US Foods Holding Corp. — Q1 2020 Form 10-Q
Reporting period: 13 weeks ended March 28, 2020. US Foods distributes food and related products to foodservice customers across the U.S. and reports as one business segment. Fiscal 2020 is a 53-week year.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $6.339 billion | $6.031 billion |
| Gross profit / margin | $1.066 billion / 16.8% | $1.052 billion / 17.4% |
| Operating income (loss) | $(126) million / (2.0)% | $131 million / 2.2% |
| Net income (loss) | $(132) million; $(0.60) per diluted share | $71 million; $0.32 per diluted share |
| Adjusted EBITDA (non-GAAP) | $177 million; 2.8% of sales | $232 million; 3.8% of sales |
| Operating cash flow | $(62) million | $154 million |
| Capital expenditures / free cash flow (non-GAAP) | $79 million / $(141) million | $61 million / $93 million |
Sales grew 5.1%, supported by $654 million of Food Group sales following its September 2019 acquisition, higher product prices and a 3.4% increase in total case volume. Organic case volume declined 7.3%; organic independent-restaurant case volume fell 7.4%. Independent-restaurant case volume increased 0.5% including acquired volume. Gross profit rose 1.3%, but its share of sales declined 0.6 percentage points.
Operating expenses increased 29.4% to $1.192 billion. The increase included a $170 million higher provision for doubtful accounts related to COVID-19, $108 million of Food Group expenses, and higher acquisition and integration costs. A $13 million LIFO benefit supported gross profit, compared with a $2 million benefit a year earlier. Interest expense rose $10 million to $52 million, primarily due to acquisition financing.
Cash, debt and liquidity
At March 28, 2020, cash and cash equivalents were $1.077 billion and total debt was $5.915 billion, including $146 million current. Debt increased from $4.736 billion at December 28, 2019. Approximately 71% of debt bore floating interest rates after swaps. The company reported $478 million of ABL availability and $23 million of ABS availability at quarter-end; it had $700 million drawn under the ABL and $640 million under the ABS facility.
Operating cash use was $62 million, versus $154 million provided in the prior-year quarter, reflecting weaker results and working-capital effects. Financing provided $1.123 billion, including $1 billion of incremental ABL and ABS borrowings to preserve flexibility amid uncertainty. Management said it believed liquidity would cover operations and ordinary-course obligations through 2021 under a severe volume scenario, but cautioned that this was not assured.
COVID-19, outlook and material developments
- Restaurant, hospitality and education customers were significantly disrupted beginning in mid-March. Case volume in the final week of the quarter was down about 50% year over year; the company reported roughly 50% declines in both sales and case volume in the first five weeks of Q2.
- Management expected Q2 performance to be affected more severely than Q1, since the disruption would affect the full quarter. It could not predict the pandemic’s duration or ultimate financial effect and provided no specific earnings guidance.
- Actions included adding retail partnerships, furloughs and compensation reductions, aligning staffing and variable costs with volumes, extending vendor terms, and limiting capital spending. The company also supported customers with delivery/carryout resources and repayment plans.
- On April 24, 2020, the company completed the $970 million Smart Foodservice acquisition, financed partly with a new $700 million term loan. It subsequently issued $1 billion of 6.25% secured notes, repaid $400 million of the new term loan, repaid and terminated the ABS facility using $542 million of cash, and increased ABL commitments from $1.6 billion to $1.99 billion.
- A $500 million Series A convertible preferred investment by KKR, carrying a 7% cumulative dividend (which increases to 10% if dividends are not paid), was expected to close in May 2020, subject to customary conditions.
Risks include prolonged reductions in away-from-home food demand, customer credit losses and receivable collectability, reduced borrowing-base capacity, constrained debt-incurrence capacity, credit-rating downgrades and capital-market access. A 1% rate change was estimated to affect annual interest expense by about $42 million. The filing also disclosed purchase and fuel commitments and ordinary-course legal proceedings; management said it did not expect the proceedings’ ultimate resolution to materially affect the company, though excess expenditures could not be reasonably estimated.
Important facts for investors to verify
- Whether post-quarter sales and case-volume trends improved from the approximately 50% year-over-year declines reported for early Q2.
- Customer receivable quality, allowance adequacy and the effect of credit losses on cash flow and ABL borrowing capacity.
- Liquidity, debt levels, covenant headroom and the completion and terms of the preferred-stock financing.
- Smart Foodservice integration results, purchase accounting and any effect on margins, leverage or cash generation.
- Whether cost reductions and capital-spending limits can offset lower volumes without impairing service or future operations.