US Foods Holding Corp. — Q1 2017 Form 10-Q
Business and period. US Foods distributes food and related products to foodservice customers nationwide through one reportable segment. This filing covers the 13 weeks ended April 1, 2017; comparisons are with the 13 weeks ended April 2, 2016. Amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $5,788 | $5,593 | +3.5% |
| Gross profit / margin | $991 / 17.1% | $960 / 17.2% | Profit +3.2%; margin down 0.1 percentage point |
| Operating income / margin | $77 / 1.3% | $85 / 1.5% | Down 9.4% |
| Net income / diluted EPS | $27 / $0.12 | $13 / $0.08 | Net income +107.7% |
| Adjusted EBITDA / margin | $215 / 3.7% | $203 / 3.6% | Up about 6% |
| Operating cash flow | $122 | $137 | Down $15 |
| Capital expenditures / free cash flow | $70 / $52 | $37 / $100 | Free cash flow down $48 |
Case volume increased 4.3%, including 2.7% organic growth; independent restaurant cases rose 4.0%. Acquisitions added about $74 million of sales. Lower sales per case, reflecting deflation and product mix, partly offset volume growth. Distribution, selling and administrative costs rose 5.7% to $913 million, and increased from 15.4% to 15.8% of sales. Management cited wages, volume, healthcare and self-insurance costs. Interest expense fell to $42 million from $71 million, primarily following 2016 debt repayment and refinancing. The effective tax rate was 23%, including a $6 million tax benefit primarily related to share-based compensation.
Financial position and liquidity
- At April 1, 2017, cash was $152 million; total debt was approximately $3.855 billion, including $82 million current. Debt increased from approximately $3.782 billion at year-end 2016. About $2.896 billion was floating-rate debt and $959 million fixed-rate.
- Available borrowing capacity under the ABL and receivables facilities was $933 million, subject to borrowing-base limits. The company reported $878 million available under the ABL Facility and $55 million under the 2012 ABS Facility. It was in compliance with debt covenants.
- Current assets were $2.994 billion and current liabilities $2.095 billion. Substantially all of USF’s assets are pledged under debt agreements; covenants restrict additional debt, liens, dividends and certain other actions.
- Operating cash flow was lower year over year, with working-capital investment and timing of IT-service payments offsetting lower interest costs. Investing outflows included $62 million for acquisitions and $70 million of property and equipment purchases.
Changes, outlook and notable items
- Management expected positive foodservice-industry growth in 2017, moderation of deflation, and continued intense competition. It noted that sudden inflation or prolonged deflation could hurt sales and gross profit because much of the business uses markups over product cost.
- Management expected procurement initiatives to be completed during 2017, with savings in product costs and logistics; corporate and administrative cost-reduction benefits were expected over the next 12–18 months. No specific earnings or sales guidance was provided.
- Expected 2017 capital additions were $330–$350 million, including about $100 million of fleet capital leases. Management believed cash generation and facility availability would cover obligations, working capital and capital spending for the next 12 months.
- The 2012 ABS Facility, with $675 million outstanding, matures September 30, 2018; the company intended to restructure or refinance it on or before September 30, 2017. A February 2017 term-loan amendment reduced the interest-rate spread by 25 basis points.
- LIFO accounting increased cost of goods sold by $10 million in Q1 2017, versus an $11 million benefit in Q1 2016. This year-over-year swing weighed on gross profit.
- Q1 acquisitions cost approximately $62 million. After quarter-end, on April 28, the company acquired FirstClass Foods, with annual sales of approximately $55 million.
- Restructuring charges were $2 million versus $11 million a year earlier. The company reported $843 million of unrecorded purchase commitments, plus $89 million of diesel-fuel and $5 million of electricity forward commitments. It estimated a 10% adverse diesel-price change on uncommitted volumes could add about $7 million of annual fuel cost.
- Legal proceedings arise in the ordinary course of business; adverse outcomes could exceed recorded provisions, though management did not expect an overall material adverse effect. The filing identified substantial-debt, interest-rate, competition, supplier, customer, labor, food-safety, fuel, acquisition and other operating risks. A 1% change in benchmark rates was estimated to change annual interest expense by about $29 million, before considering the term-loan LIBOR floor.
- The company stated it had no current plans to pay dividends. The January 2016 special distribution was $666 million; there was no comparable distribution in Q1 2017.
Key facts for investors to verify
- Whether volume growth and acquisition contributions can continue while deflation and product mix pressure sales per case and gross margin.
- Whether higher operating costs and the LIFO impact ease, and whether announced procurement and overhead initiatives deliver the expected savings.
- Cash conversion and working-capital trends, particularly given lower operating cash flow and free cash flow despite higher net income and Adjusted EBITDA.
- Plans and financing terms for refinancing the 2012 ABS Facility, and sensitivity to rates on the predominantly floating-rate debt.
- Execution, integration and returns from acquisitions, including the post-quarter FirstClass Foods transaction; also monitor capital spending against the stated range.
- Potential developments in legal matters, purchase commitments, self-insurance exposures and pension obligations.