US Foods Holding Corp. — Q2 2022 Form 10-Q
Business and period: US Foods distributes food and related products to foodservice customers across the U.S. The filing covers the 13 and 26 weeks ended July 2, 2022, compared with the periods ended July 3, 2021. Dollar amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $8,827 | $7,663 | $16,625 | $13,958 |
| Gross profit / margin | $1,383 / 15.7% | $1,169 / 15.3% | $2,578 / 15.5% | $2,172 / 15.6% |
| Operating income / margin | $150 / 1.7% | $124 / 1.6% | $184 / 1.1% | $152 / 1.1% |
| Net income | $70 | $55 | $63 | $31 |
| Net income available to common shareholders | $61 | $46 | $45 | $7 |
| Diluted EPS | $0.27 | $0.20 | $0.20 | $0.03 |
| Adjusted EBITDA / margin | $368 / 4.2% | $332 / 4.3% | $609 / 3.7% | $504 / 3.6% |
| Operating cash flow | $101 | $74 | $259 | $250 |
| Capital expenditures | $71 | $61 | $143 | $107 |
| Free cash flow | $30 | $13 | $116 | $143 |
Financial position and liquidity
- At July 2, 2022, cash and cash equivalents were $197; total debt was $5,020, including $108 current and $4,912 long-term. Approximately 46% of debt carried floating rates.
- The ABL facility had no borrowings, $248 of letters of credit outstanding and $1,742 of available capacity. The company reported approximately $1.9 billion of cash and available liquidity.
- First-half operating cash flow was $259. Receivables and inventory increased by $363 and $107, respectively, while accounts payable and cash overdraft liability increased by $450.
- Management said cash from operations and borrowing capacity should be adequate for debt service, operations, working capital and capital spending over the next 12 months.
Changes and management commentary
- Q2 sales rose 15.2%, while total case volume declined 0.4%; independent restaurant case volume increased 0.3%. First-half sales increased 19.1%, total case volume rose 1.7%, and independent restaurant volume grew 4.3%.
- Management attributed sales growth largely to food-cost inflation: approximately 15.0% in Q2 and 16.1% in the first half. It cited pricing optimization, improved inbound logistics and cost-of-goods-sold optimization as contributors to gross profit growth.
- Q2 gross margin improved year over year, but first-half gross margin edged down. LIFO expense was $65 in Q2 and $137 in the first half, versus $97 and $118 in the comparable 2021 periods.
- Operating expenses increased with distribution costs, higher wages and turnover. Cost savings initiatives included routing improvements, warehouse selection technology and process changes. Q2 Adjusted EBITDA increased, but its margin declined to 4.2% from 4.3%.
- First-half free cash flow declined to $116 from $143, despite higher operating cash flow, as capital expenditures increased to $143 from $107.
Outlook, risks and unusual items
- Capital spending outlook: The company expected fiscal 2022 cash capital expenditures of $280–$300, excluding approximately $110 of capital expenditures under fleet financing leases. The filing provides no specific revenue or earnings guidance.
- Operating risks: Management cited elevated inflation, supply-chain disruption, labor shortages and continuing COVID-19 effects, with uncertainty over their ongoing impact. Other disclosed risks include food and fuel cost volatility, customer demand, competition, supplier dependence, interest rates, cybersecurity and regulation.
- Interest-rate exposure: A hypothetical 1% rate change was estimated to change annual interest expense on floating-rate debt by approximately $24. The company had no interest-rate swaps outstanding; it also noted LIBOR’s scheduled discontinuation and uncertainty around replacement rates.
- Fuel exposure: A hypothetical 10% unfavorable diesel-price change was estimated to add approximately $26 of fuel cost on uncommitted volumes through November 2023. Forward purchases covered about 15% of projected diesel needs over that period.
- Notable expenses and adjustments: Q2 operating expenses included contested proxy-related legal and consulting costs and CEO severance. Adjusted EBITDA adds back specified items, including LIFO adjustments and business transformation costs; it is a non-GAAP measure. The first-half comparison also included a $23 debt-extinguishment loss in 2021.
- Contingencies: The company is involved in ordinary-course legal proceedings; it said current expected outcomes were not believed to have a material adverse effect, but adverse outcomes could exceed recorded provisions and amounts may not be reasonably estimable. It disclosed $1,758 of purchase commitments for the rest of fiscal 2022.
- The filing reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It reported no material changes to the principal risk factors from its 2021 Form 10-K.
Important facts for investors to verify
- Whether sales growth and margins can hold as food-cost inflation changes, and how much growth comes from volume versus pricing.
- Whether labor, distribution and other operating-cost pressures ease, and whether the cited efficiency initiatives deliver savings.
- Debt servicing capacity and exposure to floating rates, including the transition from LIBOR and the 2024 ABL maturity.
- Working-capital movements, capital spending and the decline in first-half free cash flow.
- The nature and continuing cost of proxy-related matters and CEO transition/severance, alongside litigation developments.
- The assumptions and exclusions behind Adjusted EBITDA, adjusted net income and free cash flow; these non-GAAP measures are not substitutes for GAAP results.