US Foods Holding Corp. — Q3 2017 Form 10-Q
Business and period: US Foods distributes food and related products to foodservice customers across the United States. This filing covers the 13 and 39 weeks ended September 30, 2017; comparisons are with the periods ended October 1, 2016. Fiscal 2017 and 2016 are 52-week years.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Net sales | $6.204bn | $5.841bn | $18.151bn | $17.241bn |
| Gross profit / margin | $1.099bn / 17.7% | $1.033bn / 17.7% | $3.144bn / 17.3% | $3.026bn / 17.6% |
| Operating income / margin | $190.0m / 3.1% | $115.1m / 2.0% | $392.1m / 2.2% | $298.2m / 1.7% |
| Net income | $95.6m | $133.0m | $187.8m | $132.9m |
| Diluted EPS | $0.42 | $0.59 | $0.83 | $0.68 |
| Adjusted EBITDA (non-GAAP) | $267m | $244m | $768m | $707m |
Sales and volume: Q3 sales rose 6.2%, including 2.0% case-volume growth and a 4.2% increase in sales rate per case, reflecting inflation and acquisitions. Organic case volume increased 1.0%; independent restaurant case volume rose 6.0% (4.1% organic). For the 39 weeks, sales rose 5.3%, case volume 3.3%, and sales rate per case 2.0%; organic case volume rose 2.0%.
Margins and earnings: Q3 operating income increased substantially, aided by lower restructuring and amortization costs and operating leverage. Q3 net income declined despite higher operating income, chiefly because the prior-year quarter included a large tax benefit from releasing deferred-tax valuation allowances. Nine-month net income increased; lower interest expense and the absence of the prior-year debt-extinguishment loss also contributed. Nine-month gross margin declined 0.3 percentage points, primarily reflecting an adverse year-over-year LIFO change: a $14m expense in 2017 versus a $25m benefit in 2016.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was $506m, versus $440m; capital expenditures were $163m, versus $105m; and free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $343m, versus $335m.
- Investing cash outflow was $321m, including approximately $183m for acquisitions and $163m of property and equipment purchases. Financing cash outflow was $169m. Cash increased $16m to $147m.
- Total debt was $3.703bn at September 30, 2017, down from $3.782bn at year-end 2016. Current debt was $106m and long-term debt $3.597bn. The company reported approximately $3.8bn fair value of debt.
- Borrowings included $2.161bn on the term loan, $600m under the receivables facility, and $594m of 5.875% senior notes due 2024. There were no ABL borrowings. Reported available capacity was $889m on the ABL and $146m on the receivables facility—$1.035bn in total, subject to borrowing-base availability.
- After swaps, approximately 55% of debt was fixed-rate and 45% floating-rate. A 1 percentage-point change in LIBOR and ABR was estimated to change annual interest expense by about $17m. The company was in compliance with debt covenants and stated that cash generation and borrowing availability should cover its needs for the next 12 months.
Material developments, outlook and risks
- The company acquired five food distribution or processing businesses in the first nine months for approximately $183m. Management said these acquisitions did not materially affect reported results or financial position.
- In August, USF entered four-year interest-rate swaps covering $1.1bn of term-loan principal, declining to $825m in year four; the hedged portion effectively bears a 4.47% rate. The receivables facility maturity was extended to September 2020.
- Management expected positive foodservice-industry growth in 2017, continued competitive pressure and year-over-year inflation. It expected independent restaurants, acquisitions, sourcing initiatives and operational improvements to support growth and margins. It gave no specific sales or earnings forecast.
- Expected 2017 capital additions were $310m–$320m, including approximately $90m in fleet capital leases. Management expected to fund capital expenditures primarily from cash on hand or operations.
- A pension-plan amendment was expected to result in approximately $100m of voluntary lump-sum payments from plan assets in Q4 2017 and about $30m of noncash settlement charges for 2017, including approximately $25m in Q4. The company said required 2017 pension contributions had been made.
- Q3 adjusted EBITDA adjustments included $3m of hurricane-related costs and product donations; the nine-month figure also included acquisition, sponsor-offering and closed-facility costs. Restructuring charges fell to $3m for the 39 weeks from $39m a year earlier.
- Key disclosed risks include competition; food and fuel inflation or deflation; supplier, customer and labor risks; substantial debt, interest-rate exposure and covenant restrictions; acquisition integration; pension obligations; food safety, litigation, weather, regulation and cybersecurity. Legal proceedings arose in the ordinary course; the company believed their resolution would not materially adversely affect it, while noting outcomes could require expenditures above recorded provisions.
Important facts for investors to verify
- Whether case-volume growth, particularly organic independent-restaurant growth, continues and translates into durable sales and margin improvement.
- How LIFO effects, food-cost inflation and pricing pass-through affect gross margin and cash generation.
- Whether the Q3 earnings comparison is interpreted in light of the prior-year valuation-allowance tax benefit; review GAAP results alongside non-GAAP adjustments.
- Debt-service capacity, borrowing-base availability, covenant headroom and exposure to floating rates.
- Execution and returns from acquisitions, planned capital spending, and the timing and accounting impact of the pension settlements.