US Foods Holding Corp. — Q1 2022 Form 10-Q
Business context and period: US Foods distributes food and related products to foodservice customers across the U.S. The company reports one operating segment. This quarter covered 13 weeks ended April 2, 2022; comparisons are with the 13 weeks ended April 3, 2021. Financial amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $7,798 | $6,295 |
| Gross profit / margin | $1,195 / 15.3% | $1,003 / 15.9% |
| Operating income / margin | $34 / 0.4% | $28 / 0.4% |
| Net loss | $(7) | $(24) |
| Net loss per diluted share | $(0.07) | $(0.18) |
| Operating cash flow | $158 | $176 |
| Capital expenditures | $72 | $46 |
| Free cash flow (non-GAAP) | $86 | $130 |
| Adjusted EBITDA (non-GAAP) | $241 | $172 |
As of April 2, 2022, cash was $190, total debt was $4,993 (including $277 of financing lease obligations), and available ABL capacity was $1,727. Management reported approximately $1.9 billion of cash and available liquidity. The company had no ABL borrowings and $263 of letters of credit outstanding. Approximately 47% of total debt bore floating interest rates. Current liabilities were $3,029 and current assets were $4,050.
Material changes and management commentary
- Sales rose 23.9%; total case volume increased 4.1% and independent restaurant case volume increased 9.2%. Management attributed sales growth to volume and a 17.3% year-over-year average inflation increase across product categories, as well as product mix.
- Gross profit increased 19.1%, but gross margin fell 0.6 percentage points. The $72 LIFO inventory-costing expense, versus $21 a year earlier, was a significant offset to volume, pricing and freight-income benefits.
- Operating expenses increased 19.1% in dollars, primarily on higher volume, distribution costs, temporary labor and wage inflation; as a percentage of sales, they declined to 14.9% from 15.5%. Management cited routing, warehouse technology and process-efficiency initiatives.
- Adjusted EBITDA increased 40.1% to $241, or 3.1% of sales versus 2.7%. This non-GAAP measure includes adjustments such as LIFO, share-based compensation and business transformation costs; it is not a substitute for GAAP earnings.
- Operating cash flow declined $18, primarily due to working-capital needs; free cash flow fell to $86 from $130 as capital expenditures increased.
Outlook, risks and contingencies
- Management expected fiscal 2022 cash capital expenditures of $280–$300, excluding approximately $110 of fleet-financing lease capital expenditures. It said available cash and operating cash generation, together with borrowing capacity, should cover debt service, operations, working capital and capital needs for the next 12 months. No earnings or revenue guidance is provided in the supplied filing text.
- Management cited continuing uncertainty from COVID-19, including potential future variants, supply constraints, inflation, logistics costs, labor shortages and changes in customer buying patterns. Omicron-related restrictions negatively affected sales in January.
- Other key exposures include food-cost and commodity volatility, fuel prices, supplier disruptions, labor availability and cost, interest-rate changes, debt restrictions, and the transition away from LIBOR. A hypothetical 1% rate change was estimated to affect annual interest expense by about $24; a hypothetical 10% unfavorable diesel-price change on uncommitted volumes through March 2023 could add about $17 in fuel costs.
- The company had $1,890 of purchase orders and purchase-contract commitments for the remainder of fiscal 2022, plus $33 of diesel and $14 of electricity forward-purchase commitments. It reported ordinary-course legal proceedings; management did not expect their ultimate outcome to materially adversely affect results, but potential expenditures above established provisions could not be reasonably estimated.
- Debt agreements impose customary restrictions; the company reported approximately $1.4 billion of restricted-payment capacity. Management may consider debt repurchases or refinancing, which could use liquidity. No material changes to the principal risk factors were reported.
Important facts for investors to verify
- How much of reported sales growth reflects sustainable volume and mix versus food-cost inflation, and whether inflation is continuing to pressure margins through LIFO costs.
- Whether labor, distribution, supply-chain and fuel costs remain manageable and whether the cited efficiency initiatives deliver savings.
- Working-capital trends, operating cash flow, capital spending and the ability to sustain free cash flow.
- Floating-rate debt exposure, refinancing needs and covenant capacity, particularly as interest rates change and LIBOR is replaced.
- The assumptions behind management’s $280–$300 fiscal 2022 cash capital-expenditure outlook and its liquidity assessment.