NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
|
OVERVIEW AND BASIS OF PRESENTATION
|
US Foods Holding Corp. and its consolidated subsidiaries are referred to herein as “we,” “our,” “us,” the “Company,” or “US Foods.” US Foods conducts all of its operations through its wholly owned subsidiary US Foods, Inc. and its subsidiaries (collectively “USF”). All of the Company’s indebtedness, as further described in Note 10, Debt, is an obligation of USF. US Foods is a Delaware corporation formed by investment funds associated with or designated by Clayton, Dubilier & Rice, LLC (“CD&R”) and Kohlberg Kravis Roberts & Co., L.P. (“KKR”). CD&R and KKR are collectively referred to herein as the “Sponsors”. As discussed in Note 12, Related Party Transactions, the Sponsors no longer retain a controlling interest in the Company.
Initial Public Offering
—On June 1, 2016, the Company closed its initial public offering (“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). In June 2016, the net proceeds of the IPO were used to redeem $1,090 million principal of the Company’s 8.5% Senior Notes due June 30, 2019 (the “Old Senior Notes”), and pay the related $23 million early redemption premium.
Business Description
—The Company operates in one business segment in which it markets, and primarily 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-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 52-53 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. Fiscal years 2017 and 2016 are 52-week fiscal years. The accompanying consolidated financial statements include the accounts of US Foods and USF. Intercompany accounts and transactions have been eliminated.
The consolidated financial statements included herein 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 Securities and Exchange Commission. Certain information and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures included herein are adequate to make the information presented not misleading. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Annual Report”).
The consolidated interim financial statements reflect all adjustments (consisting of normal recurring items, unless otherwise disclosed) 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 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, to better align a company’s risk management activities and financial reporting for hedging relationships, simplify the hedge accounting requirements, and improve the disclosures of hedging arrangements. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt the guidance in this ASU effective the beginning of fiscal 2018, and does not expect the provisions of the new standard to impact its financial position or results of operations. The Company’s only hedging activities, its interest rate swaps designated as cash flow hedges, are highly effective.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation
—
Stock Compensation (Topic 718): Scope of Modification Accounting
.
This ASU provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. This ASU should be applied prospectively to an award modified on or after the adoption date. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2017, with early adoption permitted. The Company does not expect the provisions of the new standard to materially affect its financial position or results of operations, as the Company does not expect to modify any share-based payment awards.
4
Table of Contents
In March 2017, the FASB issued ASU No. 2017-07,
Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
This ASU requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2017, with early adoption permitted.
The amendments in this update require retrospective presentation in the income statement.
The Company does not expect the provisions of the new standard to materially affect its financial position or results of operations, as the reclassification of other components of net periodic pension cost and net periodic postretirement benefit cost to non-operating expense is not expected to have a significant affect on operating income.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendment also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The new standard is not expected to materially affect the Company’s financial position or results of operations, as the fair value of the Company’s reporting unit exceeded its carrying value by a substantial margin based on the fiscal 2017 annual impairment analysis.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which clarifies the presentation of restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending cash balances on the statement of cash flows. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2017, with early adoption permitted.
This ASU should be applied using a retrospective transition method to each period presented.
The Company is currently reviewing the provisions of the new standard, but does not expect it to have a material impact on its financial statements as restricted cash is not material.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
which requires entities to use a forward looking, expected loss model to estimate credit losses. It also requires additional disclosure related to credit quality of trade and other receivables, including information related to management’s estimate of credit allowances. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2019, with early adoption permitted. The Company does not expect the provisions of the new standard to materially affect its financial position or results of operations.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842),
which supersedes Accounting Standards Codification (“ASC”) 840, Leases. This ASU does not significantly impact lessor accounting. The ASU requires lessees to record a right-of-use asset and a lease liability for almost all leases. 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. In addition, the ASU expands the disclosure requirements of lease arrangements. Adoption of this guidance will use a modified retrospective transition approach, which includes a number of practical expedients. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2018, with early adoption permitted. Upon adoption, US Foods expects an increase to assets and liabilities on its balance sheet. The Company has begun gathering lease data, reviewing its lease portfolio, and completing the overall adoption impacts assessment.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers,
which will be introduced into the FASB’s ASC as Topic 606. Topic 606, as amended, replaces Topic 605, the previous revenue recognition guidance. The new standard’s 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. 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 significant changes in the results under the new versus old standards.
5
Table of Contents
Through the third quarter of 2017, the Company completed the review of its contract portfolio and adoption impact assessment. Based upon the review, the Company believes the impacts are limited to the capitalization of direct and incremental contract acquisition costs, which have not historically been material. Under the current guidance, most of these costs are expensed as incurred. Under the new standard, these costs will be capitalized on our Consolidated Balance Sheets and amortized on a systematic basis over the expected contract term. The Company has also implemented relevant policies and procedures to meet the new accounting, reporting and disclosure requirements of Topic 606 and will update internal controls accordingly. During the remainder of 2017, we will continue our adoption effort by reviewing new contracts entered into for the remainder of the year. The Company does not believe there are any significant barriers to implementation of the new standard, and will adopt the standard in the first quarter of fiscal 2018, and, preliminarily, expects to use the full retrospective method. However, our method is subject to change as we finalize our adoption related documentation.
Acquisitions during the 39-weeks ended September 30, 2017 included (1) certain assets of
The Thompson Company, Braunger Foods and Variety Foods, broadline distributors all owned and operated by TOBA Inc., acquired in July; (
2)
the stock of Riverside Food Distributors, LLC,
d/b/a F.
Christiana and Co.,
a broadline distributor, acquired in June; (3)
the stock of
FirstClass Foods-Trojan, Inc., d/b/a FirstClass Foods, a meat
processor, acquired in April
; (4)
certain assets of SRA Foods. Inc., a meat processor and distributor, acquired in March;
and (5)
certain assets of All American Foods, a broadline distributor, acquired in February. Total consideration consisted of cash of approximately $183 million. In fiscal 2017, the Company also paid a minor purchase price adjustment related to a 2016 business acquisition.
Acquisitions during fiscal 2016 included (1) the stock of Bay-N-Gulf, Inc., d/b/a Save On Seafood, a seafood processor and distributor, acquired in October; (2) certain assets of Jeraci Food Distributors, Inc., an Italian specialty distributor, acquired in October; (3) the stock of Fresh Unlimited, Inc., d/b/a Freshway Foods, a produce processor, repacker, and distributor, acquired in June; and (4) 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 $123 million.
Business acquisitions periodically provide for contingent consideration, including earnout agreements
in the event certain operating results are achieved, which are generally over periods of up to two years from the respective dates of such acquisitions.
During fiscal 2017, the Company paid approximately $8 million of earnout contingent consideration related to 2016 business acquisitions, of which $6 million was included as part of the fair value of the acquisition date assets and liabilities, and is reflected in the Company’s Consolidated Statement of Cash Flows in Cash flows from financing activities. As of September 30, 2017, aggregate contingent consideration outstanding for business acquisitions was approximately $6 million, including approximately $1 million for the estimated fair value of earnout liabilities.
The 2017 and 2016 acquisitions, reflected in the Company’s consolidated financial statements commencing from the date of acquisition, did not materially affect the Company’s results of operations or financial position and, therefore, pro forma financial information has not been provided. Acquisitions are integrated into the Company’s foodservice distribution network and funded primarily with cash from operations.
The following table summarizes the purchase price allocations recognized for the 2017 and 2016 business acquisitions as follows (in thousands):
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Accounts receivable
|
|
$
|
17,108
|
|
|
$
|
22,871
|
|
Inventories
|
|
|
25,232
|
|
|
|
9,493
|
|
Other current assets
|
|
|
411
|
|
|
|
732
|
|
Property and equipment
|
|
|
29,492
|
|
|
|
24,119
|
|
Goodwill
|
|
|
59,307
|
|
|
|
32,570
|
|
Other intangible assets
|
|
|
72,050
|
|
|
|
64,130
|
|
Accounts payable
|
|
|
(7,986
|
)
|
|
|
(16,216
|
)
|
Accrued expenses and other current liabilities
|
|
|
(5,713
|
)
|
|
|
(12,173
|
)
|
Deferred income taxes
|
|
|
(7,301
|
)
|
|
|
—
|
|
Long-term debt
|
|
|
—
|
|
|
|
(2,514
|
)
|
Cash paid for acquisitions
|
|
$
|
182,600
|
|
|
$
|
123,012
|
|
6
Table of Contents
The Company’s inventories—consisting mainly of food and other foodservice-related products—are primarily considered finished goods. Inventory costs include the purchase price of the product and freight charges to deliver it to the Company’s warehouses, as well as depreciation and labor related to processing facilities and equipment, and are net of certain cash or non-cash consideration 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.
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, or date of acquisition in the case of a business acquisition, where applicable. At September 30, 2017 and December 31, 2016, the LIFO balance sheet reserves were $130 million and $116 million, respectively. As a result of changes in LIFO reserves, Cost of goods sold decreased $26 million and $7 million, for the 13-weeks ended September 30, 2017 and October 1, 2016, respectively, and increased $14 million and decreased $25 million, for the 39-weeks ended September 30, 2017 and October 1, 2016, respectively.
5.
|
ACCOUNTS RECEIVABLE FINANCING PROGRAM
|
Under the Credit and Security Agreement, dated as of August 27, 2012, as amended (the “2012 ABS Facility”), the Company sells—on a revolving basis—its 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 required under 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 Company’s 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 September 30, 2017 or December 31, 2016. Included in the Company’s accounts receivable balance as of September 30, 2017 and December 31, 2016 was $1,053 million and $923 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 changes in Assets held for sale for the 39-weeks ended September 30, 2017 were as follows (in thousands):
Balance at December 31, 2016
|
|
$
|
21,039
|
|
Transfers in
|
|
|
599
|
|
Tangible asset impairment charges
|
|
|
(100
|
)
|
Balance at September 30, 2017
|
|
$
|
21,538
|
|
During the second quarter of 2017, an operating facility was closed and reclassified into Assets held for sale. Operations of the closed facility were transferred to a recently acquired facility.
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 September 30, 2017 and December 31, 2016, Property and equipment-net included accumulated depreciation of $1,899 million and $1,724 million, respectively. Depreciation expense was $71 million and $66 million for the 13-weeks ended September 30, 2017 and October 1, 2016, respectively, and $210 million and $198 million for the 39-weeks ended September 30, 2017 and October 1, 2016, respectively.
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Table of Contents
8.
|
GOODWILL AND OTHER INTANGIBLES
|
Goodwill and Other intangible assets include 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 Company’s portfolio of exclusive brands and trademarks. Brand names and trademarks are indefinite-lived intangible assets and, accordingly, are not subject to amortization.
Customer relationships and Noncompete agreements are intangible assets with definite lives, and are carried at the acquired fair value less accumulated amortization. Customer relationships and Noncompete agreements are amortized over the estimated useful lives (two to four years). Amortization expense was $10 million and $40 million for the 13-weeks ended September 30, 2017 and October 1, 2016, respectively, and $85 million and $116 million for the 39-weeks ended September 30, 2017 and October 1, 2016, respectively.
Goodwill and Other intangibles, net, consisted of the following (in thousands):
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Goodwill
|
|
$
|
3,967,344
|
|
|
$
|
3,908,484
|
|
Other intangibles—net
|
|
|
|
|
|
|
|
|
Customer relationships—amortizable:
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
165,199
|
|
|
$
|
1,393,799
|
|
Accumulated amortization
|
|
|
(47,300
|
)
|
|
|
(1,260,011
|
)
|
Net carrying value
|
|
|
117,899
|
|
|
|
133,788
|
|
Noncompete agreements—amortizable:
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
3,950
|
|
|
|
800
|
|
Accumulated amortization
|
|
|
(932
|
)
|
|
|
(507
|
)
|
Net carrying value
|
|
|
3,018
|
|
|
|
293
|
|
Brand names and trademarks—not amortizing
|
|
|
252,800
|
|
|
|
252,800
|
|
Total Other intangibles—net
|
|
$
|
373,717
|
|
|
$
|
386,881
|
|
The 2017 increases in Goodwill and Noncompete agreements are attributable to the 2017 business acquisitions. The net decrease in the gross carrying amount of Customer relationships is attributable to the write off of the fully amortized intangible asset initially recognized in 2007 upon acquisition of the Company by the Sponsors, partially offset by the 2017 business acquisitions.
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 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. The Company completed its most recent annual impairment assessment for Goodwill and indefinite-lived intangible assets as of July 2, 2017—the first day of the third quarter of 2017—with no impairments noted.
For Goodwill, the reporting unit used in assessing impairment is the Company’s one business segment as described in Note 18, Business Information. The Company’s assessment for impairment of Goodwill utilized a combination of discounted cash flow analysis, comparative market multiples, and comparative market transaction multiples, which were weighted 40%, 40% and 20%, respectively, to determine the fair value of the reporting unit for comparison to the corresponding carrying value. Since the Company has been a registrant for over one year, the Company modified the weighting from the prior year (50%, 35% and 15%, respectively) to give more weight to the current actual market capitalization and that of its peers. 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 Company’s fiscal 2017 annual Goodwill impairment analysis, the Company concluded the fair value of its reporting unit exceeded its carrying value.
The Company’s 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 Company’s fiscal 2017 annual impairment analysis, the Company concluded the fair value of the Company’s brand names and trademarks exceeded its carrying value.
8
Table of Contents
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 Company’s 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 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 that 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 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 Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, aggregated by the level in the fair value hierarchy within which those measurements fall, were as follows (in thousands):
|
|
September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
44,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,000
|
|
Interest rate swaps
|
|
|
|
|
|
$
|
6,771
|
|
|
|
—
|
|
|
|
6,771
|
|
|
|
$
|
44,000
|
|
|
$
|
6,771
|
|
|
$
|
—
|
|
|
$
|
50,771
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
2,769
|
|
|
$
|
—
|
|
|
$
|
2,769
|
|
Contingent consideration payable for business acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1,000
|
|
|
|
1,000
|
|
|
|
$
|
—
|
|
|
$
|
2,769
|
|
|
$
|
1,000
|
|
|
$
|
3,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
31,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,600
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable for business acquisitions
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,775
|
|
|
$
|
9,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant assets or liabilities on the Company's Consolidated Balance Sheets measured at fair value on a nonrecurring basis.
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.
9
Table of Contents
Derivative Financial Instruments
The Company uses interest rate swaps, designated as cash flow hedges, to manage its exposure to interest rate movements on its variable-rate Amended and Restated 2016 Term Loan (as defined in Note 10, Debt).
On August 1, 2017, USF entered into four-year interest rate swap agreements with a notional amount of $1.1 billion, reducing to $825 million in the fourth year, effectively converting approximately half of the Amended and Restated 2016 Term Loan from a variable to a fixed rate loan. The Company effectively pays an aggregate rate of 4.47% on the notional amount covered by the interest rate swaps, comprised of 1.72% plus a spread of 2.75%.
The Company records its interest rate swaps in the Consolidated Balance Sheet at fair value, based on projections of cash flows and future interest rates. The determination of fair value includes the consideration of any credit valuation adjustments necessary, giving consideration to the creditworthiness of the respective counterparties or the Company, as appropriate.
The following table presents the balance sheet location and fair value of the interest rate swaps at September 30, 2017 (in thousands):
Balance at September 30, 2017
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other noncurrent assets
|
|
$
|
6,771
|
|
Interest rate swaps
|
|
Other current liabilities
|
|
$
|
(2,769
|
)
|
|
|
|
|
|
|
|
The effective portion of gains and losses on the interest rate swaps are initially recorded in
Other comprehensive loss and reclassified to interest expense during the period in which the hedged transaction affects income. There was no ineffectiveness attributable to the Company’s interest rate swaps during the 13-weeks and 39-weeks ended September 30, 2017. The following table presents the effect of the Company’s interest rate swaps in the Consolidated Statement of Comprehensive Income for the 13-weeks and 39-weeks ended September 30, 2017
(in thousands):
Derivatives in Cash Flow Hedging Relationships
|
|
Amount of Gain Recognized in 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 September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
1,888
|
|
|
Interest expense─net
|
|
$
|
557
|
|
For the 39-weeks ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
1,888
|
|
|
Interest expense─net
|
|
$
|
557
|
|
|
|
|
|
|
|
|
|
|
|
|
During the next twelve months, the Company estimates that $3 million will be reclassified from Accumulated other comprehensive loss to income.
Credit Risk-Related Contingent Features−
The interest swap agreements contain a provision whereby the Company could be declared in default on its hedging obligations if more than $75 million of the Company’s other indebtedness is accelerated.
We review counterparty credit risk and currently are not aware of any facts that indicate our counterparties will not be able to comply with the contractual terms of their agreements.
Contingent Consideration Payable for Business Acquisitions
As discussed in Note 3, Business Acquisitions, contingent consideration may be paid under an earnout agreement for a 2016 business acquisition, primarily in the event certain operating results are achieved, over a two-year period from the respective date of such acquisition. The amounts included in the above table, classified under Level 3 within the fair value hierarchy, represent the estimated fair value of the earnout liability for the respective periods. We estimate the fair value of earnout liabilities based on financial projections of the acquired companies and estimated probability of achievement. Changes in fair value resulting from changes in the estimated amount of contingent consideration are included in Distribution, selling and administrative costs in the Consolidated Statements of Comprehensive Income.
10
Table of Contents
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 fair value of the Company’s total debt approximated $3.8 billion as of September 30, 2017 and December 31, 2016, as compared to its carrying value of $3.7 billion and $3.8 billion as of September 30, 2017 and December 31, 2016, respectively. The September 30, 2017 and December 31, 2016 fair value of the Company’s 5.875% unsecured Senior Notes due June 15, 2024 (the “2016 Senior Notes”), estimated at $0.6 billion, at the end of each period, 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 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.
Total debt consisted of the following (in thousands):
|
|
|
|
Interest Rate at
|
|
|
|
|
|
|
|
|
|
|
Debt Description
|
|
Maturity
|
|
September 30,
2017
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
ABL Facility
|
|
October 20, 2020
|
|
|
—
|
|
%
|
|
$
|
—
|
|
|
$
|
30,000
|
|
2012 ABS Facility
|
|
September 21, 2020
|
|
2.23
|
|
|
|
|
600,000
|
|
|
|
645,000
|
|
Amended and Restated 2016 Term Loan (net of $11,598 and
$13,318 of unamortized deferred financing costs)
|
|
June 27, 2023
|
|
3.98
|
|
|
|
|
2,160,902
|
|
|
|
2,175,682
|
|
2016 Senior Notes (net of $6,468 and $7,185 of unamortized
deferred financing costs)
|
|
June 15, 2024
|
|
5.88
|
|
|
|
|
593,532
|
|
|
|
592,815
|
|
Obligations under capital leases
|
|
2018–2025
|
|
2.36 - 6.18
|
|
|
|
|
338,295
|
|
|
|
305,544
|
|
Other debt
|
|
2018–2031
|
|
5.75 - 9.00
|
|
|
|
|
9,970
|
|
|
|
32,672
|
|
Total debt
|
|
|
|
|
|
|
|
|
|
3,702,699
|
|
|
|
3,781,713
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
(106,052
|
)
|
|
|
(75,962
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
$
|
3,596,647
|
|
|
$
|
3,705,751
|
|
At September 30, 2017, after considering interest rate swaps that fixed the interest rate on $1.1 billion of principal of the Amended and Restated 2016 Term Loan, approximately 55% of the Company’s total debt was at a fixed rate and approximately 45% was at a floating rate.
Following is a description of each of the Company’s debt instruments outstanding as of September 30, 2017:
Revolving Credit Agreement
—The Amended and Restated ABL Credit Agreement, dated October 20, 2015, as amended, is USF’s asset backed senior secured revolving loan facility (the “ABL Facility”) and 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.
As of September 30, 2017, there were no outstanding borrowings, but letters of credit totaling $411 million have been issued under the ABL Facility. Outstanding letters of credit included: (1) $86 million issued to secure USF’s obligations with respect to certain facility leases, (2) $322 million issued in favor of certain commercial insurers securing USF’s 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 $889 million at September 30, 2017. As of September 30, 2017, on Tranche A-1 borrowings, USF can periodically elect to pay interest at an alternative base rate (“ABR”), as defined in the ABL Facility, 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 1.25% and an unused commitment fee of 0.25%.
Accounts Receivable Financing Program
—Under the 2012 ABS Facility, USF sells—on a revolving basis—its eligible receivables to the Receivables Company. See Note 5, Accounts Receivable Financing Program.
On September 20, 2017, the 2012 ABS Facility was amended to extend the maturity date from September 30, 2018 to September 21, 2020. There were no other significant changes to the 2012 ABS Facility. The Company incurred $1 million of lender fees and third party costs related to the amendment, which were capitalized as deferred financing costs and will be amortized to the September 2020 maturity date.
11
Table of Contents
The maximum capacity under the 2012 ABS Facility is $800 million. Borrowings under the 2012 ABS Facility were
$600
million at September 30, 2017.
The Company
, at its option, can request additional borrowings up to the maximum commi
tment, provided sufficient eligible receivables are available as collateral. There was available capacity on the 2012 ABS Facility of
$146
million at September 30, 2017 based on eligible receivables as collateral. The 2012 ABS Facility bears interest at LI
BOR plus 1.00%
,
and
carries
an unused commitment fee of 0.35%.
Amended and Restated 2016 Term Loan Agreement
—The Amended and Restated 2016 Term Loan Credit Agreement, dated June 27, 2016, as amended (the “Amended and Restated 2016 Term Loan”), consists of a senior secured term loan with a carrying value of $2,161 million at September 30, 2017, net of $12 million of unamortized deferred financing costs. 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.
On February 17, 2017, the Amended and Restated 2016 Term Loan was amended, reducing the interest rate spread on outstanding borrowings by 25 basis points to a fixed rate of ABR plus 1.75% or LIBOR plus 2.75%, with a LIBOR floor of 0.75%, based on USF’s periodic election. The Company determined the terms of the February 17, 2017 amendment were not substantially different from the previous terms of the Amended and Restated 2016 Term Loan, for continuing lenders, and therefore substantially all of the transaction was accounted for as a debt modification. The Company recorded the $0.4 million of third party costs related to the February 17, 2017 amendment, and a write-off of $0.2 million of unamortized deferred financing costs related to non-continuing lenders, in interest expense. Unamortized deferred financing costs of $13 million were carried forward and will be amortized through June 27, 2023, the maturity date of the Amended and Restated 2016 Term Loan.
As described in Note 9, Fair Value Measurements,
USF
entered into four-year interest rate swaps with a notional amount of $1.1 billion, reducing to $825 million in the fourth year, effectively converting approximately half of the Amended and Restated 2016 Term Loan from a variable to a 4.47% fixed rate loan.
2016 Senior Notes
—The 2016 Senior Notes due 2024, with a carrying value of $594 million at September 30, 2017, net of $6 million of unamortized deferred financing costs, bear interest at 5.875%. On or after June 15, 2019, this debt is redeemable, at USF’s 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 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 June 27, 2016 Indenture, as supplemented, at a redemption premium of 105.875%.
Other Debt
–Obligations under capital leases of $338 million at September 30, 2017, consist of amounts due for transportation equipment and building leases. Other debt of $10 million at September 30, 2017 consists primarily of various state industrial revenue bonds.
2016 Debt Transactions and Loss on Extinguishment
As discussed in Note 1, Overview and Basis of Presentation, net proceeds from the June 2016 US Foods IPO were used to redeem the majority of USF’s Old Senior Notes. In June 2016, USF also entered into a series of transactions to refinance its term loan and redeem the remainder of its Old Senior Notes, and in September 2016, USF defeased its CMBS Fixed Loan Facility (“CMBS Fixed Facility”).
The debt redemption, refinancing, and defeasance transactions resulted in a loss on extinguishment of debt of $54 million, consisting of
fees paid to debt holders, third party costs, the write off of certain pre-existing unamortized debt issuance costs, an early redemption premium, and the write-off of an unamortized issue premium.
Security Interests
Substantially all of the Company’s 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, as well as inventory and tractors and trailers owned by the Company. Additionally, the lenders under the ABL Facility have a second priority interest in the assets pledged under the Amended and Restated 2016 Term Loan. USF’s obligations under the Amended and Restated 2016 Term Loan are secured by all of the capital stock of USF and its direct and indirect wholly owned domestic subsidiaries—as defined in the agreements—and substantially all non-real estate assets of USF and its subsidiaries not pledged under the 2012 ABS Facility or
the ABL Facility. Additionally, the lenders under the Amended and Restated 2016 Term Loan have a second priority interest in the inventory and tractors and trailers pledged under the ABL Facility. USF’s interest rate swap obligations are secured by the collateral securing the ABL Facility. Pursuant to the terms of the interest rate swap agreement between each of the interest rate
12
Table of Contents
swap counterparties and
USF
, each of the interest rate swap counterparties has agreed that its right to receive payment from the sale of the collateral is subordinate to the rights
of the lenders under the ABL Facility.
USF
is not required to provide additional collateral to its hedge counterparties
.
Restrictive Covenants
The credit facilities, loan agreements and indentures contain customary covenants. These include, among other things, covenants that restrict USF’s ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends, or engage in mergers or consolidations. As of September 30, 2017, USF had $622 million of restricted payment capacity under these covenants, and approximately $2,123 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 when made, and certain insolvency events. If a default event occurs and continues, the principal amounts outstanding—together with all accrued unpaid interest and other amounts owed—may be declared immediately due and payable by the lenders. Were such an event to occur, the Company would be forced to seek new financing that may not be on as favorable terms as its current facilities. The Company’s ability to refinance its indebtedness on favorable terms—or at all—is directly affected by the current economic and financial conditions. In addition, the Company’s 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 September 30, 2017 (in thousands):
|
|
Severance and
Related Costs
|
|
|
Facility
Closing Costs
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
22,596
|
|
|
$
|
865
|
|
|
$
|
23,461
|
|
Current period charges
|
|
|
5,937
|
|
|
|
—
|
|
|
|
5,937
|
|
Change in estimate
|
|
|
(2,402
|
)
|
|
|
(256
|
)
|
|
|
(2,658
|
)
|
Payments and usage—net of accretion
|
|
|
(16,870
|
)
|
|
|
(109
|
)
|
|
|
(16,979
|
)
|
Balance at September 30, 2017
|
|
$
|
9,261
|
|
|
$
|
500
|
|
|
$
|
9,761
|
|
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 may incur various costs including multiemployer pension withdrawal liabilities, severance and other employee separation costs.
During the 39-weeks ended September 30, 2017, the Company incurred a net charge of $3 million, primarily for Severance and Related Costs associated with its efforts to streamline its corporate back office organization and centralize replenishment activities.
During the 39-weeks ended October 1, 2016, the Company incurred a net charge of $36 million associated with its efforts to streamline its field organization model and close its Baltimore, Maryland distribution facility. The Company also recorded $3 million in Facility Closing Costs related to a lease termination settlement.
12.
|
RELATED PARTY TRANSACTIONS
|
On September 18, 2017, May 17, 2017 and January 31, 2017, the Company closed on follow-on offerings of its common stock held primarily by the Sponsors. A total of 127,400,000 shares were sold, in the aggregate, however, the Company did not receive any proceeds from the offerings. Each Sponsor’s interest in the Company’s common stock was reduced to approximately 9% as of September 18, 2017. In accordance with terms of the registration rights agreement with the Sponsors, the Company incurred approximately $5 million of expenses in connection with the follow-on offerings, approximately $1 million of which was incurred in 2016. Underwriting discounts and commissions were paid by the selling shareholders.
KKR Capital Markets LLC (“KKR Capital Markets”), an affiliate of KKR,
received a de minimis fee for services rendered i
n connection with the February 2017 amendment of the Amended and Restated 2016 Term Loan. Additionally, KKR Capital Markets
received
underwriter discounts and commissions of $5 million in connection with the Company’s IPO, and $1 million
13
Table of Contents
for services rendered in connection with the June 2016 debt refinancing transactions.
Investment funds or accounts managed or advised by an affiliate of KKR held approximately 1% of the Company’s outstanding
debt as of
September 30, 2017
.
The Company was previously 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. For the 39-week period ended October 1, 2016, the Company recorded $5 million in fees and expenses. On June 1, 2016, the agreements with each of the Sponsors were terminated for an aggregate termination fee of $31 million. All fees and expenses paid to the Sponsors, including the termination fees, are reported in Distribution, selling and administrative costs in the Consolidated Statements of Comprehensive Income.
On January 8, 2016, US Foods paid a $666 million, or $3.94 per share, one-time special cash distribution to its shareholders of record 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 the Company’s credit facilities. The Company has no current plans to pay future dividends, 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 debt covenants that restrict USF’s ability to make cash distributions to US Foods.
The Company has defined benefit and defined contribution retirement plans for its employees, and provides certain health care benefits to eligible retirees and their dependents. The components of net periodic benefit costs (credits) for pension and other postretirement benefits, for Company sponsored plans, are provided below (in thousands):
|
|
13-Weeks Ended
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
Components of Net periodic benefit costs (credits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
755
|
|
|
$
|
962
|
|
|
$
|
7
|
|
|
$
|
9
|
|
Interest cost
|
|
|
9,329
|
|
|
|
10,114
|
|
|
|
68
|
|
|
|
73
|
|
Expected return on plan assets
|
|
|
(11,943
|
)
|
|
|
(12,072
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization of prior service cost
|
|
|
35
|
|
|
|
39
|
|
|
|
2
|
|
|
|
2
|
|
Amortization of net loss (gain)
|
|
|
785
|
|
|
|
2,063
|
|
|
|
(86
|
)
|
|
|
(17
|
)
|
Settlements
|
|
|
1,000
|
|
|
|
750
|
|
|
|
—
|
|
|
|
—
|
|
Net periodic benefit costs (credits)
|
|
$
|
(39
|
)
|
|
$
|
1,856
|
|
|
$
|
(9
|
)
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39-Weeks Ended
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
Components of Net periodic benefit costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,767
|
|
|
$
|
2,887
|
|
|
$
|
26
|
|
|
$
|
28
|
|
Interest cost
|
|
|
29,606
|
|
|
|
30,344
|
|
|
|
212
|
|
|
|
221
|
|
Expected return on plan assets
|
|
|
(35,871
|
)
|
|
|
(36,220
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization of prior service cost
|
|
|
104
|
|
|
|
118
|
|
|
|
5
|
|
|
|
5
|
|
Amortization of net loss (gain)
|
|
|
2,886
|
|
|
|
6,191
|
|
|
|
(112
|
)
|
|
|
(53
|
)
|
Settlements
|
|
|
3,000
|
|
|
|
2,250
|
|
|
|
—
|
|
|
|
—
|
|
Net periodic benefit costs
|
|
$
|
1,492
|
|
|
$
|
5,570
|
|
|
$
|
131
|
|
|
$
|
201
|
|
In the second quarter of 2017, the Company approved a plan amendment to offer voluntary lump sum settlement payments to certain former employees participating in the Company sponsored defined benefit plan. The plan amendment was finalized and communicated to relevant participants in the third quarter of 2017. Lump sum settlement payments are estimated at approximately $100 million, based on the expected participation rate, and will be paid from pension plan assets. As a result of the plan amendment, the Company expects to incur non-cash settlement charges of approximately $30 million in fiscal year
2017, including approximately $25 million in the fourth quarter, when the lump sum settlements are expected to be paid.
Settlement charges are included in Distribution, selling and administrative costs in the Consolidated Statements of Comprehensive Income.
14
Table of Contents
The Company contributed $36 million to its defined benefit and other postretirement plans during both 39-week periods ended September 30, 2017 and October 1, 2016. The Company has funded all required contributions to the Company-sponsored pension plans for fiscal year 2017.
The Company’s employees are eligible to participate in a Company sponsored defined contribution 401(k) plan that provides for Company matching on the participant’s contributions of up to 100% of the first 3% of participant’s compensation and 50% of the next 2% of a participant’s compensation, for a maximum Company matching contribution of 4%. The Company’s contributions to this plan were $11 million and $10 million for the 13-weeks ended September 30, 2017 and October 1, 2016, respectively, and $34 million and $32 million for the 39-weeks ended September 30, 2017 and October 1, 2016, respectively.
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 Company’s contributions to these plans were $9 million and $8 million for the 13-week periods ended September 30, 2017 and October 1, 2016, respectively, and $26 million and $24 million for the 39-week periods ended September 30, 2017 and October 1, 2016, respectively.
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 should 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 were insignificant and did not materially impact the calculation of basic or diluted EPS. The remaining non-vested restricted stock that contained non-forfeitable dividend rights vested on December 31, 2016. As such, the Company has not computed EPS using the two-class method during fiscal 2017.
Basic EPS is computed by dividing Net income available to common stockholders 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. Stock options, non-vested restricted shares with forfeitable dividend rights, non-vested restricted stock units, and employee stock purchase plan deferrals are considered potentially dilutive securities.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
13-Weeks Ended
|
|
|
39-Weeks Ended
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(in thousands)
|
|
$
|
95,551
|
|
|
$
|
133,011
|
|
|
$
|
187,825
|
|
|
$
|
132,930
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
223,807,520
|
|
|
|
220,608,821
|
|
|
|
222,641,854
|
|
|
|
193,269,252
|
|
Dilutive effect of share-based awards
|
|
|
2,054,754
|
|
|
|
4,445,230
|
|
|
|
3,683,857
|
|
|
|
3,536,738
|
|
Weighted-average dilutive shares outstanding
|
|
|
225,862,274
|
|
|
|
225,054,051
|
|
|
|
226,325,711
|
|
|
|
196,805,990
|
|
Basic earnings per share
|
|
$
|
0.43
|
|
|
$
|
0.60
|
|
|
$
|
0.84
|
|
|
$
|
0.69
|
|
Diluted earnings per share
|
|
$
|
0.42
|
|
|
$
|
0.59
|
|
|
$
|
0.83
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Table of Contents
15.
|
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
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
Accumulated Other Comprehensive Loss Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension and other postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
(1)
|
|
$
|
(116,826
|
)
|
|
$
|
(90,621
|
)
|
|
$
|
(119,363
|
)
|
|
$
|
(74,378
|
)
|
Reclassification adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
(2) (3)
|
|
|
37
|
|
|
|
41
|
|
|
|
109
|
|
|
|
123
|
|
Amortization of net loss
(2) (3)
|
|
|
699
|
|
|
|
2,046
|
|
|
|
2,774
|
|
|
|
6,138
|
|
Settlements
(2) (3)
|
|
|
1,000
|
|
|
|
750
|
|
|
|
3,000
|
|
|
|
2,250
|
|
Prior year correction
(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,917
|
)
|
Total before income tax
|
|
|
1,736
|
|
|
|
2,837
|
|
|
|
5,883
|
|
|
|
(13,406
|
)
|
Income tax provision (benefit)
|
|
|
677
|
|
|
|
(5,199
|
)
|
|
|
2,287
|
|
|
|
(5,199
|
)
|
Current period comprehensive income (loss), net of tax
|
|
|
1,059
|
|
|
|
8,036
|
|
|
|
3,596
|
|
|
|
(8,207
|
)
|
Balance at end of period
(1)
|
|
$
|
(115,767
|
)
|
|
$
|
(82,585
|
)
|
|
$
|
(115,767
|
)
|
|
$
|
(82,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative cash flow hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Change in fair value of interest rate swaps
|
|
|
3,091
|
|
|
|
—
|
|
|
|
3,091
|
|
|
|
—
|
|
Amounts reclassified to interest expense−net
|
|
|
911
|
|
|
|
—
|
|
|
|
911
|
|
|
|
—
|
|
Total before income tax
|
|
|
4,002
|
|
|
|
—
|
|
|
|
4,002
|
|
|
|
—
|
|
Income tax provision
|
|
|
1,557
|
|
|
|
—
|
|
|
|
1,557
|
|
|
|
—
|
|
Current period comprehensive income, net of tax
|
|
|
2,445
|
|
|
|
—
|
|
|
|
2,445
|
|
|
|
—
|
|
Balance at end of period
(1)
|
|
$
|
2,445
|
|
|
$
|
—
|
|
|
$
|
2,445
|
|
|
$
|
—
|
|
Accumulated Other Comprehensive Loss at end of period
(1)
|
|
$
|
(113,322
|
)
|
|
$
|
(82,585
|
)
|
|
$
|
(113,322
|
)
|
|
$
|
(82,585
|
)
|
|
(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)
|
Correction of a computational error related to a third quarter 2015 pension curtailment. See discussion below.
|
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 a September 30, 2015 pension plan freeze. The Company determined the error did not materially impact the financial statements for any of the periods reported.
The determination of the Company’s 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 Company’s 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 September 30, 2017 and October 1, 2016 for purposes of determining its year-to-date tax provision (benefit).
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 during the 13-weeks ended October 1, 2016 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.
16
Table of Contents
The effective tax rate for the 13-weeks ended September 30, 2017 of 35% is equivalent to the federal statutory rate, primarily as a result of state income taxes being offset by the recognition of various discrete tax items. The discrete tax items included a tax benefit of $7 million, primarily related to excess tax benefits associated with share-based compensation. The effective tax rate for the 13-weeks ended October 1, 2016 of (143)% 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 13-weeks ended October 1, 2016, the valuation allowance decreased $101 million, primarily as a result of the year-to-date pre-tax 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 effective tax rate for the 39-weeks ended September 30, 2017 of 29% varied from the 35% federal statutory rate, primarily as a result of state income taxes and the recognition of various discrete tax items. The discrete tax items included a tax benefit of $27 million, primarily related to excess tax benefits associated with share-based compensation. The effective tax rate of (143)% for the 39-weeks ended October 1, 2016 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, the valuation allowance decreased $101 million, primarily as a result of the year-to-date pre-tax 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.
17.
|
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 September 30, 2017, the Company had $813 million of purchase orders and purchase contract commitments, of which $794 million and $19 million pertain to products to be purchased in the remainder of fiscal year 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 September 30, 2017, the Company had diesel fuel forward purchase commitments totaling $51 million through June 2018 ($18 million in 2017 and $33 million in 2018). Additionally, as of September 30, 2017, the Company had electricity forward purchase commitments totaling $5 million through December 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 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 recognized provisions with respect to the proceedings, where appropriate, 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 Company’s policy to expense attorney fees as incurred.
The Company’s consolidated results represent the results of its one business segment which is 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, primarily, 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 and operations. The Company’s 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 projects—whether for cost savings or generating incremental revenue—are evaluated based on estimated economic returns to the organization as a whole—e.g., net present value, return on investment.
17
Table of Contents
Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include 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. The statements are based on assumptions that we have made, based on our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments, and other factors we think are appropriate. We believe these judgments are reasonable. However, you should understand that these statements are not guarantees of performance or results. Our actual results could differ materially from those expressed in the 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:
|
•
|
Our ability to remain profitable during times of cost inflation/deflation, commodity volatility, and other factors
|
|
•
|
Industry competition and our ability to successfully compete
|
|
•
|
Our reliance on third-party suppliers, including the impact of any interruption of supplies or increases in product costs
|
|
•
|
Risks related to our indebtedness, including our substantial amount of debt, our ability to incur substantially more debt, and increases in interest rates
|
|
•
|
Restrictions and limitations placed on us by our agreements and instruments governing our debt
|
|
•
|
Any change in our relationships with group purchasing organizations
|
|
•
|
Any change in our relationships with long-term customers
|
|
•
|
Our ability to increase sales to independent restaurant customers
|
|
•
|
Our ability to successfully consummate and integrate acquisitions
|
|
•
|
Our ability to achieve the benefits that we expect from our cost savings initiatives
|
|
•
|
Shortages of fuel and increases or volatility in fuel costs
|
|
•
|
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
|
|
•
|
Liability claims related to products we distribute
|
|
•
|
Our ability to maintain a good reputation
|
|
•
|
Costs and risks associated with labor relations and the availability of qualified labor
|
|
•
|
Changes in industry pricing practices
|
|
•
|
Changes in competitors’ cost structures
|
|
•
|
Our ability to retain customers not obligated by long-term contracts
|
|
•
|
Environmental, health and safety costs
|
|
•
|
Costs and risks associated with current and changing government laws and regulations, including environmental, health, safety, food safety, transportation, labor and employment laws and regulations
|
|
•
|
Technology disruptions and our ability to implement new technologies
|
|
•
|
Costs and risks associated with a potential cybersecurity incident
|
|
•
|
Our ability to manage future expenses and liabilities associated with our retirement benefits and multiemployer pension plans
|
|
•
|
Disruptions to our business caused by extreme weather conditions
|
|
•
|
Costs and risks associated with litigation
|
|
•
|
Changes in consumer eating habits
|
18
Table of Contents
|
•
|
Costs and risks associated with our intellectual property protections
|
|
•
|
Risks associated with potential infringements of the intellectual property of others
|
For a detailed discussion of these risks and uncertainties, see Part I, Item 1A— “Risk Factors,” in our 2016 Annual Report, as filed with the Securities and Exchange Commission (“SEC”). All forward-looking statements made in this report are qualified by these cautionary statements. The forward-looking statements contained herein 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.
19
Table of Contents