US Foods Holding Corp. — Q2 2021 Form 10-Q
Reporting period: The 13 weeks ended July 3, 2021; year-to-date figures cover 26 weeks. Comparisons are with the corresponding 2020 periods, when COVID-19 restrictions sharply reduced foodservice demand. Amounts are in millions except per-share data.
Business context and results
US Foods distributes food and related products to foodservice customers across the U.S. It reported one operating segment. Management said demand improved as restrictions eased, although case volumes remained below pre-pandemic levels.
- Q2 sales: $7,663, up 68.0%; total case volume rose 53.5% and independent restaurant case volume rose 79.1%. Sales growth also reflected a 14.5% increase in sales rate per case, including 8.2% inflation and favorable product mix.
- Q2 earnings: Gross profit was $1,169, up 74.2%; operating income was $124 versus an operating loss of $59; net income was $55 versus a net loss of $92. Net income available to common shareholders was $46, or $0.21 basic and $0.20 diluted per share, after $9 of preferred dividends.
- Q2 margins: Gross margin was 15.3% versus 14.7%; operating expenses were 13.6% of sales versus 16.0%; operating margin was 1.6% versus negative 1.3%. Adjusted EBITDA was $332, or 4.3% of sales, versus $88, or 1.9%.
- First half: Sales were $13,958, up 28.1%; total case volume increased 22.1%. Operating income was $152 versus an operating loss of $185; net income was $31 versus a net loss of $224. Adjusted EBITDA was $504 versus $265. Gross margin declined to 15.6% from 15.9%, while operating expenses fell to 14.5% of sales from 17.6%.
Cash flow, liquidity and debt
- First-half operating cash flow was $250, down from $770; free cash flow, a non-GAAP measure, was $143 versus $639. Management attributed the operating cash-flow decline primarily to working-capital needs as sales recovered. Q2 operating cash flow was $74 versus $832.
- First-half capital expenditures were $107. Cash and cash equivalents were $699 at July 3, 2021, versus $828 at January 2, 2021. Management reported approximately $2.4 billion of cash and available liquidity and said resources should cover operating needs, debt service and capital expenditures through fiscal 2022.
- Total debt carrying value was $5,515, down from $5,748 at fiscal year-end. The company made $200 of voluntary prepayments on its initial term loan during Q2. Approximately 51% of debt bore floating rates after considering swaps; those swaps expired July 31, 2021. A 1% rate change was estimated to affect annual interest expense by about $28.
- The company issued $900 of 4.75% notes due 2029 and used proceeds and cash on hand to repay its 2024 unsecured notes and 2020 incremental term loan. The refinancing resulted in a first-half $23 debt-extinguishment loss. The $1,990 ABL facility had no borrowings and $1,737 of available capacity after letters of credit at quarter-end.
Material changes, outlook and risks
- Results rebounded from the pandemic-affected comparison period. Recovery-driven volume and higher inflation lifted sales, while supply-chain labor, fuel, repair and maintenance costs increased. LIFO expense rose to $97 in Q2 from $19 and to $118 in the first half from $6, reducing gross-profit benefit from sales growth.
- Management forecast fiscal 2021 cash capital expenditures of $290–$305, excluding approximately $35–$45 of fleet lease capital expenditures. The filing gives no specific earnings or sales guidance.
- Management noted continued recovery uncertainty, product-supply constraints, higher product and logistics costs, labor availability and customer-mix changes. Other cited risks include COVID-19 effects, commodity and fuel volatility, competition, customer and supplier relationships, debt and interest rates, and LIBOR transition. The company said its principal risk factors had not materially changed from its 2020 Form 10-K.
- Purchase orders and purchase-contract commitments totaled $1,481 for the remainder of fiscal 2021; additional commitments included $55 for information technology, $28 for diesel fuel and $5 for electricity. The company is subject to ordinary-course legal proceedings; management did not expect their ultimate outcome to materially adversely affect results, but noted some exposures could exceed recorded provisions and cannot be reasonably estimated.
- Unusual or nonrecurring items included the $23 debt-extinguishment loss, a $13 favorable legal-settlement recovery, and pandemic-related allowance-for-doubtful-accounts movements. Q2 2020 included a $75 reduction in the doubtful-account provision, with no comparable reduction in Q2 2021.
Important facts for investors to verify
- Whether case-volume recovery persists and approaches pre-pandemic levels, particularly for independent restaurants and other customer groups.
- Whether inflation, LIFO charges, product availability, labor and delivery costs affect margins and cash generation in subsequent quarters.
- Working-capital trends and conversion of reported earnings into operating and free cash flow.
- Debt reduction, refinancing needs, floating-rate exposure after the swap expiration, and compliance with debt covenants.
- The assumptions underlying management’s liquidity-through-fiscal-2022 assessment and fiscal 2021 capital-expenditure estimate.
- How reported GAAP results compare with non-GAAP Adjusted EBITDA and free cash flow, including the adjustments excluded from those measures.