US Foods Holding Corp. — Q3 2019 Form 10-Q
Reporting period: 13 and 39 weeks ended September 28, 2019; comparable periods ended September 29, 2018. The company distributes food and related products to foodservice customers across the United States and reports one operating segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $6.531B | $6.153B | $19.005B | $18.134B |
| Gross profit / margin | $1.156B / 17.7% | $1.108B / 18.0% | $3.350B / 17.6% | $3.214B / 17.7% |
| Operating income / margin | $188M / 2.9% | $179M / 2.9% | $513M / 2.7% | $488M / 2.7% |
| Net income | $106M | $114M | $293M | $307M |
| Diluted EPS | $0.48 | $0.52 | $1.34 | $1.41 |
| Adjusted EBITDA (non-GAAP) | $307M | $283M | $859M | $806M |
Q3 sales rose 6.1%, with case volume up 3.0%; organic case volume grew 0.9%. Independent restaurant case volume increased 6.3% overall and 4.2% organically. Management attributed sales growth to volume and inflation in categories including grocery, produce and beef. Gross profit growth reflected margin initiatives, volume and the acquired business, partly offset by less favorable LIFO adjustments. Higher distribution wages, acquisition costs and acquired operations increased expenses. Q3 net income declined despite higher sales and operating income, with the tax provision rising to $39M from $26M.
For the first 39 weeks, operating cash flow was $559M, versus $444M; capital expenditures were $157M, resulting in reported free cash flow of $402M versus $276M. Investing cash outflow was $1.977B, including the Food Group acquisition. Financing provided $1.411B. Cash, cash equivalents and restricted cash ended at $98M, compared with $88M a year earlier.
Balance sheet, debt and liquidity
At September 28, 2019, total debt was $4.924B, up from $3.457B at December 29, 2018, largely reflecting acquisition financing. Long-term debt was $4.788B and current debt was $136M. Cash and cash equivalents were $90M; current assets were $3.560B and current liabilities $2.546B. The company reported $1.532B of borrowing availability under its ABL and accounts receivable facilities, based on borrowing-base availability, and stated it expected cash generation and available borrowing capacity to cover obligations and operating needs for the next 12 months. It was in compliance with debt covenants. About 65% of debt was floating-rate after hedges; a 1% rate change was estimated to affect annual interest expense by approximately $32M.
Material changes and unusual items
- USF acquired the Food Group for $1.8B cash on September 13, 2019, expanding its West and Northwest network. The acquisition was financed with a new $1.5B incremental term loan and revolving-facility borrowings. Preliminary purchase accounting included $761M goodwill and $691M other intangibles and remains subject to valuation adjustments. The Food Group contributed $132M of sales in the quarter.
- To obtain regulatory clearance, three acquired distribution facilities were divested after quarter-end. The October 11 sale generated $94M at closing, with approximately $21M in holdback funds and expected working-capital adjustments; the filing says proceeds and adjustments together approximate fair value. Related balances and results were classified as discontinued operations.
- The company refinanced its ABL facility in May and its receivables-backed ABS facility in September 2019. Debt rose materially during the period.
- Management expected approximately $75M of pension settlement payments from plan assets and about $19M of non-cash settlement charges in fiscal 2019, including approximately $16M in Q4; these arrangements were expected not to require additional company funding.
Outlook, risks and contingencies
The filing provides no new quantified earnings guidance; it refers investors to the outlook in the 2018 Annual Report. Management cited continued growth execution, customer differentiation and operational improvement as priorities. Fiscal 2019 capital additions were expected to be $345M–$355M, including approximately $75M in fleet financing leases.
Key disclosed risks include food-cost inflation or deflation and commodity volatility, competition, supplier disruptions, customer and group-purchasing-organization relationships, labor availability and costs, fuel prices, economic and consumer-spending conditions, acquisition integration and cost-savings execution, indebtedness and interest rates, and technology and cybersecurity risks. The company had $959M of product purchase orders and purchase commitments for the remainder of fiscal 2019, plus fuel and electricity commitments. It said legal proceedings could result in liabilities, although it did not expect their ultimate resolution to materially adversely affect the company; additional expenditures beyond recorded provisions could not be reasonably estimated.
Important facts for investors to verify
- How the Food Group integration, final purchase-price allocation and expected synergies affect growth, margins and leverage.
- Whether sales growth is sustained by organic case volumes, rather than acquisition contribution and product inflation, and whether margin pressure from LIFO and distribution costs changes.
- Debt service capacity, facility availability, covenant headroom and sensitivity to floating interest rates.
- Actual costs and timing of the pension settlements, including the expected Q4 non-cash charge.
- Completion and final proceeds of the divestiture, including holdbacks and working-capital adjustments.