NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
|
OVERVIEW AND BASIS OF PRESENTATION
|
US Foods Holding Corp., a Delaware corporation, and
its consolidated subsidiaries are referred to here as we, our, us, the Company, or US Foods. US Foods conducts all of its operations through its wholly owned subsidiary US Foods, Inc.
(USF). All of the indebtedness, as further described in Note 10, Debt, is an obligation of USF, and its subsidiaries. US Foods is controlled by investment funds associated with or designated by Clayton, Dubilier & Rice, LLC
(CD&R) and Kohlberg Kravis Roberts & Co., L.P. (KKR). KKR and CD&R are collectively referred to herein as the Sponsors.
Terminated Acquisition by Sysco
On December 8, 2013, US Foods entered into an agreement and plan of merger (the
Acquisition Agreement) with Sysco Corporation (Sysco); Scorpion Corporation I, Inc., a wholly owned subsidiary of Sysco (Merger Sub One); and Scorpion Company II, LLC, a wholly owned subsidiary of Sysco
(Merger Sub Two), through which Sysco would have acquired US Foods (the Acquisition) on the terms and subject to the conditions set forth in the Acquisition Agreement. The closing of the Acquisition was subject to customary
conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
On February 2, 2015, US Foods, USF and certain of its subsidiaries, and Sysco entered into an asset purchase agreement (the Asset
Purchase Agreement) with Performance Food Group, Inc. (PFG), through which PFG agreed to purchase, subject to the terms and conditions of the Asset Purchase Agreement, eleven USF distribution centers and related assets and
liabilities, in connection with (and subject to) the closing of the Acquisition.
On February 19, 2015, the U.S. Federal Trade
Commission (the FTC) voted by a margin of 3-2 to seek to block the proposed Acquisition by filing a federal district court action in the District of Columbia for a preliminary injunction. The preliminary injunctive hearing in federal
district court commenced on May 5, 2015 and, on June 23, 2015, the federal district court granted the FTCs request for a preliminary injunction to block the proposed Acquisition.
On June 26, 2015, US Foods, Sysco, Merger Sub One and Merger Sub Two entered into an agreement to terminate the Acquisition Agreement and
Sysco paid a termination fee of $300 million to US Foods. Upon the termination of the Acquisition Agreement, the Asset Purchase Agreement automatically terminated and USF paid a termination fee of $12.5 million to PFG pursuant to the terms of the
Asset Purchase Agreement.
Reverse Stock Split
In connection with its initial public offering (IPO), the
Companys Board of Directors approved a 2.7-for one reverse stock split of the Companys common stock. The par value per share of common stock and authorized shares of common stock remain unchanged at $0.01 per share and 600 million
shares, respectively. The reverse stock split became effective on May 17, 2016. All common share and per share amounts in the financial statements and notes have been retroactively adjusted to give effect to the reverse stock split. The Company
also reclassified $3 million related to the reduction in aggregate par value of common stock to Additional paid-in-capital.
Initial
Public Offering
On June 1, 2016 the Company closed its IPO selling 51,111,111 shares of common stock for a cash offering price of $23.00 per share ($21.9075 per share net of underwriter discounts and commissions and before offering
expenses), including the exercise in full by underwriters of their option to purchase 6,666,667 additional shares. The IPO was registered under the Securities Act of 1933, as amended (the Securities Act), on a registration statement on
Form S-1 (Registration No. 333-209442), as amended (the Registration Statement). The Companys common stock is listed on the New York Stock Exchange under the ticker symbol USFD.
The Company used the net proceeds from the IPO of approximately $1,114 million (after the payment of underwriter discounts and commissions and
offering expenses) to redeem $1,090 million principal amount, and pay the related $23 million early redemption premium, for USFs 8.5% unsecured Senior Notes due June 30, 2019, (the Old Senior Notes).
USF Public Filer Status
During the fiscal second quarter 2013, USF completed the registration of $1,350 million aggregate principal
amount of its Old Senior Notes and became subject to rules and regulations of the Securities and Exchange Commission (the SEC), including periodic and current reporting requirements under the Securities Exchange Act of 1934, as
amended. USF did not receive any proceeds from the registration of the Old Senior Notes. USF had filed periodic reports as a voluntary filer pursuant to contractual obligations in the indenture governing the Old Senior Notes. On June 30,
2016, all of the Old Senior Notes were redeemed, as noted above, and USF ceased to be a voluntary filer. See Note 10, Debt.
Business Description
USF markets and distributes fresh, frozen and dry food and non-food products to foodservice customers
throughout the United States. These customers include independently owned single and multi-location restaurants, regional concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military
organizations, colleges and universities, and retail locations.
5
Basis of Presentation
The Company operates on a 52-53 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 fourth quarter. The Companys fiscal year 2016 is a 52-week year and fiscal year 2015 was a 53-week year. The accompanying
consolidated financial statements include the accounts of US Foods and its wholly owned subsidiary, USF and its wholly owned subsidiaries. All intercompany transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP) for interim financial information and the applicable rules and regulations of the SEC. Accordingly, they do not include all the information and disclosures required by GAAP for annual financial statements. These
consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Registration Statement. Certain footnote disclosures included in the annual financial statements
prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.
The consolidated financial statements have been prepared by the Company, without audit, with the exception of the January 2, 2016
Consolidated Balance Sheet which was included in the Registration Statement. The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The
consolidated financial statements reflect all adjustments which are of a normal and recurring nature that are, in the opinion of management, 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 the full year.
2.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
In August 2016, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payment,
which addresses the classification and presentation
of certain cash receipts and cash payments in the statement of cash flows, with the objective of reducing the existing diversity in practice. This guidance is effective for fiscal yearsand interim periods within those fiscal
yearsbeginning after December 15, 2017, with early adoption permitted. The Company is currently reviewing the provisions of the new standard.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments,
which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require
entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entitys
assumptions, models and methods for estimating expected credit losses. This guidance is effective for fiscal yearsand interim periods within those fiscal yearsbeginning after December 15, 2018, with early adoption permitted. The
Company is currently reviewing the provisions of the new standard.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal yearsand interim periods within those fiscal yearsbeginning after December 15, 2016,
with early adoption permitted. The Companys adoption of this ASU in the fiscal second quarter of 2016 did not materially affect its financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842),
which supersedes Accounting Standards Codification
(ASC) 840, Leases
.
This ASU, based on the principle that entities should recognize assets and liabilities arising from leases, does not significantly change the lessees recognition, measurement and presentation of expenses
and cash flows from the previous accounting standard. Leases are classified as finance or operating. The ASUs primary change is the requirement for entities to recognize a lease liability for payments and a right of use asset representing the
right to use the leased asset during the term of operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors
accounting is largely unchanged from the previous accounting standard. In addition, the ASU expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number
of practical expedients. This guidance is effective for fiscal yearsand interim periods within those fiscal yearsbeginning after December 15, 2018, with early adoption permitted. The Company is currently reviewing the provisions of
the new standard.
6
In May 2014, the FASB issued ASU No. 2014-09
Revenue from Contracts with
Customers,
which will be introduced into the FASBs ASC as Topic 606. Topic 606 replaces Topic 605, the previous revenue recognition guidance. The new standards core principle is for companies to recognize revenue to depict the
transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the Company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced
disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. The new standard will
be effective for the Company in the first quarter of fiscal 2018, with early adoption permitted in the first quarter of fiscal 2017. The new standard permits two implementation approaches, one requiring full retrospective application of the new
standard with restatement of prior years, and one requiring modified retrospective application of the new standard with disclosure of results under old standards. The Company is currently evaluating the impact of this ASU and has not yet selected an
implementation approach.
Business acquisitions during the 39-weeks ended October 1,
2016, included the stock of Fresh Unlimited, Inc. d/b/a Freshway Foods, a produce processor, repacker, and distributor, acquired in June, and certain assets of Cara Donna Provisions Co., Inc. and Cara Donna Properties LLC, a broadline distributor,
acquired in March. Total consideration consisted of cash of approximately $96 million, plus $6 million for the estimated fair value of contingent consideration. On December 31, 2015, the Company purchased Waukesha Wholesale Foods, Inc. d/b/a
Dierks Waukesha, a broadline distributor for cash of $69 million. The acquisitions, made in order to expand the Companys presence in the produce category and in certain geographic areas, are integrated into the Companys foodservice
distribution network and were funded with cash from operations.
In March 2016, approximately $1 million was received as a purchase price
adjustment related to the 2015 business acquisition resulting in minimal decreases to Property and equipment- net and Goodwill.
The
following table summarizes the purchase price allocations for the 2016 and 2015 business acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
January 2,
|
|
|
|
2016
|
|
|
2016
|
|
Accounts receivable
|
|
|
17,180
|
|
|
|
6,724
|
|
Inventories
|
|
|
6,922
|
|
|
|
7,022
|
|
Other current assets
|
|
|
474
|
|
|
|
702
|
|
Property and equipment
|
|
|
21,403
|
|
|
|
7,200
|
|
Goodwill
|
|
|
24,472
|
|
|
|
40,242
|
|
Other intangible assets
|
|
|
48,600
|
|
|
|
21,200
|
|
Accounts payable
|
|
|
(12,484
|
)
|
|
|
(3,290
|
)
|
Accrued expenses and other current liabilities
|
|
|
(8,397
|
)
|
|
|
(1,554
|
)
|
Long-term debt
|
|
|
(2,514
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
(8,765
|
)
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions
|
|
$
|
95,656
|
|
|
$
|
69,481
|
|
|
|
|
|
|
|
|
|
|
The 2016 and 2015 acquisitions did not materially affect the Companys results of operations or financial
position and, therefore, pro forma financial information has not been provided.
The Companys inventoriesconsisting mainly of food and other
foodservice-related productsare primarily considered finished goods. Inventory costs include the purchase price of the product and freight charges to deliver it to the Companys warehouses, as well as depreciation and labor related to
processing facilities and equipment, and are net of certain cash or non-cash considerations received from vendors. The Company assesses the need for valuation allowances for slow-moving, excess and obsolete inventories by estimating the net
recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions.
7
The Company records inventories at the lower of cost or market, using the last-in, first-out
(LIFO) method. The base year values of beginning and ending inventories are determined using the inventory price index computation method. This links current costs to original costs in the base year when the Company adopted
LIFO. At October 1, 2016, and January 2, 2016, the LIFO balance sheet reserves were $109 million and $134 million, respectively. As a result of net changes in LIFO reserves, Cost of goods sold decreased $7 million and $20 million, for the
13-weeks ended October 1, 2016 and September 26, 2015, respectively, and decreased $25 million and $42 million, for the 39-weeks ended October 1, 2016 and September 26, 2015, respectively.
5.
|
ACCOUNTS RECEIVABLE FINANCING PROGRAM
|
Under its accounts receivable financing facility
dated as of August 27, 2012, as amended (the 2012 ABS Facility), USF, and from time to time certain of its subsidiaries, sellon a revolving basistheir eligible receivables to a wholly owned, special purpose, bankruptcy remote
subsidiary (the Receivables Company). The Receivables Company, in turn, grants a continuing security interest in all of its rights, title and interest in the eligible receivables to the administrative agent, for the benefit of the
lenders as defined by the 2012 ABS Facility. The Company consolidates the Receivables Company and, consequently, the transfer of the receivables is a transaction internal to the Company and the receivables have not been derecognized from the
Companys Consolidated Balance Sheets. On a daily basis, cash from accounts receivable collections is remitted to the Company as additional eligible receivables are sold to the Receivables Company. If, on a weekly settlement basis, there are
not sufficient eligible receivables available as collateral, the Company is required to either provide cash collateral or, in lieu of providing cash collateral, it can pay down its borrowings on the 2012 ABS Facility to cover the shortfall. Due to
sufficient eligible receivables available as collateral, no cash collateral was held at October 1, 2016 or January 2, 2016. Included in the Companys accounts receivable balance as of October 1, 2016 and January 2, 2016 was
$1,008 million and $933 million, respectively, of receivables held as collateral in support of the 2012 ABS Facility. See Note 10, Debt for a further description of the 2012 ABS Facility.
The Company classifies its closed facilities as Assets held for
sale at the time management commits to a plan to sell the facility, the facility is actively marketed and available for immediate sale, and the sale is expected to be completed within one year. Due to market conditions, certain facilities may be
classified as Assets held for sale for more than one year as the Company continues to actively market the facilities at reasonable prices.
The Assets held for sale activity for the 39-weeks ended October 1, 2016 was as follows (in thousands):
|
|
|
|
|
Balance at January 2, 2016
|
|
$
|
5,459
|
|
Transfers in
|
|
|
23,245
|
|
Assets sold
|
|
|
(3,894
|
)
|
Tangible asset impairment charges
|
|
|
(125
|
)
|
|
|
|
|
|
Balance at October 1, 2016
|
|
$
|
24,685
|
|
|
|
|
|
|
During the Companys third quarter of 2016, the facility acquired as part of the Cara Donna acquisition
was closed and transferred to Assets held for sale. During the Companys second quarter of 2016, the Baltimore distribution facility was closed and reclassified to Assets held for sale. During the 39-weeks ended October 1, 2016 the
Fairmont, Minnesota and Lakeland, Florida facilities were sold for aggregate proceeds of $7 million, resulting in a $3 million gain.
7.
|
PROPERTY AND EQUIPMENT
|
Property and equipment are stated at cost. Depreciation of
property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to 40 years. Property and equipment under capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the remaining terms of the respective lease or the estimated useful lives of the assets. At October 1, 2016 and January 2, 2016, Property and equipment-net included accumulated depreciation of $1,671
million and $1,517 million, respectively. Depreciation expense was $66 million and $65 million for the 13-weeks ended October 1, 2016 and September 26, 2015, respectively, and $198 million and $189 million for the 39-weeks ended
October 1, 2016 and September 26, 2015, respectively.
8
8.
|
GOODWILL AND OTHER INTANGIBLES
|
Goodwill and Other intangible assets includes the cost
of acquired businesses in excess of the fair value of the tangible net assets acquired. Other intangible assets include Customer relationships, Noncompete agreements, and the Brand names and trademarks comprising the Companys portfolio of
exclusive brands and trademarks. Brand names and trademarks are indefinite-lived intangible assets, and accordingly, are not subject to amortization.
Customer relationship and Noncompete agreements are intangible assets with definite lives, and are carried at the acquired fair value less
accumulated amortization. Customer relationship and Noncompete agreements are amortized over the estimated useful lives (four to ten years). Amortization expense was $40 million and $36 million for the 13-weeks ended October 1, 2016 and
September 26, 2015, respectively, and $116 million and $110 million for the 39-weeks ended October 1, 2016 and September 26, 2015, respectively.
Goodwill and Other intangibles, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
January 2,
|
|
|
2016
|
|
|
2016
|
|
Goodwill
|
|
$
|
3,899,514
|
|
|
$
|
3,875,719
|
|
|
|
|
|
|
|
|
|
|
Other intangiblesnet
|
|
|
|
|
|
|
|
|
Customer relationshipsamortizable:
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
1,391,812
|
|
|
$
|
1,373,920
|
|
Accumulated amortization
|
|
|
(1,234,909
|
)
|
|
|
(1,149,572
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
|
156,903
|
|
|
|
224,348
|
|
|
|
|
|
|
|
|
|
|
Noncompete agreementsamortizable:
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
800
|
|
|
|
800
|
|
Accumulated amortization
|
|
|
(467
|
)
|
|
|
(347
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
|
333
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
Brand names and trademarksnot amortizing
|
|
|
252,800
|
|
|
|
252,800
|
|
|
|
|
|
|
|
|
|
|
Total Other intangiblesnet
|
|
$
|
410,036
|
|
|
$
|
477,601
|
|
|
|
|
|
|
|
|
|
|
The 2016 increase in Goodwill reflects the 2016 business acquisitions, partially offset by a purchase price
adjustment related to the December 2015 acquisition. The 2016 increase in the gross carrying amount of Customer relationships is attributable to the 2016 business acquisitions of $49 million see Note 3, Business Acquisitions partially
offset by the write-off of fully amortized Customer relationships intangible assets of $31 million.
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 Companys policy is to assess for
impairment at the beginning of each fiscal third quarter. For intangible assets with definite lives, the Company assesses impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All Goodwill is
assigned to the consolidated company as the reporting unit. The Company completed its most recent annual impairment assessment for Goodwill and indefinite-lived intangible assets as of July 3, 2016the first day of the fiscal third quarter
of 2016with no impairments noted.
For Goodwill, the reporting unit used in assessing impairment is the Companys one business
segment as described in Note 19Business Segment Information. The Companys assessment for impairment of Goodwill utilized a combination of discounted cash flow analysis, comparative market multiples, and comparative market transaction
multiples, which were weighted 50%, 35% and 15% respectively, to determine the fair value of the reporting unit for comparison to the corresponding carrying value. If the carrying value of the reporting unit exceeds its fair value, the Company must
then perform a comparison of the implied fair value of Goodwill with its carrying value. If the carrying value of the Goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to the excess. Based upon the
Companys fiscal 2016 annual Goodwill impairment analysis, the Company concluded the fair value of its reporting unit exceeded its carrying value.
9
The Companys fair value estimates of the brand names and trademarks indefinite-lived
intangible assets are based on a relief- from-royalty method. The fair value of these intangible assets is determined for comparison to the corresponding carrying value. If the carrying value of these assets exceeds its fair value, an impairment
loss is recognized in an amount equal to the excess. Based upon the Companys fiscal 2016 annual impairment analysis, the Company concluded the fair value of the Companys brand names and trademarks exceeded its carrying value.
Due to the many variables inherent in estimating fair value and the relative size of the recorded indefinite-lived intangible assets,
differences in assumptions may have a material effect on the results of the Companys impairment analysis.
9.
|
FAIR VALUE MEASUREMENTS
|
The Company follows the accounting standards for fair value,
whereas fair value is a market-based measurement, not an entity-specific measurement. The Companys 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 1observable inputs, such as quoted prices in active markets
|
|
|
|
Level 2observable inputs other than those included in Level 1such 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 3unobservable inputs in 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 at
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 Companys assets and liabilities measured at fair value on a recurring and nonrecurring basis as of October 1, 2016 and
January 2, 2016, aggregated by the level in the fair value hierarchy within which those measurements fall, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
54,464
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2016
|
|
$
|
54,464
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
113,700
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
113,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2016
|
|
$
|
113,700
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
113,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable for business acquisitions
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,375
|
|
|
$
|
6,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2016
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,375
|
|
|
$
|
6,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,600
|
|
|
$
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2016
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,600
|
|
|
$
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Recurring Fair Value Measurements
Money Market Funds
Money market funds include highly liquid investments with a maturity of three or fewer months. They are valued using quoted market prices in
active markets and are classified under Level 1 within the fair value hierarchy.
Nonrecurring Fair Value Measurements
Assets Held for Sale
The Company records Assets held for sale at the lesser of the carrying amount or estimated fair value less cost to sell. Certain Assets held
for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in insignificant Tangible asset impairment charges in 2016 and 2015. Fair value was estimated by the Company based on information received from real estate
brokers. The amounts included in the tables above, classified under Level 3 within the fair value hierarchy, represent the estimated fair values of those Assets held for sale that became the new carrying amounts at the time the impairments were
recorded.
Contingent Consideration Payable for Business Acquisitions
Certain 2016 business acquisitions involve contingent consideration in the event certain operating results are achieved over a one-year period
from the respective dates of such acquisitions. The amount included in the above table represents the estimated fair value of the contingent consideration.
Other Fair Value Measurements
The carrying value of cash, restricted cash, Accounts receivable, Bank checks outstanding, Accounts payable and accrued expenses approximate
their fair values due to their short-term maturities. The carrying value of the self-funded industrial revenue bond asset and the corresponding long-term liability approximate their fair values. See Note 10, Debt, for a further description of the
industrial revenue bond agreement.
The fair value of USFs total debt approximated $3.9 billion and $4.8 billion, as compared to its
aggregate carrying value of $3.8 billion and $4.7 billion as of October 1, 2016 and January 2, 2016, respectively. The October 1, 2016 and January 2, 2016 fair value of USFs 5.875% unsecured Senior Notes due June 15,
2024, (the 2016 Senior Notes) and Old Senior Notes, estimated at $0.6 billion and $1.4 billion, respectively, was classified under Level 2 of the fair value hierarchy, with fair value based upon the closing market price at the end of the
reporting period. The fair value of the balance of USFs 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 USFs overall credit risk. See Note 10, Debt for further description of USFs debt.
11
As provided in Note 1, all indebtedness is an obligation of USF, and its subsidiaries.
USFs debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Description
|
|
Maturity
|
|
Interest rate at
October 1, 2016
|
|
|
October 1,
2016
|
|
|
January 2,
2016
|
|
ABL Facility
|
|
October 20, 2020
|
|
|
3.04
|
%
|
|
$
|
30,000
|
|
|
$
|
|
|
2012 ABS Facility
|
|
September 30, 2018
|
|
|
1.76
|
|
|
|
680,000
|
|
|
|
586,000
|
|
Amended and Restated 2016 Term Loan (net of $13,825 of unamortized deferred financing
costs)
|
|
June 27, 2023
|
|
|
4.00
|
|
|
|
2,180,675
|
|
|
|
|
|
Amended 2011 Term Loan (net of $9,848 of unamortized deferred financing costs)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,037,652
|
|
2016 Senior Notes (net of $7,423 of unamortized deferred financing costs)
|
|
June 15, 2024
|
|
|
5.88
|
|
|
|
592,577
|
|
|
|
|
|
Old Senior Notes (net of $13,441 of unamortized deferred financing costs)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,334,835
|
|
CMBS Fixed Facility (net of $1,473 of unamortized deferred financing costs)
|
|
|
|
|
|
|
|
|
|
|
|
|
470,918
|
|
Obligations under capital leases
|
|
20182025
|
|
|
2.36 - 6.18
|
|
|
|
315,325
|
|
|
|
270,406
|
|
Other debt
|
|
20182031
|
|
|
5.75 - 9.00
|
|
|
|
32,773
|
|
|
|
33,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
|
|
|
3,831,350
|
|
|
|
4,733,136
|
|
Add unamortized premium
|
|
|
|
|
|
|
|
|
|
|
|
|
11,652
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
(75,230
|
)
|
|
|
(62,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
$
|
3,756,120
|
|
|
$
|
4,682,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 1, 2016, $0.9 billion of the total debt was at a fixed rate and $2.9 billion was at a floating
rate.
Debt Transactions
IPO Proceeds
As discussed
in Note 1, Overview and Basis of Presentation, in June 2016, US Foods completed its IPO. Net proceeds of $1,114 million were used to redeem $1,090 million in principal of USFs Old Senior Notes and pay the related $23 million early redemption
premium. The balance of the Old Senior Notes was redeemed with proceeds from the June 2016 refinancings further discussed below.
June
2016 Refinancings
In June 2016, USF entered into a series of transactions to refinance the $2,042 million principal of its senior
secured term loan (the Amended 2011 Term Loan) and redeem the remaining $258 million principal of its Old Senior Notes. The Amended 2011 Term Loan was amended and restated to, among other things, increase the aggregate principal
outstanding to $2,200 million (the Amended and Restated 2016 Term Loan). Additionally, USF issued $600 million in principal amount of 2016 Senior Notes.
12
|
|
|
Amended and Restated 2016 Term Loan Agreement
The aggregate principal of the Amended and Restated 2016 Term Loan of $2,200 million matures on June 27, 2023. Continuing lenders refinanced $1,393 million
in term loan principal and purchased $238 million of additional principal from lenders electing not to participate in, or electing to decrease their holdings in the loan. Additionally, $569 million in principal was sold to new lenders.
|
USF performed an analysis, by creditor, to determine if the terms of the newly Amended and Restated 2016 Term Loan were
substantially different from the previous term loan facility. Based upon the analysis, it was determined that pre-existing lenders holding a significant portion of the previous term loan facility either elected not to participate in the newly
amended facility, or had terms that were substantially different from their original loan agreements. As a result, a portion of the transaction was accounted for as an extinguishment of debt and the contemporaneous acquisition of new debt.
Pre-existing lenders holding the remaining portion of the newly amended facility that had terms that were not substantially different from their original loan agreements were accounted for as a debt modification.
|
|
|
Old Senior Notes
In June 2016, USF redeemed the remaining $258 million in aggregate principal amount of its Old Senior Notes for $264 million, including a $6 million early redemption premium.
|
The debt redemption and refinancing transactions completed in June 2016 resulted in a loss on extinguishment of debt of $42
million, consisting of a $29 million early redemption premium related to the Old Senior Notes, $7 million of lender and third party fees, and a $6 million write-off of certain pre-existing unamortized deferred financing costs and premiums related to
the refinanced and redeemed facilities. Unamortized deferred financing costs of $4 million related to the portion of the Amended 2011 Term Loan refinancing accounted for as a debt modification will be carried forward and amortized through
June 27, 2023the maturity date of the Amended and Restated 2016 Term Loan.
CMBS Fixed Facility Defeasance
On September 23, 2016, USF, through a wholly owned subsidiary, legally defeased the commercial mortgage backed securities facility (the
CMBS Fixed Facility), scheduled to mature on August 1, 2017. The CMBS Fixed Facility, secured by mortgages on 34 properties, consisting of distribution centers, had an outstanding balance of $471 million net of unamortized deferred
financing costs of $1 million, and provided for interest at 6.38%. The cash outlay for the defeasance of $485 million represented the purchase price of U.S. government securities that will generate sufficient cash flow to fund continued
interest payments from the effective date of the defeasance through, and the repayment of the CMBS Fixed Facility on, February 1, 2017, the earliest date the loan could be prepaid. As a result of the defeasance, the mortgages on the properties
were extinguished and all properties previously held as collateral were released. The defeasance resulted in a loss on extinguishment of debt of approximately $12 million consisting of the difference between the purchase price of the U.S. Government
securities not attributable to accrued interest through the effective date of the defeasance and the outstanding principal of the CMBS Fixed Facility of $472 million, and other costs of $1 million, consisting of unamortized deferred
financing costs and other third party costs.
Following is a description of each of USFs debt instruments outstanding as of
October 1, 2016:
Revolving Credit Agreement
USFs asset backed senior secured revolving loan facility (the ABL
Facility) provides for loans under its two tranches: ABL Tranche A-1 and ABL Tranche A, with its capacity limited by a borrowing base. The maximum borrowing available is $1,300 million with ABL Tranche A-1 at $100 million, and ABL Tranche A at
$1,200 million. Due to the June 2016 refinancings, the maturity date of the ABL Facility is October 20, 2020.
As of October 1,
2016, USF had $30 million outstanding borrowings and had issued letters of credit totaling $403 million under the ABL Facility. Outstanding letters of credit included: (1) $69 million issued to secure USFs obligations with respect to
certain facility leases, (2) $331 million issued in favor of certain commercial insurers securing USFs obligations with respect to its self-insurance program, and (3) $3 million in letters of credit for other obligations. There was
available capacity on the ABL Facility of $866 million at October 1, 2016. As of October 1, 2016, on Tranche A-1 borrowings, USF can periodically elect to pay interest at an alternative base rate (ABR), as defined in USFs
credit agreements, plus 1.50% or the London Inter Bank Offered Rate (LIBOR) plus 2.50%. On Tranche A borrowings, USF can periodically elect to pay interest at ABR plus 0.25% or LIBOR plus 1.25%. The ABL Facility also carries letter of
credit fees of 1.125% and an unused commitment fee of 0.125%.
13
Accounts Receivable Financing Program
Under the 2012 ABS Facility, USF, and from time
to time certain of its subsidiaries, sellon a revolving basistheir eligible receivables to the Receivables Company, a wholly owned subsidiary of USF. The Receivables Company, in turn, grants a continuing security interest in all of its
rights, title and interest in the eligible receivables to the administrative agent for the benefit of the lenders (as defined by the 2012 ABS Facility). See Note 5, Accounts Receivable Financing Program.
The maximum capacity under the 2012 ABS Facility is $800 million. Borrowings under the 2012 ABS Facility were $680 million and $586 million at
October 1, 2016 and January 2, 2016, respectively. USF, at its option, can request additional borrowings up to the maximum commitment, provided sufficient eligible receivables are available as collateral. There was available capacity on
the 2012 ABS Facility of $63 million at October 1, 2016 based on eligible receivables as collateral. The portion of the 2012 ABS Facility held by the lenders who fund the 2012 ABS Facility with commercial paper bears interest at the
lenders commercial paper rate, plus any other costs associated with the issuance of commercial paper plus 1.00%, and an unused commitment fee of 0.35%. The portion of the 2012 ABS Facility held by lenders that do not fund the 2012 ABS Facility
with commercial paper bears interest at LIBOR plus 1.00%, and an unused commitment fee of 0.35%.
Amended and Restated 2016 Term Loan
Agreement
The Amended and Restated 2016 Term Loan consists of a senior secured term loan with outstanding borrowings of $2,181 million at October 1, 2016, net of $14 million of unamortized deferred financing costs. This debt bears
interest equal to ABR plus 2.25%, or LIBOR plus 3.25%, with a LIBOR floor of 0.75%, based on a periodic election of the interest rate by USF. Principal repayments of $5.5 million are payable quarterly with the balance due at maturity. The debt may
require mandatory repayments if certain assets are sold, as defined in the agreement. The interest rate for all borrowings was 4.00%the LIBOR floor of 0.75% plus 3.25% at October 1, 2016.
2016 Senior Notes
The 2016 Senior Notes, with outstanding principal of $593 million at October 1, 2016, net of $7 million of
unamortized deferred financing costs, bear interest at 5.875%. On or after June 15, 2019, this debt is redeemable, at USFs option, in whole or in part at a price of 102.938% of the remaining principal, plus accrued and unpaid interest, if
any, to the redemption date. On or after June 15, 2020 and June 15, 2021, the optional redemption price for the debt declines to 101.469% and 100.0%, respectively, of the remaining principal amount, plus accrued and unpaid interest, if
any, to the redemption date. Prior to June 15, 2019, up to 40% of the debt may be redeemed with the aggregate proceeds from equity offerings, as defined in the 2016 Senior Note indenture, at a redemption premium of 105.875%.
Other Debt
Obligations under capital leases consist of amounts due for transportation equipment and building leases. Other debt of
$33 million at October 1, 2016 and January 2, 2016 consists primarily of various state industrial revenue bonds. To obtain certain tax incentives related to the construction of a new distribution facility, USF and a wholly owned subsidiary
entered into an industrial revenue bond agreement with a state in January 2015, for the issuance of a maximum of $40 million in taxable demand revenue bonds (the TRBs). The TRBs are self-funded as USFs wholly owned subsidiary
purchases the TRBs, and the state loans the proceeds back to USF. The TRBs, which mature January 1, 2030, can be prepaid without penalty one year after issuance. Interest on the TRBs and the loan is 6.25%. At October 1, 2016 and
January 2, 2016, $22 million has been drawn on TRBs resulting in $22 million being recognized as a long-term asset and a corresponding long-term liability in the Companys Consolidated Balance Sheets.
Security Interests
Substantially all of USFs assets are pledged under the various debt agreements. Debt under the 2012 ABS Facility is secured by certain
designated receivables and, in certain circumstances, by restricted cash. The ABL Facility is secured by certain other designated receivables not pledged under the 2012 ABS Facility, inventories and tractors and trailers owned by USF. Additionally,
the ABL Facility has a third priority interest in the assets pledged under the 2012 ABS Facility and a second priority interest in the assets pledged under the Amended and Restated 2016 Term Loan. USFs obligations under the Amended and
Restated 2016 Term Loan are secured by all of the capital stock of its subsidiaries, each of the direct and indirect wholly owned domestic subsidiaries as defined in the agreements and are secured by substantially all assets of USF and
its subsidiaries not pledged under the 2012 ABS Facility or the ABL Facility. Additionally, the Amended and Restated 2016 Term Loan has a second priority interest in the assets pledged under the ABL Facility and the 2012 ABS facility.
Restrictive Covenants
USFs credit facilities, loan agreements and indentures contain customary covenants. These include, among other things, covenants that
restrict USFs ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends, or engage in mergers or consolidations. As of October 1, 2016, USF had $432 million of restricted payment capacity under
these covenants, and approximately $2,060 million of its net assets were restricted after taking into consideration the net deferred tax assets and intercompany balances that eliminate in consolidation.
Certain debt agreements also contain customary events of default. Those include, without limitation, the failure to pay interest or principal
when it is due under the agreements, cross default provisions, the failure of representations and warranties contained in the agreements to be true, and certain insolvency events. If a default event occurs and continues, the principal amounts
14
outstandingtogether with all accrued unpaid interest and other amounts owedmay be declared immediately due and payable by the lenders. Were such an event to occur, USF would be forced
to seek new financing that may not be on as favorable terms as its current facilities. USFs ability to refinance its indebtedness on favorable termsor at allis directly affected by the current economic and financial conditions. In
addition, USFs ability to incur secured indebtedness (which may enable it to achieve more favorable terms than the incurrence of unsecured indebtedness) depends in part on the value of its assets. This, in turn, relies on the strength of its
cash flows, results of operations, economic and market conditions, and other factors.
11.
|
RESTRUCTURING LIABILITIES
|
The following table summarizes the changes in the
restructuring liabilities for the 39-weeks ended October 1, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
|
|
|
Facility Closing
|
|
|
Total
|
|
|
Related Costs
|
|
|
Costs
|
|
|
Balance at January 2, 2016
|
|
$
|
118,634
|
|
|
$
|
210
|
|
|
$
|
118,844
|
|
Current period charges
|
|
|
52,848
|
|
|
|
2,563
|
|
|
|
55,411
|
|
Change in estimate
|
|
|
(16,737
|
)
|
|
|
|
|
|
|
(16,737
|
)
|
Payments and usagenet of accretion
|
|
|
(57,455
|
)
|
|
|
(1,970
|
)
|
|
|
(59,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2016
|
|
$
|
97,290
|
|
|
$
|
803
|
|
|
$
|
98,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company periodically closes or consolidates distribution facilities and implements initiatives in its
ongoing efforts to reduce costs and improve operating effectiveness. In connection with these activities, the Company incurs various costs including multiemployer pension withdrawal liabilities, severance and other employee separation costs
that are included in the above table.
During the 39-weeks ended October 1, 2016, the Company incurred a net charge of $36 million for
Severance and Related Costs associated with its plan to streamline its field operations model and its decision to close its Baltimore, Maryland distribution facility. Additionally, the Company incurred $3 million related to an unused facility lease
settlement.
At October 1, 2016, Severance and Related Costs consisted of $86 million of multiemployer pension withdrawal liabilities,
of which $36 million related to distribution facilities closed prior to 2015 and payable through 2031 at interest rates ranging from 5.9% to 6.5%. Also included was $50 million of estimated withdrawal liability related to the closure of the
Baltimore, Maryland distribution facility. The calendar year 2015 pension withdrawal estimate was based on the latest available information received from the respective plans administrator. Actual results could materially differ from initial
estimates due to changes in market conditions and changes in the funded status of the related multiemployer pension plans. The balance of Severance and Related Costs of $11 million is primarily related to the Companys initiative to reorganize
its field procurement activities and field operations model.
12.
|
RELATED PARTY TRANSACTIONS
|
The Company was a party to consulting agreements with each
of the Sponsors pursuant to which each Sponsor provided the Company with ongoing consulting and management advisory services and received fees and reimbursement of related out of pocket expenses. On June 1, 2016, the agreements with each of the
Sponsors were terminated. For the 39-week period ended October 1, 2016, the Company recorded $36 million in fees and expenses, including an aggregate termination fee of $31 million. For the 13-week and 39-week periods ended September 26,
2015, the Company recorded $3 million and $8 million, respectively, in fees and expenses, in the aggregate. All fees paid to the Sponsors, including the termination fees, are reported in Distribution, selling and administrative costs in the
Consolidated Statements of Comprehensive Income (Loss). Investment funds or accounts managed or advised by an affiliate of KKR held approximately 1% of the Companys outstanding debt as of October 1, 2016.
KKR Capital Markets LLC, an affiliate of KKR, received underwriter discounts and commissions of $5 million in connection with the
Companys IPO, described in Note 1, Overview and Basis of Presentation, and $1 million for services rendered in connection with the June 2016 USF debt refinancing transactions described in Note 10, Debt.
On January 8, 2016, the Company paid a $666 million, or $3.94 per share, one-time special cash distribution to its shareholders of record
(including holders of unvested restricted shares) as of January 4, 2016, of which $657 million was paid to the Sponsors. The distribution was funded with cash on hand and approximately $314 million of additional borrowings under USFs
15
credit facilities. The Company has no current plans to pay future dividends on its common stock, and has never paid dividends on its common stock, other than the January 2016 one-time cash
distribution. Any decision to declare and pay dividends in the future will be made at the sole discretion of our Board of Directors, and could be limited by USF debt covenants.
The Company sponsors defined benefit and defined contribution plans
for its employees and provides certain health care benefits to eligible retirees and their dependents. The components of net pension and other postretirement benefit costs for Company sponsored plans for the periods presented are provided below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Weeks Ended
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement Plans
|
|
|
|
October 1,
|
|
|
September 26,
|
|
|
October 1,
|
|
|
September 26,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
962
|
|
|
$
|
11,349
|
|
|
$
|
9
|
|
|
$
|
9
|
|
Interest cost
|
|
|
10,114
|
|
|
|
9,716
|
|
|
|
73
|
|
|
|
66
|
|
Expected return on plan assets
|
|
|
(12,072
|
)
|
|
|
(14,208
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost (credit)
|
|
|
39
|
|
|
|
48
|
|
|
|
2
|
|
|
|
(16
|
)
|
Amortization of net loss (gain)
|
|
|
2,063
|
|
|
|
2,027
|
|
|
|
(17
|
)
|
|
|
4
|
|
Settlements
|
|
|
750
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs
|
|
$
|
1,856
|
|
|
$
|
9,582
|
|
|
$
|
67
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39-weeks Ended
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement Plans
|
|
|
|
October 1,
|
|
|
September 26,
|
|
|
October 1,
|
|
|
September 26,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
2,887
|
|
|
$
|
31,617
|
|
|
$
|
28
|
|
|
$
|
28
|
|
Interest cost
|
|
|
30,344
|
|
|
|
30,016
|
|
|
|
221
|
|
|
|
198
|
|
Expected return on plan assets
|
|
|
(36,220
|
)
|
|
|
(40,805
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost (credit)
|
|
|
118
|
|
|
|
146
|
|
|
|
5
|
|
|
|
(47
|
)
|
Amortization of net loss (gain)
|
|
|
6,191
|
|
|
|
9,053
|
|
|
|
(53
|
)
|
|
|
11
|
|
Settlements
|
|
|
2,250
|
|
|
|
1,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs
|
|
$
|
5,570
|
|
|
$
|
31,977
|
|
|
$
|
201
|
|
|
$
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of 2016, the Company recorded a $22 million increase to its pension obligation, with a
corresponding increase to Accumulated other comprehensive loss, to correct a computational error related to the September 30, 2015 USF pension plan freeze. The Company determined the error did not materially impact the financial statements for
any of the periods reported. The fiscal year 2016 decrease in net periodic pension benefit costs is primarily attributable to the September 30, 2015 USF pension plan freeze.
The Company contributed $36 million and $48 million to its defined benefit plans during the 39-week periods ended October 1, 2016 and
September 26, 2015, respectively. The Company has funded all required contributions to the Company-sponsored pension plans for fiscal year 2016.
The Companys employees are eligible to participate in a Company sponsored defined contribution 401(k) Plan which provides for
Company matching on the participants contributions of up to 100% of the first 3% of participants compensation and 50% of the next 2% of a participants compensation, for a maximum Company matching contribution of 4%. During 2015,
the Company match on the participants contributions was 50% of the first 6% of a participants compensation. The Companys contributions to this plan were $10 million and $7 million for the 13-weeks ended October 1, 2016 and
September 26, 2015, respectively. The Companys contributions to this plan were $32 million and $21 million for the 39-weeks ended October 1, 2016 and September 26, 2015, respectively.
16
The Company also contributes to numerous multiemployer pension plans under the terms of certain
of its collective bargaining agreements that cover its union-represented employees. The Company does not administer these multiemployer pension plans. The Companys contributions to these plans were $8 million and $9 million for the 13-week
periods ended October 1, 2016 and September 26, 2015, respectively. The Companys contributions to these plans were $24 million and $25 million for the 39-week periods ended October 1, 2016 and September 26, 2015,
respectively.
14.
|
REDEEMABLE COMMON STOCK
|
Redeemable common stock is a security with redemption features
that are outside the control of the issuer, is not classified as an asset or liability in conformity with GAAP, and is not mandatorily redeemable. Prior to the Companys IPO, common stock owned by management and key employees gave the holder,
via the management stockholders agreement, the right to require the Company to repurchase all of his or her restricted common stock (put option) in the event of a termination of employment due to death or disability. If an employee
terminated for any reason other than death or disability, the contingent put option was cancelled. Since this redemption feature, or put option, was outside of the control of the Company, the value of the shares was shown outside of permanent equity
as Redeemable common stock. In addition to the value of the common stock held, stock-based awards with similar underlying common stock were also recorded in Redeemable common stock. Redeemable common stock included values for common stock issuances
to key employees, vested restricted shares, vested restricted stock units and vested stock option awards.
In connection with the
Companys IPO, the management stockholders agreement was amended to remove the put option; therefore the common stock no longer has a redemption feature that is outside the Companys control and could require the Company to redeem
these shares. Accordingly, the entire amount reflected in Redeemable common stock was reclassified to Shareholders equity during the second quarter of 2016. The sole remaining redemption feature provides the Company with the right, but not the
obligation, to repurchase all of the holders vested shares upon termination without cause. Based on the current redemption feature of the common stock, there will be no amounts attributed to Redeemable common stock in future periods.
The Company computes earnings per share (EPS) in
accordance with ASC 260,
Earnings per Share
, which requires that non-vested restricted stock containing non-forfeitable dividend rights be treated as participating securities pursuant to the two-class method. Under the two-class method, net
income is reduced by the amount of dividends declared in the period for common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for
the period had been distributed. The amounts of distributed and undistributed earnings allocated to participating securities for the 13-week and 39-week periods ended October 1, 2016 and September 26, 2015 were insignificant and did not
materially impact the calculation of basic or diluted EPS.
Basic EPS is computed by dividing income or loss available to common
stockholders by the weighted average number of shares of common stock, shares in Redeemable common stock, if any, (including common stock issuances to key employees, vested restricted shares and vested restricted stock units) and non-vested
restricted shares outstanding for the year.
Diluted EPS is computed using the weighted average number of shares of common stock, shares in
Redeemable common stock, for the 13-week and 39-week periods ended September 26, 2015, and non-vested restricted shares outstanding for the period, plus the effect of potentially dilutive securities. Stock options and unvested restricted stock
units are considered potentially dilutive securities.
17
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Weeks Ended
|
|
|
39-Weeks Ended
|
|
|
|
October 1,
|
|
|
September 26,
|
|
|
October 1,
|
|
|
September 26,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (in thousands)
|
|
$
|
133,011
|
|
|
$
|
5,387
|
|
|
$
|
132,930
|
|
|
$
|
177,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
220,608,821
|
|
|
|
169,594,374
|
|
|
|
193,269,252
|
|
|
|
169,583,156
|
|
Dilutive effect of Share-based awards
|
|
|
4,445,230
|
|
|
|
1,247,209
|
|
|
|
3,536,738
|
|
|
|
1,298,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average dilutive shares outstanding
|
|
|
225,054,051
|
|
|
|
170,841,583
|
|
|
|
196,805,990
|
|
|
|
170,881,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.60
|
|
|
$
|
0.03
|
|
|
$
|
0.69
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.59
|
|
|
$
|
0.03
|
|
|
$
|
0.68
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
|
The following table presents changes in
Accumulated other comprehensive loss by component for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Weeks Ended
|
|
|
39-Weeks Ended
|
|
|
|
October 1,
|
|
|
September 26,
|
|
|
October 1,
|
|
|
September 26,
|
|
Accumulated Other Comprehensive Loss Components
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Defined benefit retirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss beginning of period
(1)
|
|
$
|
(90,621
|
)
|
|
$
|
(149,641
|
)
|
|
$
|
(74,378
|
)
|
|
$
|
(158,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service
cost
(2)(3)
|
|
|
41
|
|
|
|
32
|
|
|
|
123
|
|
|
|
99
|
|
Amortization of net loss
(2)(3)
|
|
|
2,046
|
|
|
|
2,031
|
|
|
|
6,138
|
|
|
|
9,064
|
|
Settlements
(2)(3)
|
|
|
750
|
|
|
|
650
|
|
|
|
2,250
|
|
|
|
1,950
|
|
Pension curtailment
(5)
|
|
|
|
|
|
|
90,649
|
|
|
|
|
|
|
|
90,649
|
|
Prior year correction
(5)
|
|
|
|
|
|
|
|
|
|
|
(21,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before income tax
(2)(3)
|
|
|
2,837
|
|
|
|
93,362
|
|
|
|
(13,406
|
)
|
|
|
101,762
|
|
Income tax benefit
(4)
|
|
|
(5,199
|
)
|
|
|
|
|
|
|
(5,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period Comprehensive (Loss) Incomenet of tax
|
|
|
8,036
|
|
|
|
93,362
|
|
|
|
(8,207
|
)
|
|
|
101,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss end of period
(1)
|
|
$
|
(82,585
|
)
|
|
$
|
(56,279
|
)
|
|
$
|
(82,585
|
)
|
|
$
|
(56,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts are presented net of tax.
|
(2)
|
Included in the computation of Net periodic benefit costs. See Note, 13 Retirement Plans for additional information.
|
(3)
|
Included in Distribution, selling and administrative costs in the Consolidated Statements of Comprehensive Income.
|
(4)
|
No impact in the 13-week and 39-week periods ended September 26, 2015 due to the Companys full valuation allowance. See Note 17, Income Taxes.
|
(5)
|
The third quarter 2015 pension curtailment is due to the freeze of non-union participants benefits for a USF sponsored defined benefit pension plan. In the second quarter of 2016, the curtailment was corrected for
a computational error. See Note 13, Retirement Plans.
|
18
The determination of the Companys overall effective tax rate
requires the use of estimates. The effective tax rate reflects the income earned and taxed in various United States federal and state jurisdictions based on enacted tax law, permanent differences between book and tax items, tax credits and the
Companys change in relative income in each jurisdiction.
The Company estimated its annual effective tax rate for the full fiscal
year and applied the annual effective tax rate to the results of the 39-weeks ended October 1, 2016 and September 26, 2015 for purposes of determining its year to date tax provision (benefit).
The valuation allowance against the net deferred tax assets was $152 million at January 2, 2016. The valuation allowance against the net
deferred tax assets decreased $101 million during the 39-weeks ended October 1, 2016, which resulted in a $51 million valuation allowance at October 1, 2016. The Company released the valuation allowance against its federal net deferred tax assets
and certain of its state net deferred tax assets in the 13-weeks ended October 1, 2016, as the Company determined it was more likely than not that the deferred tax assets would be realized. The Company maintained a valuation allowance on certain
state net operating loss and tax credit carryforwards expected to expire unutilized as a result of insufficient forecasted taxable income in the carryforward period, or the utilization of which are subject to limitation. The decision to release the
valuation allowance was made after management considered all available evidence, both positive and negative, including but not limited to, historical operating results, cumulative income in recent years, forecasted earnings, and a reduction of
uncertainty regarding forecasted earnings as a result of developments in certain customer and strategic initiatives during the 13-weeks ended October 1, 2016.
The effective tax rate for the 13-weeks ended October 1, 2016 and September 26, 2015 of (143)% and (62)%, respectively, varied from the 35%
federal statutory rate primarily due to a change in the valuation allowance and the recognition of various discrete tax items. During the 13-weeks ended October 1, 2016 and September 26, 2015, the valuation allowance decreased $101 million and $3
million, respectively. The decrease in the valuation allowance for the 13-weeks ended October 1, 2016 was primarily the result of the year to date ordinary income and the corresponding release of the valuation allowance. The discrete tax items for
the 13-weeks ended October 1, 2016 included a tax benefit of $80 million, primarily related to the release of the valuation allowance. The decrease in the valuation allowance for the 13-weeks ended September 26, 2015 was primarily the result of the
year to date ordinary income, partially offset by an increase in the valuation allowance due to an increase in deferred tax liabilities related to indefinite-lived intangibles. The discrete tax items for the 13-weeks ended September 26, 2015
included a tax benefit of $2 million, primarily related to the settlement of tax audits and the expiration of the statute of limitations in various state and local jurisdictions, which had a significant impact on the effective tax rate, as compared
to the ordinary income of $3 million for the 13-weeks ended September 26, 2015.
The effective tax rate for the 39-weeks ended October 1,
2016 and September 26, 2015 of (143)% and 17%, respectively, varied from the 35% federal statutory rate primarily as a result of a change in the valuation allowance and the recognition of various discrete tax items. During the 39-weeks ended October
1, 2016 and September 26, 2015, the valuation allowance decreased $101 million and $43 million, respectively. The decrease in the valuation allowance for the 39-weeks ended October 1, 2016 was primarily the result of the year to date ordinary income
and the corresponding release of the valuation allowance. The discrete tax items for the 39-weeks ended October 1, 2016 included a tax benefit of $80 million, primarily related to the release of the valuation allowance. The decrease in the valuation
allowance for the 39-weeks ended September 26, 2015 was primarily the result of the year to date ordinary income, partially offset by an increase in the valuation allowance due to an increase in deferred tax liabilities related to indefinite-lived
intangibles. The year to date ordinary income for the 39-weeks ended September 26, 2015 was impacted by the $288 million net termination fee received pursuant to the terminated Acquisition Agreement. The discrete tax items for the 39-weeks ended
September 26, 2015 included a tax benefit of $2 million, primarily related to the settlement of tax audits and the expiration of the statute of limitations in various state and local jurisdictions.
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. As of October 1, 2016, the Company
had $956 million of purchase orders and purchase contract commitments, of which $696 million, $130 million and $130 million pertain to products to be purchased in the balance of fiscal year 2016, and in fiscal years 2017, and 2018, respectively, and
are not recorded in the Consolidated Balance Sheets.
To minimize fuel cost risk, the Company enters into forward purchase commitments for
a portion of its projected diesel fuel requirements. At October 1, 2016, the Company had diesel fuel forward purchase commitments totaling $109 million through March 2018. The Company also enters into forward purchase agreements for
electricity. At October 1, 2016, the Company had electricity forward purchase commitments totaling $10 million through September 2018. 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 under GAAP guidance.
Legal
Proceedings
The Company and its subsidiaries are parties to a number of legal proceedings arising from the normal course of business. These legal proceedingswhether pending, threatened or unasserted, if decided adversely to or settled
by the Companymay result in liabilities material to its financial position, results of operations, or cash flows. The Company recognizes provisions with respect to the proceedings where appropriate. These are reflected in the Consolidated
Balance Sheets. It is possible that the Company could be required to make expenditures, in excess of the established provisions, in amounts that cannot be reasonably estimated. However, the Company believes that the ultimate resolution of these
proceedings will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows. It is the Companys policy to expense attorney fees as incurred.
19
19.
|
BUSINESS SEGMENT INFORMATION
|
The Company operates in one business segment based on how
the Companys chief operating decision makerthe CEO 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 United States. 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 centers. The Companys distribution centers form a single network to reach its customers; it is common for a single customer to make purchases from several
different distribution centers. Capital projectswhether for cost savings or generating incremental revenueare evaluated based on estimated economic returns to the organization as a whole (e.g., net present value, return on investment).
The measure used by the CEO to assess operating performance is Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure defined as Net
income (loss), plus Interest expense net, Income tax provision (benefit), and Depreciation and amortization collectively EBITDA adjusted for: (1) Sponsor fees; (2) Restructuring and tangible asset
impairment charges; (3) Share-based compensation (4) the non-cash impact of LIFO adjustments; (5) Loss on extinguishment of debt (6) Business transformation costs; (7) Acquisition-related costs; (8) Acquisition
termination feesnet; and (9) Other gains, losses or charges as specified under the Companys debt agreements. Costs to optimize and transform the Companys business are noted as business transformation costs in the table below
and are added to EBITDA in arriving at Adjusted EBITDA. Business transformation costs include costs related to significant process and systems redesign in the Companys replenishment and category management functions; cash & carry
retail store strategy; and process and system redesign related to the Companys sales model.
The aforementioned items are specified
as items to add to EBITDA in arriving at Adjusted EBITDA per the Companys debt agreements and, accordingly, the Companys management includes such adjustments when assessing the operating performance of the business.
20
The following is a reconciliation of Adjusted EBITDA to the most directly comparable GAAP
financial performance measure, which is Net (loss) income for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Weeks Ended
|
|
|
39-Weeks Ended
|
|
|
|
October 1,
|
|
|
September 26,
|
|
|
October 1,
|
|
|
September 26,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Adjusted EBITDA
|
|
$
|
244,097
|
|
|
$
|
225,433
|
|
|
$
|
706,934
|
|
|
$
|
620,090
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sponsor fees
(1)
|
|
|
|
|
|
|
(2,527
|
)
|
|
|
(35,691
|
)
|
|
|
(7,571
|
)
|
Restructuring and tangible asset impairment
charges
(2)
|
|
|
(14,662
|
)
|
|
|
(29,104
|
)
|
|
|
(38,799
|
)
|
|
|
(81,697
|
)
|
Share-based compensation expense
(3)
|
|
|
(4,762
|
)
|
|
|
(2,575
|
)
|
|
|
(14,429
|
)
|
|
|
(7,888
|
)
|
LIFO reserve change
(4)
|
|
|
7,066
|
|
|
|
20,145
|
|
|
|
24,808
|
|
|
|
41,999
|
|
Loss on extinguishment of debt
(5)
|
|
|
(11,483
|
)
|
|
|
|
|
|
|
(53,632
|
)
|
|
|
|
|
Business transformation costs
(6)
|
|
|
(10,006
|
)
|
|
|
(10,976
|
)
|
|
|
(25,777
|
)
|
|
|
(30,969
|
)
|
Acquisition related costs
(7)
|
|
|
|
|
|
|
(22,631
|
)
|
|
|
(671
|
)
|
|
|
(78,616
|
)
|
Acquisition termination feesnet
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
287,500
|
|
Other
(9)
|
|
|
(604
|
)
|
|
|
(3,045
|
)
|
|
|
(4,186
|
)
|
|
|
(19,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
209,646
|
|
|
|
174,720
|
|
|
|
558,557
|
|
|
|
723,746
|
|
Interest expensenet
|
|
|
(48,956
|
)
|
|
|
(69,927
|
)
|
|
|
(189,759
|
)
|
|
|
(210,821
|
)
|
Income tax benefit (provision)
|
|
|
78,359
|
|
|
|
2,063
|
|
|
|
78,117
|
|
|
|
(36,761
|
)
|
Depreciation and amortization expense
|
|
|
(106,038
|
)
|
|
|
(101,469
|
)
|
|
|
(313,985
|
)
|
|
|
(298,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
133,011
|
|
|
$
|
5,387
|
|
|
$
|
132,930
|
|
|
$
|
177,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consists of fees paid to the Sponsors for consulting and management advisory services. On June 1, 2016, the consulting and management agreements with each of the Sponsors were terminated for an aggregate
termination fee of $31 million.
|
(2)
|
Consists primarily of facility related closing costs, including severance and related costs, tangible asset impairment charges, organizational realignment costs and estimated multiemployer pension withdrawal
liabilities.
|
(3)
|
Share-based compensation expense for vesting of stock awards.
|
(4)
|
Represents the non-cash impact of LIFO reserve adjustments.
|
(5)
|
Includes fees paid to debt holders, third party costs, early redemption premium, and the write off of certain pre-existing unamortized deferred financing costs, partially offset by the write-off of unamortized issue
premium related to the June 2016 debt refinancing, and the loss related to the September 2016 CMBS Fixed Facility defeasance. See Note 10, Debt.
|
(6)
|
Consists primarily of costs related to significant process and systems redesign, across multiple functions.
|
(7)
|
Consists of costs related to the Acquisition, including certain employee retention costs.
|
(8)
|
Consists of net fees received in connection with the termination of the Acquisition Agreement.
|
(9)
|
Other includes gains, losses or charges as specified under USFs debt agreements. The balance for the 13-weeks ended September 26, 2015 includes $9 million of brand re-launch and marketing costs and $3 million of
closed facility carrying costs, partially offset by a $9 million net insurance benefit. The balance for the 39-weeks ended October 1, 2016 includes $5 million of IPO readiness costs, $4 million of closed facility carrying costs and $3 million of
business acquisition related costs, partially offset by a $10 million insurance benefit. The balance for the 39-weeks ended September 26, 2015 includes a $16 million legal settlement charge, $9 million of brand re-launch and marketing costs, and $4
million of closed facility carrying costs, partially offset by a $11 million net insurance benefit.
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Subsequent to the balance sheet date, the Company acquired Jeraci
Food Distributors, Inc. (Jeraci) and Save on Seafood with combined annual sales totaling approximately $100 million. The Jeraci acquisition is in furtherance of our strategy to expand our geographic market share with independent
restaurants. Save on Seafood helps strengthen our capabilities in the center-of-the-plate category. The acquisitions have been funded with cash flows from operations.
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Forward-Looking Statements
This report contains forward-looking statements within the meaning of the safe harbor provisions of the United States Private
Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as believe, expect, project, anticipate, intend, plan, estimate,
target, seek, will, may, would, should, could, forecasts, mission, strive, more, goal, or similar
expressions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and
financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results to differ materially
from the forward-looking statements contained in this report include, among others:
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Our ability to remain profitable during times of cost inflation/deflation, commodity volatility, and other factors
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Industry competition and our ability to successfully compete
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Our reliance on third-party suppliers, including the impact of any interruption of supplies or increases in product costs
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Risks related to our indebtedness, including our substantial amount of debt, our ability to incur substantially more debt, and increases in interest rates
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Any change in our relationships with group purchasing organizations
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Any change in our relationships with long-term customers
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Our ability to increase sales to independent restaurant customers
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Our ability to successfully consummate and integrate future acquisitions
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Our ability to achieve the benefits that we expect from our cost savings programs
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Shortages of fuel and increases or volatility in fuel costs
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Any declines in the consumption of food prepared away from home, including as a result of changes in the economy or other factors affecting consumer confidence
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Liability claims related to products we distribute
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Our ability to maintain a good reputation
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Costs and risks associated with labor relations and the availability of qualified labor
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Changes in industry pricing practices
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Changes in competitors cost structures
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Our ability to retain customers not obligated by long-term contracts to continue purchasing products from us
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Environmental, health and safety costs
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Costs and risks associated with government laws and regulations, including environmental, health, safety, food safety, transportation, labor and employment laws and regulations, and changes in existing laws or
regulations
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Technology disruptions and our ability to implement new technologies
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Costs and risks associated with a potential cybersecurity incident
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Our ability to manage future expenses and liabilities associated with our retirement benefits
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Disruptions to our business caused by extreme weather conditions
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Costs and risks associated with litigation
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Changes in consumer eating habits
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Costs and risks associated with our intellectual property protections
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Risks associated with potential infringements of the intellectual property of others
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For a detailed discussion of these risks and uncertainties, see the section entitled Risk Factors, in
our prospectus dated May 25, 2016 (the Prospectus) which was filed with the SEC on May 27, 2016 pursuant to Rule 424(b)(4) of the Securities Act (File
No. 333-209442,
as
amended). All forward-looking statements made in this report are qualified by these cautionary statements. The forward-looking statements contained in this presentation are based only on information currently available to us and speak only as of the
date of this report. We undertake no obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or
changes in future operating results over time or otherwise. 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 only be
viewed as historical data.
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