10-Q 1 usfd-10q_20170701.htm USFD-10Q Q2 2017 usfd-10q_20170701.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-37786

 

US FOODS HOLDING CORP.

(Exact name of registrant as specified in its charter)

 

Delaware

26-0347906

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

9399 W. Higgins Road, Suite 500

Rosemont, IL 60018

(847) 720-8000

(Address, including Zip Code, and telephone number, including area code, of registrant’s principal executive offices)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

 

Accelerated filer

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No 

223,814,607 shares of common stock were outstanding as of July 28, 2017.

 


 

TABLE OF CONTENTS

 

 

 

Page

No.

Part I. Financial Information

 

Item 1.

Financial Statements (Unaudited)

 

 

Consolidated Balance Sheets as of July 1, 2017 and December 31, 2016

1

 

Consolidated Statements of Comprehensive Income (Loss) for the 13-weeks and 26-weeks ended
July 1, 2017 and July 2, 2016

2

 

Consolidated Statements of Cash Flows for the 26-weeks ended July 1, 2017 and July 2, 2016

3

 

Notes to Consolidated Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

32

 

 

Part II. Other Information

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34

Signatures

 

35

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

US FOODS HOLDING CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

 

 

July 1,

2017

 

 

December 31,

2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

149,972

 

 

$

131,090

 

Accounts receivable, less allowances of $24,683 and $25,388

 

 

1,366,470

 

 

 

1,226,032

 

Vendor receivables, less allowances of $2,907 and $1,819

 

 

156,596

 

 

 

105,542

 

Inventories—net

 

 

1,236,167

 

 

 

1,223,037

 

Prepaid expenses

 

 

80,754

 

 

 

72,650

 

Assets held for sale

 

 

21,638

 

 

 

21,039

 

Other current assets

 

 

9,926

 

 

 

9,781

 

Total current assets

 

 

3,021,523

 

 

 

2,789,171

 

PROPERTY AND EQUIPMENT—Net

 

 

1,786,657

 

 

 

1,767,611

 

GOODWILL

 

 

3,957,166

 

 

 

3,908,484

 

OTHER INTANGIBLES—Net

 

 

363,237

 

 

 

386,881

 

DEFERRED TAX ASSETS

 

 

30,984

 

 

 

34,405

 

OTHER ASSETS

 

 

48,529

 

 

 

57,898

 

TOTAL ASSETS

 

$

9,208,096

 

 

$

8,944,450

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Bank checks outstanding

 

$

161,781

 

 

$

142,712

 

Accounts payable

 

 

1,526,190

 

 

 

1,294,796

 

Accrued expenses and other current liabilities

 

 

421,192

 

 

 

455,815

 

Current portion of long-term debt

 

 

103,903

 

 

 

75,962

 

Total current liabilities

 

 

2,213,066

 

 

 

1,969,285

 

LONG-TERM DEBT

 

 

3,623,397

 

 

 

3,705,751

 

DEFERRED TAX LIABILITIES

 

 

404,444

 

 

 

380,835

 

OTHER LONG-TERM LIABILITIES

 

 

333,731

 

 

 

350,929

 

Total liabilities

 

 

6,574,638

 

 

 

6,406,800

 

COMMITMENTS AND CONTINGENCIES (Note 17)

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value—600,000 shares authorized; 223,801 and 220,929

   issued and outstanding as of July 1, 2017 and December 31, 2016, respectively

 

 

2,238

 

 

 

2,209

 

Additional paid-in capital

 

 

2,792,232

 

 

 

2,791,264

 

Accumulated deficit

 

 

(44,186

)

 

 

(136,460

)

Accumulated other comprehensive loss

 

 

(116,826

)

 

 

(119,363

)

Total shareholders’ equity

 

 

2,633,458

 

 

 

2,537,650

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

$

9,208,096

 

 

$

8,944,450

 

 

See Notes to Consolidated Financial Statements (Unaudited)

1


 

US FOODS HOLDING CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In thousands, except share and per share data)

 

 

 

13-Weeks Ended

 

 

26-Weeks Ended

 

 

 

July 1,

2017

 

 

July 2,

2016

 

 

July 1,

2017

 

 

July 2,

2016

 

NET SALES

 

$

6,158,654

 

 

$

5,806,758

 

 

$

11,947,079

 

 

$

11,399,907

 

COST OF GOODS SOLD

 

 

5,104,605

 

 

 

4,772,721

 

 

 

9,901,722

 

 

 

9,406,102

 

Gross profit

 

 

1,054,049

 

 

 

1,034,037

 

 

 

2,045,357

 

 

 

1,993,805

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution, selling and administrative costs

 

 

927,771

 

 

 

922,240

 

 

 

1,840,682

 

 

 

1,786,554

 

Restructuring charges

 

 

704

 

 

 

13,360

 

 

 

2,577

 

 

 

24,137

 

Total operating expenses

 

 

928,475

 

 

 

935,600

 

 

 

1,843,259

 

 

 

1,810,691

 

OPERATING INCOME

 

 

125,574

 

 

 

98,437

 

 

 

202,098

 

 

 

183,114

 

INTEREST EXPENSE — Net

 

 

41,003

 

 

 

70,245

 

 

 

82,889

 

 

 

140,804

 

LOSS ON EXTINGUISHMENT OF DEBT

 

 

 

 

 

42,149

 

 

 

 

 

 

42,149

 

Income (loss) before income taxes

 

 

84,571

 

 

 

(13,957

)

 

 

119,209

 

 

 

161

 

INCOME TAX PROVISION (BENEFIT)

 

 

19,113

 

 

 

(565

)

 

 

26,935

 

 

 

242

 

NET INCOME (LOSS)

 

 

65,458

 

 

 

(13,392

)

 

 

92,274

 

 

 

(81

)

OTHER COMPREHENSIVE INCOME (LOSS) — Net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in retirement benefit obligations, net of income tax

 

 

1,880

 

 

 

(18,876

)

 

 

2,537

 

 

 

(16,243

)

COMPREHENSIVE INCOME (LOSS)

 

$

67,338

 

 

$

(32,269

)

 

$

94,811

 

 

$

(16,324

)

NET INCOME (LOSS) PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.29

 

 

$

(0.07

)

 

$

0.42

 

 

$

 

Diluted

 

$

0.29

 

 

$

(0.07

)

 

$

0.41

 

 

$

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

222,754,030

 

 

 

190,077,211

 

 

 

222,059,022

 

 

 

179,599,467

 

Diluted

 

 

226,791,449

 

 

 

190,077,211

 

 

 

226,557,430

 

 

 

179,599,467

 

DISTRIBUTION DECLARED AND PAID

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution declared and paid per share (Note 12)

 

$

 

 

$

 

 

$

 

 

$

3.94

 

 

See Notes to Consolidated Financial Statements (Unaudited).

2


 

US FOODS HOLDING CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

26-Weeks Ended

 

 

 

July 1,

2017

 

 

July 2,

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

92,274

 

 

$

(81

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

213,792

 

 

 

207,947

 

Gain on disposal of property and equipment

 

 

(221

)

 

 

(7,511

)

Asset impairment charges

 

 

 

 

 

125

 

Loss on extinguishment of debt

 

 

 

 

 

42,149

 

Amortization and write-off of deferred financing costs

 

 

2,358

 

 

 

4,866

 

Amortization of Senior Notes original issue premium

 

 

 

 

 

(1,664

)

Insurance proceeds relating to operating activities

 

 

 

 

 

7,083

 

Insurance benefit in net loss

 

 

 

 

 

(7,083

)

Deferred tax provision

 

 

18,075

 

 

 

234

 

Share-based compensation expense

 

 

8,553

 

 

 

9,667

 

Provision for doubtful accounts

 

 

8,975

 

 

 

5,991

 

Changes in operating assets and liabilities, net of business acquisitions:

 

 

 

 

 

 

 

 

Increase in receivables

 

 

(188,565

)

 

 

(77,336

)

Decrease (increase) in inventories

 

 

4,179

 

 

 

(62,606

)

(Increase) decrease in prepaid expenses and other assets

 

 

(20,660

)

 

 

6,303

 

Increase in accounts payable and bank checks outstanding

 

 

276,493

 

 

 

275,484

 

Decrease in accrued expenses and other liabilities

 

 

(46,807

)

 

 

(102,155

)

Net cash provided by operating activities

 

 

368,446

 

 

 

301,413

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Acquisition of businesses—net of cash

 

 

(134,808

)

 

 

(94,938

)

Proceeds from sales of property and equipment

 

 

1,679

 

 

 

8,665

 

Purchases of property and equipment

 

 

(107,967

)

 

 

(66,743

)

Proceeds from redemption of industrial revenue bonds

 

 

22,139

 

 

 

 

Investment in Avero, LLC

 

 

 

 

 

(7,658

)

Net cash used in investing activities

 

 

(218,957

)

 

 

(160,674

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from debt borrowings

 

 

1,117,267

 

 

 

1,410,994

 

Proceeds from debt refinancings

 

 

 

 

 

2,213,803

 

Principal payments on debt and capital leases

 

 

(1,212,792

)

 

 

(3,208,276

)

Repayment of industrial revenue bonds

 

 

(22,139

)

 

 

 

Redemption of Old Senior Notes

 

 

 

 

 

(1,376,927

)

Payment for debt financing costs and fees

 

 

(426

)

 

 

(25,629

)

Proceeds from initial public offering

 

 

 

 

 

1,113,799

 

Cash distribution to shareholders

 

 

 

 

 

(666,332

)

Contingent consideration paid for business acquisition

 

 

(5,000

)

 

 

 

Proceeds from employee share purchase plan

 

 

7,729

 

 

 

 

Proceeds from exercise of stock options

 

 

10,944

 

 

 

 

Tax withholding payments for net share-settled equity awards

 

 

(25,693

)

 

 

 

Proceeds from common stock sales

 

 

 

 

 

2,850

 

Common stock and share-based awards settled

 

 

(497

)

 

 

(7,417

)

Net cash used in financing activities

 

 

(130,607

)

 

 

(543,135

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

18,882

 

 

 

(402,396

)

CASH AND CASH EQUIVALENTS—Beginning of period

 

 

131,090

 

 

 

517,802

 

CASH AND CASH EQUIVALENTS—End of period

 

$

149,972

 

 

$

115,406

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest (net of amounts capitalized)

 

$

79,135

 

 

$

137,828

 

Income taxes paid—net

 

 

2,862

 

 

 

3,708

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable

 

 

17,405

 

 

 

12,695

 

Capital lease additions

 

 

60,730

 

 

 

63,984

 

Cashless exercise of equity awards

 

 

25,535

 

 

 

 

Contingent consideration payable for business acquisitions

 

 

4,200

 

 

 

6,375

 

See Notes to Consolidated Financial Statements (Unaudited).

 

3


 

US FOODS HOLDING CORP.

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 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, and formerly controlled 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 USF’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, through USF, 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 May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, CompensationStock 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.

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

4


 

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.

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 2016 impairment analysis for goodwill.  

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 is currently evaluating the full effect that adoption will have on its financial position and results of operations.

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, 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 significant changes in the results under the new versus old standards.

During the first half of 2017, the Company completed the review of its contract portfolio and adoption impact assessment.  Based upon our review, we believe 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. During the remainder of 2017, we will continue our adoption effort by implementing relevant policies and procedures to meet the new accounting, reporting and disclosure requirements of ASC 606 and will update our internal controls accordingly.  We will also review new contracts entered into throughout the year.  The Company does not believe there are any significant barriers to implementation of the new standard, plans to 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.

 

5


 

3.

BUSINESS ACQUISITIONS

Acquisitions during the 26-weeks ended July 1, 2017 included (1) the stock of Riverside Food Distributors, LLC, d/b/a F. Christiana and Co., a broadline distributor, acquired in June; (2) the stock of FirstClass Foods-Trojan, Inc., d/b/a FirstClass Foods, a meat processor, acquired in April; (3) certain assets of SRA Foods. Inc., a meat processor and distributor, acquired in March; and (4) certain assets of All American Foods, a broadline distributor, acquired in February. Total consideration consisted of cash of approximately $135 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 a one-year period, from the respective dates of such acquisitions. During fiscal 2017, the Company paid approximately $6 million of earnout contingent consideration related to a 2016 business acquisition, of which, $5 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 July 1, 2017, aggregate contingent consideration outstanding for business acquisitions was approximately $8 million, including approximately $2 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 estimated purchase price allocation for the 2017 and 2016 business acquisitions as follows (in thousands):

 

 

 

July 1,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accounts receivable

 

$

12,048

 

 

$

22,871

 

Inventories

 

 

17,345

 

 

 

9,493

 

Other current assets

 

 

724

 

 

 

732

 

Property and equipment

 

 

22,373

 

 

 

24,119

 

Goodwill

 

 

49,129

 

 

 

32,570

 

Other intangible assets

 

 

51,450

 

 

 

64,130

 

Accounts payable

 

 

(5,867

)

 

 

(16,216

)

Accrued expenses and other current liabilities

 

 

(5,271

)

 

 

(12,173

)

Deferred income taxes

 

 

(7,346

)

 

 

 

Long-term debt

 

 

 

 

 

(2,514

)

Cash paid for acquisitions

 

$

134,585

 

 

$

123,012

 

 


6


 

4.

INVENTORIES

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 July 1, 2017 and December 31, 2016, the LIFO balance sheet reserves were $156 million and $116 million, respectively. As a result of changes in LIFO reserves, Cost of goods sold increased $30 million and decreased $7 million, for the 13-weeks ended July 1, 2017 and July 2, 2016, respectively, and increased $40 million and decreased $18 million, for the 26-weeks ended July 1, 2017 and July 2, 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”), USF 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 July 1, 2017 or December 31, 2016. Included in the Company’s accounts receivable balance as of July 1, 2017 and December 31, 2016 was $1,027 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.

6.

ASSETS HELD FOR SALE

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 26-weeks ended July 1, 2017 were as follows (in thousands):

 

Balance at December 31, 2016

 

$

21,039

 

Transfers in

 

 

599

 

Balance at July 1, 2017

 

$

21,638

 

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 July 1, 2017 and December 31, 2016, Property and equipment-net included accumulated depreciation of $1,837 million and $1,724 million, respectively. Depreciation expense was $70 million and $66 million for the 13-weeks ended July 1, 2017 and July 2, 2016, respectively, and $139 million and $131 million for the 26-weeks ended July 1, 2017 and July 2, 2016, respectively. 

7


 

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 ten years). Amortization expense was $36 million and $39 million for the 13-weeks ended July 1, 2017 and July 2, 2016, respectively, and $75 million and $77 million for the 26-weeks ended July 1, 2017 and July 2, 2016, respectively.

Goodwill and Other intangibles, net, consisted of the following (in thousands):  

 

 

 

July 1,

2017

 

 

December 31,

2016

 

Goodwill

 

$

3,957,166

 

 

$

3,908,484

 

Other intangibles—net

 

 

 

 

 

 

 

 

Customer relationships—amortizable:

 

 

 

 

 

 

 

 

Gross carrying amount

 

$

1,442,099

 

 

$

1,393,799

 

Accumulated amortization

 

 

(1,334,908

)

 

 

(1,260,011

)

Net carrying value

 

 

107,191

 

 

 

133,788

 

Noncompete agreements—amortizable:

 

 

 

 

 

 

 

 

Gross carrying amount

 

 

3,950

 

 

 

800

 

Accumulated amortization

 

 

(704

)

 

 

(507

)

Net carrying value

 

 

3,246

 

 

 

293

 

Brand names and trademarks—not amortizing

 

 

252,800

 

 

 

252,800

 

Total Other intangibles—net

 

$

363,237

 

 

$

386,881

 

 

The 2017 increases in Goodwill and the gross carrying amounts of Customer relationships and Noncompete agreements are attributable to 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. 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 completed its most recent annual impairment assessment for Goodwill and indefinite-lived intangible assets as of July 3, 2016—the first day of the third quarter of 2016—with no impairments noted.

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 which prioritizes the inputs used in measuring fair value as follows:

 

Level 1—observable inputs, such as quoted prices in active markets

 

Level 2—observable inputs other than those included in Level 1—such as quoted prices for similar assets and liabilities in active or inactive markets that are observable either directly or indirectly, or other inputs that are observable or can be corroborated by observable market data

 

Level 3—unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions

Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized 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.

8


 

The Company’s assets and liabilities measured at fair value on a recurring basis as of July 1, 2017 and December 31, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2017

 

$

48,200

 

 

$

 

 

$

 

 

$

48,200

 

Balance at December 31, 2016

 

$

31,600

 

 

$

 

 

$

 

 

$

31,600

 

Contingent consideration payable for business

   acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2017

 

$

 

 

$

 

 

$

2,375

 

 

$

2,375

 

Balance at December 31, 2016

 

$

 

 

$

 

 

$

9,775

 

 

$

9,775

 

There were no 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.

Contingent Consideration Payable for Business Acquisitions

In addition to the $6 million paid in fiscal 2017 discussed in Note 3, Business Acquisitions, contingent consideration may be paid under earnout agreements for certain other 2016 business acquisitions, primarily in the event certain operating results are achieved, generally over a one-year period, from the respective dates of such acquisitions. 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 (Loss).

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 USF’s total debt approximated $3.8 billion as of July 1, 2017 and December 31, 2016, as compared to its carrying value of $3.7 billion and $3.8 billion as of July 1, 2017 and December 31, 2016, respectively. The July 1, 2017 and December 31, 2016 fair value of USF’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 USF’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 USF’s overall credit risk.

9


 

10.

DEBT

Total debt consisted of the following (in thousands):

 

Debt Description

 

Maturity

 

Interest rate at

July 1, 2017

 

 

 

July 1,

2017

 

 

December 31,

2016

 

ABL Facility

 

October 20, 2020

 

 

 

 

 

$

 

 

$

30,000

 

2012 ABS Facility

 

September 30, 2018

 

2.20

 

%

 

 

620,000

 

 

 

645,000

 

Amended and Restated 2016 Term Loan (net of $12,105 and

   $13,318 of unamortized deferred financing costs)

 

June 27, 2023

 

3.98

 

 

 

 

2,165,895

 

 

 

2,175,682

 

2016 Senior Notes (net of $6,707 and $7,185 of unamortized

   deferred financing costs)

 

June 15, 2024

 

5.88

 

 

 

 

593,293

 

 

 

592,815

 

Obligations under capital leases

 

2018–2025

 

2.36 - 6.18

 

 

 

 

338,044

 

 

 

305,544

 

Other debt

 

2018–2031

 

5.75 - 9.00

 

 

 

 

10,068

 

 

 

32,672

 

Total debt

 

 

 

 

 

 

 

 

 

3,727,300

 

 

 

3,781,713

 

Current portion of long-term debt

 

 

 

 

 

 

 

 

 

(103,903

)

 

 

(75,962

)

Long-term debt

 

 

 

 

 

 

 

 

$

3,623,397

 

 

$

3,705,751

 

 

At July 1, 2017, $941 million of the carrying value of total debt was at a fixed rate and $2,786 million was at a floating rate. As discussed in Note 19, Subsequent Events, on August 1, 2017, USF entered into interest rate swap agreements that fixed the interest rate on $1.1 billion of principal of the Amended and Restated 2016 Term Loan. After considering the effect of the interest rate swaps, $2,035 million of the carrying value of total debt was at a fixed rate and $1,692 million was at a floating rate.

Following is a description of each of USF’s debt instruments outstanding as of July 1, 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 July 1, 2017, USF had no outstanding borrowings, but had issued letters of credit totaling $378 million under the ABL Facility. Outstanding letters of credit included: (1) $60 million issued to secure USF’s obligations with respect to certain facility leases, (2) $315 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 $922 million at July 1, 2017. As of July 1, 2017, on Tranche A-1 borrowings, USF can periodically elect to pay interest at an alternative base rate (“ABR”), as defined in USF’s 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 1.25% 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.

The maximum capacity under the 2012 ABS Facility is $800 million. Borrowings under the 2012 ABS Facility were $620 million at July 1, 2017. 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 $110 million at July 1, 2017 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 lender’s 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 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 $2,166 million at July 1, 2017, net of $12 million of unamortized deferred financing costs.

On February 17, 2017, the Amended and Restated 2016 Term Loan was further amended, whereby the interest rate spread on outstanding borrowings was reduced 25 basis points and fixed at ABR plus 1.75% or LIBOR plus 2.75%, with a LIBOR floor of 0.75%, based on USF’s periodic election. USF 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

10


 

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.

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 3.98%—LIBOR of 1.23% plus 2.75%—at July 1, 2017.

2016 Senior Notes—The 2016 Senior Notes due 2024, with a carrying value of $593 million at July 1, 2017, 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 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 Indenture, dated June 27, 2016, as supplemented, at a redemption premium of 105.875%.

Other Debt–Obligations under capital leases of $338 million at July 1, 2017, consist of amounts due for transportation equipment and building leases. Other debt of $10 million at July 1, 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.

The debt redemption and refinancing transactions resulted in a loss on extinguishment of debt of $42 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 USF’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, 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. USF’s 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

USF’s 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 July 1, 2017, USF had $560 million of restricted payment capacity under these covenants, and approximately $2,074 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 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, USF would be forced to seek new financing that may not be on as favorable terms as its current facilities. USF’s ability to refinance its indebtedness on favorable terms—or at all—is directly affected by the current economic and financial conditions. In addition, USF’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


 

11.

RESTRUCTURING LIABILITIES

The following table summarizes the changes in the restructuring liabilities for the 26-weeks ended July 1, 2017 (in thousands):

 

 

 

Severance and

Related Costs

 

 

Facility

Closing Costs

 

 

Total

 

Balance at December 31, 2016

 

$

22,596

 

 

$

865

 

 

$

23,461

 

Current period charges

 

 

4,032

 

 

 

 

 

 

4,032

 

Change in estimate

 

 

(1,199

)

 

 

(256

)

 

 

(1,455

)

Payments and usage—net of accretion

 

 

(13,879

)

 

 

(109

)

 

 

(13,988

)

Balance at July 1, 2017

 

$

11,550

 

 

$

500

 

 

$

12,050

 

 

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 26-weeks ended July 1, 2017, the Company incurred a net charge of $3 million for Severance and Related Costs associated with its efforts to streamline its corporate back office organization and centralize replenishment activities.

During the 26-weeks ended July 2, 2016, the Company incurred a net charge of $21 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 May 17, 2017 and January 31, 2017, the Company closed on follow-on offerings of its common stock held primarily by investment funds associated with the Sponsors. A total of 87,400,000 shares were sold; 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 18% as of May 17, 2017.  In accordance with terms of the registration rights agreement with the Sponsors, the Company incurred approximately $3 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 in 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 for services rendered in connection with the June 2016 USF 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 July 1, 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 13-week and 26-week periods ended July 2, 2016, the Company recorded $2 million and $5 million, respectively, in fees and expenses, in the aggregate. 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 (Loss).

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 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 USF’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 USF debt covenants.

12


 

13.

RETIREMENT PLANS

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 for pension and other postretirement benefits, for Company sponsored plans, are provided below (in thousands):

 

 

 

13-Weeks Ended

 

 

 

Pension Benefits

 

 

Other Postretirement Benefits

 

 

 

July 1,

2017

 

 

July 2,

2016

 

 

July 1,

2017

 

 

July 2,

2016

 

Components of Net periodic benefit costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

506

 

 

$

959

 

 

$

9

 

 

$

10

 

Interest cost

 

 

10,139

 

 

 

10,413

 

 

 

72

 

 

 

74

 

Expected return on plan assets

 

 

(11,964

)

 

 

(11,927

)

 

 

 

 

 

 

Amortization of prior service cost

 

 

34

 

 

 

40

 

 

 

2

 

 

 

1

 

Amortization of net loss (gain)

 

 

1,050

 

 

 

2,268

 

 

 

(13

)

 

 

(18

)

Settlements

 

 

2,000

 

 

 

750

 

 

 

 

 

 

 

Net periodic benefit costs

 

$

1,765

 

 

$

2,503

 

 

$

70

 

 

$

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26-Weeks Ended

 

 

 

Pension Benefits

 

 

Other Postretirement Benefits

 

 

 

July 1,

2017

 

 

July 2,

2016

 

 

July 1,

2017

 

 

July 2,

2016

 

Components of Net periodic benefit costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,012

 

 

$

1,925

 

 

$

19

 

 

$

19

 

Interest cost

 

 

20,277

 

 

 

20,230

 

 

 

144

 

 

 

148

 

Expected return on plan assets

 

 

(23,928

)

 

 

(24,148

)

 

 

 

 

 

 

Amortization of prior service cost

 

 

69

 

 

 

79

 

 

 

3

 

 

 

3

 

Amortization of net loss (gain)

 

 

2,101

 

 

 

4,128

 

 

 

(26

)

 

 

(36

)

Settlements

 

 

2,000

 

 

 

1,500

 

 

 

 

 

 

 

Net periodic benefit costs

 

$

1,531

 

 

$

3,714

 

 

$

140

 

 

$

134

 

 

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 is expected to be 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 (Loss).

The Company contributed $36 million to its defined benefit and other postretirement plans during both 26-week periods ended July 1, 2017 and July 2, 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 which 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 July 1, 2017 and July 2, 2016, respectively, and $23 million and $22 million for the 26-weeks ended July 1, 2017 and July 2, 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 July 1, 2017 and July 2, 2016, respectively, and $17 million and $16 million for the 26-week periods ended July 1, 2017 and July 2, 2016, respectively.

13


 

14.

EARNINGS PER SHARE

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 26-week periods ended July 2, 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, which includes vested restricted shares and restricted stock units outstanding for the year.

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, non-vested restricted stock units, and employee stock purchase plan deferrals are considered potentially dilutive securities. For the 13-week and 26-week periods ended July 2, 2016, potentially dilutive share-based awards representing 10,290,392 underlying common shares were not included in the computation of diluted earnings (loss) per share because the effect would be anti-dilutive.

The following table sets forth the computation of basic and diluted earnings (loss) per share:

 

 

 

13-Weeks Ended

 

 

26-Weeks Ended

 

 

 

July 1,

2017

 

 

July 2,

2016

 

 

July 1,

2017

 

 

July 2,

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (in thousands)

 

$

65,458

 

 

$

(13,392

)

 

$

92,274

 

 

$

(81

)

Denominator: