US Foods Holding Corp. — Q3 2016 Form 10-Q
Reporting period: 13 weeks ended October 1, 2016; year-to-date (YTD) covers 39 weeks. Comparisons are to periods ended September 26, 2015. US Foods distributes food and related products to foodservice customers across the United States.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Net sales | $5.841B | $5.796B | $17.241B | $17.192B |
| Gross profit / margin | $1.033B / 17.7% | $1.013B / 17.5% | $3.026B / 17.6% | $2.935B / 17.1% |
| Operating income / margin | $115M / 2.0% | $73M / 1.3% | $298M / 1.7% | $138M / 0.8% |
| Net income | $133M | $5M | $133M | $177M |
| Adjusted EBITDA (non-GAAP) | $244M | $225M | $707M | $620M |
| Operating cash flow | $139M | $321M | $440M | $586M |
| Free cash flow (non-GAAP) | $101M | $290M | $335M | $444M |
Q3 sales rose 0.8%, while case volume increased 4.0%; lower prices per case, reflecting deflation and product mix, offset much of the volume increase. Independent restaurant case volume grew 5.5%. YTD sales increased 0.3% on 2.5% case-volume growth. Q3 Adjusted EBITDA margin increased to 4.2% from 3.9%; YTD margin rose to 4.1% from 3.6%.
Q3 net income included an approximately $80M tax benefit, primarily from releasing valuation allowances on federal and certain state deferred tax assets. The YTD 2015 comparison included $287.5M of net acquisition termination fee income from the canceled Sysco transaction; accordingly, YTD net income fell despite stronger operating income and Adjusted EBITDA. YTD 2016 also included $54M of debt-extinguishment losses, including refinancing costs and the CMBS defeasance.
Liquidity, debt and capital
- Cash was $150M at October 1, 2016, down from $518M at January 2, 2016. Total debt was $3.831B, versus $4.733B at year-end 2015; $75M was current and $3.756B long-term.
- USF had $929M of aggregate available capacity under its ABL and receivables facilities, subject to borrowing-base availability. The company reported compliance with debt agreements.
- June 2016 refinancing and the IPO-funded redemption of senior notes extended major maturities to 2023 and 2024 and reduced borrowing costs. The company also defeased a $472M CMBS facility using $485M of U.S. government securities; repayment is scheduled for February 2017.
- YTD operating cash flow was $440M. Investing outflows were $681M, including the $485M securities purchase, acquisitions and capital spending. Financing outflows were $126M, including the $666M one-time shareholder distribution, offset partly by IPO and debt proceeds.
- Management expected 2016 capital additions of $260M–$280M, including about $80M in fleet capital leases, and believed cash generation and available financing would cover needs and debt service for the next 12 months.
Outlook, commentary and risks
- Management expected continued foodservice demand growth and high competition, with deflation continuing through the balance of 2016 and potentially into early 2017. It cited independent restaurant growth, acquisitions, customer mix and merchandising initiatives as supports to margins.
- A corporate and administrative cost-reduction program launched in October was expected to incur employee separation costs in Q4, with savings anticipated over the following 12–18 months. Field procurement centralization was expected to be completed during 2017.
- Management identified risks including substantial debt and floating interest rates, commodity and fuel price volatility, competition, supplier and customer relationships, labor availability and disputes, pension liabilities, acquisitions, litigation, food safety, weather and cybersecurity. A 1% rate change on floating-rate debt was estimated to change annual interest expense by about $29M. A 10% unfavorable diesel-price move on uncommitted volumes could add approximately $8M of fuel cost.
- Labor disruptions occurred at several facilities; management said contingency measures limited their material impact. Five labor agreements covering approximately 850 employees were up for renegotiation during the remainder of 2016.
- YTD restructuring included costs tied to field reorganization, procurement centralization and the Baltimore facility closure. Estimated multiemployer pension withdrawal liability was $50M for Baltimore and could differ materially from the estimate.
- Subsequent to quarter-end, the company acquired Jeraci Food Distributors and Save on Seafood, with combined annual sales of approximately $100M.
Most important facts for investors to verify
- Whether case-volume growth and independent restaurant momentum continue to offset deflation, mix changes and planned national-chain exits.
- How sustainable operating-margin and Adjusted EBITDA gains are, including the effect of excluded restructuring, transformation and other costs.
- Whether the approximately $80M tax benefit is nonrecurring and how future tax results compare after the valuation-allowance release.
- Debt reduction, borrowing-base availability, floating-rate exposure and compliance with restrictive covenants; also assess the liquidity effect of the special distribution and defeasance.
- Actual 2016 capital additions, cost-saving realization, acquisition integration, and final pension withdrawal costs associated with facility closures.
- Potential sponsor share sales: sponsors held approximately 75.5% of common stock, with IPO-related lock-up restrictions expected to expire 180 days after the IPO unless waived.