US Foods Holding Corp. — Q2 2020 Form 10-Q
Reporting period: 13 weeks ended June 27, 2020; comparisons are with the 13 weeks ended June 29, 2019. Six-month figures are for the 26 weeks ended on those dates. Dollar amounts are in millions unless noted.
Business context
US Foods distributes food and related products to foodservice customers across the U.S. COVID-19 restrictions and reduced demand for meals prepared away from home significantly disrupted restaurant, hospitality and education customers. The company operates as one reportable segment.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $4,560 | $6,443 | $10,899 | $12,474 |
| Gross profit | $671 | $1,142 | $1,737 | $2,194 |
| Operating income (loss) | $(59) | $194 | $(185) | $325 |
| Net income (loss) | $(92) | $116 | $(224) | $187 |
| Adjusted EBITDA | $88 | $320 | $265 | $552 |
| Adjusted EBITDA margin | 1.9% | 5.0% | 2.4% | 4.4% |
- Q2 sales fell 29.2%; total case volume declined 28.0%, and independent restaurant case volume fell 32.1%. For the first half, sales and case volume each decreased 12.6%.
- Gross margin was 14.7% in Q2 versus 17.7% a year earlier; first-half gross margin was 15.9% versus 17.6%. Q2 diluted loss per share was $0.44; first-half diluted loss per share was $1.05.
- Q2 gross profit was pressured by lower volume, $40 million of COVID-related product donations and inventory adjustments, and unfavorable LIFO effects. Cost reductions and lower volume helped reduce Q2 operating expenses, but operating expenses rose as a share of sales.
- First-half GAAP operating cash flow was $770 million versus $394 million; capital expenditures were $131 million, leaving reported free cash flow of $639 million versus $284 million. Higher cash flow reflected working-capital changes, including reduced inventories, vendor payment-term extensions and collection efforts, despite the net loss.
Liquidity, debt and significant transactions
- Cash and cash equivalents were $1,668 million at June 27, 2020, compared with $90 million at December 28, 2019. Total debt was $6,214 million, including current debt of $149 million; long-term debt was $6,065 million.
- The amended ABL facility had $1,990 million of commitments, $400 million of borrowings and $252 million of letters of credit outstanding; reported available capacity was $1,275 million.
- Approximately 58% of debt bore floating interest rates after swaps. Management estimated a one-percentage-point rate change would affect annual interest expense by about $36 million.
- US Foods acquired Smart Foodservice for $973 million net of cash acquired on April 24, adding 70 cash-and-carry stores. The acquisition contributed $208 million of sales and $11 million of net income during the period it was included. The preliminary allocation included $898 million of goodwill.
- Financing actions included a $1.0 billion 6.25% secured-notes offering due 2025, a $700 million incremental term loan (of which $400 million was repaid with note proceeds), an increase in ABL commitments, repayment and termination of the $542 million ABS facility, and a $500 million Series A preferred-stock investment by KKR.
- The preferred stock carries a cumulative 7% annual dividend, initially payable in additional preferred shares, and is convertible at an initial $21.50 per common share. KKR would own about 9.5% of common shares on an as-converted basis and may designate one director.
Outlook, risks and unusual items
- Management gave no specific earnings or sales guidance. It expected COVID-19 to continue materially affecting results and said recovery timing and severity were uncertain. Management believed liquidity would fund operations and ordinary-course obligations through 2021 under a severe case-volume scenario, while cautioning that this was not assured.
- Management cited long-term opportunity from a fragmented industry and expected volumes to improve over time as restrictions ease and customer demand recovers. It also described customer support initiatives, vendor-term extensions, cost reductions, sales-force reductions and limits on nonessential capital spending.
- COVID-related allowance changes were substantial: the company added $170 million to doubtful-account reserves in Q1 and reversed $75 million in Q2 following better-than-expected collections. The allowance ended the period at $120 million. The reported first-half provision for doubtful accounts was $106 million.
- Other notable items included $16 million of Q2 restructuring costs, $40 million of Q2 product donations and inventory adjustments, and acquisition/integration costs. These contributed to differences between GAAP and company-defined adjusted results.
- Key risks include continued restaurant and hospitality weakness, customer credit and receivable collectability, reduced ABL borrowing-base availability, constrained debt-incurrence capacity, credit-rating downgrades and capital-market access. Other risks include variable-rate debt, fuel prices, supplier disruption, labor, litigation and debt covenants. Legal proceedings were described as ordinary-course matters; the company said resolution was not expected to materially harm results, while noting potential exposure beyond recorded provisions.
Important facts for investors to verify
- Whether restaurant, hospitality and education case volumes and customer collections recover, and how that affects sales, margins and bad-debt reserves.
- Whether working-capital-driven cash generation is sustainable; distinguish first-half operating cash flow of $770 million from Q2 cash flow and from non-GAAP free cash flow.
- Debt maturities, floating-rate exposure, ABL availability and covenant capacity under continued weak operating conditions.
- Final Smart Foodservice purchase-price allocation, integration costs and realization of anticipated benefits.
- The preferred stock’s dividend accumulation, conversion and governance terms, including potential dilution and KKR’s influence.