US Foods Holding Corp. — Q3 2020 Form 10-Q
Reporting period: 13 weeks ended September 26, 2020; year-to-date results cover 39 weeks. US Foods distributes food and related products to foodservice customers across the U.S. All amounts are in millions except per-share data and percentages.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Net sales | $5,848 | $6,531 | $16,747 | $19,005 |
| Gross profit | $974 | $1,156 | $2,711 | $3,350 |
| Gross margin | 16.7% | 17.7% | 16.2% | 17.6% |
| Operating income (loss) | $78 | $188 | ($107) | $513 |
| Net income (loss) | $8 | $106 | ($216) | $293 |
| Adjusted EBITDA | $209 | $307 | $474 | $859 |
| Adjusted EBITDA margin | 3.6% | 4.7% | 2.8% | 4.5% |
| Operating cash flow | ($237) | $165 | $533 | $559 |
| Free cash flow | ($260) | $118 | $379 | $402 |
Q3 sales declined 10.5% year over year; total case volume fell 8.9%, while organic case volume fell 22.2%. Independent restaurant case volume declined 6.8% overall and 20.0% organically. YTD sales declined 11.9%, total case volume 11.4%, and organic case volume 23.5%. Acquisition contributions partly offset lower volumes.
Q3 operating expenses declined 7.4% to $896, but rose to 15.3% of sales from 14.8%. Q3 interest expense increased to $63 from $43. YTD interest expense was $178, up from $127. Q3 net income available to common shareholders was a loss of $2 after $10 of preferred dividends; diluted EPS was a loss of $0.01. YTD diluted EPS was a loss of $1.05.
Liquidity, debt and capital
- Cash and cash equivalents were $1,019 at September 26, 2020, versus $90 at December 28, 2019. Current assets were $3,805 and current liabilities $2,372.
- Total debt carrying value was $5,787, versus $4,736 at year-end 2019. Approximately 57% of debt bore floating rates after swaps; a hypothetical 1% rate change would affect annual interest expense by about $33.
- The amended ABL facility had $1,990 of commitments, $274 of letters of credit outstanding and $1,716 of available capacity. No ABL borrowings were outstanding at quarter-end.
- US Foods issued $1,000 of 6.25% senior secured notes and raised $491 net proceeds from $500 of Series A preferred stock issued to KKR. The preferred stock carries a cumulative 7% annual dividend, convertible at an initial $21.50 per common share; initial dividends were paid in kind.
- Management believed liquidity would fund operations and ordinary obligations through 2021, even under a downside case where case volumes remained at April 2020 levels through mid-2021, but cautioned it could not assure this outcome.
- YTD operating cash flow was $533; investing cash use was $1,087, including the $973 Smart Foodservice acquisition; financing provided $1,475. The Q3 operating cash outflow was $237.
Material changes and unusual items
- COVID-19 materially reduced restaurant, hospitality and education demand. Management reported some sequential improvement in Q3 as restrictions eased and outdoor dining expanded, but volumes remained below 2019 and were expected to remain depressed at least through the rest of 2020.
- Gross profit was pressured by lower volume and $40 of YTD product donations and inventory adjustments. Q3 included a $30 reversal of COVID-related doubtful-account reserves, following $75 reversed in Q2, based on better collections of pre-pandemic receivables. The original Q1 incremental reserve was $170.
- Cost actions included workforce reductions and facility closures, resulting in $30 of YTD restructuring charges. The company also recorded $9 of impairment charges on Food Group trade names. A $17 gain on sale of excess land reduced operating expenses.
- Smart Foodservice was acquired April 24 for $973 net of cash acquired; the company operates 70 cash-and-carry stores. It contributed $276 of Q3 sales and $8 of net income, and $484 of YTD sales and $19 of net income.
- Management described long-term prospects as favorable and cited the company’s scale, national footprint, cash-and-carry business and technology capabilities. It also noted that customer failures, slow recovery, worsening receivables and constrained credit availability could further hurt results and liquidity.
Risks and contingencies
- Key risks include the duration and severity of COVID-19, restaurant and hospitality recovery, customer credit losses, reduced ABL borrowing-base availability, commodity and fuel volatility, labor costs, supplier disruption and indebtedness. A credit-rating downgrade was announced in September 2020.
- About 64% of projected diesel needs for contracted periods through December 2021 were covered by forward commitments. A hypothetical 10% unfavorable diesel-price change on uncommitted volumes could add about $4 of fuel cost.
- The company reported $1,119 of purchase orders and purchase-contract commitments due through Q1 2021, plus $63 of IT commitments through 2024. It is party to ordinary-course legal proceedings; management did not expect their outcome to materially affect the company, while acknowledging possible costs beyond recorded provisions.
- KKR’s preferred investment represents approximately 9.6% of common stock on an as-converted basis and includes a right to designate one director. The company also disclosed related-party financing fees paid to a KKR affiliate.
Most important facts for investors to verify
- Whether customer volumes, especially organic restaurant volumes, recover and whether COVID-related restrictions or customer closures worsen.
- Receivables collection trends, allowance adequacy and the effect of receivable quality on ABL borrowing capacity.
- Cash generation and liquidity against debt service, contractual commitments and management’s through-2021 liquidity assessment.
- Debt levels, floating-rate exposure, covenant capacity, the credit-rating downgrade and the cost or availability of future financing.
- Whether acquisition contributions, cost reductions and adjusted results translate into sustainable GAAP profitability and margins.