Business context and reporting period
US Foods Holding Corp. distributes food and non-food products to foodservice customers across the United States and reports one operating segment. This unaudited Form 10-Q covers the 13 weeks ended March 31, 2018; the comparable period ended April 1, 2017. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial results and liquidity
| Metric | 13 weeks ended Mar. 31, 2018 | Prior comparable period |
|---|---|---|
| Net sales | $5,822.5 | $5,788.4 |
| Gross profit / margin | $991.9 / 17.0% | $991.3 / 17.1% |
| Operating income / margin | $102.5 / 1.8% | $75.8 / 1.3% |
| Net income / diluted EPS | $67.3 / $0.31 | $26.8 / $0.12 |
| Adjusted EBITDA (non-GAAP) | $224 | $215 |
| Cash from operations | $191.6 | $121.6 |
| Capital expenditures | $57.2 | $70.1 |
| Free cash flow (non-GAAP) | $135 | $52 |
Quarter-end cash and cash equivalents were $85.3 million ($85.6 million including restricted cash), down from $118.8 million at December 30, 2017. Total debt was $3.63 billion, versus $3.76 billion at fiscal year-end, including $120.7 million current and $3.51 billion long-term. Debt fair value was estimated at approximately $3.7 billion. The company reported $1.113 billion of borrowing availability across its ABL and receivables facilities, was in compliance with debt covenants, and said liquidity should cover obligations and operating needs for the next 12 months. Approximately 57% of debt was fixed-rate after swaps and 43% floating-rate.
Material changes versus prior period
- Sales increased 0.6%, while total case volume fell 2.3%; sales benefited from inflation, acquisitions and a 2.9% increase in sales rate per case. Acquisitions contributed about $85 million of sales. Independent restaurant case volume grew 4.3%, but organic case volume declined 3.2%.
- Gross profit was nearly flat and gross margin slipped 0.1 percentage point. Higher inbound freight and LIFO expense offset acquisition and margin-initiative benefits. LIFO expense was $19 million, compared with $10 million.
- Operating expenses fell 2.8% to $889 million, chiefly because amortization declined $27 million after the 2007-acquisition customer relationship intangible finished amortizing. Operating income increased 34.2%.
- Net income rose to $67.3 million, with the reported tax benefit materially affecting the comparison: the effective tax rate was (7)%, including $21 million of discrete tax benefits, versus a 23% rate and $6 million discrete benefit in the prior period.
- Operating cash flow rose by $70 million, attributed primarily to higher earnings and improved working-capital management. Investing outflow narrowed as the prior period included acquisition spending; financing shifted to a $168 million outflow, mainly net repayments on revolving facilities.
Outlook, risks and unusual items
Management said its fiscal 2018 outlook, as provided in the 2017 Form 10-K, remained unchanged. It expected 2018 capital additions of $330–$340 million, including approximately $80 million in fleet capital leases, funded from available cash or operating cash flow. Management cited continued focus on growth, customer differentiation and operational improvement. It also noted that adverse weather, planned chain-customer exits and lower education volume weighed on the quarter.
Key exposures include substantial indebtedness and restrictive covenants, interest-rate movements, commodity and fuel-cost volatility, customer retention and supplier reliance, competition, labor, food safety, cybersecurity, weather, and acquisition integration. A 1% change in benchmark rates could change annual interest expense by approximately $16 million. Fuel commitments covered about 56% of projected needs for contracted periods; a 10% unfavorable diesel-price move on uncommitted volumes could add approximately $2 million in costs.
At quarter-end, the company had $790 million of unrecorded purchase commitments for the remainder of fiscal 2018, plus $17 million of diesel and $6 million of electricity forward commitments. Legal proceedings arise in the ordinary course; the company said adverse outcomes could exceed recorded provisions, but did not expect the ultimate resolution to materially harm consolidated results. An EPA matter involving alleged Fairburn, Georgia facility violations was settled for a $107,961 penalty, paid April 23, 2018. The company made a further $25 million retirement-plan contribution in April, substantially completing planned 2018 contributions. Tax accounting for certain Tax Act effects remained provisional; no adjustment was made in the quarter.
Management concluded disclosure controls were effective as of March 31, 2018 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether falling total and organic case volumes stabilize, particularly following chain exits and weakness in education customers.
- How much of the improvement in reported net income reflects sustainable operations versus discrete tax benefits; compare GAAP results with management’s non-GAAP measures.
- Whether gross-margin pressure from LIFO, inflation and freight costs persists, and whether operating-cost savings continue after the amortization reduction.
- Debt maturities, covenant restrictions, borrowing-base availability and exposure to floating interest rates; confirm liquidity against planned capital spending and debt service.
- Execution of the unchanged 2018 outlook and $330–$340 million capital-additions plan, including expected fleet leases.
- Updates on legal contingencies, purchase commitments, retirement-plan funding and completion of provisional Tax Act accounting.