US Foods Holding Corp. — FY 2018 Form 10-K
Business context and reporting period
US Foods is a U.S. broadline foodservice distributor serving approximately 250,000 customer locations. This 10-K reports the 52-week fiscal year ended December 29, 2018; the filing also provides unaudited fourth-quarter results. The company operates as one segment.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $24.175 billion | $24.147 billion |
| Gross profit / margin | $4.306 billion / 17.8% | $4.218 billion / 17.5% |
| Operating income / margin | $658 million / 2.7% | $588 million / 2.4% |
| Net income | $407 million | $444 million |
| Diluted EPS | $1.87 | $1.97 |
| Adjusted EBITDA (non-GAAP) | $1.103 billion | $1.058 billion |
| Operating cash flow | $609 million | $749 million |
| Capital expenditures | $235 million | $221 million |
| Free cash flow (non-GAAP) | $374 million | $528 million |
| Cash and cash equivalents at year-end | $104 million | $119 million |
| Total debt | $3.457 billion | $3.757 billion |
FY 2018 distribution, selling and administrative costs were $3.647 billion, or 15.1% of sales. Net sales grew 0.1%; operating income increased 11.9%, while net income declined 8.3%. About 41% of debt principal carried floating rates after interest-rate swaps. At year-end, borrowing availability under the ABL and receivables facilities was approximately $847 million and $455 million, respectively. The company said available cash and financing, together with operating cash generation, should cover obligations and operating needs for the next 12 months; it was in compliance with debt covenants.
In Q4 2018, net sales were $6.041 billion, gross profit was $1.092 billion, operating expenses were $922 million, and net income was $100 million. Q4 2017 net sales were $5.996 billion and net income was $256 million; the prior-year quarter included a $119 million income tax benefit, making the earnings comparison tax-affected.
Material changes versus the prior comparable period
- Total case volume fell 1.2%; independent restaurant case volume grew 3.8%. Planned exits from selected national-chain customers contributed to the volume decline.
- Sales per case increased 1.3%, mainly reflecting inflation; acquisitions completed in 2017 added approximately $137 million to 2018 sales.
- Gross margin expanded from 17.5% to 17.8%, primarily from margin initiatives and year-over-year LIFO effects. Adjusted EBITDA rose 4.3% to $1.103 billion.
- Operating cash flow decreased $140 million, primarily due to a $35 million additional pension contribution, higher tax payments, and working-capital changes. Free cash flow fell from $528 million to $374 million.
- Debt declined $300 million. Interest expense nevertheless increased $5 million, reflecting higher benchmark rates, partly offset by lower debt.
Outlook, risks and unusual items
- Management expected positive U.S. foodservice-distribution industry growth and moderate inflation in 2019, with competitive pressures remaining high. It expected independent-restaurant sales to increase as a proportion of the mix and cited customer mix, acquisitions, sourcing initiatives, technology and operational improvements as potential margin supports.
- Expected 2019 capital additions were $335–$345 million, including approximately $75 million in fleet capital leases.
- The proposed $1.8 billion cash acquisition of SGA’s Food Group remained subject to regulatory approvals and other customary closing conditions. A $1.5 billion senior secured term-loan commitment was arranged to fund a substantial portion of the price.
- The Tax Act reduced the federal corporate tax rate to 21%. The 2017 comparison included a $173 million tax benefit from the rate reduction; FY 2018 included an 18% effective tax rate and a $21 million tax benefit from specified tax adjustments.
- Key risks include thin industry margins and commodity, fuel and interest-rate volatility; intense competition and low customer switching costs; supplier and food-safety disruptions; labor costs and potential multiemployer pension withdrawal liability (estimated at approximately $110 million); acquisition integration and financing; and regulatory, litigation, cybersecurity and severe-weather risks. The filing states that ordinary-course legal proceedings were not expected to have a material adverse effect, while noting outcomes and potential excess expenditures cannot be assured.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the SGA acquisition closed, its final financing and purchase price, and whether expected synergies and integration benefits materialized.
- Whether case-volume trends, particularly independent-restaurant growth and planned chain exits, translated into durable organic growth and improved margins.
- Whether cash conversion recovers after the FY 2018 working-capital and pension-related outflows, and how 2019 capital spending affects free cash flow.
- Debt reduction, refinancing and interest-rate exposure, including facility maturities in 2020 and the effect of variable-rate borrowing.
- The assumptions and exclusions behind Adjusted EBITDA, adjusted net income and free cash flow, which are non-GAAP measures and are not substitutes for GAAP results.