Facility and ABS Facility, which were used to finance the acquisition of the Food Group. Cash flows used in financing activities for the 39 weeks ended September 28, 2019 included net payments of $3 million under our revolving credit facilities and $79 million of scheduled payments under our non-revolving debt and financing leases. We incurred approximately $42 million of lender fees and third-party costs in connection with the Incremental Term Loan Facility and other debt refinancings. Financing activities for the 39 weeks ended September 28, 2019 also included
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$15 million and $13 million of proceeds received from stock purchases under our employee stock purchase plan and the exercise of employee stock options, respectively, partially offset by $5 million of employee tax withholdings paid in connection with the vesting of equity awards.
Cash flows used in financing activities of $310 million for the 39 weeks ended September 29, 2018 included $241 million of net payments under our revolving credit facilities and $94 million of scheduled payments under our non-revolving debt and financing leases. Financing activities for the 39 weeks ended September 29, 2018 also included $18 million and $15 million of proceeds received from the exercise of employee stock options and stock purchases under our employee stock purchase plan, respectively, which were partially offset by $6 million of employee tax withholdings paid in connection with the vesting of equity awards.
Retirement Plans
We sponsor defined benefit and defined contribution retirement plans that pay benefits to eligible employees at retirement. In addition, we provide certain postretirement health and welfare benefits to eligible retirees and their dependents. We do not expect to make a significant contribution to the Company sponsored defined benefit and other postretirement plans in fiscal year 2019. We contributed $70 million to the Company sponsored defined benefit and other postretirement plans during the 39 weeks ended September 29, 2018. As described in Note 15, Retirement Plans, in our consolidated financial statements, during the third quarter of 2019, we amended our defined benefit plan to offer certain terminated plan participants with vested benefits the opportunity to elect to receive an immediate lump sum payment. In addition, we intend to spin-off certain active participants with small accrued benefits and retirees into a separate plan and terminate that plan in order to allow those participants the ability to receive an immediate lump sum payout, with any remaining liabilities transferring to an insurance company through the purchase by the Company of an annuity contract. We estimate that pension obligation settlement payments related to these transactions will be approximately $75 million, which will be paid from pension plan assets through a combination of lump sum payments and purchased annuities and will not require additional funding from the Company. The settlement payments are expected to be paid in the fourth quarter of 2019.
Certain employees are eligible to participate in the Company's 401(k) savings plan. We made employer matching contributions to the 401(k) plan of $13 million and $11 million for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively, and $38 million and $36 million for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively.
We also are required to contribute to various multiemployer pension plans under the terms of certain of our collective bargaining agreements. Our contributions to these plans were $10 million and $9 million for the 13 weeks ended September 28, 2019 and September 29, 2018, respectively, and $28 million and $27 million for the 39 weeks ended September 28, 2019 and September 29, 2018, respectively.
Off-Balance Sheet Arrangements
As of September 28, 2019, we entered into $235 million of letters of credit in favor of certain commercial insurers to secure obligations with respect to our self-insurance programs, primarily under the ABL Facility. Additionally, we entered into $71 million of letters of credit to secure obligations with respect to certain of our real estate leases, primarily under the ABL Facility, and $1 million of letters of credit for other obligations.
Except as disclosed above, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
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Contractual Obligations
The following table presents information about our significant contractual obligations as of September 28, 2019 that affect our liquidity and capital needs. The table includes information about payments due under specified contractual obligations and the maturity profile of our consolidated debt, operating leases and other long-term liabilities. The table reflects the impact of the refinancing of the ABL Facility on May 31, 2019, the acquisition of the Food Group on September 13, 2019 and the refinancing of the ABS Facility on September 20, 2019 on our contractual obligations as of September 28, 2019.
Payments Due by Period | |||||||||||||||||||
Less Than | More Than | ||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Recorded Contractual Obligations: | |||||||||||||||||||
Debt, including financing lease obligations | $ | 4,970 | $ | 136 | $ | 205 | $ | 2,405 | $ | 2,224 | |||||||||
Operating lease obligations | 192 | 46 | 76 | 43 | 27 | ||||||||||||||
Self-insured liabilities(1) | 178 | 45 | 51 | 23 | 59 | ||||||||||||||
Pension plans and other postretirement benefits contributions(2) | 8 | 1 | 2 | 2 | 3 | ||||||||||||||
Unrecorded Contractual Obligations: | |||||||||||||||||||
Interest payments on debt(3) | 969 | 196 | 380 | 265 | 128 | ||||||||||||||
Multiemployer contractual minimum pension contributions(4) | 18 | 4 | 7 | 7 | — | ||||||||||||||
Purchase obligations(5) | 1,125 | 1,067 | 52 | 6 | — | ||||||||||||||
Total contractual cash obligations | $ | 7,460 | $ | 1,495 | $ | 773 | $ | 2,751 | $ | 2,441 |
(1) | Represents the estimated undiscounted payments on our self-insurance programs for general, fleet and workers compensation liabilities. Actual payments may differ from these estimates. |
(2) | Represents estimated contributions and benefit payments for Company sponsored pension and other postretirement benefit plans. Estimates beyond 2019 are not available for the Company's defined benefit pension plan. |
(3) | Represents future interest payments on fixed rate debt, financing leases and $3.2 billion of variable rate debt at interest rates as of September 28, 2019. The amounts shown in the table include interest payments under interest rate swap agreements. |
(4) | Represents minimum required contributions to the Central States Teamsters Southeast and Southwest Area Pension Fund through 2023. |
(5) | Represents purchase obligations for purchases of product in the normal course of business, for which all significant terms have been confirmed, information technology commitments and forward fuel and electricity purchase obligations. The balance does not include capital additions. |
Critical Accounting Policies and Estimates
We have prepared the financial information in this Quarterly Report in accordance with GAAP. Preparing the Company's consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods. We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances. These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2018 Annual Report includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the 39 weeks ended September 28, 2019.
Recent Accounting Pronouncements
See Note 2, Recent Accounting Pronouncements, in our consolidated financial statements for information related to new accounting standards.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to certain risks arising from both our business operations and overall economic conditions. We principally manage our exposures to a wide variety of business and operational risks through managing our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our debt funding. During 2017, we entered into interest rate swap agreements to limit our exposure to variable interest rate terms on certain borrowings under our Initial Term Loan Facility. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Market risk is the possibility of loss from adverse changes in market rates and prices, such as interest rates and commodity prices.
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Interest Rate Risk
As of September 28, 2019, after considering interest rate swaps that fixed the interest rate on $733 million of the principal amounts of our Initial Term Loan Facility, approximately 65% of the principal amount of our debt bore interest at floating rates based on LIBOR or ABR, as defined in the credit agreements. A 1% change in the applicable rate would cause the interest expense on our floating rate debt to change by approximately $32 million per year (see Note 12, Debt, in our consolidated financial statements). As was announced in July 2017, the use of LIBOR is expected to be phased out by the end of 2021. We are unable to predict the impact of using alternative reference rates and corresponding rate risk at this time.
Fuel Price Risk
We are also exposed to risk due to fluctuations in the price and availability of diesel fuel. Increases in the cost of diesel fuel can negatively affect consumer spending, raise the price we pay for products, and increase the costs we incur to deliver products to our customers. To minimize fuel cost risk, we enter into forward purchase commitments for a portion of our projected diesel fuel requirements. As of September 28, 2019, we had diesel fuel forward purchase commitments totaling $106 million through February 2021. These locked in approximately 51% of our projected diesel fuel purchase needs for the contracted periods. Our remaining fuel purchase needs will occur at market rates. Using published market price projections for diesel and estimated fuel consumption needs, a 10% unfavorable change in diesel fuel prices from the projected market prices could result in approximately $10 million in additional fuel cost on such uncommitted volumes through February 2021.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that this information is accumulated and communicated to Company management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 28, 2019.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended September 28, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As permitted by applicable SEC guidance, the scope of our evaluation regarding changes in our internal control over financial reporting during the fiscal quarter ended September 28, 2019 excluded internal control over financial reporting for the Food Group, which was acquired on September 13, 2019.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
For information relating to legal proceedings, see Note 19, Commitments and Contingencies, in our consolidated financial statements.
Item 1A. | Risk Factors |
There have been no material changes to the principal risks that we believe are material to our business, results of operations, and financial condition from those disclosed in Part I, Item 1A—“Risk Factors” of the 2018 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
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Item 6. | Exhibits |
Exhibit Number | ||
2.1 | ||
10.1 | ||
10.2 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101 | Interactive Data File. |
* Portions, schedules and exhibits have been omitted pursuant to Item 601 of Regulation S-K. US Foods Holding Corp. undertakes to furnish copies of any omitted portions, schedules and exhibits upon request by the Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
US FOODS HOLDING CORP. | ||||
(Registrant) | ||||
Date: | November 5, 2019 | By: | /s/ PIETRO SATRIANO | |
Pietro Satriano | ||||
Chairman and Chief Executive Officer | ||||
Date: | November 5, 2019 | By: | /s/ DIRK J. LOCASCIO | |
Dirk J. Locascio | ||||
Chief Financial Officer |
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