US Foods Holding Corp. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016 (52 weeks); fiscal 2015 was a 53-week year. The filing also reports fourth-quarter results. US Foods is a national foodservice distributor operating as one segment, with approximately $22.9 billion in annual sales, 250,000 customer locations, 60 distribution centers, and approximately 6,000 trucks.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $22.919 billion | $23.128 billion |
| Gross profit / margin | $4.053 billion / 17.7% | $4.013 billion / 17.4% |
| Operating income / margin | $414 million / 1.8% | $190 million / 0.8% |
| Net income | $210 million | $168 million |
| Adjusted EBITDA | $972 million | $875 million |
| Cash from operations | $556 million | $556 million |
| Capital expenditures | $164 million | $187 million |
| Free cash flow | $392 million | $368 million |
FY2016 sales declined 0.9% as reported, but increased 0.6% excluding FY2015’s extra week. Case volume increased 1.4% as reported and 2.9% on the comparable-week basis; independent restaurant case volume rose 4.7% and 6.4%, respectively. Deflation and product-mix changes reduced the average rate per case. The company reported gross-margin improvement and lower operating expenses, including cost-reduction benefits.
Fourth quarter: Net sales were $5.678 billion, gross profit $1.027 billion, operating expenses $911 million, and net income $76.9 million. In fourth-quarter 2015, sales were $5.935 billion, gross profit $1.078 billion, operating expenses $1.026 billion, and net loss $9.9 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $131 million at year-end, down from $518 million. Total debt was approximately $3.782 billion, down from approximately $4.745 billion in selected financial data.
- At December 31, 2016, the company reported $882 million of available borrowing capacity: $861 million under its asset-based lending facility and $21 million under its receivables facility. It reported compliance with debt covenants and said available liquidity and operating cash were expected to cover obligations for the next 12 months.
- Approximately $2.9 billion of debt was floating-rate. Management estimated that a 1 percentage-point rate increase would add about $29 million in annual interest expense, before considering the term-loan LIBOR floor.
- The 2016 IPO generated $1.114 billion in net proceeds, primarily used to redeem older notes. Debt refinancing extended major maturities to 2023 and 2024 and reduced borrowing costs; a February 2017 amendment further reduced the term-loan spread by 25 basis points.
- A one-time $666 million shareholder distribution was paid in January 2016, largely to the Sponsors. The company stated it had no current plans to pay future dividends.
- Cash used in investing activities was $762 million, including $485 million used to defease the CMBS facility, $122 million for acquisitions, and $164 million of property and equipment purchases. Total 2017 capital additions were expected to be $330–$350 million, including approximately $100 million in fleet capital leases.
Changes, unusual items and outlook
- Year-over-year comparisons are affected by the extra week in FY2015. FY2015 also included $288 million of net acquisition-termination fee income from the failed Sysco transaction. In 2016, the company recorded a $54 million loss on debt extinguishment related to refinancing and defeasance.
- FY2016 net income included a $78.7 million income-tax benefit. The company released much of its federal and certain state deferred-tax valuation allowance, citing improved evidence that deferred tax assets were more likely than not to be realized. Adjusted net income, a non-GAAP measure, was $321 million versus $154 million in FY2015.
- Acquisitions in 2016 included Cara Donna, Freshway Foods, Jeraci Foods, and Save On Seafood. In February 2017, the company acquired All American Foods, a distributor with approximately $60 million in annual sales.
- Management expected positive foodservice-industry growth in 2017, but anticipated continuing deflation and intense competition. It expected independent restaurants to increase as a share of sales and cited acquisitions, merchandising, technology, and cost initiatives as growth and margin supports. Procurement centralization benefits were expected during 2017; administrative cost savings were expected over the following 12–18 months.
- Key risks include thin distribution margins, commodity inflation or deflation, competition and customer switching, reliance on suppliers and group purchasing organizations, labor and pension obligations, food safety, technology and cybersecurity disruption, and substantial debt and variable interest rates. The company estimated approximately $120 million of aggregate potential multiemployer pension withdrawal liability, although it settled substantially all liabilities for previously closed facilities in 2016.
- Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting that some proceedings could require expenditures beyond recorded provisions that cannot be reasonably estimated. Deloitte issued an unqualified opinion on the financial statements; it did not audit internal control over financial reporting under the newly public company transition provision.
Most important facts for investors to verify
- Comparable underlying growth and margins after adjusting for FY2015’s extra week, commodity deflation, and changes in customer and product mix.
- How much FY2016 earnings improvement is sustainable versus the one-time tax valuation-allowance release and other adjustments; review reconciliations for non-GAAP measures.
- Debt availability, refinancing and covenant terms, near-term maturities, and sensitivity to interest-rate increases.
- Whether acquisition integration and announced cost-saving initiatives deliver the expected benefits, alongside the elevated 2017 capital-additions plan.
- Potential future cash demands from pension plans, self-insurance, legal matters, and purchase commitments; assess the effect of Sponsor control and the absence of planned dividends.