US Foods Holding Corp. — Q2 2019 Form 10-Q
Reporting period: The quarter was the 13 weeks ended June 29, 2019; year-to-date results cover 26 weeks. US Foods distributes food and related products to foodservice customers across the United States and reports as one business segment.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $6,443 million | $6,158 million | $12,474 million | $11,981 million |
| Gross profit | $1,142 million | $1,114 million | $2,194 million | $2,106 million |
| Operating income | $194 million | $206 million | $325 million | $309 million |
| Net income | $116 million | $126 million | $187 million | $193 million |
| Diluted EPS | $0.53 | $0.58 | $0.85 | $0.89 |
| Adjusted EBITDA (non-GAAP) | $320 million | $300 million | $552 million | $523 million |
| Operating cash flow | $240 million | $119 million | $394 million | $311 million |
| Free cash flow (non-GAAP) | $191 million | $59 million | $284 million | $194 million |
Q2 gross margin was 17.7% versus 18.1%; operating margin was 3.0% versus 3.3%; net margin was 1.8% versus 2.0%. First-half gross margin was 17.6% in both years, and operating margin was 2.6% in both years. Adjusted EBITDA margin was 5.0% for Q2 and 4.4% for the first half, compared with 4.9% and 4.4%, respectively.
Material changes and management commentary
- Q2 sales rose 4.6%, reflecting 1.7% case-volume growth and a 2.9% increase in sales rate per case, primarily from inflation in grocery, poultry and produce. Independent restaurant case growth was 4.8%. First-half sales rose 4.1%, with total case volume up 1.6% and independent restaurant case growth of 5.2%.
- Q2 gross profit increased, but margin declined amid unfavorable LIFO effects: LIFO was a $14 million expense versus an $11 million benefit in the prior-year quarter. First-half LIFO expense was $12 million versus $8 million.
- Operating expenses rose 4.4% in Q2, including higher wages, acquisition-related costs and depreciation; expense-control initiatives partly offset these increases. First-half expenses rose 4.0%, also reflecting higher distribution-related costs.
- Net income declined in both comparison periods. Management cited the factors above; the first-half tax provision was $58 million versus $31 million, while prior-year results included significant discrete tax benefits. Interest expense declined as lower debt levels more than offset higher benchmark rates.
- First-half operating cash flow improved by $83 million, primarily because the prior year included $70 million of defined-benefit pension contributions that did not recur. Capital expenditures were $110 million versus $117 million.
- Management’s stated fiscal 2019 outlook remains the outlook presented in the 2018 Annual Report; this filing gives no updated numerical guidance. The company says it will continue growth, customer differentiation and operational-improvement initiatives.
Balance sheet, liquidity and financing
- At June 29, cash was $96 million; total assets were $9.339 billion and shareholders’ equity was $3.435 billion. Accounts receivable were $1.391 billion and accounts payable were $1.535 billion.
- Total debt was $3.205 billion, down from $3.457 billion at December 29, 2018. This includes $2.129 billion under the term loan, $595 million of senior notes, and $363 million of financing lease obligations. Approximately 47% of debt was floating-rate after giving effect to swaps.
- Available borrowing capacity was $970 million under the ABL facility and $665 million under the receivables-backed ABS facility. The company reported covenant compliance and said liquidity sources should cover operating needs, debt service and capital expenditures for the next 12 months.
- The ABL facility was refinanced in May 2019, with $1.4 billion of commitments and up to $300 million of additional commitments subject to conditions, including the contemplated SGA acquisition. The facility matures in 2024, subject to a springing-maturity provision.
- Fiscal 2019 capital additions are expected to be $335–$345 million, including approximately $75 million in fleet financing leases. The company reported $783 million of purchase orders and purchase-contract commitments for the remainder of fiscal 2019, plus $60 million of IT commitments through May 2024.
Outlook, risks and contingencies
- The proposed $1.8 billion cash acquisition of SGA’s Food Group remained subject to customary conditions, including regulatory approvals. US Foods had a commitment for a $1.5 billion senior secured term loan to fund a substantial portion of the purchase price.
- Interest-rate sensitivity: a 1% change in applicable rates was estimated to change annual interest expense by approximately $15 million. Diesel commitments covered approximately 55% of projected fuel needs for contracted periods; a 10% unfavorable price change on uncommitted volumes was estimated to add approximately $11 million through December 2020.
- Legal proceedings arise in the ordinary course. The company believes their resolution will not materially adversely affect consolidated results, but notes that expenditures could exceed established provisions and cannot be reasonably estimated.
- Other disclosed risks include commodity and fuel volatility, competition, supplier and customer relationships, labor costs, acquisition integration, cost-saving execution, economic conditions, regulation, litigation, cybersecurity, pension obligations and indebtedness. The filing reports no material change to the principal risks in the 2018 Annual Report.
- Disclosure controls were assessed as effective at period end; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether the SGA transaction closed, received approvals and was financed on the contemplated terms.
- Whether sales growth and independent restaurant case growth persist, and whether inflation and LIFO effects support or pressure gross margins.
- Whether operating-cost growth, particularly wages, depreciation and distribution costs, remains controlled relative to sales growth.
- Whether operating cash flow and free cash flow are sustainable apart from the comparison benefit of the prior-year pension contribution.
- Debt reduction, floating-rate exposure, borrowing availability and compliance with debt covenants, including any springing-maturity implications.
- Progress against the annual capital-additions outlook and the company’s stated fiscal 2019 outlook in its 2018 Annual Report.