US Foods Holding Corp. — Q1 2019 Form 10-Q
Reporting period: 13 weeks ended March 30, 2019; comparison is with the 13 weeks ended March 31, 2018. US Foods distributes food and related products to foodservice customers nationwide and reports one operating segment. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $6,031 | $5,823 |
| Gross profit / margin | $1,052 / 17.4% | $992 / 17.0% |
| Operating income / margin | $131 / 2.2% | $103 / 1.8% |
| Net income | $71 | $67 |
| Diluted earnings per share | $0.32 | $0.31 |
| Adjusted EBITDA / margin | $232 / 3.8% | $224 / 3.8% |
| Operating cash flow | $154 | $192 |
| Capital expenditures | $61 | $57 |
| Free cash flow | $93 | $135 |
Gross margin improved from margin-expansion initiatives, favorable year-over-year LIFO adjustments and lower inbound freight costs. Adjusted EBITDA and free cash flow are non-GAAP measures; the filing provides reconciliations.
Liquidity, debt and balance sheet
- Cash was $92 at March 30, 2019, versus $104 at December 29, 2018. Total debt was $3,381, down from $3,457; long-term debt was $3,275.
- Debt included a $2,134 term loan, $595 senior notes, $270 under the receivables-backed ABS facility, and $373 in financing lease obligations. About 39% of total debt carried floating rates after swaps.
- There were no ABL borrowings; $929 of ABL capacity and $496 of ABS capacity were available. The company reported compliance with debt covenants and believed liquidity sources were adequate for the next 12 months.
- Operating cash flow fell $38 year over year, primarily because of working-capital benefits in the prior-year quarter. Working-capital movements included a $131 increase in receivables, partly offset by higher payables and cash overdraft liabilities.
Changes, outlook and notable items
- Sales rose 3.6%; total case volume increased 1.4%, including 5.5% growth in independent restaurant cases. Sales growth reflected volume and a 2.2% increase in sales rate per case, primarily from inflation. Private brands were approximately 35% of sales versus 34%.
- Operating expenses increased 3.6% to $921, including higher payroll and related costs, acquisition-related costs, and diesel and other distribution costs. The prior-year quarter included $2 of restructuring costs; current-quarter costs were de minimis.
- The 2019 fiscal-year outlook was unchanged from the 2018 Form 10-K; the filing gives no further numerical earnings guidance here. Expected fiscal 2019 capital additions were $335–$345, including approximately $75 of fleet financing leases.
- The proposed $1.8 billion cash acquisition of SGA Food Group remained subject to customary conditions, including regulatory approval. A $1.5 billion term-loan commitment was arranged to fund a substantial portion of the purchase.
- Adoption of lease accounting at fiscal-year start added approximately $100 of net lease assets and liabilities; management said it did not materially affect income or cash flows.
- Key stated risks include food-cost inflation and commodity volatility, competition, supplier and customer relationships, labor and fuel costs, acquisition integration, interest rates, indebtedness, regulation, litigation, weather and cybersecurity. A 1% change in applicable floating rates was estimated to change annual interest expense by about $13; a 10% unfavorable diesel-price change on uncommitted volumes could add about $10 in fuel cost.
- Purchase and purchase-contract commitments for the remainder of fiscal 2019 were $791; additional IT commitments were $73 through September 2023. Legal proceedings arise in the ordinary course; management did not expect their ultimate resolution to materially adversely affect the company, but noted possible expenditures beyond recorded provisions that cannot be reasonably estimated.
Important facts for investors to verify
- Whether the SGA acquisition closes, receives regulatory approval, and is financed on the expected terms; assess resulting leverage and integration risks.
- Whether case growth and gross-margin gains persist, particularly as inflation, LIFO effects and freight costs change.
- Whether operating cash flow recovers and working-capital requirements, especially receivables and payables, remain manageable.
- Debt maturities, borrowing-base availability, covenant restrictions and exposure to floating rates, including the transition away from LIBOR.
- Actual capital spending versus the $335–$345 fiscal 2019 estimate and the scale of purchase commitments, fuel exposure and legal contingencies.