US Foods Holding Corp. — Q1 2023 Form 10-Q
Business and period: US Foods distributes food and non-food products to U.S. foodservice customers through one operating segment. This report covers the 13 weeks ended April 1, 2023, compared with the 13 weeks ended April 2, 2022. Fiscal 2023 is a 52-week year.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $8.542 billion | $7.798 billion | Up 9.5% |
| Gross profit / margin | $1.425 billion / 16.7% | $1.195 billion / 15.3% | Up $230 million |
| Operating income / margin | $187 million / 2.2% | $34 million / 0.4% | Up $153 million |
| Net income (loss) | $82 million | $(7) million | Improved $89 million |
| Diluted EPS | $0.32 | $(0.07) | Improved |
| Adjusted EBITDA (non-GAAP) | $337 million; 3.9% of sales | $241 million; 3.1% of sales | Up 39.8% |
| Operating cash flow | $279 million | $158 million | Up $121 million |
| Free cash flow (non-GAAP) | $218 million | $86 million | Up $132 million |
Gross margin improved amid case growth, pricing and cost-of-goods-sold optimization, increased freight income, and a more favorable year-over-year LIFO impact. LIFO expense was $20 million, versus $72 million a year earlier. Operating expenses rose 6.6% to $1.238 billion, but declined as a share of sales to 14.5% from 14.9%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $292 million at April 1, 2023, up from $211 million at year-end 2022. Management reported approximately $2.1 billion of cash and available liquidity.
- Total debt was $4.810 billion, including $117 million current and $4.693 billion long-term. Approximately 41% of debt bore floating rates. The company had no ABL borrowings, $458 million of letters of credit, and $1.842 billion of remaining ABL capacity.
- Interest expense increased to $81 million from $55 million, primarily due to higher interest rates, partly offset by lower debt. A hypothetical 1% rate change was estimated to affect annual interest expense by approximately $22 million.
- Operating cash flow benefited from net income and working-capital movements, including increases in accounts payable and cash overdraft liability. Capital expenditures were $61 million; financing cash outflow was $138 million, including $65 million of voluntary term-loan prepayments and $34 million of share repurchases.
- The company entered into two interest-rate cap agreements after quarter-end, covering $450 million of term-loan principal through April 30, 2025.
Business trends, outlook and notable items
- Total case volume rose 5.7%; independent restaurant volume rose 8.1%. Management also cited hospitality volume growth of 18.8% and healthcare volume growth of 5.9%. Food-cost inflation was 3.7%.
- Management attributed operating-expense growth to greater volume and higher distribution and labor costs, partly offset by routing improvements and other cost-saving initiatives. It cited inflation, supply-chain disruption and labor shortages as continuing business pressures.
- Fiscal 2023 cash capital expenditure expectations were $290 million to $310 million, excluding approximately $120 million of fleet-financing lease expenditures. Management said available cash, operating cash flow and borrowing capacity should be adequate for obligations and needs over the next 12 months.
- The company repurchased 917,704 shares for approximately $34 million during the quarter; $452 million remained authorized under its $500 million program. KKR converted 161,237 preferred shares into approximately 7.6 million common shares. Preferred dividends were $7 million.
- Q1 Adjusted EBITDA included specified adjustments, among them $14 million share-based compensation, $20 million LIFO adjustment, $4 million transformation costs, and $13 million acquisition, integration and other costs. These non-GAAP measures are not substitutes for GAAP results.
- Unrecorded purchase orders and purchase-contract commitments for the remainder of fiscal 2023 totaled $1.845 billion. Fuel forward commitments totaled $34 million through December 2023; a hypothetical 10% adverse diesel-price change on uncommitted volumes was estimated to add about $11 million of cost through then.
- Legal proceedings arise in the ordinary course. The company believes their ultimate outcome will not materially adversely affect it, but states that costs could exceed recorded provisions and cannot be reasonably estimated. No material changes to the previously disclosed principal risk factors were reported.
Most important facts for investors to verify
- Whether case growth, particularly in independent restaurants, persists and how much sales and margin performance depends on inflation and pricing.
- Whether gross-margin improvement and cost-saving initiatives continue as LIFO effects, labor costs and supply-chain conditions change.
- Floating-rate debt exposure, debt maturities and the effect of interest rates; assess the extent of protection provided by the post-quarter interest-rate caps.
- Cash conversion and working-capital movements, including the contribution of payable and overdraft changes to operating cash flow.
- Execution of the stated capital-spending plan, purchase commitments, and share repurchases alongside debt reduction and liquidity needs.