US Foods Holding Corp. — Q2 2023 Form 10-Q
Reporting period: 13 weeks ended July 1, 2023; comparisons are with the 13 weeks ended July 2, 2022. The filing also reports year-to-date results for the 26 weeks ended those dates. US Foods distributes food and related products to U.S. foodservice customers and reports one business segment.
Financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $9.013B | $8.827B | $17.555B | $16.625B |
| Gross profit / margin | $1.591B / 17.7% | $1.383B / 15.7% | $3.016B / 17.2% | $2.578B / 15.5% |
| Operating income / margin | $322M / 3.6% | $150M / 1.7% | $509M / 2.9% | $184M / 1.1% |
| Net income | $182M | $70M | $264M | $63M |
| Diluted EPS | $0.73 | $0.27 | $1.05 | $0.20 |
| Adjusted EBITDA | $432M | $368M | $769M | $609M |
| Operating cash flow | $374M | $101M | $653M | $259M |
| Free cash flow | $327M | $30M | $545M | $116M |
Adjusted EBITDA and free cash flow are company-defined non-GAAP measures; the filing cautions that they are not substitutes for GAAP measures and may not be comparable across companies.
Business trends and period-over-period changes
- Q2 net sales rose 2.1%; total case volume increased 2.7%, including independent restaurant growth of 4.8%. First-half sales rose 5.6% and case volume increased 4.0%.
- Growth in independent restaurants, hospitality and healthcare was partly offset by lower chain volume: down 4.5% in Q2 and 2.9% year to date. Food costs were down 0.3% in Q2 but up 1.6% for the first half.
- Management attributed gross-profit improvement to higher volume, cost-of-goods-sold optimization, improved inbound freight, pricing and favorable year-over-year LIFO comparisons. Q2 included a $15M LIFO benefit versus $65M of LIFO expense in the prior-year quarter. First-half 2023 included $5M of LIFO expense versus $137M a year earlier.
- Operating expenses increased 2.9% in Q2 and 4.7% year to date, mainly from higher volume and compensation costs; lower fuel costs and cost-saving efforts partly offset the increases. Expenses were 14.1% of sales in Q2 versus 14.0%, and 14.3% for the first half versus 14.4%.
- Interest expense rose to $82M in Q2 and $163M year to date, primarily because of higher interest rates, partly offset by lower debt. Q2 diluted EPS also reflects the preferred-stock conversion and resulting share count.
Cash, debt and capital allocation
- At July 1, 2023, cash and cash equivalents were $379M and total debt was $4.751B, including $472M of financing lease obligations. Approximately 31% of debt bore floating interest rates after considering rate caps.
- The company reported approximately $2.2B of cash and available liquidity, including $1.829B of remaining ABL capacity; it had no ABL borrowings and $471M of letters of credit outstanding. Management said available liquidity and operating cash generation should cover obligations and needs for the next 12 months.
- First-half capital expenditures were $108M. Fiscal 2023 cash capital expenditures are expected to be $290M–$310M, excluding approximately $120M of fleet capital expenditures under financing leases.
- First-half financing cash outflow included $125M of voluntary term-loan prepayments and $200M of common-stock repurchases. The repurchase authorization had approximately $286M remaining at period-end.
- In April, USF entered into two interest-rate caps covering $450M of term loans through April 2025. In June, it amended its term-loan agreement to replace LIBOR-based pricing with SOFR-based pricing. A hypothetical 1% rate change was estimated to alter annual interest expense on floating-rate debt by approximately $21M.
Outlook, risks and unusual items
- No specific revenue, earnings or case-volume guidance is provided. Management cited ongoing exposure to inflation, supply-chain disruption and labor shortages, and said the effects on operations and customer buying patterns remain uncertain.
- CHEF’STORE system-conversion challenges weighed on independent case growth by 0.7 percentage points in Q2 and 0.9 points year to date; management said the issues were largely resolved.
- Fuel-price sensitivity remains relevant: the company said customer surcharges typically offset approximately 40% of fuel-cost increases. Fuel commitments covered about 26% of projected needs through December 2023; a hypothetical 10% unfavorable diesel-price change on uncommitted volumes could add approximately $7M in fuel costs through that month.
- Purchase orders and purchase-contract commitments for the remainder of fiscal 2023 totaled $1.712B and were not recorded as liabilities on the balance sheet. Legal proceedings arise in the ordinary course; management believed their ultimate outcome would not materially adversely affect the company, while noting some outcomes or settlements could exceed recorded provisions.
- On July 7, 2023, after quarter-end, the company completed the $143M Renzi Foodservice asset acquisition, funded with cash, to expand in central upstate New York.
- KKR converted its remaining Series A preferred stock in May and completed a secondary offering; US Foods repurchased $150M of common stock in connection with the transaction. KKR relinquished its board seat and ceased to be a related party.
Investor verification points
- Assess how much of the improvement in gross profit and earnings came from operating progress versus LIFO comparisons and other adjusted-EBITDA exclusions.
- Track case-volume trends, particularly chain customers, independent restaurants and CHEF’STORE following its system conversion.
- Monitor floating-rate exposure, refinancing needs—including the 2025 secured notes—and the effects of SOFR and higher interest rates on interest expense.
- Review cash conversion, planned capital spending, debt prepayments and repurchases alongside the company’s leverage and available liquidity.
- Follow integration and performance of the Renzi acquisition, and any developments in legal contingencies or purchase commitments.