US Foods Holding Corp. — Q3 2018 Form 10-Q
Reporting period: 13 and 39 weeks ended September 29, 2018; comparisons are with the periods ended September 30, 2017. US Foods distributes food and related products to foodservice customers in the United States. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $6,153 | $6,204 | $18,134 | $18,151 |
| Gross profit / margin | $1,108 / 18.0% | $1,099 / 17.7% | $3,214 / 17.7% | $3,144 / 17.3% |
| Operating income / margin | $179 / 2.9% | $189 / 3.0% | $487 / 2.7% | $392 / 2.2% |
| Net income | $114 | $96 | $307 | $188 |
| Diluted EPS | $0.52 | $0.42 | $1.41 | $0.83 |
| Adjusted EBITDA (non-GAAP) | $283 | $267 | $806 | $768 |
| Operating cash flow | $133 | $138 | $444 | $506 |
- Q3 sales fell 0.8%; total case volume declined 0.8%, with independent-restaurant case volume up 3.3%. Planned chain customer exits were a principal volume headwind.
- Q3 gross profit rose 0.9%, but operating income fell 5.3% as operating expenses grew 2.2%, mainly from higher diesel costs and acquisition-related costs. Net income increased, reflecting lower tax expense as well as operating results.
- For the 39 weeks, sales were nearly flat and case volume declined 1.3%. Acquisitions contributed about $138 million to sales, and a 1.2% increase in sales rate per case largely offset lower volume. Operating income rose 24.3% and Adjusted EBITDA rose about 4.9%.
- Gross-margin improvement reflected margin-expansion initiatives; the year-over-year LIFO effect also benefited the nine-month comparison. Q3 LIFO inventory accounting provided a $9 million benefit versus $26 million in the prior-year quarter.
Cash, debt and liquidity
- At September 29, 2018, cash and cash equivalents were $88 million, total assets $9.27 billion, and total shareholders’ equity $3.15 billion.
- Total debt was $3.51 billion, including $2.14 billion on the term loan, $594 million of senior notes, $390 million under the receivables facility and $344 million of capital-lease obligations. Debt was down from $3.76 billion at December 30, 2017.
- After interest-rate swaps fixed $1.1 billion of term-loan principal, about 42% of total debt had floating rates. Management estimated a 1% change in benchmark rates would change annual interest expense by approximately $15 million.
- Available borrowing capacity was $894 million under the ABL facility and $365 million under the receivables facility. The company reported covenant compliance and stated liquidity should cover obligations and operating needs for at least 12 months.
- Nine-month operating cash flow was $444 million, down from $506 million, primarily due to a $35 million incremental pension contribution, income-tax payments and working-capital activity. Capital expenditures were $168 million; free cash flow, as defined by the company, was $276 million versus $343 million.
Outlook, notable items and risks
- Management said its fiscal 2018 outlook remained unchanged. It expected 2018 capital additions of $340–$350 million, including approximately $90 million in fleet capital leases.
- US Foods agreed to acquire SGA’s Food Group of Companies for $1.8 billion in cash. The transaction remained subject to customary conditions, including regulatory approval. A $1.5 billion secured term-loan financing commitment was obtained to fund a substantial portion of the purchase price.
- The 2018 effective tax rate benefited from discrete tax items: the nine-month rate was 16%, including benefits associated with an IRS accounting-method consent, share-based compensation and finalization of Tax Act estimates. These items supported reported earnings and may not recur.
- The company contributed approximately $70 million to defined-benefit and other postretirement plans during the first 39 weeks, including $35 million above its original plan. It said substantially all planned 2018 contributions were complete.
- Purchase orders and purchase-contract commitments totaled $804 million for the remainder of 2018 and 2019. Diesel-fuel forward commitments were $25 million through June 2019, covering about 24% of projected fuel needs for contracted periods; a 10% unfavorable diesel-price change on uncommitted volumes could add about $9 million in fuel costs.
- Legal proceedings arise in the ordinary course; management believed ultimate resolution would not materially adversely affect the company, but noted additional expenditures beyond recorded provisions could be required and could not be reasonably estimated. Principal disclosed risks include competition, customer retention, supplier and commodity volatility, labor, fuel, food safety, litigation, cybersecurity, interest rates and substantial indebtedness.
Investor verification points
- Check the regulatory and closing status, final financing and integration assumptions for the proposed $1.8 billion SGA acquisition.
- Assess whether case-volume trends and independent-restaurant growth can offset planned chain exits, and whether margin gains can persist amid fuel, wage and commodity pressures.
- Separate recurring earnings from discrete tax benefits and non-GAAP adjustments; review the company’s reconciliations of Adjusted EBITDA, Adjusted net income and free cash flow.
- Monitor working-capital cash usage, capital spending, debt reduction, floating-rate exposure and available borrowing capacity following the acquisition.
- Review pension funding obligations, purchase commitments and legal contingencies, whose ultimate cash effects may differ from recorded amounts.