US Foods Holding Corp. — Q3 2021 Form 10-Q
Reporting period: 13 weeks ended October 2, 2021; year-to-date period covers 39 weeks. Comparisons are with the corresponding 2020 periods. US Foods distributes food and related products to foodservice customers across the United States. Results are for its single operating segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Net sales | $7.890 billion | $5.848 billion | $21.848 billion | $16.747 billion |
| Gross profit / margin | $1.241 billion / 15.7% | $974 million / 16.7% | $3.413 billion / 15.6% | $2.711 billion / 16.2% |
| Operating income (loss) / margin | $135 million / 1.7% | $78 million / 1.3% | $287 million / 1.3% | $(107) million / (0.6)% |
| Net income (loss) | $64 million | $8 million | $95 million | $(216) million |
| Net income (loss) per diluted share | $0.24 | $(0.01) | $0.28 | $(1.05) |
| Adjusted EBITDA | $291 million | $209 million | $795 million | $474 million |
| Operating cash flow | $270 million | $(237) million | $520 million | $533 million |
| Free cash flow | $204 million | $(260) million | $347 million | $379 million |
Q3 net sales increased 34.9%; year-to-date sales increased 30.5%. Total case volume rose 18.5% in Q3 and 20.8% year to date; independent restaurant volume rose 25.1% and 33.5%, respectively. Sales growth also reflected higher average sales rates, including inflation. Year-to-date sales included $895 million from Smart Foodservice, acquired in April 2020.
Gross margin declined year over year in both periods, primarily reflecting higher LIFO expense amid product inflation. LIFO expense was $32 million in Q3 and $150 million year to date, versus $3 million and $9 million, respectively, in 2020. Operating expenses rose in dollars, including from higher supply-chain labor and distribution costs, but declined as a share of sales. Adjusted EBITDA margin was 3.7% in Q3 versus 3.6%; year to date it was 3.6% versus 2.8%.
Liquidity, debt and cash flow
At October 2, 2021, cash was $772 million, total debt was $5.396 billion, and current liabilities were $2.852 billion. The company reported approximately $2.5 billion of cash and available liquidity, including $1.737 billion of remaining ABL capacity; there were no ABL borrowings and $253 million of letters of credit outstanding. Management said available cash, operating cash generation and borrowing capacity should be adequate for debt service, operations, working capital and capital spending through fiscal 2022.
Year-to-date operating cash flow was $520 million, compared with $533 million a year earlier. Investing used $166 million, including $173 million of capital expenditures. Financing used $411 million. Cash and cash equivalents decreased from $828 million at January 2, 2021 to $772 million at October 2, 2021.
Debt declined from $5.748 billion at January 2, 2021. The company made $300 million of voluntary prepayments on its initial term loan. In February, it issued $900 million of 4.75% notes due 2029 and used the proceeds, with cash, to redeem 2024 notes and repay the 2020 incremental term loan; the refinancing resulted in a $23 million debt-extinguishment loss. Approximately 60% of debt bore floating rates. A hypothetical 1% rate change would change annual interest expense by about $33 million.
Outlook, commentary and risks
- Capital spending: Fiscal 2021 cash capital expenditures were expected to be $300 million–$315 million, excluding approximately $55 million–$65 million under fleet financing leases. No earnings or sales guidance is provided in the filing.
- Recovery and operations: Management reported improving demand as COVID-related restrictions eased, while case volumes remained below pre-pandemic levels. It cited continuing uncertainty around the pandemic, product availability, product and logistics costs, labor shortages and changes in customer purchasing patterns.
- Workforce: The filing discusses federal vaccine requirements and OSHA regulations issued November 4, 2021, after the quarter ended. Management was evaluating potential effects on its workforce and on suppliers’ and customers’ workforces, including possible labor and supply-chain disruption.
- Inflation and rates: Product inflation increased reported sales rates but also drove LIFO expense and pressured gross margin. Fuel-price exposure remains; committed fuel purchases covered approximately 19% of projected needs through December 2022. The company also highlighted LIBOR transition uncertainty and floating-rate exposure.
- Other items: A $7 million trade-name impairment related to rebranding was recorded in Q3. Year-to-date results included a $13 million favorable legal settlement recovery and a $23 million debt-extinguishment loss. The company reported purchase commitments of $1.337 billion for the remainder of fiscal 2021. It said pending legal matters were not expected to materially affect consolidated results, while noting adverse outcomes could exceed recorded provisions.
Most important facts to verify
- Whether volume recovery and independent-restaurant growth continue, and how much sales growth reflects inflation rather than underlying demand.
- Whether LIFO costs, product inflation, labor and distribution expenses continue to pressure gross margin and operating profitability.
- Cash conversion and working-capital needs, given the year-to-date increase in receivables and inventories and decline in cash.
- Debt-reduction progress, refinancing needs and sensitivity to interest rates, with about 60% of debt floating-rate.
- Effects of COVID-19 developments and vaccine requirements on staffing, product supply and customer demand; also confirm delivery of the stated fiscal 2021 capital-spending plan.