US Foods Holding Corp. — Q2 2017 Form 10-Q
Business and period: US Foods distributes food and related products to foodservice customers across the U.S. The quarter was the 13 weeks ended July 1, 2017; year-to-date figures cover 26 weeks. Comparisons are with the periods ended July 2, 2016.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | 26 weeks 2017 | 26 weeks 2016 |
|---|---|---|---|---|
| Net sales | $6.159B | $5.807B | $11.947B | $11.400B |
| Gross profit; gross margin | $1.054B; 17.1% | $1.034B; 17.8% | $2.045B; 17.1% | $1.994B; 17.5% |
| Operating income; margin | $126M; 2.0% | $98M; 1.7% | $202M; 1.7% | $183M; 1.6% |
| Net income (loss) | $65M | $(13)M | $92M | $(0.1)M |
| Diluted EPS | $0.29 | $(0.07) | $0.41 | — |
| Adjusted EBITDA (non-GAAP) | $286M | $260M | $501M | $463M |
Sales rose 6.1% in Q2 and 4.8% year to date. Case volume increased 3.6% and 4.0%, respectively; acquisitions contributed approximately $103M of Q2 sales and $178M year to date. Independent restaurant case volume grew 4.7% in Q2 and 4.3% year to date. Management attributed sales growth to volume, acquisitions, and inflation-related higher prices.
Gross margin declined 0.7 percentage points in Q2 and 0.4 points year to date, primarily reflecting LIFO expense amid 2017 product inflation versus LIFO benefits during 2016 deflation. LIFO adjustments increased cost of goods sold by $30M in Q2 and $40M year to date, compared with benefits of $7M and $18M in the prior-year periods. Operating income improved, with lower restructuring costs and the absence of 2016 Sponsor fees and debt-extinguishment charges contributing to comparisons.
Cash and debt: Cash was $150M at July 1, 2017, versus $131M at December 31, 2016. For the first half, operating cash flow was $368M (prior year $301M); capital expenditures were $108M (prior year $67M), and free cash flow, a non-GAAP measure, was $260M (prior year $234M). Investing used $219M, including approximately $135M for acquisitions; financing used $131M.
Total debt was $3.727B, including $104M current debt; long-term debt was $3.623B. The company reported $922M available under its ABL facility and $110M under its receivables facility, or $1.032B in aggregate borrowing availability. It was in compliance with debt covenants. Current assets were $3.022B and current liabilities $2.213B. Approximately $2.786B of debt was floating-rate at quarter-end; management estimated a 1 percentage-point rate change would affect annual interest expense by about $28M, before subsequent swaps.
Changes, outlook, and material items
- Management expected positive 2017 foodservice-industry growth, continued competition and year-over-year inflation. It expected independent restaurant sales mix, acquisitions, sourcing initiatives, and operational improvements to support growth and margins; no specific revenue or earnings guidance was provided.
- Management expected 2017 capital additions of $330M–$350M, including about $100M in fleet capital leases, funded primarily from cash and operating cash flow. It intended to restructure or refinance the receivables facility, which matures September 30, 2018, on or before September 30, 2017.
- On August 1, 2017, after quarter-end, the company entered into interest-rate swaps covering $1.1B of term-loan principal, declining to $825M in the fourth year. The swaps set a 4.47% aggregate rate on the covered amount and reduce reported floating-rate exposure prospectively.
- On July 28, 2017, the company acquired three distributors with approximately $130M in combined annual sales, funded with operating cash flow.
- A voluntary pension lump-sum settlement offer was expected to result in approximately $100M of payments from plan assets and about $30M of noncash settlement charges in fiscal 2017, including approximately $25M in Q4. The company said required 2017 pension contributions were funded.
- Risks highlighted include substantial indebtedness and refinancing needs, interest-rate and fuel-price exposure, competition, supplier and customer relationships, food-away-from-home demand, acquisition integration, labor and pension obligations, litigation, regulation, weather, and cybersecurity. Legal proceedings arise in the ordinary course; the company said it did not expect their resolution to materially adversely affect consolidated results, while noting excess expenditures could not be reasonably estimated.
Most important facts for investors to verify
- Whether the receivables facility was refinanced or restructured as intended, and on what terms.
- Whether case-volume growth and the higher independent-restaurant mix continue, and whether margin pressure from LIFO and inflation moderates.
- Actual capital spending, acquisition integration and returns, and the cash-flow impact of working-capital movements.
- The effect of the interest-rate swaps on future interest expense and remaining floating-rate exposure.
- The timing and accounting impact of the pension settlements, and progress on the expected $30M fiscal-2017 charges.
- Non-GAAP measures such as Adjusted EBITDA and free cash flow alongside GAAP results; their definitions and adjustments differ from GAAP measures.