US Foods Holding Corp. — Q3 2023 Form 10-Q
Reporting period: The 13 weeks ended September 30, 2023; year-to-date figures cover 39 weeks. Comparisons are against the corresponding periods ended October 1, 2022. US Foods distributes food and related products to foodservice customers across the U.S. and reports one business segment.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Net sales | $9.106B | $8.917B | $26.661B | $25.542B |
| Gross profit / margin | $1.542B / 16.9% | $1.460B / 16.4% | $4.558B / 17.1% | $4.038B / 15.8% |
| Operating income / margin | $230M / 2.5% | $214M / 2.4% | $739M / 2.8% | $398M / 1.6% |
| Net income | $95M | $109M | $359M | $172M |
| Diluted EPS | $0.38 | $0.43 | $1.43 | $0.64 |
| Adjusted EBITDA (non-GAAP) | $402M | $351M | $1.171B | $960M |
| Operating cash flow | $282M | $354M | $935M | $613M |
| Free cash flow (non-GAAP) | $223M | $296M | $768M | $412M |
Q3 sales rose 2.1%; reported total case volume increased 4.0%, while food-cost deflation of 1.3% partly offset volume growth. Independent restaurant case volume grew 5.8%; chain volume declined 3.6%. Year-to-date sales rose 4.4%, reflecting 4.0% total case growth and 0.6% food-cost inflation.
Q3 net income declined despite higher sales and operating income, with interest expense up $16M year over year and a $21M loss on debt extinguishment. Year-to-date operating income and net income increased substantially. Q3 operating expenses rose 5.3% and increased to 14.4% of sales from 14.0%; year-to-date expenses rose 4.9% and were 14.3% of sales, unchanged year over year.
Balance sheet, liquidity and capital allocation
- At September 30, 2023, cash was $346M; total debt was $4.686B, including $472M of financing lease obligations. Current and long-term debt were $112M and $4.574B, respectively.
- Management reported approximately $2.2B of cash and available liquidity. The $2.3B ABL facility had no borrowings, $487M of letters of credit, and $1.813B of available capacity.
- Operating cash flow increased year to date to $935M from $613M. Cash capital expenditures were $167M year to date. Management expects fiscal 2023 cash capital expenditures of $290M–$310M, excluding approximately $120M of fleet expenditures under financing leases.
- US Foods refinanced its $1B 6.25% secured notes due 2025 with $500M of 6.875% unsecured notes due 2028, $500M of 7.25% unsecured notes due 2032, and cash on hand. The redemption generated a $21M extinguishment loss, including a $16M premium and $5M of deferred financing costs written off.
- Approximately 30% of debt bore floating rates after considering $450M of interest-rate caps. Management estimates a 1% rate change would affect annual interest expense by approximately $20M. The 2021 term loan margin was reduced in an August amendment.
- The company repurchased $229M of shares year to date; approximately $257M remained under the $500M authorization at quarter-end. The Series A preferred stock was fully converted by May 2023.
Material changes, outlook and risks
- Gross profit rose 5.6% in Q3 and 12.9% year to date. Management cited case growth, cost-of-goods-sold optimization, and, year to date, improved inbound logistics and pricing. The Q3 LIFO expense was $37M versus $6M a year earlier; year-to-date LIFO expense was $42M versus $143M.
- Adjusted EBITDA, a non-GAAP measure, increased 14.5% in Q3 and 22.0% year to date. Adjusted EBITDA margin was 4.4% in both 2023 periods, versus 3.9% and 3.8%, respectively. These measures are not substitutes for GAAP results.
- Renzi Foodservice was acquired for $142M in July, expanding coverage in central upstate New York. The acquisition added $60M of goodwill and $57M of intangible assets; it did not materially affect reported results or financial position.
- The company recorded $20M of year-to-date doubtful-account provision and $31M of customer write-offs, including a Q3 $17M one-time write-off related primarily to a large national customer whose receivable had previously been reserved.
- Management expects operating cash, borrowing capacity and other financing arrangements to meet debt service, working-capital and capital-investment needs for the next 12 months. The filing provides capital-expenditure expectations but no clear full-year sales, earnings or EBITDA guidance.
- Management cited inflation, supply-chain disruption and labor shortages as ongoing uncertainties. Other key exposures include customer demand and away-from-home food consumption, commodity and fuel prices, interest rates and leverage, supplier interruptions, labor costs, competition, cybersecurity, weather events, litigation and regulatory changes. A 10% unfavorable diesel-price move on uncommitted volumes was estimated to add approximately $4M of fuel cost through December 2023.
- Purchase orders and purchase-contract commitments totaled $896M for the remainder of fiscal 2023; IT commitments totaled $30M through September 2025. Management said pending legal matters were not expected to have a material adverse effect, while noting outcomes and potential excess expenditures cannot be reasonably estimated. Disclosure controls were concluded effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether continued case-volume growth, especially in independent restaurants, offsets food-cost deflation and weaker chain volume.
- How much margin improvement reflects durable operating efficiencies versus LIFO effects, pricing and freight optimization.
- The cost and risk implications of refinancing into higher-coupon unsecured notes, floating-rate exposure, and debt maturities.
- Whether forecast capital spending, working-capital needs, share repurchases and acquisition spending remain supportable by cash generation.
- The collection and customer-concentration implications of the large national-customer receivable write-off, along with developments in legal contingencies.