US Foods Holding Corp. — Q2 2016 Form 10-Q
Reporting period: 13 and 26 weeks ended July 2, 2016; comparisons are to the corresponding periods ended June 27, 2015. US Foods distributes food and non-food products to foodservice customers across the United States. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $5,807 | $5,843 | $11,400 | $11,396 |
| Gross profit / margin | $1,034 / 17.8% | $993 / 17.0% | $1,994 / 17.5% | $1,922 / 16.9% |
| Operating income / margin | $98 / 1.7% | $22 / 0.4% | $183 / 1.6% | $64 / 0.6% |
| Net income (loss) | $(13) | $165 | $(0.1) | $172 |
| Adjusted EBITDA | $260 | $236 | $463 | $395 |
- Q2 case volume rose 1.2%; independent restaurant case volume grew 6.8% (4.6% organically). Net sales fell 0.6% as the rate per case declined 1.8%, reflecting deflation and product mix. First-half case volume increased 1.8%, including 7.3% growth in independent restaurants.
- Gross margin improvement reflected volume, acquisitions and merchandising initiatives; Q2 also benefited from a $7 million LIFO reserve change. Private-brand products were about 33% of sales, up roughly 90 basis points year over year in Q2.
- Q2 net loss included a $42 million debt-extinguishment loss and a $31 million Sponsor termination fee recorded in selling, general and administrative costs. First-half 2015 results included $288 million of net Sysco acquisition termination fees; therefore headline earnings comparisons are not representative of underlying operating trends.
- First-half operating cash flow was $301 million versus $265 million; capital expenditures were $67 million versus $111 million, yielding reported free cash flow of $234 million versus $154 million. Investing cash outflow was $161 million, including about $95 million for acquisitions. Financing cash outflow was $543 million.
Financial position, liquidity and capital actions
- At July 2, 2016, cash was $115 million, total debt was $3.871 billion (including current maturities), and shareholders’ equity was $2.348 billion. Total debt was down from $4.733 billion at January 2, 2016. Current assets were $2.829 billion and current liabilities were $2.014 billion.
- About $2.5 billion of debt was floating-rate and $1.4 billion fixed-rate. Management estimated a 1 percentage-point change in benchmark rates could change annual interest expense by approximately $25 million, subject to stated rate-floor assumptions.
- Available borrowing capacity under the ABL and receivables facilities totaled $1.327 billion at period-end. Management said cash from operations and financing availability should cover debt service, operations, working capital and capital expenditure needs for the next 12 months. The company was in compliance with debt covenants.
- The June IPO raised approximately $1.114 billion net; proceeds were used to redeem $1.090 billion principal of 8.5% notes and pay an early redemption premium. June refinancing included a $2.2 billion term loan and $600 million of 5.875% notes due 2024; the term loan matures in 2023. The company reported $42 million of refinancing and redemption-related extinguishment costs.
- Management expected to defease the $471 million carrying-value CMBS facility in Q3 2016 for approximately $490 million cash and estimated a further $10–$20 million in penalty, fees and expenses. The facility bore 6.38% and matured in 2017.
- Cash fell from $518 million at fiscal year-end, reflecting financing activity that included the $666 million one-time cash distribution paid in January. No current plans for future common-stock dividends were reported.
Outlook, commentary and risks
- Management expected positive foodservice-industry demand during the rest of fiscal 2016, while anticipating continued competitive pressure. It highlighted growing independent-restaurant and private-brand sales, cost control, facility optimization and changes to the field operating model. No quantified earnings or sales guidance was provided.
- Deflation, particularly in beef, reduced average selling prices per case; management noted that both inflation and prolonged deflation can pressure sales and gross margin. Fuel-price volatility is another exposure; fuel forward commitments covered about 64% of projected diesel needs for contracted periods, and a 10% adverse change in prices on uncommitted volumes was estimated to add about $6 million in fuel costs.
- Labor actions included strikes at the Baltimore facility, which ceased operations in June, and a three-day strike at Corona. The company transferred Baltimore business to other distribution centers; management said disruptions could delay deliveries or raise costs and was continuing to assess their impact.
- Restructuring included Baltimore closure and field-model changes. First-half restructuring charges were $24 million; period-end restructuring liabilities were $109 million, including an estimated $50 million pension withdrawal liability related to Baltimore. Actual multiemployer pension withdrawal costs could differ materially from estimates.
- Other key risks cited include substantial indebtedness and refinancing, supplier and customer relationships, competition, food-away-from-home demand, acquisition integration, labor availability, product liability, regulation, cybersecurity, weather and retirement-benefit costs. The filing reported no material change to previously disclosed principal risk factors.
Most important facts to verify
- Whether operating and adjusted EBITDA margin gains persist as deflation, sales mix and competitive pricing evolve; review non-GAAP adjustments when comparing results.
- Completion, cash cost and final fees for the planned CMBS defeasance, and the resulting debt maturity and interest profile.
- Liquidity and covenant headroom after debt refinancing, the special distribution and planned defeasance, including exposure to floating interest rates.
- Actual pension withdrawal liabilities and restructuring cash costs, particularly for Baltimore, and any continuing effects of labor actions on service and expenses.
- Whether expected industry demand, independent-customer growth and private-brand momentum continue, and how planned national-chain exits affect volume.