US Foods Holding Corp 10-Q for FY2021 Q3
US Foods Holding Corp. (USFD)
10-Q
2021-11-08
For: 2021-10-02
View Original
Added on
April 11, 2026
About this 10-Q
US Foods Holding Corp filed this 10-Q on November 8, 2021, covering the quarter ended October 2, 2021 (FY2021 Q3).
Headline figures
Quarter ended October 2, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.89B
- up 34.9% from $5.85B a year earlier
- Net income
- $64M
- up 700.0% from net income of $8M a year earlier
- Diluted EPS
- $0.24
- compared with -$0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended October 2, 2021
OR
Commission File No. 001-37786
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||||||||||||||
(847 ) 720-8000
(Address, including Zip Code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q (this “Quarterly Report”) which are not historical in nature are “forward-looking statements” within the meaning of the federal securities laws. These statements often include words such as “believe,” “expect,” “project,” “anticipate,” “intend,” “plan,” “outlook,” “estimate,” “target,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecast,” “mission,” “strive,” “more,” “goal,” or similar expressions (although not all forward-looking statements may contain such words) and are based upon various assumptions and our experience in the industry, as well as historical trends, current conditions, and expected future developments. However, you should understand that these statements are not guarantees of performance or results, and there are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from those expressed in the forward-looking statements, including, among others:
• economic factors affecting consumer confidence and discretionary spending and reducing the consumption of food prepared away from home; | ||
• the extent and duration of the negative impact of the coronavirus (“COVID-19”) pandemic on us; | ||
| • cost inflation/deflation and commodity volatility; | ||
| • competition; | ||
| • reliance on third-party suppliers and interruption of product supply or increases in product costs; | ||
| • changes in our relationships with customers and group purchasing organizations; | ||
| • our ability to increase or maintain the highest margin portions of our business; | ||
| • achievement of expected benefits from cost savings initiatives; | ||
| • increases in fuel costs; | ||
| • changes in consumer eating habits; | ||
| • cost and pricing structures; | ||
| • impairment charges for goodwill, indefinite-lived intangible assets or other long-lived assets; | ||
• environmental, health and safety and other governmental regulation, including actions taken by national, state and local governments to contain the COVID-19 pandemic, such as travel restrictions or bans, social distancing requirements, and required closures of non-essential businesses; | ||
| • product recalls and product liability claims; | ||
| • our reputation in the industry; | ||
| • indebtedness and restrictions under agreements governing our indebtedness; | ||
| • interest rate increases; | ||
• changes in the method of determining London Interbank Offered Rate (“LIBOR”) or the replacement of LIBOR with an alternative reference rate; | ||
| • labor relations and increased labor costs and continued access to qualified and diverse labor; | ||
| • risks associated with intellectual property, including potential infringement; | ||
| • disruption of existing technologies and implementation of new technologies; | ||
| • cybersecurity incidents and other technology disruptions; | ||
| • effective integration of acquired businesses; | ||
| • changes in tax laws and regulations and resolution of tax disputes; | ||
| • adverse judgments or settlements resulting from litigation; | ||
• extreme weather conditions, natural disasters and other catastrophic events, including pandemics and the rapid spread of contagious illnesses; | ||
• costs and risks associated with current and changing government laws and regulations, and potential changes as a result of initiatives by the Biden administration; and | ||
| • management of retirement benefits and pension obligations. | ||
For a detailed discussion of these and other risks, uncertainties and factors, see Part I, Item 1A— “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 (the “2020 Annual Report”).
In light of these risks, uncertainties and other important factors, the forward-looking statements in this Quarterly Report might not prove to be accurate, and you should not place undue reliance on them. All forward-looking statements attributable to us, or others acting on our behalf, are expressly qualified in their entirety by the cautionary statements above. All of these statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise, except as required by law.
Comparisons of results between current and prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should be viewed only as historical data.
TABLE OF CONTENTS | ||||||||
| Page No. | ||||||||
| Part I. Financial Information | ||||||||
Item 1. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
| Part II. Other Information | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 5. | ||||||||
Item 6. | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
US FOODS HOLDING CORP. | |||||||||||
| CONSOLIDATED BALANCE SHEETS | |||||||||||
| (In millions, except par value) | |||||||||||
| October 2, 2021 | January 2, 2021 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, less allowances of $39 and $67 | |||||||||||
Vendor receivables, less allowances of $6 and $5 | |||||||||||
Inventories—net | |||||||||||
Prepaid expenses | |||||||||||
Assets held for sale | |||||||||||
Other current assets | |||||||||||
Total current assets | |||||||||||
| Property and equipment—net | |||||||||||
| Goodwill | |||||||||||
| Other intangibles—net | |||||||||||
| Deferred tax assets | |||||||||||
| Other assets | |||||||||||
Total assets | $ | $ | |||||||||
| LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
Cash overdraft liability | $ | $ | |||||||||
Accounts payable | |||||||||||
Accrued expenses and other current liabilities | |||||||||||
Current portion of long-term debt | |||||||||||
Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
Total liabilities | |||||||||||
| Commitments and contingencies (Note 18) | |||||||||||
| Mezzanine equity: | |||||||||||
| Series A convertible preferred stock, $0.01 par value—25 shares authorized; 0.5 issued and outstanding as of October 2, 2021 and January 2, 2021 | |||||||||||
| Shareholders’ equity: | |||||||||||
Common stock, $0.01 par value—600 shares authorized; 223 and 221 issued and outstanding as of October 2, 2021 and January 2, 2021, respectively | |||||||||||
Additional paid-in capital | |||||||||||
Retained earnings | |||||||||||
Accumulated other comprehensive loss | ( | ( | |||||||||
Total shareholders’ equity | |||||||||||
Total liabilities, mezzanine equity and shareholders' equity | $ | $ | |||||||||
See Notes to Consolidated Financial Statements (Unaudited).
1
US FOODS HOLDING CORP. | |||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | |||||||||||||||||||||||
| (In millions, except per share data) | |||||||||||||||||||||||
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
Distribution, selling and administrative costs | |||||||||||||||||||||||
Restructuring costs and asset impairment charges | |||||||||||||||||||||||
Total operating expenses | |||||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Other income—net | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense—net | |||||||||||||||||||||||
| Loss on extinguishment of debt | |||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Income tax provision (benefit) | ( | ||||||||||||||||||||||
Net income (loss) | ( | ||||||||||||||||||||||
| Other comprehensive income (loss)—net of tax: | |||||||||||||||||||||||
Changes in retirement benefit obligations | |||||||||||||||||||||||
Unrecognized gain (loss) on interest rate swaps | ( | ||||||||||||||||||||||
Comprehensive income (loss) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Series A convertible preferred stock dividends | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) available to common shareholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Net income (loss) per share | |||||||||||||||||||||||
Basic (Note 13) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Diluted (Note 13) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted-average common shares outstanding | |||||||||||||||||||||||
Basic (Note 13) | |||||||||||||||||||||||
Diluted (Note 13) | |||||||||||||||||||||||
See Notes to Consolidated Financial Statements (Unaudited).
2
| US FOODS HOLDING CORP. | |||||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) | |||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| BALANCE—January 2, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Proceeds from employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||
| Vested restricted stock units, net | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Tax withholding payments for net share-settled equity awards | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Series A convertible preferred stock dividends | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Unrecognized gain on interest rate swaps, net of income tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| BALANCE—April 3, 2021 | ( | ||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Proceeds from employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax withholding payments for net share-settled equity awards | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Series A convertible preferred stock dividends | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Unrecognized gain on interest rate swaps, net of income tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| BALANCE—July 3, 2021 | ( | ||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Proceeds from employee stock purchase plan | 1 | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||
| Series A convertible preferred stock dividends | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Unrecognized gain on interest rate swaps, net of income tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| BALANCE—October 2, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
3
| US FOODS HOLDING CORP. | |||||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) | |||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| BALANCE—December 28, 2019 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Proceeds from employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Tax withholding payments for net share-settled equity awards | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Unrecognized loss on interest rate swaps, net of income tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Adoption of ASU 2016-13 | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| BALANCE—March 28, 2020 | ( | ||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Proceeds from employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Tax withholding payments for net share-settled equity awards | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Series A convertible preferred stock dividends | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Changes in retirement benefit obligations, net of income tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| BALANCE—June 27, 2020 | ( | ||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Proceeds from employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Series A convertible preferred stock dividends | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Unrecognized gain on interest rate swaps, net of income tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| BALANCE—September 26, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements (Unaudited).
4
US FOODS HOLDING CORP. | |||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | |||||||||||
(In millions) | |||||||||||
| 39 Weeks Ended | |||||||||||
| October 2, 2021 | September 26, 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | $ | ( | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | |||||||||||
Gain on disposal of property and equipment—net | ( | ||||||||||
Intangible asset impairment charges | |||||||||||
| Loss on extinguishment of debt | |||||||||||
Amortization of deferred financing costs | |||||||||||
Deferred tax provision (benefit) | ( | ||||||||||
Share-based compensation expense | |||||||||||
(Benefit) provision for doubtful accounts | ( | ||||||||||
Changes in operating assets and liabilities: | |||||||||||
(Increase) decrease in receivables | ( | ||||||||||
(Increase) decrease in inventories—net | ( | ||||||||||
Decrease in prepaid expenses and other assets | |||||||||||
Increase in accounts payable and cash overdraft liability | |||||||||||
Increase (decrease) in accrued expenses and other liabilities | ( | ||||||||||
Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of businesses—net of cash | ( | ||||||||||
Proceeds from sales of divested assets | |||||||||||
| Proceeds from sales of property and equipment | |||||||||||
Purchases of property and equipment | ( | ( | |||||||||
Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
Proceeds from debt borrowings | |||||||||||
Principal payments on debt and financing leases | ( | ( | |||||||||
| Net proceeds from issuance of Series A convertible preferred stock | |||||||||||
| Dividends paid on Series A convertible preferred stock | ( | ||||||||||
Debt financing costs and fees | ( | ( | |||||||||
Proceeds from employee stock purchase plan | |||||||||||
Proceeds from exercise of stock options | |||||||||||
Tax withholding payments for net share-settled equity awards | ( | ( | |||||||||
Net cash (used in) provided by financing activities | ( | ||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash—beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash—end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
Interest paid—net of amounts capitalized | $ | $ | |||||||||
Income taxes paid—net | |||||||||||
Property and equipment purchases included in accounts payable | |||||||||||
| Property and equipment transferred to assets held for sale | |||||||||||
Leased assets obtained in exchange for financing lease liabilities | |||||||||||
Leased assets obtained in exchange for operating lease liabilities | |||||||||||
Cashless exercise of stock options | |||||||||||
| Paid-in-kind Series A convertible preferred stock dividends | |||||||||||
See Notes to Consolidated Financial Statements (Unaudited).
5
US FOODS HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Amounts in tables in millions, except per share data, unless otherwise noted)
1. OVERVIEW AND BASIS OF PRESENTATION
US Foods Holding Corp., a Delaware corporation, and its consolidated subsidiaries are referred to in these consolidated financial statements and notes as “we,” “our,” “us,” the “Company,” or “US Foods.” US Foods Holding Corp. conducts all of its operations through its wholly owned subsidiary US Foods, Inc. (“USF”) and its subsidiaries. All of the Company’s indebtedness, as further described in Note 10, Debt, is a direct obligation of USF and its subsidiaries.
Business Description—The Company, through USF, operates in one business segment in which it markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States (“U.S.”). These customers include independently owned single and multi-unit restaurants, regional concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities and retail locations.
Basis of Presentation—The Company operates on a 52- or 53-week fiscal year, with all periods ending on a Saturday. When a 53-week fiscal year occurs, the Company reports the additional week in the fiscal fourth quarter. Fiscal year 2021 is a 52-week fiscal year. Fiscal year 2020 was a 53-week fiscal year.
The consolidated financial statements included in this Quarterly Report have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements and notes prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures included in this Quarterly Report are adequate to make the information presented not misleading. These interim consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes included in the 2020 Annual Report.
The consolidated interim financial statements reflect all adjustments (consisting of normal recurring items) necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results that might be achieved for any other interim period or the full fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, convertible debt will be accounted for as a single liability measured at its amortized cost. Additionally, the new guidance requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. This guidance is effective for fiscal years beginning after December 15, 2021.The Company plans to adopt the provisions of ASU No. 2020-06 at the beginning of the first quarter of fiscal year 2022 and does not expect the provisions of the new standard to materially affect our financial position, results of operation or cash flows.
3. REVENUE RECOGNITION
The Company recognizes revenue when the performance obligation is satisfied, which occurs when a customer obtains control of the promised goods or services. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these goods or services. The Company generates substantially all of its revenue from the distribution and sale of food and food-related products and recognizes revenue when title and risk of loss passes and the customer accepts the goods, which occurs at delivery. Customer sales incentives, such as volume-based rebates or discounts, are treated as a reduction of revenue at the time the revenue is recognized. Sales taxes invoiced to customers and remitted to governmental authorities are excluded from net sales. Shipping and handling costs are treated as fulfillment costs and included in distribution, selling and administrative costs.
The Company did not have any material outstanding performance obligations, contract liabilities or capitalized contract acquisition costs as of October 2, 2021 or January 2, 2021. Customer receivables, which are included in accounts receivable,
6
less allowances in the Company’s Consolidated Balance Sheets, were $1.5 billion and $1.1 billion as of October 2, 2021 and January 2, 2021, respectively.
The Company has certain customer contracts under which incentives are paid upfront to its customers. These payments have become industry practice and are not related to financing any customer’s business, nor are these payments associated with any distinct good or service to be received from any customer. These incentive payments are capitalized in prepaid expenses and other assets and amortized as a reduction of revenue over the life of the contract or as goods or services are transferred to the customer. The Company’s contract assets for these upfront payments were $26 million and $30 million included in prepaid expenses in the Company’s Consolidated Balance Sheets as of October 2, 2021 and January 2, 2021, respectively, and $27 million included in other assets in the Company’s Consolidated Balance Sheets as of both October 2, 2021 and January 2, 2021.
The following table presents the disaggregation of revenue for each of the Company’s principal product categories:
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Meats and seafood | $ | $ | $ | $ | |||||||||||||||||||
| Dry grocery products | |||||||||||||||||||||||
| Refrigerated and frozen grocery products | |||||||||||||||||||||||
| Dairy | |||||||||||||||||||||||
| Equipment, disposables and supplies | |||||||||||||||||||||||
| Beverage products | |||||||||||||||||||||||
| Produce | |||||||||||||||||||||||
| Total Net sales | $ | $ | $ | $ | |||||||||||||||||||
4. BUSINESS ACQUISITIONS
Smart Foodservice Acquisition—On April 24, 2020, USF completed the acquisition of Smart Stores Holding Corp., a Delaware corporation (“Smart Foodservice”), from funds managed by affiliates of Apollo Global Management, Inc. Total consideration paid at the closing of the acquisition (net of cash acquired) was $972 million. At the time of the acquisition, Smart Foodservice operated 70 small-format cash and carry stores across California, Idaho, Montana, Nevada, Oregon, Utah, and Washington serving small and mid-sized restaurants and other food business customers. The acquisition of Smart Foodservice expanded the Company’s cash and carry business in the West and Northwest parts of the U.S.
USF financed the Smart Foodservice acquisition with a new $700 million incremental senior secured term loan facility under its existing term loan credit agreement, as further described in Note 10, Debt, and with cash on hand. The assets, liabilities and results of operations of Smart Foodservice have been included in the Company’s consolidated financial statements since the date the acquisition was completed.
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The following table summarizes the final purchase price allocation recognized for the Smart Foodservice acquisition as of April 24, 2020. The decrease in goodwill from January 2, 2021 to October 2, 2021 was due to the finalization of deferred income taxes associated with the acquisition in the first quarter of 2021.
| Purchase Price Allocation | ||||||||
| Accounts receivable | $ | |||||||
| Inventories | ||||||||
| Other current assets | ||||||||
| Property and equipment | ||||||||
Goodwill(1) | ||||||||
Other intangibles(2) | ||||||||
| Other assets | ||||||||
| Accounts payable | ( | |||||||
| Accrued expenses and other current liabilities | ( | |||||||
| Deferred income taxes | ( | |||||||
| Other long-term liabilities, including financing leases | ( | |||||||
| Cash paid for acquisition | $ | |||||||
(1) Goodwill recognized is primarily attributable to intangible assets that do not qualify for separate recognition, as well as expected synergies from the combined company. The acquired goodwill is not deductible for U.S. federal income tax purposes.
(2) Other intangibles consist of a trade name of $14 million with an estimated useful life of approximately 1 year.
Smart Foodservice acquisition and integration related costs included in distribution, selling and administrative costs in the Company’s Consolidated Statements of Comprehensive Income were $2 million and less than $1 million for the 13 weeks ended October 2, 2021 and September 26, 2020, respectively, and $11 million and $20 million for the 39 weeks ended October 2, 2021 and September 26, 2020, respectively.
Pro Forma Financial Information—The following table presents the Company’s unaudited pro forma consolidated net sales, net income and earnings per share (“EPS”) for the 13 weeks and 39 weeks ended October 2, 2021 and September 26, 2020. The unaudited pro forma financial information presents the combined results of operations as if the acquisition and related financing of Smart Foodservice had occurred as of December 30, 2018, which date represents the first day of the Company’s fiscal year prior to the Smart Foodservice acquisition date.
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Pro forma net sales | $ | $ | $ | $ | |||||||||||||||||||
| Pro forma net income (loss) available to common shareholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Pro forma net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
The unaudited pro forma financial information above includes adjustments for: (1) incremental depreciation expense related to fair value increases of certain acquired property and equipment, (2) amortization expense related to the fair value of amortizable intangible assets acquired, (3) interest expense related to the incremental senior secured term loan facility used to finance the acquisition, (4) the elimination of acquisition-related costs that were included in the Company’s historical results, and (5) adjustments to the income tax provision based on pro forma results of operations. No effect has been given to potential synergies, operating efficiencies or costs arising from the integration of Smart Foodservice with our previously existing operations or the standalone cost estimates and estimated costs that were incurred by the former parent company. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the date indicated. Further, the pro forma financial information does not purport to project the Company’s future consolidated results of operations following the acquisition.
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5. INVENTORIES
6. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information. Collections and payments from customers are continuously monitored. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. The Company maintains an allowance for doubtful accounts, which is based upon historical experience, future expected losses, as well as specific customer collection issues that have been identified. The Company uses specific criteria to determine uncollectible receivables to be written off, including bankruptcy, accounts referred to outside parties for collection, and accounts past due over specified periods.
Since mid-March 2020, our business has been significantly impacted by the COVID-19 pandemic. Starting in March 2020, in order to reduce the spread of COVID-19 and its variants, many countries, including the United States, took steps to restrict travel, temporarily close or enforce capacity restrictions on businesses, schools and other public gathering spaces, including restaurants and recreational, sporting and other similar venues. Due to the impact that the COVID-19 pandemic was expected to have on our customers, particularly our restaurant and hospitality customers, and to reflect the increased collection risk associated with our customers, we significantly increased our allowance for doubtful accounts during the 13 weeks ended March 28, 2020. In each subsequent quarter of fiscal year 2020 and during the 13 weeks ended April 3, 2021, due to more favorable than anticipated collections on our pre-COVID-19 accounts receivable, we reduced our allowance for doubtful accounts while leaving the remaining pre-COVID-19 accounts receivable fully reserved.
A summary of the activity in the allowance for doubtful accounts for the 39 weeks ended October 2, 2021 was as follows:
| Balance as of January 2, 2021 | $ | |||||||
| Reversed from costs and expenses | ( | |||||||
| Customer accounts written off—net of recoveries | ( | |||||||
| Balance as of October 2, 2021 | $ | |||||||
This table excludes the vendor receivable related allowance for doubtful accounts of $6 million and $5 million as of October 2, 2021 and January 2, 2021, respectively.
7. PROPERTY AND EQUIPMENT
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8. GOODWILL AND OTHER INTANGIBLES
Goodwill includes the cost of acquired businesses in excess of the fair value of the tangible and other intangible net assets acquired. Other intangible assets include customer relationships, amortizable trade names, noncompete agreements, the brand names comprising the Company’s portfolio of exclusive brands, and trademarks. Brand names and trademarks are indefinite-lived intangible assets and, accordingly, are not subject to amortization, but are subject to impairment assessments as described below.
Customer relationships, amortizable trade names and noncompete agreements are intangible assets with definite lives, and are carried at the acquired fair value less accumulated amortization. Customer relationships, amortizable trade names and noncompete agreements are amortized over their estimated useful lives (which range from approximately 3 to 15 years). Amortization expense was $12 million and $21 million for the 13 weeks ended October 2, 2021 and September 26, 2020, respectively, and $44 million and $59 million for the 39 weeks ended October 2, 2021 and September 26, 2020, respectively.
Goodwill and other intangibles—net consisted of the following:
| October 2, 2021 | January 2, 2021 | ||||||||||
| Goodwill | $ | $ | |||||||||
| Other intangibles—net | |||||||||||
Customer relationships—amortizable: | |||||||||||
Gross carrying amount | $ | $ | |||||||||
Accumulated amortization | ( | ( | |||||||||
Net carrying value | |||||||||||
Trade names—amortizable: | |||||||||||
Gross carrying amount | |||||||||||
Accumulated amortization | ( | ||||||||||
Net carrying value | |||||||||||
Noncompete agreements—amortizable: | |||||||||||
Gross carrying amount | |||||||||||
Accumulated amortization | ( | ( | |||||||||
Net carrying value | |||||||||||
Brand names and trademarks—not amortizing | |||||||||||
| Total other intangibles—net | $ | $ | |||||||||
The Company assesses for impairment of intangible assets with definite lives only if events occur that indicate that the carrying amount of an intangible asset may not be recoverable. The Company assesses goodwill and other intangible assets with indefinite lives for impairment annually, or more frequently if events occur that indicate an asset may be impaired. For goodwill and indefinite-lived intangible assets, the Company’s policy is to assess for impairment as of the beginning of each fiscal third quarter. The Company completed its most recent annual impairment assessment for goodwill and indefinite-lived intangible assets for impairment as of July 4, 2021, the first day of the third quarter of fiscal year 2021. During the third quarter of fiscal year 2021, the Company implemented rebranding initiatives related to the integration of a trade name acquired as part of the 2019 Food Group acquisition. As a result of the rebranding initiatives, the Company recognized an impairment charge of $7 million, which was included in restructuring and asset impairment charges in the Company's Consolidated Statement of Comprehensive Income. The remaining carrying value of the acquired trade name of $3 million as of October 2, 2021, was reclassified to trade names—amortizable and will be amortized with an estimated remaining useful life of 10 years. No other impairments were noted as part of the annual impairment assessment.
The decrease in goodwill as of October 2, 2021 is attributable to the finalization of the purchase price allocation recognized for the Smart Foodservice acquisition, as described in Note 4, Business Acquisitions. The net decrease in the gross carrying amount of customer relationships as of October 2, 2021 is attributable to the write-off of fully amortized intangible assets related to certain 2016 and 2017 business acquisitions. The net decrease in the gross carrying amount of amortizable trade names is attributable to the write-off of the fully amortized trade name related to the Smart Foodservice acquisition, when Smart Foodservice® warehouse stores were rebranded to CHEF'STORE® in March 2021, partially offset by the aforementioned reclassification of the remaining carrying value of the trade name acquired with the Food Group acquisition. The net decrease in the gross carrying amount of brand names and trademarks—not amortizing is primarily due to the aforementioned impairment
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9. FAIR VALUE MEASUREMENTS
Certain assets and liabilities are carried at fair value under GAAP, under which fair value is a market-based measurement, not an entity-specific measurement. The Company’s fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
•Level 1—observable inputs, such as quoted prices in active markets
•Level 2—observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active or inactive markets that are observable either directly or indirectly, or other inputs that are observable or can be corroborated by observable market data
•Level 3—unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions
Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized as of the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented below.
The Company’s assets and liabilities measured at fair value on a recurring basis as of October 2, 2021 and January 2, 2021, aggregated by the level in the fair value hierarchy within which those measurements fall, were as follows:
| October 2, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| January 2, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
Interest rate swaps | $ | $ | $ | $ | |||||||||||||||||||
There were no significant assets or liabilities on the Company's Consolidated Balance Sheets measured at fair value on a nonrecurring basis for the periods presented above, except as further disclosed in Note 8, Goodwill and Other Intangibles.
Recurring Fair Value Measurements
Money Market Funds
Money market funds include highly liquid investments with an original maturity of three or fewer months. These funds are valued using quoted market prices in active markets and are classified under Level 1 within the fair value hierarchy.
Derivative Financial Instruments
The Company may use interest rate swaps, designated as cash flow hedges, to manage its exposure to interest rate movements in connection with its variable-rate debt.
As of January 2, 2021, the fair value of the Company’s interest rate swaps liability from certain previously entered into four-year interest rate swap agreements, which collectively had a notional value of $550 million, was $5 million, as reflected in its Consolidated Balance Sheet in accrued expenses and other current liabilities. The Company recorded these interest rate swaps at fair value based on projections of cash flows and future interest rates. The determination of fair value included the consideration of any credit valuation adjustments necessary, to reflect the creditworthiness of the respective counterparties and the Company.
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These interest rate swap agreements expired on July 31, 2021. Through the term of the swap agreements, the Company paid an aggregate effective rate of 3.45 % on the notional amount of the Initial Term Loan Facility covered by the interest rate swap agreements, comprised of a rate of 1.70 % plus a spread of 1.75 % (see Note 10, Debt).
Gains and losses on the interest rate swaps were initially recorded in accumulated other comprehensive loss and reclassified to interest expense during the period in which the hedged transaction affected income. The following table presents the effect of the Company’s interest rate swaps in its Consolidated Statements of Comprehensive Income f or the 13 weeks and 39 weeks ended October 2, 2021 and September 26, 2020:
| Derivatives in Cash Flow Hedging Relationships | Amount of Loss Recognized in Accumulated Other Comprehensive Loss, net of tax | Location of Amounts Reclassified from Accumulated Other Comprehensive Loss | Amount of Loss Reclassified from Accumulated Other Comprehensive Loss to Income, net of tax | |||||||||||||||||
| For the 13 weeks ended October 2, 2021 | ||||||||||||||||||||
Interest rate swaps | $ | Interest expense—net | $ | |||||||||||||||||
| For the 13 weeks ended September 26, 2020 | ||||||||||||||||||||
Interest rate swaps | $ | Interest expense—net | $ | |||||||||||||||||
| For the 39 weeks ended October 2, 2021 | ||||||||||||||||||||
Interest rate swaps | $ | Interest expense—net | $ | |||||||||||||||||
| For the 39 weeks ended September 26, 2020 | ||||||||||||||||||||
Interest rate swaps | $ | ( | Interest expense—net | $ | ||||||||||||||||
Other Fair Value Measurements
The carrying value of cash, accounts receivable, vendor receivables, cash overdraft liability and accounts payable approximate their fair values due to their short-term maturities.
The fair value of the Company’s total debt approximated its carrying value of $5.4 billion as of October 2, 2021. The fair value of the Company’s total debt approximated $5.8 billion, compared to its carrying value of $5.7 billion as of January 2, 2021.
The fair value of the Company's 4.75 % unsecured senior notes due February 15, 2029 (the “Unsecured Senior Notes due 2029”) was $0.9 billion as of October 2, 2021. As discussed in Note 10, Debt, the proceeds from the Unsecured Senior Notes due 2029 were used to redeem the Company's 5.875 % unsecured senior notes due 2024 (the “Unsecured Senior Notes due 2024”) and other outstanding Company debt. The fair value of the Unsecured Senior Notes due 2024 was $0.6 billion as of January 2, 2021. The fair value of the Company’s 6.25 % senior secured notes due April 15, 2025 (the “Secured Notes”) was $1.1 billion as of both October 2, 2021 and January 2, 2021. Fair value of the Secured Notes, the Unsecured Senior Notes due 2029 and the Unsecured Senior Notes due 2024 is based upon their closing market prices on the respective dates. The fair value of the Secured Notes, the Unsecured Senior Notes due 2029 and the Unsecured Senior Notes due 2024 is classified under Level 2 of the fair value hierarchy. The fair value of the balance of the Company’s debt is primarily classified under Level 3 of the fair value hierarchy, with fair value estimated based upon a combination of the cash outflows expected under these debt facilities, interest rates that are currently available to the Company for debt with similar terms, and estimates of the Company’s overall credit risk.
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10. DEBT
Total debt consisted of the following:
| Debt Description | Maturity | Interest Rate as of October 2, 2021 | Carrying Value as of October 2, 2021 | Carrying Value as of January 2, 2021 | ||||||||||||||||||||||
| ABL Facility | May 31, 2024 | $ | $ | |||||||||||||||||||||||
Initial Term Loan Facility (net of $2 and $3 of unamortized deferred financing costs, respectively) | June 27, 2023 | |||||||||||||||||||||||||
| 2019 Incremental Term Loan Facility (net of $26 and $30 of unamortized deferred financing costs, respectively) | September 13, 2026 | |||||||||||||||||||||||||
2020 Incremental Term Loan Facility (net of $11 of unamortized deferred financing costs)(1) | April 24, 2025 | |||||||||||||||||||||||||
Secured Notes (net of $11 and $13 of unamortized deferred financing costs) | April 15, 2025 | |||||||||||||||||||||||||
Unsecured Senior Notes due 2024 (net of $3 of unamortized deferred financing costs)(1) | June 15, 2024 | |||||||||||||||||||||||||
Unsecured Senior Notes due 2029 (net of $9 of unamortized deferred financing costs) | February 15, 2029 | |||||||||||||||||||||||||
| Obligations under financing leases | 2021–2039 | 1.63% - 6.1% | ||||||||||||||||||||||||
| Other debt | 2021–2031 | 5.75% - 9.00% | ||||||||||||||||||||||||
| Total debt | ||||||||||||||||||||||||||
Current portion of long-term debt | ( | ( | ||||||||||||||||||||||||
| Long-term debt | $ | $ | ||||||||||||||||||||||||
(1) The 2020 Incremental Term Loan Facility and Unsecured Senior Notes due 2024 were paid in full on February 4, 2021 with the issuance of the Unsecured Senior Notes due 2029 and subsequently terminated as further discussed below. The related unamortized deferred financing costs were written off in connection with the terminations.
As of October 2, 2021, approximately 60 % of the Company’s total debt bears interest at a floating rate.
ABL Facility
USF's asset based senior secured revolving credit facility (the “ABL Facility”) provides USF with loan commitments having a maximum aggregate principal amount of $1,990 million. The ABL Facility is scheduled to mature on May 31, 2024.
Borrowings under the ABL Facility bear interest, at USF’s periodic election, at a rate equal to the sum of an alternative base rate (“ABR”), as described under the ABL Facility, plus a margin ranging from 0.00 % to 0.50 %, or the sum of LIBOR plus a margin ranging from 1.00 % to 1.50 %, in each case based on USF’s excess availability under the ABL Facility. The margin under the ABL Facility as of October 2, 2021 was 0.00 % for ABR loans and 1.00 % for LIBOR loans.
USF had no outstanding borrowings, and had issued letters of credit totaling $253 1,737 million under the ABL Facility as of October 2, 2021.
Term Loan Facilities
Under its term loan credit agreement, USF has entered into an initial senior secured term loan facility (the “Initial Term Loan Facility”) and an incremental senior secured term loan facility (the “2019 Incremental Term Loan Facility”). The Initial Term Loan Facility had a carrying value of $1,783 million, net of $2 million of unamortized deferred financing costs as of October 2, 2021. During the 39 weeks ended October 2, 2021, the Company made voluntary prepayments of the Initial Term Loan Facility totaling $300 million. The table above reflects the interest rate on the Initial Term Loan Facility as of October 2, 2021. The Initial Term Loan Facility is scheduled to mature on June 27, 2023.
The 2019 Incremental Term Loan Facility had a carrying value of $1,444 million, net of $26 million of unamortized deferred financing costs as of October 2, 2021. Borrowings under the 2019 Incremental Term Loan Facility bear interest at a rate per annum equal to, at USF’s option, either the sum of LIBOR plus a margin of 2.00 %, or the sum of an ABR, determined in accordance with the term loan credit agreement, plus a margin of 1.00 %. The 2019 Incremental Term Loan Facility is scheduled to mature on September 13, 2026.
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Secured Notes
The Secured Notes had a carrying value of $989 million, net of $11 million of unamortized deferred financing costs, as of October 2, 2021. The Secured Notes are scheduled to mature on April 15, 2025.
Unsecured Senior Notes due 2029
On February 4, 2021, USF completed a private offering of $900 million aggregate principal amount of Unsecured Senior Notes due 2029. USF used the proceeds of the Unsecured Senior Notes due 2029, together with cash on hand, to redeem all of the Company's then outstanding Unsecured Senior Notes due 2024, repay all of the then outstanding borrowings under the incremental senior secured term loan facility borrowed in April 2020 (the “2020 Incremental Term Loan Facility”) and to pay related fees and expenses. In connection with the repayment of the Unsecured Senior Notes due 2024 and 2020 Incremental Term Loan Facility, the Company applied debt extinguishment accounting and recorded $23 million in loss on extinguishment of debt in the Company's Consolidated Statements of Comprehensive Income, consisting of a $14 million write-off of pre-existing unamortized deferred financing costs related to the redeemed facilities and a $9 million early redemption premium related to the Unsecured Senior Notes due 2024. Lender fees and third-party costs of $9 million associated with the issuance of the Unsecured Senior Notes due 2029 were capitalized as deferred financing costs. The Unsecured Senior Notes due 2029 had an outstanding balance of $891 million, net of $9 million of unamortized deferred financing costs, as of October 2, 2021. The Unsecured Senior Notes due 2029 bear interest at a rate of 4.75 % per annum and will mature on February 15, 2029. On or after February 15, 2024, the Unsecured Senior Notes due 2029 are redeemable, at USF's option, in whole or in part at a price of 102.375 % of the remaining principal, plus accrued and unpaid interest, if any, to the redemption date. On or after February 15, 2025 and February 15, 2026, the optional redemption price for the Unsecured Senior Notes due 2029 declines to 101.188 % and 100.000 %, respectively, of the remaining principal amount, plus accrued and unpaid interest, if any, to the redemption date.
Debt Covenants
The agreements governing our indebtedness contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends, or engage in mergers or consolidations. USF had approximately $1.4 billion of restricted payment capacity under these covenants, and approximately $2.8 billion of its net assets were restricted after taking into consideration the net deferred tax assets and intercompany balances that eliminate in consolidation as of October 2, 2021.
11. RESTRUCTURING LIABILITIES
From time to time, the Company may implement initiatives or close or consolidate facilities in an effort to reduce costs and improve operating effectiveness. In connection with these activities, the Company may incur various costs including severance and other employee-related separation costs.
During the 39 weeks ended October 2, 2021, the Company incurred net restructuring costs of $3 million for severance and related costs associated with the announced closure of an excess facility and initiatives to improve operational effectiveness. During the 13 weeks ended October 2, 2021, net restructuring costs were de minimis. During the 13 weeks and 39 weeks ended September 26, 2020, in order to reduce operating expenses in line with the decrease in sales volume caused by the COVID-19 pandemic, the Company reduced its work force and incurred net restructuring costs of $14 million and $30 million for severance and related costs. Net restructuring liabilities were $3 million and $2 million as of October 2, 2021 and January 2, 2021, respectively.
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12. RETIREMENT PLANS
The Company sponsors a defined benefit pension plan and a 401(k) plan for eligible employees, and provides certain postretirement health and welfare benefits to eligible retirees and their dependents. During fiscal year 2020, in connection with the Smart Foodservice acquisition, the Company assumed a defined benefit pension plan with net liabilities of approximately $19 million. This defined benefit plan was merged into the US Foods Consolidated Defined Benefit Retirement Plan as of December 31, 2020.
The components of net periodic pension benefit credits for Company sponsored defined benefit plans were as follows:
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Components of net periodic pension benefit credits | |||||||||||||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||||||||||
Interest cost | |||||||||||||||||||||||
Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of net loss | |||||||||||||||||||||||
| Net periodic pension benefit credits | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Other postretirement benefit costs were de minimis for both the 13 weeks and 39 weeks ended October 2, 2021 and September 26, 2020.
The service cost component of net periodic benefit credits is included in distribution, selling and administrative costs, while the other components of net periodic benefit credits are included in other income—net, respectively, in the Company's Consolidated Statements of Comprehensive Income.
The Company does not expect to make significant contributions to its defined benefit pension plan in fiscal year 2021.
Certain employees are eligible to participate in the Company's 401(k) plan. The Company made employer matching contributions to the 401(k) plan of $13 million and $11 million for the 13 weeks ended October 2, 2021 and September 26, 2020, respectively, and $39 million and $34 million for the 39 weeks ended October 2, 2021 and September 26, 2020, respectively.
The Company is also required to contribute to various multiemployer pension plans under the terms of collective bargaining agreements that cover certain of its union-represented employees. The Company’s contributions to these plans were $11 million for each of the 13 weeks ended October 2, 2021 and September 26, 2020, and $33 million for each of the 39 weeks ended October 2, 2021 and September 26, 2020.
13. EARNINGS PER SHARE
The Company computes EPS in accordance with ASC 260, Earnings per Share. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding.
Diluted EPS is computed using the weighted average number of shares of common stock, plus the effect of potentially dilutive securities. The Company applies the treasury method to calculate the dilution impact of share-based awards—stock options, non-vested restricted shares with forfeitable dividend rights, restricted stock units, and employee stock purchase plan deferrals. The Company applies the if-converted method to calculate the dilution impact of the Series A convertible preferred stock, if dilutive in the period. For the 13 weeks and 39 weeks ended October 2, 2021 and September 26, 2020, share-based awards representing 2 million and 9 million underlying common shares, respectively, were not included in the computation because the effect would have been anti-dilutive. For the 13 weeks ended October 2, 2021 and September 26, 2020, convertible preferred stock representing 25 million and 23 million of underlying common shares, respectively, were not included in the computation because the effect would have been anti-dilutive. For the 39 weeks ended October 2, 2021 and September 26, 2020, convertible preferred stock representing 25 million and 12 million of underlying common shares, respectively, were not included in the computation because the effect would have been anti-dilutive.
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The following table sets forth the computation of basic and diluted EPS:
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
Net income (loss) | $ | $ | $ | $ | ( | ||||||||||||||||||
Less: Series A convertible preferred stock dividends (1) | ( | ( | ( | ( | |||||||||||||||||||
Net income (loss) available to common shareholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Denominator: | |||||||||||||||||||||||
Weighted-average common shares outstanding—basic | |||||||||||||||||||||||
Effect of dilutive share-based awards | |||||||||||||||||||||||
Effect of dilutive underlying shares of the Series A convertible preferred stock (2) | |||||||||||||||||||||||
Weighted-average common shares outstanding—diluted | |||||||||||||||||||||||
| Net income (loss) per share | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
(1) Preferred stock dividends for the first quarter of 2021 were paid in kind on March 31, 2021. Preferred stock dividends for the second and third quarters of 2021 were paid in cash on June 30, 2021 and September 28, 2021, respectively. Preferred stock dividends for the second and third quarters of 2020 were paid in kind on June 30, 2020 and September 30, 2020, respectively.
(2) The Company applies the if-converted method to calculate the dilution impact of the Series A convertible preferred stock, if dilutive in the period. Under the if-converted method, the Series A convertible preferred stock are converted to common shares for inclusion in the calculation of the weighted-average common shares outstanding—diluted. Once converted, there would be no preferred stock outstanding and therefore no preferred stock dividend.
14. CONVERTIBLE PREFERRED STOCK
On May 6, 2020 (the “Issuance Date”), pursuant to the terms of an Investment Agreement (the “Investment Agreement”) with KKR Fresh Aggregator L.P., a Delaware limited partnership, which agreement was joined on February 25, 2021 by permitted transferee KKR Fresh Holdings L.P., a Delaware limited partnership (“KKR”), the Company issued and sold 500,000 shares of the Company’s Series A convertible preferred stock, par value $0.01 per share to KKR Fresh Aggregator L.P. for an aggregate purchase price of $500 million, or $1,000 per share (the “Issuance”). The Company used the net proceeds from the Issuance for working capital and general corporate purposes. As of January 2, 2021, the Company had issued a total of 523,127 shares of Series A convertible preferred stock. On March 31, 2021, the Company paid a dividend on the shares of the Series A convertible preferred stock in the form of 9,154 shares of Series A convertible preferred stock, plus a de minimis amount in cash in lieu of fractional shares in accordance with the terms of the Certificate of Designations for the Series A convertible preferred stock. On June 30, 2021 and September 28, 2021, the Company paid cash dividends of $9 million each on the shares of the Series A convertible preferred stock.
The following table summarizes the activity for the outstanding Series A convertible preferred stock and associated carrying value for the 39 weeks ended October 2, 2021 was as follows:
| Series A Convertible Preferred Stock | |||||||||||
| Shares | Carrying Value | ||||||||||
| Balance, January 2, 2021 | $ | ||||||||||
| Shares issued as paid in kind dividend | |||||||||||
| Balance October 2, 2021 | $ | ||||||||||
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15. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Accumulated other comprehensive loss components | |||||||||||||||||||||||
| Retirement benefit obligations: | |||||||||||||||||||||||
Balance as of beginning of period (1) | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Reclassification adjustments: | |||||||||||||||||||||||
Amortization of net loss(2) (3) | |||||||||||||||||||||||
Total before income tax | |||||||||||||||||||||||
Income tax provision | |||||||||||||||||||||||
Current period comprehensive income, net of tax | |||||||||||||||||||||||
Balance as of end of period(1) | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Interest rate swaps: | |||||||||||||||||||||||
Balance as of beginning of period (1) | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Change in fair value of interest rate swaps | ( | ||||||||||||||||||||||
Amounts reclassified to interest expense—net | |||||||||||||||||||||||
Total before income tax | ( | ||||||||||||||||||||||
Income tax provision (benefit) | ( | ||||||||||||||||||||||
Current period comprehensive income (loss), net of tax | ( | ||||||||||||||||||||||
Balance as of end of period(1) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Accumulated other comprehensive loss as of end of period(1) | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
(1) Amounts are presented net of tax.
(2) Included in the computation of net periodic benefit costs. See Note 12, Retirement Plans, for additional information.
(3) Included in other income—net in the Company's Consolidated Statements of Comprehensive Income.
16. RELATED PARTY TRANSACTIONS
17. INCOME TAXES
The determination of the Company’s overall effective income tax rate requires the use of estimates. The effective income tax rate reflects the income earned and taxed in U.S. federal and various state jurisdictions based on enacted tax law, permanent differences between book and tax items, tax credits and the Company’s change in relative income in each jurisdiction.
The Company estimated its annual effective income tax rate for the full fiscal year and applied the annual effective income tax rate to the results of the 39 weeks ended October 2, 2021 and September 26, 2020, and then recognized the impact of discrete tax items for purposes of determining its year-to-date tax provision.
For the 13 weeks ended October 2, 2021, the Company's effective income tax rate of 30 % differed from the 21 % federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. The discrete tax items were not material individually or in the aggregate; however, when compared to the pre-tax income of $91 million for the period on a percentage basis, these tax items had a significant impact on the effective tax rate.
For the 13 weeks ended September 26, 2020, the Company's effective income tax rate of 58 % differed from the 21 % federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. Because pre-tax income for the 13 weeks ended September 26, 2020 was $21 million, all tax adjustments had a significant impact on a
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18. COMMITMENTS AND CONTINGENCIES
Purchase Commitments—The Company enters into purchase orders with vendors and other parties in the ordinary course of business and has a limited number of purchase contracts with certain vendors that require it to buy a predetermined volume of products. The Company had $1,337 million of purchase orders and purchase contract commitments as of October 2, 2021 to be purchased in the remainder of fiscal year 2021 and $46 million of information technology commitments through August 2025 that are not recorded in the Company's Consolidated Balance Sheets.
To minimize fuel price risk, the Company enters into forward purchase commitments for a portion of its projected diesel fuel requirements. The Company had diesel fuel forward purchase commitments totaling $31 million through December 2022, as of October 2, 2021. Additionally, the Company had electricity forward purchase commitments totaling $4 million through June 2024, as of October 2, 2021. The Company does not measure its forward purchase commitments for fuel and electricity at fair value, as the amounts under contract meet the physical delivery criteria in the normal purchase exception.
Legal Proceedings—The Company is subject to a number of legal proceedings arising in the normal course of business. These legal proceedings, whether pending, threatened or unasserted, if decided adversely to or settled by the Company, may result in liabilities material to its financial position, results of operations, or cash flows. The Company has recognized provisions with respect to the proceedings, where appropriate, in its Consolidated Balance Sheets. It is possible that the Company could settle one or more of these proceedings or could be required to make expenditures, in excess of the established provisions, in amounts that cannot be reasonably estimated. However, the Company, at present, believes that the ultimate outcome of these proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
19. BUSINESS INFORMATION
The Company’s consolidated results represent the results of its one business segment based on how the Company’s chief operating decision maker, the Chief Executive Officer, views the business for purposes of evaluating performance and making operating decisions.
The Company markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the U.S. The Company uses a centralized management structure, and its strategies and initiatives are implemented and executed consistently across the organization to maximize value to the organization as a whole. The Company uses shared resources for sales, procurement, and general and administrative activities across each of its distribution facilities and operations. The Company’s distribution facilities form a single network to reach its customers; it is common for a single customer to make purchases from several different distribution facilities. Capital projects, whether for cost savings or generating incremental revenue, are evaluated based on estimated economic returns to the organization as a whole.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollar amounts presented in millions, unless otherwise noted)
The following discussion and analysis should be read together with the accompanying unaudited consolidated financial statements and the notes thereto included in this Quarterly Report and the audited consolidated financial statements and the notes thereto in the 2020 Annual Report. The following discussion and analysis contain certain financial measures that are not required by, or presented in accordance with GAAP. We believe these non-GAAP measures provide meaningful supplemental information about our operating performance and liquidity. Information regarding reconciliations of and the rationale for these measures is discussed under “Non-GAAP Reconciliations” below. Results of operations for the 13 weeks and 39 weeks ended October 2, 2021 are compared to the 13 weeks and 39 weeks ended September 26, 2020 unless specifically noted otherwise.
Overview
At US Foods, our promise is to help customers Make It by providing the innovative products and easy-to-use technology solutions they need to operate their businesses profitably. This promise is supported by our GREAT FOOD. MADE EASY.™ strategy. We operate as one business with standardized business processes, shared systems infrastructure, and an organizational model that optimizes national scale with local execution, allowing us to manage the business as a single operating segment. We have centralized activities where scale matters and our local field structure focuses on customer facing activities.
We supply approximately 300,000 customer locations nationwide. These customer locations include independently owned single and multi-unit restaurants, regional restaurant chains, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations. We provide more than 400,000 fresh, frozen, and dry food stock-keeping units, or SKUs, as well as non-food items, sourced from approximately 6,000 suppliers. Approximately 3,500 sales associates manage customer relationships at local, regional, and national levels. Our sales associates are supported by sophisticated marketing and category management capabilities, as well as a sales support team that includes world-class chefs and restaurant operations consultants, new business development managers and others that help us provide more comprehensive service to our customers. Our extensive network of approximately 70 distribution facilities and fleet of approximately 6,500 trucks, along with 80 cash and carry locations, allow us to operate efficiently and provide high levels of customer service. This operating model allows us to leverage our nationwide scale and footprint while executing locally.
COVID-19 Update
In March 2020, the World Health Organization characterized COVID-19 as a pandemic amidst a rising number of confirmed cases and thousands of deaths worldwide. Starting in March 2020, in order to reduce the spread of COVID-19 and its variants, many countries, including the United States, took steps to restrict travel, temporarily close or enforce capacity restrictions on businesses, schools and other public gathering spaces including restaurants and recreational, sporting and other similar venues. Although vaccines have now been authorized and approved for use by the United States Food and Drug Administration for the vast majority of the United States population, including, most recently, for children aged five to eleven years, the restrictions and recommended safety measures related to COVID-19, such as capacity limits, physical distancing and face mask protocols still remain in effect in many parts of the country and continue to evolve. As such, the timing and extent of the economic recovery from the COVID-19 pandemic is dependent upon many factors, including the rate of vaccine adoption, the extent of COVID-19 variants (and the continued effectiveness of the vaccines against those variants) and the duration and implications of continued restrictions and safety measures.
Recently-enacted federal and state executive orders have required certain employers, including us, currently or in the near term, to implement a vaccine mandate for employees and require periodic testing for employees who are not vaccinated. Additionally, on November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) issued its related regulations for covered employers, including us, which set a January 4, 2022 deadline for compliance. Such vaccine mandates could result in nationwide workforce, supply chain and production disruptions that could impact our business and delay, slow or reverse the economic recovery from the COVID-19 pandemic.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has adversely impacted many of our customers, especially our restaurant, hospitality and education customers. As a result, we experienced decreased demand for our products, resulting in lower Net sales and total case volumes beginning in mid-March 2020. We saw improvement in Net sales and total case volumes during the second and third quarters of 2021 as compared to the first quarter of 2021, with additional loosening of indoor dining restrictions and other safety measures. Overall demand has started to return to pre-COVID-19 levels; however, case volumes remained lower than pre-COVID-19 levels. Total case volume increased 18.5% and 20.8% for the 13 weeks and 39 weeks ended October 2, 2021, compared to the prior year.
Economic and operating conditions for our business have improved in each quarter of 2021 as compared to the fourth quarter of 2020. While many restrictions have been lifted and consumers are returning to consuming food away from home, traveling for personal and business purposes and attending sporting, entertainment and other events regularly. However, we and the industry may continue to face pandemic-related challenges as the recovery continues, such as constrains on the availability of product supply, increased product
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and logistics costs, labor shortages, and shifts in the buying patterns of our customers. Therefore, we are unable to predict the duration and extent to which the pandemic will continue to impact our results of operations. We are currently evaluating the impacts of the November 4, 2021 OSHA vaccine regulations related to the federal vaccine mandate and, therefore, we are unable to predict the impact vaccine mandates may have on our operations and our ability to access qualified labor or the impact such mandates may have on the workforces of our suppliers and customers.
Operating Metrics
Case growth—Case growth, by customer type (e.g., independent restaurants) is reported as of a point in time. Customers periodically are reclassified, based on changes in size or other characteristics, and when those changes occur, the respective customer’s historical volume follows its new classification.
Organic growth—Organic growth includes growth from operating business that has been reflected in our results of operations for at least 12 months.
Highlights
Financial Highlights—Total case volume for the 13 weeks and 39 weeks ended October 2, 2021 increased 18.5% and 20.8%, respectively, and independent restaurant case volume increased 25.1% and 33.5%, respectively for those same periods. Net sales increased $2,042 million, or 34.9%, and $5,101 million, or 30.5% for the 13 weeks and 39 weeks ended October 2, 2021, primarily due to volume improvements commensurate with easing of COVID-19 related restrictions on our customers. The increase in Net sales during the 39 weeks ended October 2, 2021 was also due to the contributions from the Smart Foodservice acquisition, which was acquired on April 24, 2020. Smart Foodservice contributed Net sales of $895 million and $484 million for the 39 weeks ended October 2, 2021 and September 26, 2020, respectively.
Gross profit increased $267 million, or 27.4%, to $1,241 million for the 13 weeks ended October 2, 2021, and increased $702 million, or 25.9%, to $3,413 million for the 39 weeks ended October 2, 2021, primarily as a result of the increase in Net sales. The increase in gross profit during the 39 weeks ended October 2, 2021 was also due to the contributions from the Smart Foodservice acquisition. These increases in gross profit were partially offset by unfavorable year-over-year LIFO adjustments. As a percentage of net sales, gross profit was 15.7% for the 13 weeks ended October 2, 2021, compared to 16.7% for the prior year period and was 15.6% for the 39 weeks ended October 2, 2021, compared to 16.2% for the prior year period.
Total operating expenses increased $210 million, or 23.4%, to $1,106 million for the 13 weeks ended October 2, 2021, and increased $308 million, or 10.9%, to $3,126 million for the 39 weeks ended October 2, 2021. The increase was primarily due to higher supply chain labor costs and increased non-labor distribution costs related to increased sales volume due to the COVID-19 recovery. The increase in total operating expenses during the 39 weeks ended October 2, 2021 was also due to the inclusion of operating expenses from the Smart Foodservice acquisition. As a percentage of net sales, operating expenses were 14.0% for the 13 weeks ended October 2, 2021, compared to 15.3% for the prior year period and was 14.3% for the 39 weeks ended October 2, 2021, compared to 16.8% for the prior year period.
Smart Foodservice Acquisition—On April 24, 2020, USF completed the acquisition of Smart Foodservice. Total consideration paid at the closing of the acquisition was $972 million (net of cash acquired). The acquisition of Smart Foodservice expanded the Company’s cash and carry business in the West and Northwest parts of the U.S. The assets, liabilities and results of operations of Smart Foodservice have been included in our consolidated financial statements since the date the acquisition was completed.
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Results of Operations
The following table presents selected historical results of operations for the periods indicated:
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||||||||||||
| Net sales | $ | 7,890 | $ | 5,848 | $ | 21,848 | $ | 16,747 | |||||||||||||||
| Cost of goods sold | 6,649 | 4,874 | 18,435 | 14,036 | |||||||||||||||||||
| Gross profit | 1,241 | 974 | 3,413 | 2,711 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
Distribution, selling and administrative costs | 1,099 | 873 | 3,115 | 2,779 | |||||||||||||||||||
Restructuring costs and asset impairment charges | 7 | 23 | 11 | 39 | |||||||||||||||||||
| Total operating expenses | 1,106 | 896 | 3,126 | 2,818 | |||||||||||||||||||
| Operating income (loss) | 135 | 78 | 287 | (107) | |||||||||||||||||||
| Other income—net | (6) | (6) | (19) | (16) | |||||||||||||||||||
| Interest expense—net | 50 | 63 | 158 | 178 | |||||||||||||||||||
| Loss on extinguishment of debt | — | — | 23 | — | |||||||||||||||||||
| Income (loss) before income taxes | 91 | 21 | 125 | (269) | |||||||||||||||||||
| Income tax provision (benefit) | 27 | 13 | 30 | (53) | |||||||||||||||||||
| Net income (loss) | 64 | 8 | 95 | (216) | |||||||||||||||||||
| Series A convertible preferred stock dividends (see Note 14) | (9) | (10) | (33) | (15) | |||||||||||||||||||
| Net income (loss) available to common shareholders | $ | 55 | $ | (2) | $ | 62 | $ | (231) | |||||||||||||||
| Percentage of Net Sales: | |||||||||||||||||||||||
Gross profit | 15.7 | % | 16.7 | % | 15.6 | % | 16.2 | % | |||||||||||||||
Operating expenses | 14.0 | % | 15.3 | % | 14.3 | % | 16.8 | % | |||||||||||||||
Operating income (loss) | 1.7 | % | 1.3 | % | 1.3 | % | (0.6) | % | |||||||||||||||
Net income (loss) | 0.8 | % | 0.1 | % | 0.4 | % | (1.3) | % | |||||||||||||||
Adjusted EBITDA(1) | 3.7 | % | 3.6 | % | 3.6 | % | 2.8 | % | |||||||||||||||
| Other Data: | |||||||||||||||||||||||
Cash flows—operating activities | $ | 270 | $ | (237) | $ | 520 | $ | 533 | |||||||||||||||
Cash flows—investing activities | (65) | 9 | (166) | (1,087) | |||||||||||||||||||
Cash flows—financing activities | (132) | (429) | (411) | 1,475 | |||||||||||||||||||
Capital expenditures | 66 | 23 | 173 | 154 | |||||||||||||||||||
EBITDA(1) | 232 | 193 | 569 | 225 | |||||||||||||||||||
Adjusted EBITDA(1) | 291 | 209 | 795 | 474 | |||||||||||||||||||
Adjusted net income(1) | 119 | 42 | 292 | 25 | |||||||||||||||||||
Free cash flow(2) | 204 | (260) | 347 | 379 | |||||||||||||||||||
(1) EBITDA is defined as net (loss) income, plus interest expense—net, income tax (benefit) provision, and depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for: (1) restructuring costs and asset impairment charges; (2) share-based compensation expense; (3) the non-cash impact of LIFO reserve adjustments; (4) loss on extinguishment of debt; (5) business transformation costs; and (6) other gains, losses, or costs as specified in the agreements governing our indebtedness. Adjusted net income is defined as net income excluding the items used to calculate Adjusted EBITDA listed above and further adjusted for the tax effect of the exclusions and discrete tax items. EBITDA, Adjusted EBITDA, and Adjusted net income as presented are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. They are not measurements of our performance under GAAP and should not be considered as alternatives to net (loss) income or any other performance measures derived in accordance with GAAP. For additional information, see the discussion under the caption “Non-GAAP Reconciliations” below.
(2) Free cash flow is defined as cash flows provided by operating activities less cash capital expenditures. Free cash flow as presented is a supplemental measure of our liquidity that is not required by, or presented in accordance with, GAAP. It is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows provided by operating activities or any other liquidity measures derived in accordance with GAAP. For additional information, see the discussion under the caption “Non-GAAP Reconciliations” below.
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Non-GAAP Reconciliations
We provide EBITDA, Adjusted EBITDA, Adjusted net income and Free cash flow as supplemental measures to GAAP financial measures regarding our operating performance and liquidity. These non-GAAP financial measures, as defined above, exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP.
We believe EBITDA and Adjusted EBITDA provide meaningful supplemental information about our operating performance because they exclude amounts that we do not consider part of our core operating results when assessing our performance.
We believe that Adjusted net income is a useful measure of operating performance for both management and investors because it excludes items that are not reflective of our core operating performance and provides an additional view of our operating performance including depreciation, interest expense and income taxes on a consistent basis from period to period. We believe that Adjusted net income may be used by investors, analysts and other interested parties to facilitate period-over-period comparisons and provides additional clarity as to how factors and trends impact our operating performance.
Management uses these non-GAAP financial measures (1) to evaluate our historical and prospective financial performance as well as our performance relative to our competitors as they assist in highlighting trends, (2) to set internal sales targets and spending budgets, (3) to measure operational profitability and the accuracy of forecasting, (4) to assess financial discipline over operational expenditures, and (5) as an important factor in determining variable compensation for management and employees. EBITDA and Adjusted EBITDA are also used in connection with certain covenants and activity restrictions under the agreements governing our indebtedness. We also believe these and similar non-GAAP financial measures are frequently used by securities analysts, investors, and other interested parties to evaluate companies in our industry. EBITDA, Adjusted EBITDA and Adjusted net income are not measurements of our performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP.
We use Free cash flow as a supplemental measure to GAAP financial measures regarding the liquidity of our operations. We measure Free cash flow as cash flows provided by operating activities less cash capital expenditures. We believe that Free cash flow is a useful financial metric to assess our ability to pursue business opportunities and investments. Free cash flow is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows provided by operating activities or any other liquidity measures derived in accordance with GAAP.
We caution readers that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA, Adjusted net income, and Free cash flow may not be the same as similar measures used by other companies. Not all companies and analysts calculate EBITDA, Adjusted EBITDA, Adjusted net income or Free cash flow in the same manner. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by presenting the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.
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The following table reconciles EBITDA, Adjusted EBITDA, Adjusted net income and Free cash flow to the most directly comparable GAAP financial performance and liquidity measures for the periods indicated:
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Net income (loss) available to common shareholders | $ | 55 | $ | (2) | $ | 62 | $ | (231) | |||||||||||||||
| Series A convertible preferred stock dividends (see Note 14) | (9) | (10) | (33) | (15) | |||||||||||||||||||
| Net income (loss) | 64 | 8 | 95 | (216) | |||||||||||||||||||
| Interest expense—net | 50 | 63 | 158 | 178 | |||||||||||||||||||
| Income tax provision (benefit) | 27 | 13 | 30 | (53) | |||||||||||||||||||
| Depreciation expense | 79 | 88 | 242 | 257 | |||||||||||||||||||
| Amortization expense | 12 | 21 | 44 | 59 | |||||||||||||||||||
| EBITDA | 232 | 193 | 569 | 225 | |||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
Restructuring costs and asset impairment charges(1) | 7 | 23 | 11 | 39 | |||||||||||||||||||
Share-based compensation expense(2) | 13 | 10 | 36 | 29 | |||||||||||||||||||
LIFO reserve change(3) | 32 | 3 | 150 | 9 | |||||||||||||||||||
Loss on extinguishment of debt(4) | — | — | 23 | — | |||||||||||||||||||
Business transformation costs(5) | 3 | — | 17 | 8 | |||||||||||||||||||
COVID-19 bad debt (benefit) expense(6) | — | (30) | (15) | 65 | |||||||||||||||||||
COVID-19 product donations and inventory adjustments(7) | — | — | — | 40 | |||||||||||||||||||
COVID-19 other related expenses(8) | — | 4 | 1 | 15 | |||||||||||||||||||
Business acquisition and integration related costs and other(9) | 4 | 6 | 3 | 44 | |||||||||||||||||||
| Adjusted EBITDA | 291 | 209 | 795 | 474 | |||||||||||||||||||
Depreciation expense | (79) | (88) | (242) | (257) | |||||||||||||||||||
Interest expense—net | (50) | (63) | (158) | (178) | |||||||||||||||||||
Income tax provision, as adjusted(10) | (43) | (16) | (103) | (14) | |||||||||||||||||||
Adjusted net income(11) | $ | 119 | $ | 42 | $ | 292 | $ | 25 | |||||||||||||||
| Cash flow | |||||||||||||||||||||||
Cash flows from operating activities | $ | 270 | $ | (237) | $ | 520 | $ | 533 | |||||||||||||||
Capital expenditures | (66) | (23) | (173) | (154) | |||||||||||||||||||
Free cash flow | $ | 204 | $ | (260) | $ | 347 | $ | 379 | |||||||||||||||
(1) Consists primarily of severance and related costs, organizational realignment costs and asset impairment charges.
(2) Share-based compensation expense for expected vesting of stock awards and employee stock purchase plan.
(3) Represents the non-cash impact of LIFO reserve adjustments.
(4) Includes early redemption premium and the write-off of certain pre-existing debt issuance costs. See Note 10, Debt, for additional information.
(5) Consists primarily of costs related to significant process and systems redesign across multiple functions.
(6) Includes the changes in the reserve for doubtful accounts expense reflecting the collection risk associated with our customer base as a result of the COVID-19 pandemic.
(7) Includes COVID-19 related expenses related to inventory adjustments and product donations.
(8) Includes COVID-19 related costs that we are permitted to addback under certain agreements governing our indebtedness.
(9) Includes: (i) aggregate acquisition and integration related costs of $4 million and $5 million for the 13 weeks ended October 2, 2021 and September 26, 2020, respectively, and $16 million and $43 million for the 39 weeks ended October 2, 2021 and September 26, 2020, respectively; (ii) favorable legal settlement recovery of $13 million for the 39 weeks ended October 2, 2021; and (iii) other gains, losses or costs that we are permitted to addback for purposes of calculating Adjusted EBITDA under certain agreements governing our indebtedness.
(10) Represents our income tax provision adjusted for the tax effect of pre-tax items excluded from Adjusted net income and the removal of applicable discrete tax items. Applicable discrete tax items include changes in tax laws or rates, changes related to prior year unrecognized tax benefits, discrete changes in valuation allowances, and excess tax benefits associated with share-based compensation. The tax effect of pre-tax items excluded from Adjusted net income is computed using a statutory tax rate after taking into account the impact of permanent differences and valuation allowances.
(11) Effective as of the first quarter 2021, we have presented Adjusted net income. Previously, we presented Adjusted net income (loss) available to common shareholders.
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A reconciliation between the GAAP income tax benefit and the income tax provision, as adjusted, is as follows:
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| GAAP income tax provision (benefit) | $ | 27 | $ | 13 | $ | 30 | $ | (53) | |||||||||||||||
| Tax impact of pre-tax income adjustments | 17 | 3 | 68 | 72 | |||||||||||||||||||
| Discrete tax items | (1) | — | 5 | (5) | |||||||||||||||||||
| Income tax provision, as adjusted | $ | 43 | $ | 16 | $ | 103 | $ | 14 | |||||||||||||||
Comparison of Results
13 Weeks Ended October 2, 2021 and September 26, 2020
Highlights
•Total case volume increased 18.5% and independent restaurant case volume increased 25.1%
•Net sales increased $2,042 million, or 34.9%, to $7,890 million in 2021.
•Operating income increased $57 million, or 73.1%, to $135 million in 2021.
•Net income improved $56 million to $64 million in 2021.
•Adjusted EBITDA increased $82 million, or 39.2%, to $291 million in 2021. As a percentage of Net sales, Adjusted EBITDA was 3.7% in 2021, compared to 3.6% in 2020.
Net Sales
Total case volume increased 18.5% and independent restaurant case volume growth of 25.1%. The increase, all organic, was primarily driven by increased leisure and business travel and increased restaurant traffic due to eased COVID-19 related restrictions on our customers.
Net sales increased $2,042 million, or 34.9%, to $7,890 million in 2021, comprised of a $1,082 million, or 18.5%, increase in case volume and a $960 million, or 16.4%, increase in the overall Net sales rate per case. The increase in Net sales rate per case reflects a year-over-year average inflation increase of 11.5% in multiple product categories including beef, poultry, and pork, as well as favorable changes in our product mix. The year-over-year increase in inflation benefited Net sales since a significant portion of our Net sales is based on a pre-established markup over product cost. Organic sales of private brands represented approximately 34% of Net sales in both 2021 and 2020.
Gross Profit
Gross profit increased $267 million, or 27.4%, to $1,241 million in 2021, primarily as a result of the increase in Net sales, partially offset by unfavorable year-over-year LIFO adjustments. Our LIFO method of inventory costing resulted in an expense of $32 million in 2021 compared to expense of $3 million in 2020 due to inflation in multiple product categories including disposables, grocery, and seafood. Gross profit as a percentage of net sales was 15.7% in 2021, compared to 16.7% in 2020, due to the aforementioned factors.
Operating Expenses
Operating expenses, comprised of distribution, selling and administrative and restructuring costs and asset impairment charges, increased $210 million, or 23.4%, to $1,106 million in 2021. Operating expenses as a percentage of net sales were 14.0% in 2021, compared to 15.3% in 2020. The increase in operating expenses was primarily due to higher supply chain labor costs and non-labor distribution costs attributable to increased sales volume as compared to the prior year period. The prior year period reflected cost-reduction actions taken in response to COVID-19 and a reduction in our allowance for doubtful accounts. The Company also recognized $7 million of asset impairment charges in 2021 related to a rebranding initiative following the integration of a trade name acquired as part of the 2019 Food Group acquisition. During 2020, the Company also recognized $9 million of asset impairment charges related to COVID-19’s adverse impacts on the fair value of certain trade names acquired as part of the 2019 Food Group acquisition. These increases in operating expenses in 2021 were partially offset by cost savings initiated in 2020.
Operating Income (Loss)
Our operating income was $135 million in 2021, compared to an operating income of $78 million in 2020. The increase in operating income was due to the factors discussed in the relevant sections above.
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Other Income—Net
Other income—net includes components of net periodic pension benefit credits, exclusive of the service cost component associated with our defined benefit and other postretirement plans. We recognized other income—net of $6 million in both 2021 and 2020.
Interest Expense—Net
Interest expense—net decreased $13 million to $50 million in 2021, primarily due to a decrease in interest rates and outstanding debt in 2021 compared to 2020.
Income Taxes
For the 13 weeks ended October 2, 2021, our effective income tax rate of 30% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. The discrete tax items were not material individually or in the aggregate; however, when compared to the pre-tax income of $91 million for the period on a percentage basis, these tax items had a significant impact on the effective tax rate. For the 13 weeks ended September 26, 2020, our effective income tax rate of 58% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. Because pre-tax income for the 13 weeks ended September 26, 2020 was $21 million, all tax adjustments had a significant impact on a percentage basis on the effective income tax rate. The discrete tax items were not material individually or in the aggregate; however, when compared to the pre-tax income of $21 million for the period on a percentage basis, these tax items had a significant impact on the effective tax rate.
Net Income (Loss)
Our net income was $64 million in 2021, compared to net income of $8 million in 2020. The improvement in net income was due to the relevant factors discussed above.
39 Weeks Ended October 2, 2021 and September 26, 2020
Highlights
•Total case volume increased 20.8% and independent restaurant case volume increased 33.5%
•Net sales increased $5,101 million, or 30.5%, to $21,848 million in 2021.
•Operating income was $287 million in 2021, compared to operating loss of $107 million in 2020.
•Net income was $95 million in 2021, compared to net loss of $216 million in 2020.
•Adjusted EBITDA increased $321 million, or 67.7%, to $795 million in 2021. As a percentage of Net sales, Adjusted EBITDA was 3.6% in 2021, compared to 2.8% in 2020.
Net Sales
Total case volume increased 20.8% in 2021 and independent restaurant case volume growth of 33.5%. Organic case volume increased 17.8% and organic independent restaurant case volume increased 29.4%. The increase was primarily driven by increased leisure and business travel and increased restaurant traffic due to eased COVID-19 related restrictions on our customers.
Net sales increased $5,101 million, or 30.5%, to $21,848 million in 2021, comprised of a $3,490 million, or 20.8%, increase in case volume and a $1,611 million, or 9.7%, increase in the overall Net sales rate per case. The increase in Net sales rate per case primarily reflects a year-over-year average inflation increase of 7.5% in multiple product categories including poultry, beef and disposables, as well as favorable changes in our product mix. The year-over-year increase in inflation benefited Net sales since a significant portion of our Net sales is based on a pre-established markup over product cost. Organic sales of private brands represented approximately 34% and 35% of Net sales in 2021 and 2020, respectively. The increase in Net sales was also due to contributions from the Smart Foodservice acquisition. Smart Foodservice contributed net sales of $895 million in 2021, as compared to $484 million in 2020.
Gross Profit
Gross profit increased $702 million, or 25.9%, to $3,413 million in 2021, primarily as a result of the increase in Net sales. The increase in gross profit was also due to contributions from the Smart Foodservice acquisition. These increases in gross profit were partially offset by unfavorable year-over-year LIFO adjustments. Our LIFO method of inventory costing resulted in an expense of $150 million in 2021 compared to expense of $9 million in 2020 due to inflation in multiple product categories including beef, poultry, and grocery. Gross profit as a percentage of net sales was 15.6% in 2021, compared to 16.2% in 2020.
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Operating Expenses
Operating expenses, comprised of distribution, selling and administrative and restructuring costs and asset impairment costs, increased $308 million or 10.9%, to $3,126 million in 2021. Operating expenses as a percentage of net sales were 14.3% in 2021, compared to 16.8% in 2020. The increase in operating expenses was primarily due to higher supply chain labor costs and non-labor distribution costs attributable to increased sales volume as compared to the prior year period. The prior year period reflected cost-reduction actions taken in response to COVID-19. The Company also recognized $7 million of asset impairment charges related to a rebranding initiative following the integration of a trade name acquired as part of the 2019 Food Group acquisition. During 2020, the Company also recognized $9 million of asset impairment charges related to COVID-19’s adverse impacts on the fair value of certain trade names acquired as part of the 2019 Food Group acquisition. The increase in operating expenses was also due to the inclusion of operating expenses for the Smart Foodservice acquisition of $119 million in 2021, as compared to $69 million in 2020. These increases in operating expenses were partially offset by a $98 million lower provision for doubtful accounts during the 39 weeks ended October 2, 2021, cost savings initiated in 2020 and a favorable legal settlement recovery of $13 million during the 39 weeks ended October 2, 2021.
Operating Income (Loss)
Our operating income was $287 million in 2021, compared to operating loss of $107 million in 2020. The increase in operating income was due to the factors discussed in the relevant sections above.
Other Income—Net
Other income—net includes components of net periodic pension benefit credits, exclusive of the service cost component associated with our defined benefit and other postretirement plans. We recognized other income—net of $19 million and $16 million in 2021 and 2020, respectively. The increase in other income—net in 2021 is primarily due to the improved funded status of our defined benefit pension plan.
Interest Expense—Net
Interest expense—net decreased $20 million to $158 million in 2021, primarily due to a decrease in interest rates and outstanding debt in 2021 compared to 2020.
Loss on Extinguishment of Debt
As discussed in Note 10, Debt, in our consolidated financial statements, we incurred a $23 million loss on extinguishment of debt during the 39 weeks ended October 2, 2021 related to the repayment of our Unsecured Senior Notes due 2024 and 2020 Incremental Term Loan Facility related to the issuance of our Senior Unsecured Notes due 2029.
Income Taxes
For the 39 weeks ended October 2, 2021, our effective income tax rate of 24 % differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of $5 million, primarily related to excess tax benefits associated with share-based compensation. For the 39 weeks ended September 26, 2020, our effective income tax rate of 20 % differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax expense of $2 million primarily related to an increase in an unrecognized tax benefit and a tax expense of $2 million primarily related to a tax benefit shortfall associated with share-based compensation.
Net Income (Loss)
Our net income was $95 million in 2021, compared to net loss of $216 million in 2020. The improvement in net income was due to the relevant factors discussed above.
Liquidity and Capital Resources
Our ongoing operations and strategic objectives require working capital and continuing capital investment. Our primary sources of liquidity include cash provided by operations, as well as access to capital from bank borrowings and other types of debt and financing arrangements. We believe that the combination of cash on hand and generated from operations, together with borrowing capacity under the agreements governing our indebtedness and other financing arrangements, will be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements through the end of fiscal year 2022. As of October 2, 2021, the Company had approximately $2.5 billion in cash and available liquidity.
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Indebtedness
The aggregate carrying value of our indebtedness was $5,396 million, net of $48 million of unamortized deferred financing costs, as of October 2, 2021. We had no outstanding borrowings and had issued letters of credit totaling $253 million under the ABL Facility as of October 2, 2021. There was remaining capacity of $1,737 million under the ABL Facility as of October 2, 2021.
The Initial Term Loan Facility had a carrying value of $1,783 million, net of $2 million of unamortized deferred financing costs, as of October 2, 2021. During the 39 weeks ended October 2, 2021, the Company made voluntary prepayments of the Initial Term Loan Facility totaling $300 million.
The 2019 Incremental Term Loan Facility had a carrying value of $1,444 million, net of $26 million of unamortized deferred financing costs, as of October 2, 2021.
The Secured Notes had a carrying value of $989 million, net of $11 million of unamortized deferred financing costs, as of October 2, 2021. We also had $281 million of obligations under financing leases for transportation equipment and building leases as of October 2, 2021.
As of October 2, 2021, the Unsecured Senior Notes due 2029 had a carrying value of $891 million, net of $9 million of unamortized deferred financing costs.
The ABL Facility will mature in 2024. The Initial Term Loan Facility and the 2019 Incremental Term Loan Facility will mature in 2023 and 2026, respectively. The Secured Notes will mature in 2025. The Unsecured Senior Notes due 2029 will mature in 2029. As economic conditions permit, we will consider opportunities to repurchase, refinance or otherwise reduce our debt obligations on favorable terms. Any potential debt reduction or refinancing could require significant use of our other available liquidity and capital resources.
The agreements governing our indebtedness contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on our assets, pay dividends, or engage in mergers or consolidations. USF had approximately $1.4 billion of restricted payment capacity under these covenants and approximately $2.8 billion of its net assets were restricted after taking into consideration the net deferred tax assets and intercompany balances that eliminate in consolidation as of October 2, 2021.
Every quarter, we review rating agency changes for all of the lenders that have a continuing obligation to provide us with funding. We are not aware of any facts that indicate our lenders will not be able to comply with the contractual terms of their agreements with us. We continue to monitor the credit markets generally and the strength of our lender counterparties.
From time to time, we may repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our leverage, including the voluntary prepayments under the Initial Term Loan Facility noted above. These actions may include open market repurchases, negotiated repurchases, and other retirements of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, will depend on market conditions, our debt trading levels, our cash position, and other considerations.
See Note 10, Debt, in our consolidated financial statements, for a further description of our indebtedness.
Cash Flows
The following table presents condensed highlights from our Consolidated Statements of Cash Flows for the periods presented:
| 39 Weeks Ended | |||||||||||
| October 2, 2021 | September 26, 2020 | ||||||||||
| Net income (loss) | $ | 95 | $ | (216) | |||||||
| Changes in operating assets and liabilities | 62 | 383 | |||||||||
| Other adjustments | 363 | 366 | |||||||||
| Net cash provided by operating activities | 520 | 533 | |||||||||
| Net cash used in investing activities | (166) | (1,087) | |||||||||
| Net cash (used in) provided by financing activities | (411) | 1,475 | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (57) | 921 | |||||||||
Cash, cash equivalents and restricted cash—beginning of period | 829 | 98 | |||||||||
| Cash, cash equivalents and restricted cash—end of period | $ | 772 | $ | 1,019 | |||||||
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Operating Activities
Cash flows provided by operating activities was $520 million for the 39 weeks ended October 2, 2021, compared to cash flows provided by operating activities of $533 million for the 39 weeks ended September 26, 2020. The Company’s working capital requirements increased in 2021 in line with the improvement in operating results and recovery of sales volumes.
Investing Activities
Cash flows used in investing activities in the 39 weeks ended October 2, 2021 and September 26, 2020 included cash expenditures of $173 million and $154 million, respectively, on investments in information technology, new construction and/or expansion of distribution facilities, and property and equipment for fleet replacement. Cash flows used in investing activities for the 39 weeks ended September 26, 2020 also included the $973 million cash purchase price for the acquisition of Smart Foodservice.
We expect total cash capital expenditures in fiscal year 2021 to be between $300 million and $315 million, exclusive of approximately $55 million to $65 million of capital expenditures under our fleet financing leases. We expect to fund our capital expenditures with available cash or cash generated from operations and through fleet financing.
Financing Activities
Cash flows used by financing activities in the 39 weeks ended October 2, 2021 included $96 million of scheduled payments under our Term Loan Facilities and financing leases and $300 million of voluntary prepayments of the Initial Term Loan Facility. We incurred approximately $18 million of lender fees and third-party costs in connection with our issuance of the Unsecured Notes due 2029, consisting of a $9 million early redemption premium related to the Unsecured Senior Notes due 2024 and $9 million of costs associated with the issuance of the Unsecured Senior Notes due 2029, which were capitalized as deferred financing costs. Cash flows used by financing activities in the 39 weeks ended October 2, 2021 also included $18 million of dividends on our Series A convertible preferred stock.
Cash flows provided by financing activities for the 39 weeks ended October 2, 2021 included aggregate borrowings of $900 million under the Unsecured Senior Notes due 2029. We used the proceeds from the issuance of the Unsecured Senior Notes due 2029, together with cash on hand, to redeem all of the then outstanding Unsecured Senior Notes due 2024 and repay all of the then outstanding borrowings under the 2020 Incremental Term Loan Facility. Cash flows provided by financing activities for the 39 weeks ended October 2, 2021 also included $16 million of proceeds received from stock purchases under our employee stock purchase plan and $13 million of proceeds from the exercise of employee stock options, which were offset by $13 million of employee tax withholdings paid in connection with the vesting of stock awards.
Cash flows provided by financing activities for the 39 weeks ended September 26, 2020 included aggregate borrowings of $700 million under the 2020 Incremental Term Loan Facility, the proceeds of which were used to finance, in part, the Smart Foodservice acquisition; $1.0 billion of gross proceeds from the issuance of the Secured Notes; and $500 million of proceeds, net of $9 million of related fees, from the issuance and sale of 500,000 shares of our Series A convertible preferred stock. We borrowed an aggregate of $1 billion under the ABL Facility and our former accounts receivable financing facility (the “ABS Facility”) in March 2020 for the purposes of increasing cash on hand and to preserve financial flexibility in light of the current economic and business uncertainty resulting from the onset of the COVID-19 pandemic. Financing activities for the 39 weeks ended September 26, 2020 also included $15 million of proceeds from stock purchases under our employee stock purchase plan and $2 million of proceeds received from the exercise of employee stock options, which were partially offset by $5 million of employee tax withholdings paid in connection with the vesting of stock awards.
Cash flows used by financing activities for the 39 weeks ended September 26, 2020 included $105 million of scheduled payments under our Term Loan Facilities and financing leases. We used part of the proceeds from the issuance of the Secured Notes to repay $400 million in principal amount of the 2020 Incremental Term Loan Facility, and we used $542 million of cash on hand to repay all of our outstanding borrowings under the ABS Facility, which was subsequently terminated. We incurred approximately $33 million of lender fees and third-party costs in connection with the aforementioned financing transactions.
Retirement Plans
See Note 12, Retirement Plans, in our consolidated financial statements for a description of our retirement plans.
Off-Balance Sheet Arrangements
We had $253 million of letters of credit outstanding, primarily in favor of certain commercial insurers to secure obligations with respect to our insurance programs, under the ABL Facility as of October 2, 2021.
Except as disclosed above, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
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Contractual Obligations
See the Contractual Obligations section in Part II, Item 7—“Management's Discussion and Analysis of Financial Condition and Results of Operations” of the 2020 Annual Report for our contractual cash obligations as of January 2, 2021. There have been no material changes to our specified contractual obligations through October 2, 2021, except as disclosed in Note 10, Debt, in our consolidated financial statements.
Critical Accounting Policies and Estimates
We have prepared the financial information in this Quarterly Report in accordance with GAAP. Preparing the Company's consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods. We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances. These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2020 Annual Report includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the 39 weeks ended October 2, 2021.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2, Recent Accounting Pronouncements, in our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain risks arising from both our business operations and overall economic conditions. Our market risks include interest rate risk and fuel price risk. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Interest Rate Risk
Our debt exposes us to risk of fluctuations in interest rates. Floating rate debt, where the interest rate fluctuates periodically, exposes us to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes us to changes in market interest rates reflected in the fair value of the debt and to the risk that we may need to refinance maturing debt with new debt at higher rates. We manage our debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps as a tool to achieve that position. We had previously entered into interest rate swap agreements to limit our exposure to variable interest rate terms on certain borrowings under our Initial Term Loan Facility. The interest rate swap agreements expired on July 31, 2021. The risks associated with interest rate swaps include changes in the interest rates affecting the fair value of such instruments, potential increases in interest expense due to market increases in floating interest rates and the creditworthiness of the counterparties.
Approximately 60% of the principal amount of our debt bore interest at floating rates based on LIBOR or ABR, as of October 2, 2021. A hypothetical 1% change in the applicable rate would cause the interest expense on our floating rate debt to change by approximately $33 million per year (see Note 10, Debt, in our consolidated financial statements). In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR announced that it intends to phase out the use of LIBOR by the end of 2021. On March 5, 2021, the ICE Benchmark Authority (“IBA”), the administrator of LIBOR, announced the cessation of the publication of the one week and two month U.S. dollar LIBOR tenors immediately following their publication on December 31, 2021, and all other U.S. dollar LIBOR tenors immediately following their publication on June 30, 2023. We are unable to predict the impact of using alternative reference rates and corresponding rate risk as of this time.
Fuel Price Risk
We are also exposed to risk due to fluctuations in the price and availability of diesel fuel. We require significant quantities of diesel fuel for our vehicle fleet, and the price and supply of diesel fuel are unpredictable and fluctuate based on events outside our control, including geopolitical developments, supply and demand for oil and gas, regional production patterns, weather conditions and environmental concerns. Increases in the cost of diesel fuel can negatively affect consumer confidence and discretionary spending and increase the prices we pay for products, and the costs we incur to deliver products to our customers.
Our activities to minimize fuel cost risk include route optimization, improving fleet utilization and assessing fuel surcharges. We also enter into forward purchase commitments for a portion of our projected diesel fuel requirements. As of October 2, 2021, we had diesel fuel forward purchase commitments totaling $31 million, which fix approximately 19% of our projected diesel fuel purchase needs
29
through December 2022. Our remaining fuel purchase needs will occur at market rates unless contracted for at a fixed price or hedged at a later date. Using current published market price projections for diesel and estimated fuel consumption needs, a hypothetical 10% unfavorable change in diesel prices from the market price could result in approximately $17 million in additional fuel cost on uncommitted volumes through December 2022.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that this information is accumulated and communicated to Company management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of October 2, 2021.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended October 2, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As permitted by applicable SEC guidance, the scope of our evaluation regarding changes in our internal control over financial reporting during the fiscal quarter ended October 2, 2021 excluded internal control over financial reporting for Smart Foodservice, which was acquired on April 24, 2020.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information relating to legal proceedings, see Note 18, Commitments and Contingencies, in our consolidated financial statements.
Item 1A. Risk Factors
There have been no material changes to the principal risks that we believe are material to our business, results of operations, and financial condition from those disclosed in Part I, Item 1A—“Risk Factors” of the 2020 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| Exhibit Number | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101 | Interactive Data File. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| US FOODS HOLDING CORP. | ||||||||||||||
| (Registrant) | ||||||||||||||
| Date: | November 8, 2021 | By: | /s/ PIETRO SATRIANO | |||||||||||
| Pietro Satriano | ||||||||||||||
| Chairman and Chief Executive Officer | ||||||||||||||
| Date: | November 8, 2021 | By: | /s/ DIRK J. LOCASCIO | |||||||||||
| Dirk J. Locascio | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
32
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Pietro Satriano, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of US Foods Holding Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 8, 2021
| /s/ PIETRO SATRIANO | ||
| Pietro Satriano | ||
| Chairman and Chief Executive Officer | ||
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dirk J. Locascio, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of US Foods Holding Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 8, 2021
| /s/ DIRK J. LOCASCIO | ||
| Dirk J. Locascio | ||
| Chief Financial Officer | ||
Exhibit 32.1
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of US Foods Holding Corp. (the “Company”) on Form 10-Q for the quarterly period ended October 2, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Pietro Satriano, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 8, 2021
| /s/ PIETRO SATRIANO | ||
| Pietro Satriano | ||
| Chairman and Chief Executive Officer | ||
Exhibit 32.2
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of US Foods Holding Corp. (the “Company”) on Form 10-Q for the quarterly period ended October 2, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dirk J. Locascio, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 8, 2021
| /s/ DIRK J. LOCASCIO | ||
| Dirk J. Locascio | ||
| Chief Financial Officer | ||